Oz, Omaha & The Way Forward

Friday Reflections

Oz, Omaha & The Way Forward

On the occasion of Berkshire Hathaway’s annual meeting last Saturday in Omaha, Warren Buffett fielded questions from all quarters, but the Omaha auditorium normally packed with nearly 19,000 investors was empty. The meeting was broadcast virtually, and the radical emptiness of the arena and other stark changes in our economic landscape are reminiscent of the cyclone that carried Dorothy and her Kansas prairie house into the Land of Oz. While not a wizard, Warren Buffett is affectionately nicknamed the “Oracle of Omaha,” and his voice has a special place amongst investors, and in moments of crisis in particular.

Following the meeting, the US equity and bond markets continued the path of modest recovery this week.  The narrative of “re-opening” has triggered optimism amongst investors, who are somewhat doggedly looking to the future, just as Warren Buffett does.  There is no yellow brick road to follow for re-opening, though, and even Warren Buffett doesn’t know what comes next.

We do know that more than 33 million workers have filed for unemployment in the past seven weeks, including approximately 20 million who lost their jobs in April.  Of those April job losses, 88% have been only temporarily laid off[1], but it is unclear how many will in fact be re-hired as economic restrictions loosen.  Some worked for small employers that can’t viably re-open while also complying with social distancing and hygiene guidelines, or larger employers that may choose to re-hire only a portion of their workforce while waiting for consumer demand to rebuild.

Beyond the business capacity for delivery of goods and services, the path forward for consumer demand is unclear.  Shelter in place orders have created a huge external support to change. Here in the East Bay we are on day 54 and new habits are forming.  People have reduced various areas of consumption, left office space unused while they attend virtual meetings, and are doing tasks for themselves that they previously hired out – cooking, cleaning, gardening, haircuts.  For both businesses and consumers, newly innovated and adapted behaviors may permanently shift our economic landscape.

In certain cases, the shifts are large enough to change the viability of a business model.  Buffett recognized this tectonic shift and elected to sell his entire stake in four major airlines during the market volatility in March. It isn’t that people won’t return to airports and won’t fly – they will.  It isn’t that management had poorly managed their companies – Buffett actually praised their stewardship.  Rather, the level of demand has shifted downward far enough due to pandemic concerns, and is compounded by cost headwinds from new debt and maintaining a full fleet of aircraft, that Buffett no longer felt the future profits justified the current risks.

Buffet’s perspective is a primary consideration from the investor standpoint:  do the future profits justify the current risk?  He is well known for buying not only stocks, but entire businesses, and his strategy epitomizes the fact that as a stock investor you are investing in a business for the long term, not just investing in a stock.  That view helps us shift perspective to think beyond the interests of shareholders alone, to go beyond the view that the only reasonable benefit from an investment is financial profit.  Our phrasing of stakeholders, not just stockholders, includes categories such as the community or the environment.  Buffett articulated it this way in his annual letter on February 22:  that in choosing investments they seek “managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country.”

Re-opening the economy is important, but it does not mean a return to a past version of “normal”.  If we can embrace that, rather than fight it, then we can start thinking about the possibility of building something better than what we came from.  Crisis creates opportunity, both for investors allocating capital and policymakers stewarding our country. Unfortunately, much of the conversation has been antagonistic, with the interests of economic growth and public health in opposition to one another.  That does not need to be so, opines Buffett, and we agree.

Like Dorothy’s quest to return back home, our road will include obstacles as well:  perhaps not flying monkeys or fields of poppies, but the challenges of developing effective virus testing or making public transit work with social distancing.  Helping all stakeholders creates the community and the resilience that makes business work, and makes the economy grow. Our stakeholders today are not scarecrows or cowardly lions, but workers, customers, and communities.  All are facing acute problems that necessitate immediate attention – jobs, liquidity, healthcare – as well as systemic issues the resolutions to which would provide foundations for true progress – wage growth, economic and social equality, climate mitigation.

A narrative has emerged that we are making progress on those acute problems, and that has led to partial recovery in the stock market that is obsessively forward-looking.  If that progress is to continue and not stall, though, we need to address the systemic issues as well.

Congress is already working on another round of stimulus to maintain the pace of recovery. This proposal may arrive next week and is estimated at $750 billion, including another round of direct support to US households.  Lifting their aim slightly, house Democrats are expanding discussions to include funding for coronavirus testing, vote-by-mail programs, and expanding Americans’ access to broadband, while Republicans have included liability protection for companies that elect to re-open.[2]

This stimulus will be helpful as unemployment filings continue and mortgages come due, but it doesn’t address the systemic issues.  It doesn’t rival the creation of the FDIC, which Warren Buffett cited as one of the most valuable outcomes of the Great Depression and a good safety net from returning to those depths.  The current proposals don’t evoke New Deal leadership, or include programs to put people back to work building a better tomorrow via infrastructure upgrades or accelerating the shift toward renewable energy, which both help private sector business long-term.

We hope the wizards in Washington are able to think big enough to enact policy that will address these generational issues.  If not, voters will have to realize, like Dorothy, that they had the real power all along.  Investors have already begun the process of realizing their own power, and many of our clients have opted to include mandates for social responsibility in their portfolios.  In recent years, access to data has expanded to include gender pay gaps, jobs created, diversity metrics, and tracking of safety violations that along with environmental metrics has allowed better assessment of portfolio risk and impact.  As we navigate this road toward sustainable recovery, voting at the ballot box (or safely via mail-in programs) and voting with your dollars will be two powerful pillars.

If we allocate our resources thoughtfully and wisely, like Dorothy, we may find ourselves more at home than we were before this saga began, in a land of technicolor and opportunity.

[1] Sarah Chaney and Eric Morath “April Unemployment Rate Rose to a Record 14.7%,” WSJ Online, May 8, 2020.

[2] House Democrats Close In on New Stimulus Proposal, 5/7/20.  https://www.wsj.com/articles/house-democrats-close-in-on-new-stimulus-proposal-11588851736