Warren Buffet Sells Half of Apple Stock Amid Growing Recession Fears Shaking Global Markets
Warren Buffett’s Berkshire Hathaway made an unexpected decision last quarter by selling nearly half of its substantial Apple holdings. The Omaha-based conglomerate revealed in its earnings report that its investment in the iPhone manufacturer was reduced by just over 49%.
The sale of Apple shares is part of a larger trend of selling by Buffett in the second quarter, during which Berkshire divested over $75 billion in equities. This increased the conglomerate’s cash reserves to a record $277 billion.
How Do You Define a Recession?
A recession is generally defined as a significant decline in economic activity that persists for an extended period, typically marked by a contraction in gross domestic product (GDP), rising unemployment rates, reduced consumer spending, and declining business investment. While there isn’t a strict rule for the duration or magnitude of these economic downturns, they are commonly characterized by negative GDP growth for two consecutive quarters or more. Recessions are a natural part of the economic cycle and can be influenced by various factors such as financial crises, external shocks, or imbalances in the economy. Policymakers often implement measures to stimulate economic recovery during recessions.
Concerns About Slowing U.S. Economy
Concerns about a slowing economy have been reignited by recent weak data, including Friday’s disappointing July jobs report. As a result, the Dow Jones Industrial Average dropped 600 points on Friday.
Global Markets Reflect Concerns
Japan’s Nikkei 225 index plummeted nearly 13% as global markets reacted to risks facing the US economy. Taiwan’s Index also tumbled, losing 7.4%, with Taiwan Semiconductor Manufacturing Co., the world’s largest chip maker, dropping 8%.
The primary concern is that higher unemployment could limit spending, further reducing hiring, incomes, and economic activity, ultimately leading to a recession.
Economists Are Concerned About the State of the US Economy
Contrary to Wall Street’s pessimistic predictions, the US economy successfully defied expectations of a prolonged downturn last year. However, according to Citi, there are indications that the US economy is poised to enter a recession in the middle of 2024.
Citi’s chief US economist, Andrew Hollenhorst said, “There’s this very powerful and seductive narrative around a soft landing, and we’re just not seeing it in the data”
Inverted Yield Curve
The Cleveland Fed considers the yield curve a predictor of economic growth. According to conventional wisdom, when the yield curve inverts (short-term rates surpass long-term rates), it forewarns an impending recession. Notably, yield curve inversions have heralded each of the last eight recessions, as defined by the NBER (National Bureau of Economic Research).
The U.S. Yield Curve (10-year minus 3-month) has been inverted for over a year.
Jobs Numbers Have Been Revised Lower
The monthly estimates by the Bureau of Labor Statistics (BLS) have painted a rosy picture of the economy. However, almost every month the BLS has quietly released downward revisions of the previous data.
The Early Benchmark Revisions of State Payroll Employment report released by the Philly Fed states that “Estimates by the Federal Reserve Bank of Philadelphia indicate that the employment changes from June through September 2023 were significantly different in 27 states compared with prebenchmark state estimates from the Bureau of Labor Statistics’ (BLS) Current Employment Statistics (CES).”
The California Legislative Analyst’s office called out the downward revisions last week mentioning that the state added fewer jobs than reported last year. The report states, “The actual job count in California is 1.5 percent lower than suggested by the preliminary monthly figures.”
“The corrected data show that the state added just 50,000 jobs between September 2022 and September 2023.
The monthly jobs report, which the administration and the Legisture relied on to gauge the economy during that period, showed the labor market growing steadily, appearing to add more than 300,000 jobs over that period.”
A similar scenario is expected to play out in the other states.
Surging Household Debt
According to the Federal Reserve Bank of New York, total household debt rose by $212 billion to $17.5 trillion in the fourth quarter of 2023.
The outstanding credit card balances, currently at $1.13 trillion, increased by $50 billion, marking a 4.6% rise over the prior quarter.
Auto loan balances continued their upward trend, experiencing a $12 billion increase, and currently stand at $1.61 trillion, maintaining the trajectory observed since the second quarter of 2020.
Mortgage balances increased by $112 billion from the previous quarter, reaching $12.25 trillion at the end of 2023. Americans under financial stress have resorted to using their home equity lines of credit (HELOC), which saw an increase of $11 billion, marking the seventh consecutive quarterly rise since 2022. The aggregate outstanding HELOC balances now amount to $360 billion.
Consumer Delinquencies Rising
Credit card balances, mortgage loans, and auto loans are at record-high levels as delinquency rates for most debt types continue to climb.
On an annualized basis, about 8.5% of credit card balances and 7.7% of auto loans became delinquent. Serious credit card delinquencies increased across all age groups, particularly among younger borrowers, surpassing pre-pandemic levels.
“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”
Since consumer spending is a critical component of the U.S. Gross Domestic Product, an uptick in delinquency rates as individuals attempt to manage debt payments with fewer financial resources could prove disastrous.
Low Personal Savings Rate
The personal saving rate, often termed as the percentage of personal saving to disposable personal income (DPI), is derived by calculating the ratio between personal saving and DPI. Personal saving represents the portion of personal income available after deducting living expenses and taxes.
As of Aug 2024, the Personal Savings Rate stands at 3.4%, one of the lowest savings rates on record.
Unsustainable Federal Debt Levels
The Gross Federal Debt Levels are at an all-time high.
The Penn Wharton Budget Model projects that financial markets may struggle under the accumulated deficits forecasted under the existing U.S. fiscal policy. Financial markets anticipate that forthcoming fiscal policies will implement significant corrective measures in advance. However, if financial markets were to lose confidence in this scenario, the debt dynamics could quickly become unsustainable and potentially unravel sooner than expected.
Fed Chairman Jerome Powell has said it is past time to have an “adult conversation about fiscal responsibility.”
The debt-to-GDP ratio is currently around 121.62%, and politicians are not showing any sign of slowing spending.
Interest On Debt Unsustainable
Year-to-date, interest on Treasury debt exceeds $357 billion, showing a 37% increase from the same time previous year. It surpasses military spending and rivals only Social Security Administration or the Department of Health and Human Services. By year-end, the interest on the debt is projected to reach $1.1 trillion.
The national debt is rising by $1 trillion every 100 days.
More Taxes Or Print Money
Higher debt must be financed with higher taxes or more money creation. Raising taxes might prove difficult, but the alternative of printing more money could result in rampant inflation. Americans have suffered in the past two years as inflation has made everyday necessities more expensive. Although the pace of price increases has slowed, food and gas prices are still higher than in the past.
Cuts to Social Programs
So far, government spending has been financed by selling U.S. debt to foreign nations. America’s ability to pay its debt is a concern for nations worldwide, which own around $7.6 trillion of our debt. Japan and China are the top two countries holding U.S. debt. Both countries have been reducing their holdings of U.S. Treasuries.
With Japan falling into a recession and China taking an aggressive stance towards the U.S., it could be harder to finance debt.
If the U.S. government can no longer find buyers for its $1.7 trillion annual debt, significant cuts must be imposed on social programs.
Is the US Headed for a Recession?
The economic indicators paint a challenging narrative for the current financial landscape. From the ominous signs of an inverted yield curve, historically a herald of impending recession, to the mounting household debt, surging delinquency rates, lower than expected employment numbers and concerning federal debt levels, the economic stage appears set for potential turbulence. As we navigate these indicators, it becomes apparent that the need for prudent fiscal measures is more crucial than ever. The looming questions about addressing these economic challenges, whether through tax hikes or increased interest rates, cast a shadow over the future.
Cutting the interest rates could spike inflation and lead to a stagflation. But if rates are high we could enter into a recession.
As policymakers grapple with these dilemmas, the potential repercussions, including cuts to social programs, hang in the balance, emphasizing the urgency of a thoughtful and strategic approach to navigating the uncertain economic terrain ahead.
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Increasing 401(k) Hardship Withdrawals Cast a Shadow on Middle-Class Financial Stability
Recent reports from prominent financial institutions like Fidelity Investments, Bank of America, and Vanguard reveal a concerning trend: an uptick in the share of retirement plan participants resorting to hardship withdrawals from their 401(k) accounts. More individuals face immediate and significant financial strains, leading them to tap into their retirement savings as a solution. This rising trend signals a worrisome pattern, shedding light on the challenges many Americans are encountering.
Increasing 401(k) Hardship Withdrawals Cast a Shadow on Middle-Class Financial Stability
Are You Prepared for the Financial Storm Ahead as Retirement Savings Dwindle and Social Security Faces Insolvency?
As millions of Americans approach retirement age, a recent AARP survey reveals a troubling reality—1 in 5 adults over 50 have no retirement savings, and more than half worry about outliving their funds. Adding to this concern, Social Security is projected to become insolvent within the next decade, leading to significant benefit cuts. Meanwhile, many recent retirees are returning to work, driven by financial necessity or the search for social and emotional fulfillment.
Survey Reveals Americans Now Need $1.46 Million for Retirement, Up 53% Since 2020 – How Does That Compare to Actual Savings?
According to a Northwestern Mutual survey of 4,588 adults, the new ideal retirement savings goal is $1.46 million, up from last year’s $1.27 million—a 15% increase. This figure marks a significant 53% rise from the $951,000 Americans estimated they would need in 2020.
Is the 4.28% Treasury I Bond Rate Still a Wise Investment Choice?
Inflation poses a serious threat. As inflation surged in the past two years, I bonds became a secure and appealing investment choice. However, with recent lower CPI figures, the composite rate for I bonds stands at 4.28%, a decrease from the attractive 9.62% annual rate investors enjoyed in May 2022. Given these reduced rates, investors are now weighing whether to continue purchasing or to sell their existing Series I bonds.
Is the 4.28% Treasury I Bond Rate Still a Wise Investment Choice?
SECURE Act 2.0 and Its Impact on Your Retirement Savings: What You Need to Know
Three years post the transformative SECURE Act, its successor, SECURE Act 2.0, extends access to retirement plans and benefits. Updates feature automatic enrollment in workplace plans, increased catch-up contributions for seniors, and expanded savings avenues for part-time workers. It also improves emergency savings access, aiming to bolster financial security. Here’s an overview of the latest provisions impacting retirement planning in America.
SECURE Act 2.0 and Its Impact on Your Retirement Savings: What You Need to Know
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
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Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
Platforms like Yieldstreet provide investment options in art, legal, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.