Warren Buffett predicted a worsening economy during Saturday’s Berkshire Hathaway annual shareholder meeting.
Berkshire’s famous investor and CEO said that most of his businesses would report lower earnings this year than they did last year, attributing the decline to the broader economic slowdown.
Berkshire operates in various industries, from railroads to manufacturing to retail to services, as well as the traditional markets of insurance and energy. The BNSF Railway, See’s Candies, and Geico are just a few of the many firms owned by Berkshire. The scale and scope of its activities have led investors to compare it to the United States economy.
Several of Berkshire’s businesses have done well over the past few years, benefitting from the low-interest rates on loans made available by the government and from the flood of money injected into the economy to counteract the impacts of the pandemic.
As Buffett put it, “That incredible era is over.” Since the new year began, there has been a dramatic shift in the economic climate.
The Federal Reserve has raised interest rates from near zero to 5% in the past 14 months to counteract historically high inflation. The goal of this change was to slow down inflation. A rise in interest rates increases the cost of borrowing money and encourages people to save. As a result, higher rates often limit demand, drive up the price of assets, and increase the chances of a recession.
Additionally, banks are under more stress now than ever before as the value of their fixed-income holdings has declined due to rising interest rates. As a result, many people have moved their money out of low-yielding bank accounts and into higher-yielding bonds and money market funds.
These factors have helped to create the current banking sector volatility. As a result of the chaos, there is now concern that banks would restrict their lending to protect themselves from more bank runs, triggering a credit crunch and a recession.
Buffett feels the U.S. economy is in trouble due to a series of aggressive rate hikes that contributed to the failure of three banks in weeks due to the inability to meet debt obligations.
This is the tenth rate hike since 2022 that the Federal Reserve has approved, increasing the Fed funds rate to a range of 5%-5.25%, the highest since August last year.