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- Warren Buffett's Berkshire Hathaway has built a record $157 billion pile of cash and Treasuries.
- Buffett is gearing up to snag bargains and strike deals once the economy weakens, Steve Hanke says.
- The investor famously capitalizes on crises, and he benefits from higher rates, Hanke says.
Warren Buffett has amassed a record amount of cash so he's ready to scoop up bargains and strike attractive deals when the American economy descends into turmoil, Steve Hanke says.
The famed investor's Berkshire Hathaway held an unprecedented $157 billion of cash, Treasury bills, and other liquid assets at the end of September — a nearly $50 billion increase in 12 months. The company's cash pile grew in part because Buffett and his team sold $5 billion of stocks on a net basis last quarter; they've now offloaded a net $44 billion of stocks over the last four quarters combined.
"This is classic Buffett," Hanke, a professor of applied economics at Johns Hopkins University, told Markets Insider in a recent interview. "He loves to fish in troubled waters."
"And with the Fed putting the money supply in a nosedive the likes that we haven't seen since 1933, Buffett is correctly anticipating that troubled economic waters are in the offing," the veteran economist and trader said.
Hanke, who's been teaching students how to value companies like Buffett for decades, is known for serving as an advisor to President Ronald Reagan, and as the president of Toronto Trust Argentina when it was the world's best-performing mutual fund in 1995.
The Berkshire boss will profitably put his dry powder to work once the economy slumps, Hanke said. "Don't forget that Buffett has made big bucks over the years by lending to and rescuing distressed financial institutions," he noted. "And while Buffett waits for the coming economic dislocations and stresses, he is being paid decent money."
Indeed, Berkshire deployed $21 billion across five transactions in just 18 months during the financial crisis, when Buffett struck lucrative deals with Goldman Sachs, General Electric, Mars, Dow Chemical, and Swiss Re.
Moreover, Berkshire earned over $4 billion of interest, dividend, and investment income last quarter, a 70% increase from the third quarter of last year. A key driver was the Fed hiking its benchmark interest rate from nearly zero to north of 5% since last spring, which has bolstered Berkshire's returns from its Treasuries.
In Hanke's view, Buffett's cash build means he's well placed to snap up discounted stocks and businesses and loan money at attractive rates if the economy tanks — and he'll earn a solid return with zero risk while he waits thanks to higher bond yields.
Other commentators have also pointed to Buffett's bulging war chest as a warning sign for investors. "I think he sees trouble next year," Portfolio Wealth Advisors chief Lee Munson recently said. "It means be cautious. He doesn't see any screaming deals."