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The Oracle of Omaha, Warren Buffett, has officially pulled the plug on his entire position in airline companies. He openly admitted this was a mistake. When I first heard the news of him selling airline companies just AFTER buying them the month prior, this was something I took very serious and it confirmed many of my initial thoughts on the severity of the virus when it comes to the economy. The butterfly effect for this pandemic will change the world for years to come. Traveling and large gatherings won’t be the same for a minimum of 18 months to two years.
For me, it was a “canary in the coal mine” news event. It was significant for these three reasons:
- This pandemic is proving to be more economically damaging than Buffett had previously anticipated.
- The airlines’ balance sheets aren’t strong enough to cover their short-term liabilities.
- The government bailouts aren’t going to be favorable enough for airlines to deserve a buy.
Buffett has just revealed in his annual shareholder’s meeting that he has sold the rest of his position in airlines since his initial selloff of Delta and Southwest, which now also includes United and American airlines.
Traveling and leisure won’t be the same for a while, and this hasn’t been priced into the economy yet.
In 2019, the idea of a cruise for most people was going to tropical islands and fun excursions. For many, it’s now more of a disgust thinking about being surrounded by thousands of people in a confined space where disease could spread rapidly.
It will take one to two years to regain trust in the medical treatments and a full passing of the COVID-19 virus, which will likely include 2nd and 3rd waves and may ultimately not recover for a decade.
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30 million Americans have filed for unemployment as this downturn has rapidly escalated. Out of a workforce in the U.S. that peaked at around 160 million, we’re talking about a serious reversal in the short-term despite the band-aids that have been applied.
Stimulus payments and unemployment have been the pain killers that have soothed the economy up until now. Implementations of mortgage protections, rent moratoriums, and money in the pockets of the people have allowed the economy to hobble along. This is going to come at a monumental price on the backend with inflation and taxes on the people that’s mostly via stealth inflation, which doesn’t need to go through a political process.
Think about a restaurant attempting to operate at 25% capacity. Their profit margins are so razor-thin as it is, usually in the range of 0-15%, with most near 3-5%. These types of businesses are not viable in the “new normal” economy. These breakdowns will mean layoffs, defaults, and a chain reaction that will ripple through the economy, which hasn’t taken place yet.
Here are my honest thoughts on stocks.
The stock market has been pricing in optimism and a “V”-shaped recovery, which I believe will be nearly impossible considering the societal changes we will be facing for the rest of 2020 and going into 2021. I believe what we’ve seen the past couple weeks have been fake rallies that will be followed by subsequent downturns.
The caveat to this is that we need to anticipate that the Fed will continue to inflate the dollar into oblivion. When we see stocks fall, know that there will likely be countermeasures in the form of increased stimulus payments to prop up markets at all costs.
To that end, I believe stocks will go up in dollar terms over time and reflect the increasing money supply, which is a reason to not completely ignore the markets but strategically acquire shares with caution.
This is why I’ve created a shopping list of stocks for my readers to consider buying when they go on sale. The majority of these companies are priced above my personal buy-up-to prices right now but we could see more selloffs shortly and you can pick up good buys that I would consider hedges against the dollar to a degree, the way I see gold and silver.
This is not a time to act irrationally or hastily. Patience will be a virtue in this environment.
Chief Editor, CrushTheStreet.com
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