Flashback to January: Warren Buffett’s $325 Billion Cash Pile
April 4th, 2025I don’t know how many times I’ve posted about Warren Buffett amassing hundreds of billions of dollars in cash, in anticipation of a major correction in stocks, but it’s a lot.
He knew that valuations had gotten insane, which essentially rigged the market to blow.
I wonder if he also knew that Trump would light the fuse?
Via: Investopedia:
A key chart value investors like Buffett use could help us narrow down the options: the S&P 500 index’s historic price-to-earnings ratio. That’s because it now sits 67% above its historical norm and almost 50% above its early 2022 value. This remarkable deviation could be a major reason that the famed Oracle of Omaha could be storing cash.
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The chart for the S&P 500’s price-to-earnings (P/E) ratio since 2022 tells a striking story about the stock market. It tells us investors are paying $30 for each dollar of earnings for the trailing 12 months, far above the historical median of 17.9.3
In other words, investors are paying almost $30 for each dollar of corporate earnings when, historically, they’ve paid 40% less. We’ve focused the chart on the run-up in the P/E ratio since early 2022; since then, it’s ballooned 50%.
Thus, this chart could provide a stark warning that stock prices are being driven more by investor optimism than the underlying value of these stocks, exactly the kind of market condition that Buffett has said makes him keep his “elephant gun” of cash at the ready.
The P/E ratio uses present share price but earnings from the past 12 months. So what can its rise mean? Either:
1. Earnings are expected to increase (at least nominally).
2. A low rate of return is accepted, because
a. commodities don’t look juicy enough, and
b. devalorization through lower activity seems unlikely.
3. Bubble. Stocks can go up as long as the winner finds a loser to play with.
A correction has happened since that article was written (at the end of January).
The financial markets really are crying tears of blood, aren’t they? Even gold is down a little bit right now.
I’m actually glad that His Orangeness is “lighting the fuse”. The more time goes by before the “Everything Bubble” pops, the more painful it will be for everybody when it finally does. As it is, the financial markets have been propped up with pallets and pallets of central-bank printed money for at least nine years. I don’t even want to think about how catastrophic allowing any further expansion of the bubble would be!
Interest rates forced low (or liquidity injections) sustain asset valuations, irrespective of book value. This should make new machinery rather attractive, in which case an inter-sectorial domino effect can result that sees price increases cancel the initial diminution of the real rate of return on stock (or maybe valuations get even larger in Department I – in what follows I pretend it’s not the case).
With earnings amplified by the new price levels, deposits, as opposed to the purchase of shares, are disincentivized, so valuations must grow again and so on. In other words it’s an inflationary loop.
However if the cause for monetary intervention is devalorization (i.e. activity more timid than expected), suppliers of machinery are unlikely to demand higher prices. In that instance the losers are the new savers.
Another reason for price hikes is easier household debt. This needs not result in inflation as long as wages are lagging.