Warren Buffett's Uncertainty Reflects Uncertainty around Coronavirus

Fatality Rate

1. The U.S. Energy industry is in trouble medium-term. As Buffett put it, "When you buy into a huge oil
production company, how it works out will depend on the price of oil, not geological home runs. It’s an
investment that depends on the price of oil...and production will go down a lot in the coming years because it
doesn’t pay to drill. There’s a lot of money that has been invested that wasn’t invested for $17 WTI price for
oil.” Things are so bad he compared the energy industry to the farm industry, and even said “I’m all for
subsidies.” The U.S. energy economy employs some 7 million of the nation's 150 million strong workforce, and
accounts for $350 billion in annual investment, so you can see why even a hyper-capitalist like Buffett would be
in favor of subsidies in the short-term. Oh, and that structural weakness "will affect the banking industry to some
degree.”
2. Airlines are in trouble. Perhaps the biggest headline from the event (and week prior) was Buffett’s
confirmation that Berkshire sold its entire stake in the country’s four largest airlines, an investment that Buffett
had initially justified as a bet to "pay $8 billion to get back $1 billion earnings." All told, Berkshire backtracked
on that bet quickly, recouping $6.5 billion worth of the stocks, and stowing away the proceeds in cash. “There
are too many planes, and the world has changed for the airlines.” This is a change that the company doesn’t
anticipate reversing anytime soon. Like energy, the coronavirus has wreaked potential long-term havoc on a
$150 billion sector that employs some 750,000 Americans and helps drive 10 million American jobs.
3. Many small businesses are in trouble. This is no surprise, but Buffett discusses the struggles of many small
businesses even within the Berkshire portfolio. He highlights how the companies in peril today were the ones
that were already struggling pre-coronavirus: local newspapers, mall operators, retail operators. In many cases,
the virus is accelerating 10 year trends in 6 months.
4. Powell deserves to be put on a pedestal. Buffett told his investors there simply weren’t many attractive
investment opportunities right now amidst so much uncertainty. The company is sitting on $137 billion in cash
partly because Berkshire is no longer the “lender of last resort” for the economy as it was when it struck so
many sweetheart deals in the Lehman Brothers aftermath. Buffett thanked Fed Chairman Jerome Powell for that
saying, “they acted with unprecedented speed and determination to prop up the economy. We don't know the
consequences of [the Fed’s balance sheet expansion], but we do know the consequences of doing nothing, and
we owe the Fed a great thank you.” (Qiao had a great breakdown of all the recent, unprecedented Fed activity
in his PRO piece last week.)
5. American exceptionalism, but more muted. Sometimes you need to read between the lines, and Buffett’s
cautiousness may be the most bearish signal we’ve yet seen from a major investor. When we hear something
like “You can bet on America, but you kind of have to be careful about how you bet” it sounds a little different
depending on your source. Given Berkshire’s $137 billion cash stockpile (30% of its market cap!), and
concentration of blue chip, recession resistant positions in Apple, BofA, Coca-Cola, Amex, and Wells Fargo
(69% of public stock portfolio), it’s noteworthy that the company is not buying back its own stock. This is a
jaw-dropping statement: “[Our cash position] isn't all that huge when you think about worst-case
possibilities…We don't prepare ourselves for a single problem, we prepare ourselves for problems that
sometimes create their own momentum."
What could quell some of the unease that one of history's most stoic investors is currently feeling?
I'd argue there's really only one metric that matters right now on the global stage, and that's the maddeningly elusive
infection fatality rate ("IFR") of the coronavirus.
We've been thinking about accuracy vs. false precision with respect to many of crypto's most important metrics. But
it wasn’t until our dive into the coronavirus this February, that we realized you could probably get more accurate data by
simply applying a bit of common sense vs. tilting at bad input windmills.
Trillions of dollars of GDP (and an entire generation’s wealth), hundreds of millions of jobs globally, and millions of
lives hinge on an accurate calculation of this single IFR data point. The social and geopolitical implications of a high
IFR aren’t fully understood yet, and the negative second-order effects of the coronavirus will take a while to play out.
But IFR undoubtedly impacts how and when we’ll return to pre-pandemic life, and yet there is literally a two order
of magnitude difference between the high-end and low-end estimates for the toll this disease may have on infected
populations, with “just the flu”-ers suggesting that the IFR might be as low as 0.1-0.2% (disputed by Balaji),
and observed case fatality rates (CFR) in regions with overwhelmed medical systems appearing closer to 5-10%.
A range of 0.1% (seasonal flu) to 10% (SARS) isn’t very helpful. What’s the real IFR?
A common sense starting point might be to begin anecdotally, and appreciate that true IFR is somewhere in between.
The low estimate seems wildly over-optimistic. Control groups like small villages, cruise ships, and hospitals show the
low estimate is almost impossibly low.
Assuming a 100% infection rate, New York City would have already eclipsed that low water mark. To say nothing of
the obvious intuition that nations worldwide wouldn’t resort to full shutdowns of their economies if there were any
chance the IFR was so low.
The high-end also seems overly pessimistic. We know there is an acute worldwide testing shortage and that many
millions of cases are either asymptomatic or too mild to warrant an office visit and full test. We can probably safely
assume that at least 50%, and perhaps 80-90% of actual infections are being missed.
Using those estimates, and making a few basic assumptions (we don’t cram into night clubs and stadiums any time soon,
the healthcare systems aren’t overrun, and better safeguards are implemented for at-risk populations), we can maybe
assume the actual IFR is under 2%. Using a mix of results from control groups and epidemiological models, we can then
tighten our estimates to something like a 0.5-2.0% IFR, a 4x range vs. a 100x range.
This is a pretty good sanity checking exercise in an otherwise insanely muddy world of coronavirus data!
And it’s a good example of how accuracy and common sense trumps false precision every time.
P.S. We’ve spent the past several months thinking through how best to balance accuracy and precision in some of the
most important metrics we work with each day at Messari: circulating supply, real volume, "risk-free” rates, and
more. Can we apply the logic above to the crypto markets? I think so.
In the weeks ahead, we’ll revamp the methodologies of some of our most important metrics to better reflect what we
believe is a more accurate - if slightly less precise - view of the crypto markets.
Exchange volumes, “free float” circulating supply, and updates to our crypto lending rate, CIRI, are all under review.
The first has been a thorn in the side of every crypto data company since the emergence of non-proof-of-work generated
assets. The second has been problematic ever since exchanges began competing for mindshare and ranking supremacy
on coin ranking sites like CoinMarketCap. The third is the foundation for both emerging DeFi markets and institutional
derivatives.All are dysfunctional, but maybe solvable. Absent industry-wide self-reporting standards, we'll need
accuracy and common sense to prevail when it comes to critical metrics. Though, we hope others will work with us on
improving the precision of our metrics, so long as it also improves their accuracy.