Turnaround in long-term bonds. Soft landing or recession? On the death of Charlie Munger of Berkshire Hathaway.

Chart of the week

The chart shows the return of the S&P 500 in February since 1980.
Why this is important
We just had the third best return for the S&P 500 in a February since 1980. To us, and regular readers of this report, there is no surprise there.

Investment sentiment was so negative that a turnaround was in the offing. Even a small improvement in the situation leads to a turnaround in such situations. After the parliamentary crisis in the USA was averted and it became clear that the war in Israel would not turn into a conflagration and escalate, many uncertainties dissipated.

Trend reversal in long-term bonds

Investors in long-term bonds of 10 or 30 years in the USA have not had an easy time over the past two years. As the chart shows, they have suffered losses similar to those suffered by equity investors during the financial crisis or when the internet bubble burst in 2000. However, the trend has reversed in recent weeks.

The chart shows the development of the key interest rates of the central banks of the USA, Europe, UK and Japan over the last two years with the solid lines and the forecasts for the next year with the dotted lines. Japan is a special case, but in the USA, Europe and the UK, interest rates are expected to remain the same over the next few months and then fall from around the middle of the year.
But you still have to be careful. Powell, the head of the US Federal Reserve, has not yet made a clear verbal commitment and says that they are on their guard and could raise interest rates again if the economy does not cool down. The volatility in long-term interest rates is likely to remain high for some time to come.

The Bank of America chart above also shows that interest rates are expected to fall. The dark blue line shows the interest rates of the ten-year US government bond and the light blue line that of the two-year government bond.

The yield curve for ten-year bonds (green dots) and two-year bonds (yellow dots) is calculated on the basis of the prices currently paid for bonds. It is currently expected that the inverted yield curve will not be resolved until the end of 2024. This is later than previously assumed.

This picture is unusual. Normally, the inverted yield curve disappears when interest rates fall. This is an indication that investors are not so sure about the future after all and that volatility in the bond sector will remain high.

The chart shows all interest rate hikes (dark blue line) and interest rate cuts (light blue line) by all central banks worldwide. The general trend is clear. Interest rate hikes are decreasing sharply and the first rate cuts are taking place.
Soft landing or recession?

The chart shows how often the term "recession" or "soft landing" is entered in Google searches. Google search terms are considered a fairly reliable leading indicator.

Many investors preparing for a soft landing Google to research which stocks to buy in such an event. A few days later, they then make these purchases.

The chart shows impressively how investor sentiment has changed in recent weeks.

With regard to the question of whether there will be a recession or not, the chart above is probably the most important. The graph shows the economic development in durable goods (blue line) (machines, cars, etc.) and the service sector (green line). The black line shows the total figure.

The conclusion of this graph is:

We already have the recession in durable goods, but not in services.

Most economic indicators such as the LEI (Leading Indicators) are very industry-heavy and show a recession, but inflation is falling too little and unemployment is not increasing either.

This leads to a major dilemma for central banks. All their control variables have a strong influence on durable goods companies, but only a weak influence on the service sector. Companies in the service sector generally have far fewer loans and are less affected by interest rate hikes.

On the death of Charlie Munger of Berkshire Hathaway
Charlie Munger passed away this week at the age of 99. He had been Warren Buffett's partner and deputy since 1971. Even in his old age, he was still active in the company and of course always attended the annual shareholders' meeting in Omaha on the stage next to Warren Buffett. The meeting is legendary and is also known as the Oracle of Omaha. Thousands make a pilgrimage to this event every year.
Since Warren Buffett bought the company Berkshire Hathaway, its value has increased by 39,783%. An investor who entrusted Warren Buffett with USD 1,000 in 1962 would have a fortune of USD 39,783,000 today.

Warren Buffett bought the textile company Berkshire Hathaway, which mainly manufactures shoes, in 1965 and transformed it into a holding company over the years. Apple is the largest position with 48%. Warren Buffett's portfolio can be viewed here.
The company is valued like a normal share. The share is currently trading at a "price to book value" of 1,472:Warren Buffett bought the textile company Berkshire Hathaway, which mainly manufactures shoes, in 1965 and transformed it into a holding company over the years. Apple is the largest position with 48%. Warren Buffett's portfolio can be viewed here.
The company is valued like a normal share. The share is currently trading at a "price to book value" of 1,472:

This means that the value of the shares exceeds the value of the positions by 47.2%. This reflects Warren Buffett's ability. In order to benefit from Warren Buffett's knowledge, investors are willing to pay a premium of over 40%. This premium has been quite stable over the past 10 years, only collapsing to almost 0% during the Covid crisis.
Warren Buffett still makes all the important investment decisions. But he too is already 93 years old. Should he die, it can be assumed that the premium will collapse from over 40% to 0%. That would be a loss of 40% for investors without Berkshire Hathaway's assets having lost even one US dollar.

There are two ways to avoid this. You can use the link above to recreate Warren Buffett's portfolio yourself. But then you are usually one month too late with new purchases. Or you can buy investment funds from managers who pursue an almost identical investment policy to Warren Buffett and also have many identical stocks in their portfolio. These funds are traded every day at net asset value, i.e. without a premium. These are managers such as Lyrical or Doge & Cox.