Berkshire Owns $100 Billion In T-Bills: More Than China And The UK

A few months ago, we pointed out that Warren Buffett, the so-called "Oracle of Omaha" said during the 100-year anniversary celebration of Forbes magazine that the "Dow will be over a million" over the next 100 years and "that is not a ridiculous forecast".

Of course, the second part of that statement was promptly ignored by the financial media, which churned out "shock and awe" headlines like "Warren Buffett Says The Dow Is Going Over One Million."

Without context, this might appear to be an incredibly bullish call. But Dow one million 100 years from now would actually represent a deceleration in the Dow's CAGR to 3.9% pre-tax, or closer to just 3% post-tax returns per year (assuming tax rates don't trend toward 100% during the intervening period). A more optimistic prediction (at least based on past performance) would be for the Dow to hit 140,000,000 in 100 years.

DJIA

Well, we received another update on Buffett's long-term thinking on Friday when the Wall Street Journal reported that Berkshire Hathaway is holding more than $100 billion in cash or cash-equivalents - i.e. Treasury bills - on its balance sheet.

The company is doing this at great expense to shareholders (referring to the opportunity cost that comes with avoiding higher-yielding assets) and Buffett - who is expected to release his widely read annual shareholder letter this weekend - has vowed to find a better place to park this cash. Because of this conservatism, Berkshire is now one of the largest holders of Treasury debt.

However, Buffett has been promising to find a home for the cash for a few years now - which makes one wonder whether this is part of a deliberate strategy...

Berkshire has used its mounting cash pile to become one of the world’s largest owners of U.S. Treasury bills after struggling to find big companies to buy in recent years.

It held $109 billion in cash as of Sept. 30, up from $86 billion at the end of 2016 and more than double what it had at the end of 2006. Nearly all of that was invested in short-term bills, according to Mr. Buffett.

Berkshire has an outsize presence in the $2 trillion market for Treasury bills, a type of government debt that matures in a year or less. It held more bills around the end of the third quarter than large countries such as China and the U.K. It also had more at that time than the $13.5 billion held collectively by a group of 23 primary bond dealers that are obligated to underwrite U.S. government debt sales.

Berkshire’s holdings are big enough that when bond dealers need bills for a specific date, they will come to Berkshire and arrange a trade, Mr. Buffett said.

"We’re the ones they call. We’ve got the best inventory," Mr. Buffett said in a 2017 interview with The Wall Street Journal. "That’s a new sideline for us here."

...

"There’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more, and we think we’re doing something brilliant by doing it," he said at Berkshire’s annual meeting last May. "I would say that history is on our side, but it would be more fun if the phone would ring."

Berkshire's cash holdings swelled by $3.3 billion last week when Phillips 66 bought back 35 million shares.

This massive inventory of T-Bills, which is a sizable portion of all outstanding short-dated debt, may be causing some of the recently noted distortions in the bond market, where short-term funding costs have risen rapidly in the form of the Libor-OIS spread, which has jumped to the highest level in over a year.

Buffett has famously resisted handing out dividends to investors - but has said Berkshire would begin buying back stock if shares ever fall below 120% of book value. Both classes of Berkshire stock were trading at 165% on Thursday. 

"He’s aware that [Berkshire’s cash] is not earning a high rate of return for shareholders," said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business and a Berkshire shareholder. "Paying out a special cash dividend, a one-time dividend at the discretion of management, makes some sense."

Berkshire earns revenue from holding and trading its Treasury bills, but the profit is minimal relative to its overall business operations. Berkshire’s head trader, Mark Millard, opted not to speak with WSJ.

Buffett

WSJ also pointed out that other corporations with large cash piles prefer to hold higher-yielding assets like corporate bonds. But Buffett prefers to hold Treasury bills because they offer more liquidity during a downturn. Berkshire typically buys about $4 billion in Treasury bills every Monday at government auctions, or less than 4% of what the Treasury is selling, Mr. Buffett said on CNBC in January. He joked: “We’re very careful about how many we bid for.”

Buffett's probity famously allowed Berkshire to throw a life line (and secure desperation deals that proved to be extremely lucrative over the following years) to Bank of America, Goldman Sachs and General Electric.

But with so much cash on hand, Buffett would have wide latitude to take advantage of the next downturn, potentially positioning Berkshire - which hasn't bought a company since 2015 when it closed on Precision Castparts, its largest deal ever - to buy whatever's on its wish list at a substantial discount.

Could this really be Buffett hinting that, though he feels compelled to maintain his optimistic rhetoric in public, he's in reality bracing for the next crash?

Comments

lookslikecraptome JRobby Fri, 02/23/2018 - 20:57 Permalink

He is going into cryptos. Right? "The total value of all cryptocurrencies taken together stands at $445 billion" https://www.coindesk.com/bitcoin-drops-below-10k-as-crypto-markets-dip/. Buffet has 25% of that amount laying around in cash. According to this article. If only he alone, not to mention other people and institutions, wanted to own the cryptos, they would. Wag the crytpo markets like a gorilla on steroids shaking a squirrel by its tail. They will when they want to. 

In reply to by JRobby

gdpetti Scuba Steve Sun, 02/25/2018 - 13:02 Permalink

$100 Billion is chump-change... maybe this is one specific Tbill? as the Chinese are said to be holding over $1 TRILLION

China already holds a huge amount of U.S. government debt. The latest data from the Treasury Department puts it at $1.2 trillion -- and some independent estimates suggest it could be even higher

http://money.cnn.com/2018/01/11/investing/china-us-treasury-purchases/index.html

In reply to by Scuba Steve

jaxville JRobby Fri, 02/23/2018 - 23:42 Permalink

  I gotta ask.....How did he accumulate so much dough?  Does the story refer to his fund (Berkshire Hathaway) or his personal wealth? In this case it is his fund but the distinction is lame.  He is often listed as one the world's richest men.

  Something really stinks about that guy and the more he is in the news the more I see him as some sort of scoundrel.  It seems there is no limit to the wealth of those who sing the praises of the global homo state.

  He made his dough the old fashioned way ....  by larceny

In reply to by JRobby

bunnyswanson jaxville Sat, 02/24/2018 - 17:33 Permalink

Also noteworthy is UK - does this include their COMMON wealth nations?  And those anonymous owners or 3rd parties?  Australia, Canada, New Zealand, 53 countries in total.

" The Commonwealth covers more than 29,958,050 km2 (11,566,870 sq mi), equivalent to 20% of the world's land area. It spans all six inhabited continents. With an estimated population of 2.419 billion people, nearly a third of the world population,[9] the Commonwealth in 2014 produced a nominal gross domestic product (GDP) of $10.45 trillion, representing 14% of the gross world product when measured nominally and 17% of the gross world product when measured in purchasing power parity (PPP). "

 

https://en.wikipedia.org/wiki/Commonwealth_of_Nations

In reply to by jaxville

Endgame Napoleon asteroids Fri, 02/23/2018 - 19:55 Permalink

Setting aside his help for a company that offshored almost all of its production and a bank that my insurance customers complained about, why does his "conservatism" seem honest to me--a non-swashbuckling non trader? I can see why traders would be peeved after the bond market tanked, but if you bet totally against it, you are betting against America, right?

In reply to by asteroids

bmw550i Fri, 02/23/2018 - 19:42 Permalink

he has dumped them all months ago and has bought Gold ... but that article is set to release  in 6 months ( when gold is riding high )

Falconsixone Fri, 02/23/2018 - 19:44 Permalink

Well, you can go to 2 Physical Therapists, 3 Chiropractors (made it worse) and an Acupuncturist (made it worse) an none of them will tell you you have a herniated disk (because somebodys gotta make an honest  living). You have to figure it out for yourself when there's money involved and if your dumb enough it takes a while. 

The Ram Falconsixone Fri, 02/23/2018 - 22:08 Permalink

That's true....Falconsixone.  People are on their own today in most every field.  The smart people figure it out and the dumb get manipulated.  For example, I decided to stop paying medical premiums.  Not worth the money.  Another example, lots of idiots out there ready to 'serve their country' and get blown away in some ridiculous war, then come home (if they make it) and expect the Veterans Admin or 'Wounded Warrior' to take care of them.  Unfortunately, few people are willing to tell young people that they are being manipulated and used to keep the MIC going.  I could go on with many examples.....but bottom line is that nature is very cruel to the many without the 'eyes to see' and the 'ears to hear.'

In reply to by Falconsixone

TrustbutVerify Fri, 02/23/2018 - 19:45 Permalink

Two key sentences in this article: (1) But Buffett prefers to hold Treasury bills because they offer more liquidity during a downturn. (2) Could this really be Buffett hinting that, though he feels compelled to maintain his optimistic rhetoric in public, he's in reality bracing for the next crash?

Buffet, as he sells his folksy BS, while selling himself, is always working for his "book."  There's nothing wrong with it, but let's not pretend he doesn't.  

jaxville TrustbutVerify Fri, 02/23/2018 - 23:54 Permalink

  If he dumps treasuries, yields will have to rise to attract other marks willing to toe the line.  When Buffet talks his book I sense other motivations than transcend mere profits. He is just posturing in an effort to keep others from selling a depreciating asset.

 Those who think they won't raise rates because the economy can't deal with it are about to get a lesson in reality.  And they will get it good and hard on their asses.

In reply to by TrustbutVerify

Dragon HAwk Fri, 02/23/2018 - 19:46 Permalink

Sounds like the Old Too Much Sloshing around and Nowhere to Put it Story  to me.

  However i would have retired to an Island somewhere full of babes long Ago

Eric Masters Fri, 02/23/2018 - 19:51 Permalink

now it all makes sense; pretty sure uncle rotted warren owns more than russia too; fucking corrupt parasite; get gov subsidies, dont pay taxes, then buy 4% of the weekly float, captain fucking brocolli