Buffett’s $13.3B Stock Sell-Off Sends Shockwaves Through Bitcoin and Risky Investments

"The Oracle of Omaha, Warren Buffett, Raises Berkshire Hathaway's Cash Holdings by $2 Billion in Q1 Amid Decreasing Confidence in Risk-Assets"

Warren Buffett, also known as the “Oracle of Omaha,” has increased Berkshire Hathaway’s cash holdings by $2 billion in Q1, signaling his decreasing confidence in risk-assets. This move suggests that he is bracing for a possible collapse in risk-on asset prices. Should Bitcoin (BTC) investors also prepare for a potential stock market crash, given that BTC is up 70% year-to-date and correlated with equities?

Berkshire Hathaway dumped $13.30 billion worth of equities and increased exposure in cash and U.S. Treasuries in Q1, according to its latest quarterly earnings report. Meanwhile, the firm channeled $4.4 billion toward purchasing its own stock and $2.9 billion on the shares of other publicly-traded companies. Given that Berkshire Hathaway’s performance is considered a key indicator to gauge the U.S. economy’s health, this move is significant. The firm’s holdings range from American railroad to electric utilities and retail businesses.

However, Buffett, who has credited the U.S. economy’s growth for the success of Berkshire Hathaway in the past, is no longer optimistic. “The majority of our businesses will report lower earnings this year than last year,” Buffett said last weekend at an event. The “incredible period” for the US economy has been coming to an end over the past six months, he added. Berkshire raised its cash reserves by $2 billion to $130.60 billion in Q1/2023, the highest level since the end of 2021 when equities entered a bear cycle. Moreover, the firm holds a vast amount of its cash in short-term Treasury bills and bank deposits thanks to higher interest rates near 5%. In other words, Buffett is preparing for a potential stock market crash, particularly as the U.S. banking crisis continues to unfold (e.g. PacWest Bancorp and Western Alliance Bancorp).

The increasing possibility of a global recession also risks putting downside pressure on Bitcoin, whose 100-week correlation with the Nasdaq reached its highest level of about 0.42%. Moreover, Bloomberg Intelligence analyst Mike McGlone expects that BTC price would likely be the leading indicator for a stock crash. “Bitcoin could pace declines for risk assets — If the worst isn’t over for risk assets, Bitcoin may lead the way lower,” noted McGlone, adding: “Bitcoin is up about 70% in 2023 to May 2 vs. 20% for the stock index, and those are maybe bounces within broader bear markets. The Fed [is] still tightening in May, and [is] more inclined to stay the course unless risk assets fall to ease inflation, may portend a lose-lose.”

In the short term, there are little expectations from the U.S. consumer price index report on May 10 about easing inflation in April. According to Bloomberg’s survey, economists expect core CPI to remain unchanged at around 5%, meaning more rate hikes ahead. On the other hand, a big drop in inflation will likely prompt the Fed to consider pausing or even slashing interest rates in an extreme case scenario. Currently, Fed funds futures’ data suggests that at least five rate cuts between May 2023 and January 2024 are likely — something which may pour cold water on Buffett’s risk-off strategy.

Bitcoin’s price has declined roughly 6% over the past week, trading for as low as $27,350 on May 9. Notably, this has pulled BTC’s price below its 50-day exponential moving average (50-day EMA; the red wave) near $27,950. Bitcoin bears are now eyeing $27,000 as the next downside target based on the level’s recent history. A decisive break below the $27,000 support, primarily in the event of further rate hikes, could then pull down BTC/USD down to its 200-day EMA (the blue wave) near $24,600. In other words, a 10% drop by June. Conversely, a rebound from $27,000 increases the possibility of BTC price retesting $30,000 as resistance, and to resume the uptrend of the last few months.

In conclusion, Warren Buffett’s move to increase cash holdings suggests that he is preparing for a potential stock market crash. Given that Berkshire Hathaway’s performance is considered a key indicator to gauge the U.S. economy’s health, this move is significant. The increasing possibility of a global recession also risks putting downside pressure on Bitcoin, whose 100-week correlation with the Nasdaq reached its highest level of about 0.42%. Bloomberg Intelligence analyst Mike McGlone expects that BTC price would likely be the leading indicator for a stock crash. Therefore, investors should conduct their own research and make informed decisions when it comes to investing in BTC or other assets.

Martin Reid

Martin Reid

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