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In recent weeks, Warren Buffett’s has begun unleashing Berkshire Hathaway’s huge cash hoard, acquiring billions of dollars in stakes in an insurance company and energy and computing companies.

But what’s more striking about his recent moves is his avoidance of investment banks.

Large U.S. banks have been Warren Buffett’s favorite investments for years. Like Buffett’s other top industry — railroads — banking is part of the country’s infrastructure, and it’s a country he keeps betting on. Banking is a business he knows, having helped bail out Salomon Brothers in the 1990s and pumped $5 billion into Goldman Sachs at the height of the 2008 financial crisis.

In fact, Wells Fargo has been Buffett’s largest holding for the third year in a row. As of 2019, Berkshire Hathaway held large stakes in four of the top five U.S. banks.

But something has changed, which observers say could have implications for the future of the U.S. economy. Investors and analysts are sure to vote on Buffett’s views at the company’s annual meeting on April 30.

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After Buffett began adding to his bank holdings in 2018, buying JPMorgan Chase and Goldman Sachs, as well as BNY Mellon, PNC Financial and US Bancorp, he explained to CNBC’s Becky Quick that these moves are a classic value game, one of the hallmarks of 1. His distinguished career as an investor.

“In my opinion, they are very good investments at reasonable prices, and they are cheaper than other companies, which are also good companies in a way,” he said.

In particular, he was excited about JPMorgan Chase, run by Jamie Dimon, and told Quick that he was “foolish” not to buy the stock sooner.

“Bad results”

However, in the wake of the coronavirus pandemic in early 2020, lenders began setting aside tens of billions of dollars for the expected flood of loan defaults. Even as the industry became noticeably cheaper, Buffett reversed many of his bets, dumping JPMorgan, Goldman Sachs and Wells Fargo.

“He sold them cheap and missed a lot of the recovery after that,” James Shanahan, the Edward Jones analyst who covers banks and Berkshire Hathaway, said in an interview. “But there was a lot of uncertainty at the time. .”

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At last year’s shareholder meeting, Buffett explained his thinking: “In general, I like banks, I just don’t like the ratios we have versus the potential risk if we get bad results that we’ve never had before, ” Buffett said.

The Federal Reserve moved to flood the country and prop up markets, avoiding the worst financial fallout from the pandemic-induced lockdown, while the industry’s expected mass defaults didn’t materialize.

Now, with the pandemic finally subsiding in the U.S., Buffett isn’t making everything clear to the bank. why is that?

Main street above wall street

His bet on the industry remains largely unchanged after giving up a number of positions in 2020, according to an analysis of quarterly filings. By selling JPMorgan and Goldman Sachs, he reduced his exposure to volatile Wall Street activity, including trading markets and global investment banking.

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His remaining list of financial stocks — including a massive $40 billion-plus position in Bank of America and a much smaller stake in the US. Bancorp – Signals Buffett’s desire to focus on basic U.S. retail and commercial banking to store funds more securely. Wells Fargo’s place in its portfolio for years was effectively replaced by Bank of America, its second-largest holding after Apple.

“What this tells you is that he thinks we need to close the door because we have a long inflation cycle and it’s likely to stall,” said Philip Pan, a professor at the Johns Hopkins Carey School of Business. “The banking cycle It’s very strong and all signs point to a period of time where we’re in a high inflation, high interest rate environment. That usually means a slowdown in lending and investment.”

Stocks have come under pressure despite rising interest rates this year, which typically boost banks by boosting credit margins.

JPMorgan shares are down 23% in 2022, hitting a 52-week low on Wednesday. Goldman Sachs is down 18% this year. The worry is that the U.S. economy could falter as the Federal Reserve fights inflation by raising interest rates, raising borrowing costs after the lowest rates in more than a decade.

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JPMorgan’s Dimon has sounded the alarm on that risk, surprising analysts this month with a $1.5 billion first-quarter loan-loss provision amid the war in Ukraine and the increased likelihood of a recession.

In other words, the “bad results” that Buffett feared for 2020 may not be in the industry yet. They were just delayed.

Buffett may be waiting for lower bank prices or signs that the U.S. is emerging from a recession to deploy his sizable cash hoard. Even after its latest $23 billion shopping spree, Berkshire Hathaway has more than $120 billion in cash left over.

Another way to look at the waning role of banks in Buffett’s portfolio is due to the influence of Berkshire’s relatively new fund manager and the pressing need to beat the benchmark S&P 500, Shanahan said, as tech companies led by Apple Inc. share is increasing.

“In the past, if you looked back five or 10 years, financial stocks were always 40% to 50%,” Shanahan said. “The biggest change in the portfolio is that it’s less focused on financial services and more focused on technology.”

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