Warren Buffett is considered the most successful investor of our time. One of the indicators that he follows is the stock market’s total valuation to GDP, which is now flashing red. Buffett’s Berkshire Hathaway currently holds in excess of $128 billion in cash.
The vertical grey lines in the chart are major recessions. Note how Buffett’s indicator peaked a year or so before the last two severe economic downturns. Now, though, the stock market’s valuation to GDP is at an even higher level. Is there a major recession awaiting about a year out?
If there is, we can expect the Fed to begin massive money printing to forestall it or at least to soften its effect. Past money printing binges by the Fed resulted in bull markets in gold and silver. Wait! The Fed has already swung into action with repurchase agreements, reverse repurchase agreements, and its $60 billion monthly T-bill purchases.
Repo and reverse repo operations are used to adjust the supply of banks’ reserve balances and to keep the federal funds rate around the target level, which now is 1.55%. When the fed funds rate shot above 10% last September, the Fed swung into action.
As of January 1, the Fed had injected $255 billion with repos alone, more than double what it supplied during the 2008 World Financial Crisis. The Fed has said that it will continue repo activity through February, but there is speculation that it may be extended to April.
It should be kept in mind that the September 2019 fed funds rate surge to 10% caught the Fed by surprise. So, we really don’t know how much money will be created as the Fed “handles” this development.