Warren Buffett has moved into cash, suggesting he is bracing for a possible collapse in risk asset prices. With Bitcoin (BTC) up 70% year to date and correlated with the stock market, should BTC investors prepare for a potential stock crash as well?
Buffett says the ‘incredible period’ is over
Buffett-owned Berkshire Hathaway sold $13.3 billion worth of shares and increased its exposure to cash and US Treasuries in the first quarter, its latest quarterly earnings report shows. Meanwhile, it funneled $4.4 billion toward buying its own shares and $2.9 billion in shares of other publicly traded companies.
The market sees Berkshire Hathaway’s results as a key gauge of the health of the US economy, as the firm’s holdings range from US railroads to electric utilities and retailers.
But the 92-year-old investor, who in the past attributed the success of Berkshire Hathaway to the growth of the US economy, is no longer so optimistic.
“Most of our companies will post lower profits this year than they did last year,” Buffett said at an event last weekend. The “incredible period” of the US economy has come to an end in the last six months, he added.
Berkshire raised its cash reserves by $2 billion to $130.6 billion in the first quarter of 2023, the highest level since late 2021, when equities entered a bear cycle. In addition, the firm holds a vast amount of its cash in short-term Treasury bills and bank deposits, thanks to higher interest rates of around 5%.
In other words, Buffett is bracing for a potential stock market crash, especially as the US banking crisis unfolds, with shares in many banks, including PacWest Bancorp and Western Alliance Bancorp, plunging.
The growing possibility of a global recession also threatens to put downward pressure on the price of Bitcoin, whose 100-week correlation with the Nasdaq has reached its highest level, around 0.42%.
Furthermore, Mike McGlone, an analyst at Bloomberg Intelligence, predicts that the price of BTC is likely to be the leading indicator of a stock market crash.
“If the worst is not over for risk assets, Bitcoin price could lead the declines,” commented McGlone, adding:
“Bitcoin is up close to 70% in 2023 through May 2 vs. 20% for the stock index, and it may be rebounds within broader bear markets. The Fed is still tightening in May, and is more inclined to hold heading unless risky assets fall to ease inflation, it may portend a lose-lose.”
In the near term, there is little expectation from the May 10 US Consumer Price Index report that inflation will ease in April. According to the Bloomberg survey, economists expect core CPI to remain unchanged at around 5%, suggesting more interest rate hikes are on the way.
On the other hand, a significant drop in inflation will likely prompt the Federal Reserve to consider pausing or even cutting interest rates in an extreme scenario.
Currently, data from Fed funds futures suggests that at least five rate cuts are likely between May 2023 and January 2024, which could throw a bucket of cold water on Buffett’s strategy of not risk.
Could the price of Bitcoin fall back below $25,000?
Bitcoin price is down about 6% over the past week, hitting a low of $27,350 on May 9.
Notably, this has dragged the price of BTC below its 50-day exponential moving average (50-day EMA; the red wave), near $27,950.
Some Bitcoin bears are eyeing the $27,000 level as the next downside target, based on the level’s recent history.
A decisive break below the $27,000 support, mainly in the event of further rate hikes, could then drag the BTC/USD pair down to its 200-day EMA (the blue wave) near $24,600. In other words, a 10% drop between now and June.
Conversely, a bounce from $27,000 raises the possibility that BTC price will touch $30,000 again as resistance and resume the bullish trend seen in recent months.
This article does not contain investment advice or recommendations. All investing and trading involves risk, so readers should do their own research before making a decision.
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