Warren Buffett is Running from the Banks

26 Aug

Warren Buffett is Running from the Banks

Warren Buffet didn’t just move toward gold.  Warren Buffett moved away from banks.  

Good moves both.

As we reported last week, (Did Warren Buffett’s Dad Just Get a Whole Lot Smarter?), Buffett’s Berkshire Hathaway has purchased $563 million in shares of Barrick Gold, the world’s second-largest gold miner.  

It’s a start.

Next, maybe the ghost of Warren’s father will whisper in his ear something about counter-party risk.  Then Warren will start buying physical gold.

That could be next, because Warren is growing skeptical about banks.  

But in the meantime it’s a step in the right direction. 

Berkshire Hathaway sold billions of dollars of JPMorgan Chase stock in the second quarter, liquidating 35.5 million shares of the largest American bank.

The company likely took a loss on its JPM holdings according to Wall Street on Parade.

Buffett, who had also dumped 84 percent of his stock in investment banker Goldman Sachs, sold the rest of his shares, 1.8 million, in the second quarter.  

What would prompt “the Oracle of Omaha” to slash his bank holdings, even taking a loss on them, while adding a large precious metals component to his portfolio?  It is an important question.  Particularly because nothing characterizes Buffett’s philosophy more than “buy and hold.”

We think the answer can be found in Buffett’s own words: “When the tide goes out you find out who’s been swimming naked.”

Well, the tide is out.

With people unemployed, unable to pay their rent and mortgages, businesses shuttering and unable to pay their leases, developers and real estate tycoons unable to pay their loans, someone, somewhere will be left holding the bag.  We think that if you trace the cascading defaults upline, it is financial institution, banks, and pension funds that will eat the losses.

Wall Street on Parade:

“One of the things that could be spooking Buffett when it comes to JPMorgan Chase is the unquantifiable risk in its derivatives book. This is, after all, the bank that famously lost $6.2 billion of its bank depositors’ money in its London Whale derivatives scandal of 2012. Buffett has previously dubbed derivatives ‘financial weapons of mass destruction.’

“According to the regulator of national banks, the Office of the Comptroller of the Currency, as of March 31, 2020, JPMorgan Chase had the largest exposure of any U.S. bank to derivatives. Its notional exposure (face amount) was $59 trillion. The bank with the second largest exposure was the Goldman Sachs bank holding company, at $47.7 trillion.”

Now, doesn’t a move out of naked financial institutions and into gold make sense?