Buffett’s Warning to Investors

The Genie’s Out of the Bottle!

How many red flags will it take to get America’s investors and consumers to wake up and smell the coffee? Maybe a warning from the Oracle of Omaha will do the trick – but don’t count on it.

There are still plenty of optimists out there, including many economists. For instance, First American Chief Economist Mark Fleming admitted that the U.S. gross domestic product (GDP) “numbers look soft” but countered that “consumer spending is just trucking along.” Fleming categorically concluded that “this is not stagflation.”

First of all, the GDP numbers don’t just look soft; they are soft. For the first three months of 2024, the U.S. GDP only grew 1.6% year-over-year while economists were expecting 2.4%. Furthermore, the U.S. GDP grew 3.4% in 4Q23 and 4.9% in the quarter before that.

Moreover, consumer spending may be “trucking along,” but if that’s the main pillar holding the house of cards up then there’s a major malfunction in the system. Americans are living paycheck to paycheck with little to no savings but plenty of credit card debt, and they’re spending more but getting less due to elevated inflation.

But here we are in the 2020s, and the mainstream media somehow believes that massive spending and high stock prices are equal to a robust economy. A main factor that kept the 1Q24 GDP from going negative was government spending. It’s also worth noting that government hiring (making the government bigger and bigger) is a primary reason for the apparently low unemployment rate.

Another pillar that’s kept the economy from completely rolling over and has also propped up the large-cap stock market indices in 2023 and 2024 is the extreme optimism about artificial intelligence (A.I.) technology. A.I. was supposed to increase America’s productivity although the GDP data clearly hasn’t followed suit.

Warren Buffett, the CEO of Berkshire Hathaway and an investing legend, has decidedly mixed feelings about the emergence of A.I. technology. Buffett compared A.I. to the invention and proliferation of nuclear weapons while warning, “The power of that genie scares the hell out of me. And I don’t know of any way to get the genie back in the bottle. And AI is somewhat similar. It’s part of the way out of the bottle.”

Buffett isn’t eager to pour Berkshire’s capital into the latest A.I. tech, either. “When you think about the potential for scamming people… Scamming has always been part of the American scene. If I was interested in investing in scamming – it’s gonna be the growth industry of all time,” he stated.

A.I. hasn’t lived up to the hype so far and may already be contributing to unemployment as workers are being displaced by machines and algorithms. Economists apparently weren’t prepared for this since they predicted that the U.S. economy would add 240,000 non-farm jobs in April. They were stunned (though I wasn’t surprised at all) when the actual number turned out to be just 175,000.

The A.I. craze hasn’t boosted the economy like some optimists hoped it would, and Buffett’s warning has a ring of truth to it. Even so, mega-cap stocks rallied in 2023 and early 2024 based on the assumption that A.I. would make everything better. It’s no wonder, then, that Berkshire Hathaway is holding a whole lot of “dry powder” now.

It’s impossible to avoid the A.I. hype if you’re a market watcher nowadays. You’ve got Elon Musk trying to rebrand Tesla as an A.I. technology and robotaxi company instead of the pioneering electric vehicle business that people thought they were investing in.

The genie’s out of the bottle, but I’m not worried since I’m diversified across multiple asset classes, including precious metals. Gold is holding up beautifully at $2,300 per ounce while silver is sitting pretty at $27.50.

It’s great to hold tangible, enduring assets while inflation is steadily rising. American inflation is at the point now where people are spending less at places like McDonald’s and Starbucks and choosing store-brand snacks over more expensive brands like Chips Ahoy.

This is frustrating, but at least your portfolio can benefit from rising consumer prices if you’re positioned in the right way. As for the A.I. technology “genie,” it’s definitely out of the bottle, and if anyone is counting on that genie to save America’s economy, get ready for shock and disappointment.