Berkshire continues to sit on cash (144B) with a thesis that productive assets are expensive due to the long period of low interest rates:
'That’s largely because of a truism: Long-term interest rates that are low push the prices of all productive
investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important.'
Upcoming interest rate increases may create good opportunities for Berkshire to invest this money and grow.
Yeah I’m a long term investor in GE and the low interest rate is actually painful for them cause of their massive pension liabilities. When the rates are so low, GE has to keep shoring up the pension funds with their own money to make up for the shortfalls. Interest on the pension’s assets just aren’t paying enough to keep up with predicted expenses.
There is a political reason for this. US leaders exempted taxpayer funded defined benefit pension plans from any rules or regulations, but subjected non taxpayer DB pension plans to strict rules and regulations (ERISA 1974 and PPA 2006).
This means GE’s pension plans have to use conservative assumptions and conservative investments, which is all well and good. As an example, GE is required to use the yield curves of high grade corporate bonds to calculate pension liabilities (~4% and lower in recent history).
But for decades, taxpayer funded pensions have been playing fast and loose, assuming enormous return on investments (~8%), underfunding the pensions (to keep taxes low), and of course, investing in riskier and riskier assets to try to make up for the previous years’ of underfunding and corruption.
Of course, politicians want to keep kicking the can down the road, and the best way to do so is to keep deflating the dollar and inflating asset prices. It is not politically feasible to cut defined benefit pension amounts, but it is politically feasible to satisfy the nominal benefits promised while providing a much lower real benefit (i.e. one with reduced purchasing power).
Since I'm not confident I'll be able to figure this out myself from the article, I'll ask you: how exactly are they keeping this "cash"? It is predominantly some kind of treasury security or something, presumably?
short term treasuries - that's almost always the answer when a company says cash. Sometimes it's other things, with almost exactly the same characteristics.
on paper, 7% inflation minus the 1%-2% T-bill interest seems like they're losing 5% per year.
But this fails because of one underlying assumption - that the cash losing value at inflation is an absolute truth. it's not. The reason is that inflation pushes cost of consumption, but the cash Berkshire is holding is not for consumption, but for investment. Investments could be expensive, or cheap, and holding on to cash _without the requirement that the cash be spent on consumption in the future_ means the cash is not hit hard by inflation figures like a household holding cash.
I think you have the causality backwards. Negative interest rates are due to central bank policy. It seems in Denmark they are trying to keep the Krone pegged to the Euro. That is, preventing it from rising.
Would people in Denmark say their money buys more today than in previous years? Including purchases such as land, healthcare, education, and legal services?
Also, we've had a 15 year bull run, arguably the greatest in history. Sooner or later that bubble has to pop. No? Though if we run into stagflation, I wonder how they plan on protecting the value of their cash. Regardless, it's amazing how much cash they've accumulated. You expect tons of cash from APPL, FB, GOOG, etc since they are in tech. But I guess it helps when you don't pay a dividend each quarter.
