← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
This Number Is Higher Than It Was Before The 1929 Crash — We Had To React
00:54:56
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- [00:01]
Narrator
Evening.
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Financial Analyst
Buyer's remorse. Buy a new car. I'll be moving in. Let's get started. Sorry, I think there's been a mistake. I bought it from Carvana. You what?
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Narrator
Yeah.
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Financial Analyst
Great price. I even have seven days to love it or return it. So there's no. No, no buyer's remorse. More like buyers rejoice. I guess I'll let myself out. Congratulations. I mean it. Buyers rejoice. Buy your car today on Carvana. Limitations and exclusions may apply. See our 7 day return policy at
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Narrator
Carvana.com a vacation rental shouldn't come with sur. It should come with verbo Care and 24. 7 Life Support. If the hot tub's broken, that's a verbo care thing.
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Financial Analyst
If my teenager starts calling me Leslie, that's a family thing.
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Narrator
Leslie.
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Financial Analyst
VRBoCare and 24.
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Narrator
7 Life Support.
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Financial Analyst
If you know you've ERBO terms apply. See vrbo.com trust for details. Everyone right now is comparing today's AI stock boom to the dot com bubble of 99. But the sharpest minds on Wall street have a different vision. One of those people is Warren Buffett. Warren Buffett is. I know that he's no longer with Berkshire Hathaway. I mean, he's chairman, but he's not actively running the company anymore. But. But what he's doing and what his company is doing is really pointing at something everybody needs to understand. If you don't understand this, you're gonna be managing your portfolio at one of the highest risk times in a way that does not make sense. You almost certainly have economic disruption coming at you at some point in the near ish future. But nobody is gonna be able to get the timing right. So this is about understanding the economic forces, what signs to look for, how to keep yourself safe, sanely positioned. That's what we're going to go through today. So let's hit it.
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Narrator
Everyone thinks Warren Buffett is selling Apple to avoid a potential 21% capital gain tax hike. But that doesn't fit his history. Buffett has always been a forever investor. He doesn't panic, sell. Something else is driving this. He's been building cash and shifting heavily into short term US treasury bills at a scale rarely seen in his portfolio. That kind of move usually shows up when cracks start forming in the economy before they're visible. Because when Buffett stops holding, he's not reacting to headlines, he's reacting to what's coming next. By the close of the first quarter of 2026, Warren Buffett's holding company, Berkshire Hathaway, was holding a record pile of cash. That figure came to $397.4 billion. Not stock, not businesses, just cash and government paper.
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Financial Analyst
Let's start defining terms. So the odds that Warren Buffett has any meaningful amount of cash is almost zero. He's going to be holding everything basically in government debt. So keep that in mind when he's talking about that he is still going to be earning a return on his money. He's just trying to be in the safest place that he can be because he's looking at the industry and he's saying, okay, I think things are overpriced right now. There are no deals to be had. We're going to get into this here in a minute, but this is something that Buffett has done before. This is coming to us, by the way, from the infographics show, somebody I'm newly familiar with. So very interesting. By all means, please support the channels that we feature here on the reacts. These guys put together some incredible stuff. So. But it's important to understand what Buffett is actually doing, what the signals actually mean, what Buffett himself is saying about it. And there, there are places where I feel like this video may fall into typical narratives about Buffett versus the actual underlying reality. And so we're going to tease that apart as we go. But as we go through this, think about your own portfolio. That is the key here. Understanding why Buffett is doing what he's doing, how you are subject to the same forces Buffett has made his choice about what he's doing. Ultimately, you're going to need to make your choice. We're going to look at some deep history from Buffett's choices that don't quite get covered in the video. But I'll fill in those blanks as
- [03:43]
Narrator
we go to understand the scale. It's larger than the annual output of countries like Finland, Portugal or Chile. This is how much it rivals the value of many of the world's biggest companies. And it didn't appear suddenly. Between 2023 and 2024, Berkshire dumped a net $172.9 billion in stocks, with roughly $134 billion sold in 2024 alone. It was the biggest sell off in the company history. While markets were hitting record highs, Buffett was doing the opposite. He was selling quarter after quarter. And the selling never stopped. In the first quarter of 2026, the firm unloaded another net $8.1 billion after the 2022 bear market. The next two years weren't supposed to be scary. 2023 and 2024 turned into some of the strongest years for United States stocks in decades. Markets climbed, portfolios recovered. And for many people, it felt like the only mistake was being outside of the market. And right in the middle of that, Buffett built up his reserve. His cash pile more than doubled. People should have paid attention. Every business show on TV calls this smart tax planning. A careful man trimming his tax bill before rates climb.
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Financial Analyst
He's going to go through that. This doesn't quite match up with Buffett's history, but I want to be very clear. Buffett himself is saying, this is me backing out of the market because of the tax strategy there. When people talk about Buffett, they give a narrative that Buffett has this, the Buffett danger line, or red line. I forget what he calls it. He's going to mention it in a minute. And that they make out like that's the thing that just drives Buffett's decisions. You hit that line and he bails out. And anything else that he says is, you know, BS or whatever. Now, listen, I think Buffett is a very careful speaker. I think he understands that he moves markets. But this, Buffett's own words are that this is about strategic cash planning. It is pretty clear that by Buffett's own analysis, almost no matter what analysis you run, and we're going to give the different things that Buffett has historically used, including the metric that, that he says is the metric, but all of them are flashing red. So I very much doubt while this probably also the timing of it has to do with him being strategic, tax efficiency is one of the single most important things you can do as an investor to make sure that you're in a good spot. And if you believe that now is the time to sell. And he has done this before, he has sold off before. So whether this violates the. That there have been times where he didn't sell in preparation for tax, keep in mind that if he's going into a phase where he knows he's going to sell and that means that he's going to take a tax burden, then doing it in the most tax efficient way makes sense. So I don't think, even though it's sort of presented here like, okay, Buffett is doing, he's basically giving you a narrative that isn't true. He's doing something else. I don't think it's quite that. I think that Buffett is. He knows he's going to sell for reasons we're going to detail shortly. He knows he's going to sell, so he's going to do it in a tax efficient way. And that very much is something you guys need to think about as investors doing things in a tax efficient way. That's very, very important.
- [06:51]
Narrator
A careful man trimming his tax bill before rates climb. But it contradicts Buffett's own past. In 1986, the corporate tax rate was set to jump from 28% to 34%. That should have set off a fire sale if taxes ever drove his choices. Instead, he left his core holdings in Place for 60 years. He built fortunes by sitting still. Tax rules have never once knocked him off of a stock he believed in. Buffett has said his favorite holding period is forever. His best time to sell a great business is almost never. Coca Cola is the proof he has held it for decades.
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Financial Analyst
Buffett is very clear that his favorite time to hold something is forever. But it's not the only time that determines when he sells something. So this is where getting into the nuance is going to become very important. When people take the bumper sticker version of investing, they make mistakes, so be thoughtful about that.
- [07:43]
Narrator
Busts he never once dumped, not even to dodge a tax bill. So we're supposed to believe he sold his Apple stock just to save a few cents on a tax form? Buffett didn't just trim his portfolio. He reduced his Apple position from nearly half of Berkshire's stock holdings down to about a fifth. Then he did something even more surprising. On January 1, 2026, he stepped down as the boss of Berkshire Hathaway.
- [08:06]
Financial Analyst
So I love this video. I think it's really phenomenal. So forgive me for picking on some of the things, but are we supposed to believe that he's handing the keys off, you know, in this moment yet? Motherfucker. He. This guy is so old. So the fact that he is retiring now should surprise absolutely nobody. I'm surprised that he made it this long. So I don't think this is some, you know, big thing that he's trying to hide. I think the reality is that it, you know, the time has come to retire. He's done what he came to do. He's got somebody that he's been training up for a long time. He's going to remain on as chairman. There's nothing weird happening here. This is very similar to how I feel about the way that the people. Way that people speak about the Rothschilds is they want to put this top spin of like, all this cloak and dagger stuff instead of just, okay, what's the mundane Thing that just matches all of the things that we see. The mundane read of what is going on with Buffett is I'm getting super old. I've led this company extraordinarily well. I understand that I'm slowing down. I've got to pass this off. I look at the market and just like I did back in 1969, which we're going to cover, I'm going to sell out of the market completely. And not completely, but I'm going to largely sell out of the market because the. There are certain metrics that I look at, and when you cross the line of these metrics, unlike other people who invest emotionally, who want to grab every last dollar that they can possibly get out of a bull run, I don't do that. I have these breakers, if you will. When a breaker is triggered, I realize there are no deals. I back out. Now that I know that I'm selling, I've got to do this in a tax efficient manner. And so even though his other times when the companies weren't like crazy overvalued, I could see the sort of near term them crawling back out of the hole in terms of overinflated valuations. I just held. There's no need to like dip in and out with every move. I'm going to hold through this. But now, and this is why I want to show this video now is different. There's something else that's going on that makes me want to get out. That's the part like, if, you know, you want to see me ringing alarm bells, this is the thing that I'm ringing. The guy who normally holds is saying, I'm telling you why I'm getting out. And there are very clear numbers that you can look at that tell you that you want to get out. Now, I'll shorthand it. Everything that's happening right now is because the stock market has become overvalued. This is both me channeling what Warren Buffett has said and I think is saying with all of these moves and what I'm seeing in my own analysis that we are reaching historic levels of, of overinvestment. We'll see this specific number in a second. But we are over on a very important metric, even more than we were before the 1929 crash that led to the Great Depression. Okay, that's how hot, to use a nice generous term, that's how hot the stock market is right now. Everyone, it's just everyone that invests is shoveling cash into this ridiculously small number of stocks, essentially all making one bet on AI. And Buffett is telling you it's too much. It's too much. And so now that I know that I'm going to get out, I'm doing it in a tax efficient manner. And it just so happens to coincide with the fact that my partner and probably best friend Charlie Munger died a year ago. I just. Now's my time. So again, looking at it with wolves howling in the sense that there's some conspiracy is going to blind you to some really basic shit that you can see in the math that is very obvious. And if you can get out of emotional thinking, all of a sudden it just becomes super clear.
- [11:51]
Narrator
The timing mattered. The cash pile was already built and the major selling had already happened before the transition. And Abel's first move as the new chief, well, he kept right on selling. Nothing changes. What does Buffett see on the horizon that the rest of us don't? There were only a couple of moments in Buffett's career where he stepped back from stocks almost entirely. One of them was 1969. Markets were running hot, driven by what were later called the nifty 50. These were high flying names like Polaroid, Xerox and Avon that investors treated as guaranteed winners. Buffett looked at the bigger picture and decided there was nothing left worth buying. So he did the unthinkable. He shut down his investment partnership and handed the money back to his own investors. He simply walked away. What came next proved him right. By 1973, that bubble had burst and a brutal bear market wiped out years of gains. The big names got slaughtered. Polaroid crashed about 91% from its high. Avon fell roughly 86% and Xerox dropped almost 71%. These weren't obscure or low quality companies. They were some of the most respected names in the market at the time. A great company is not the same thing as a great stock.
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Financial Analyst
A great company is not the same as a great stock. Okay, we need to talk about what actually happened in 1969. Now he acknowledges this. I want to be very clear. The guy that made this video is aware of this. He just doesn't take the time to elucidate it. He truncates it to saying later this became known as the nifty 50s. Now the reason that I think Buffett got out in the in 69 was because of something that came before it, which was called the Go Go era. So everybody was just overinflating stocks and things were going to the moon. This would ultimately lead to the nifty 50s. But the nifty 50 where you saw this massive consolidation where everybody thought, okay, these companies are what they call a one decision stock. You decide to buy it and you're just going to hold it forever. Buffett looks at the way that people are behaving and he's like, hold on, you guys are pulling forward so much future revenue that it's going to be next to impossible for these companies to make good on this. This is the important thing to understand. We've been talking a lot about how what's going on right now with AI matches what happened in the dot com bubble. That's 100% true. But we've actually seen this pattern repeat before. And now we get to watch Buffett's behavior over time. And so he's seeing this at the end of the Go Go era and he's realizing, okay, hold on a second. Like these valuations are getting extreme. They're starting to go up above Buffett's red line, which is what is the, the amount that these stocks are trading at divided by GDP. And as that number reaches 200%. So when the value of the stock market is 200%, the value of GDP, like, yikes, you're, you're starting to get into a scary place. And so that's when he has historically backed out. And so we see that going into the, the, we see that in the Go Go era leading into what'll become the Nifty50. Now, the really important thing. And God damn it, if you haven't been listening, I want you to listen right now. So we're hitting pause for a moment, but there's plenty more ahead, so don't go anywhere. Let's talk about timing. It's August, the slow part of the summer right now you have time. In a month you won't fall hits. Your calendar is going to fill up fast. And everything that you meant to handle over the summer gets buried like the drawer of faded, stretched out teas. The stuff you keep meaning to replace but don't. The time to handle it is now, while it's still easy. That's where Quince comes in. Fewer pieces, better prices, everyday staples, premium materials built to outlast all the cheap stuff. Quince uses ethical factories with no middlemen. You pay for the product, not the logo. Upgrade your everyday. Download the Quint app for app exclusive offers or go to quince.comimpact pod to get free shipping on your order and 365 day returns now available in Canada and the UK as well. 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Fake emails and fake texts go out to my team all the time pretending to be me. Stuff like this is urgent. Click this link. I need gift cards. Send it over right now. And in that split second of panic, someone almost always lets their guard down. The scam works precisely because personal information can be bought and sold, and that's where Incogni comes in. You authorize them. Once they track your personal data across hundreds of broker sites and get it removed. When it reappears and it will, they take it down again. Plus, with customer removals, you can send them any link where your information shows up and their team will handle the rest. They can't come after you with data that they can't find. So go to incogni.comimpact and use code impact for 60% off an annual plan. Try it risk free for 30 days. That's incognito ni.com impact and use code impact. Thanks for sticking around. Let's get right back into the action. Guess what happens in 1973. So he says, hey, the bubble burst in 1973. The thing that happened in 1973 that made Warren Buffett look like a genius was the Arab oil embargo. So there was a shock to the oil supply that ends up causing this massive wave of inflation. Now, for reasons that we've talked about before, this is playing out very differently. But the fact that right now we have the same level of instability in the same region of the world that caused a massive problem then and absolutely detonated the market. And Buffett was like, thank God, I got out. We're seeing something very similar now. Why isn't the same thing happening in the Middle East? Why before when we had a supply shock, did we then have massive inflation? Now we have a supply shock and we're seeing a little bit of inflation, but we're not seeing the massive inflation that we thought we would see. We're seeing a destruction of demand. The answer is the economy was already very weak at the level of building things, at the level of needing the oil, both in China, it's actually more in China than the US. China accounts for roughly 74% of the decline in oil demand. So they've been able to just completely shut off their demand somehow, some way. And I think the answer is, and we've covered this in detail before, so I'll just speed run it now. The fact that they haven't kept their refineries going, which has nothing to do with incoming supply and has only to do with demand, the fact that they didn't turn or leave that on, they turned that off as well. And the fact that they didn't keep buying when the price dropped back down tells you that what China's actually dealing with is, is pre existing decline in demand. And they were using the COVID story of the war in Iran to mask the fact that they just didn't have the demand. So they stopped filling their coffers up to the billion dollar or billion barrels that they had. And they're just like, we're going to pretend that this is about the Iran war, but really this is destruction of demand. So that's why we're not seeing the same thing. But we've got instability in the same region that ended up causing the problem in 1973 that made the market end up tanking when we had a similar concentration of stocks. So you've got the nifty 50 gets hit with oil disruption in the Middle east causing that bubble to burst. Now we see this play out very similarly in the dot com bubble. Now the dot com bubble, people normally rightfully talk about it as this is something with a massive infrastructure buildout. You get this gap between when the debt is due and when the revenue actually comes in. It's a very direct parallel to AI. But you also have the fact that even before AI we've got the Magnificent Seven. You have this massive reduction in the number of actually productive growing stocks. And because of that, and people are still flowing in because they're trying to avoid inflation, right? You got a hide in the stock market that's driving valuations beyond anything that would be considered normal. So we're once again approaching Buffett's red line of the value of the stock market divided by gdp. And we have something called the Cape ratio. And the Cape ratio has gotten completely unhinged again. So the Cape ratio, so you guys know this is developed by Nobel laureate Robert Shiller and it's the stands for cyclically adjusted price to earnings ratio. So the Cape ratio, sometimes known as the Shiller PE ratio. So it divides the current price of an index, usually the S&P 500, by its 10 year average of inflation adjusted earnings per share. Now why this matters is that standard trailing twelve month PE ratios are super deceptive, okay? Because in economic booms, corporate profits are going to surge temporarily and that's going to make stocks look like they're cheap on paper. But when you go into a recession, the profits are then going to collapse and it's going to make the stocks look expensive. So the idea behind having the Cape ratio is that it's going to smooth out all of these cyclical distortions and you're looking at a 10 year business cycle snapshot. So it provides a much more realistic fundamental baseline. Okay? And the crazy thing right now with the math is that the historical long term average of the Cape ratio is roughly 16 to 17 times right now. The S&P 500 CAPE ratio has been holding at 40 times. That is crazy. In the entire history of US capital markets, a CAPE ratio above 40 has only been reached and sustained once during the absolute peak of the 1999-2000.com bubble. Okay, right before the NASDAQ like hemorrhages 75% of its value. That's when we hit that. And this is what I alluded to earlier. Even the 1929 market peak that led to the Great Depression didn't climb this high. It didn't reach the Cape levels that we're at now. And so that's where it's like, okay, you start. Whether Buffett actually uses the Cape ratio or not, which he does not seem to by the way, he doesn't talk much about it. He has another metric that we talked about and but they're both screaming red. So this is where it's like almost no matter what metric you look at at these days, is it concentration into a few number of stocks, Is it the value of the market divided by GDP? Is it the trailing 10 year performance of the shares? Like no matter what you look at, it's all red. It's all red. And so now knowing that Nobody gets the timing right that there's going to be some period, maybe a day, maybe a year, maybe five years, where there's still a lot of money to be made in the bull run and the people that are doing it while they're doing it are going to look like geniuses. What do you do with this information? Right. You're going to have to make your own decision. But this should, hearing all of these alarm bells and looking all of this going off should really give people pause about what to do. All right, we're going to talk more about what Buffett has done historically, because there's a lot of narrative around what he did in 69, but we're going to want to uncover what he really did. We'll talk more about that in a minute. But yeah, you want to put all these pieces together. What do you do? What do you actually do in these moments? All right, let's keep going.
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Narrator
Buffett realized that years before anyone else. Thirty years later, he did a softer version of the same thing. In 1999, the dot com mania was in full swing. Companies with no profits were being valued at billions. Pets.com became a household name more for its advertising than its business model. While the market was celebrating the new era, Buffett publicly pushed back, warning that returns built on speculation wouldn't last. He wasn't caught up in the hype. He believed the market was priced so high that returns would crawl for years.
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Financial Analyst
Here's something. It's a really important idea that we have to tease out. So he's talking about people that are investing based on speculation. So speculation, as opposed to a, the value of the company, is strong. So when you're looking at a company and you're looking at it in terms of how much free cash flow is this company likely to have access to? And this, by the way, when pressed, Warren Buffett will say the number one most important metric. And he's very clear that you never want to judge anything on a single metric because times can be crazy. Context is always different. There's never any, like just set in stone thing. But according to Buffett, if you're looking for one real thing to pin all your hopes on, it's discounted future cash flows. So it's a somewhat complicated idea that has to do with what are the likely, what's the likely inflation rate, what are interest rates going to be? There's a lot of sort of future facing guessing that you're going to have to do. But right now you're trying to figure out really for Real with all of the headwinds and all of the things that may happen in the economy, and that's the discount part, what are the likely cash flows for this business going to be? Now, the reason that cash matters so much, you'll hear from investors, including Ray Dalio, that cash is trash. But then you'll hear from a business perspective that free cash flow is everything. Now the reason free cash flow is everything, the reason that people should have been way more clued in in 2000, that we had a problem, the reason that people should be clued in now with AI that we have a problem is that if you have the cash flow coming in from the operation of your business that says that people really need your services, they are paying for it, they're willing to give you their hard earned money because they want to use the thing. That means it's a real ongoing concern of a business. If the business on the other hand, like OpenAI and Anthropic are both known as default dead, meaning they don't generate enough revenue to continue to exist, if they're unable to borrow money or sell equity, they go out of business. That's where you start getting into trouble. So the future of discounted cash flows become a much bigger question mark in AI, for instance. So there's a lot of belief, there's a lot of hype, there's a lot of people that are very excited about what it could be, but they're actually placing their bets on speculation. They don't know that that revenue is going to come in. They certainly don't know the timeline that that revenue is going to come in. They're speculating on the fact they're gambling. They're gambling on the fact that somebody else is going to believe that it's going to come in and that they can time it or get out sooner or that hey, eventually for sure, like these revenues are going to come in because AI is going to be so revolutionary or again, at least somebody else is going to believe that and I'll be able to sell to them and get out at the right time. So when you're betting on speculation number go up somehow, some way for someone and then I can get out when I need to get out versus you're actually, I still say you're betting, but you're betting based on fundamentals. I believe this company is going to be here for a long period of time, which is a gamble, but I'm betting that this company is going to be here for a long period of time based on the fact that, that people are actually paying for the services or the product that it puts out. And because they're able to do this so profitably, they're far more likely, even though there may be some turmoil, they're far more likely to survive a downturn. So if you look at the dot com bubble of the 2000s and you realize that was the Amazon, not the pets dot com, pets dot com had to keep raising money to be viable in the same way that Anthropic and OpenAI have to do today. It's not that they don't have revenue, is that they don't have nearly enough revenue to account for the thing called capex, which is capital expenditure. How much money do I have to keep spending year after year to actually build my business, pay my employees, all of that stuff? Well, technically, capex is just the things you're buying anyway. What are my expense structure? You're often going to hear with AI CapEx, because CapEx is like the biggest thing that they have to deal with, which is building out the data centers, refreshing the chips, et cetera. So what are the needs of the business and are they ahead of or behind that, the revenue coming in? And so if you looked at Amazon, you would see a business, oh, this is a real business. They've got real money. And they were. Even though their stock price fell by something like 97%, even though that happened, the business made real money. And so their growth might, growth rate might have slowed. Their stock price obviously took a massive hit, but they were able to survive the just massive economic downturn that was that bubble bursting because they had real cash. So if you accurately predicted their discounted future cash flows, you would have realized, all right, these guys are a worthwhile bet because of what I see their growth rate actually selling real products, showing growth trajectory, they're profitable. Yeah, count me in. You look at something that's hemorrhaging money, that is an unwise bet. And so when you start putting all that together now, this moment in the world hopefully gets clearer for everybody. But certainly it becomes understandable why Buffett is doing what he's doing. Right, back to it.
- [30:40]
Narrator
NASDAQ began a fall that erased about three quarters of its value. Pets.com went straight to zero. Microsoft stock dropped 50% in a year. It took 17 long years to climb back. Intel did even worse. What ties those two moments together isn't luck. When he stepped back in 1969, his reasoning was simple. He couldn't find anything worth buying at a sane price. He did not Predict the crash. He just saw the gap between what businesses were worth and what people paid. He doesn't guess the storm. He just looks at a gap between price and value and only steps back when that gap gets too wide. Two exits, two moments where he stepped away. It's something he's almost never done. Now place early 2026. On top of that, the total value of the US stock market compared to the real economy is sitting at historically stretched levels again. In some measures, it matches previous peaks. In others, it exceeds them. Buffett even has a name for this. The Buffett Indicator. It stacks the value of all stocks against the size of the economy. He says if the danger line gets close to 200%, you are playing with fire. It hit that level in 1999, right before the crash. In early 2026, it's back there. The market is now dominated by a handful of tech giants known as the Magnificent Seven. Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla. At times, those seven names alone have made up a third of the entire S&P 500. That level of concentration means a small group of stocks is doing a huge share of the market's head heavy lifting. There was a similar pattern in 1969 during the nifty 50 era.
- [32:15]
Financial Analyst
This is almost pedantic, but technically, nifty 50 era was more. It's clocked at 70 to 72. So call it 71, 72, or the peak bursting ultimately in 73. He's confusing the go go with the nifty 50 anyway.
- [32:30]
Narrator
And more about recognition, because when the same structure shows up again, it usually isn't random. For years, Apple was Buffett's untouchable favorite, the one tech business he said he truly got. Then he gutted it. Between 2022 and 2024, Apple's sales grew by about 1.5% per year. A successful company, absolutely, but not a fast growing one. At the same time, the stock kept climbing. By 2024, investors were paying more than 30 times the company's annual earnings to own it. The stock was dramatically outpacing the actual business. Apple's growth did pick back up later as newer iPhone cycles pushed sales higher in 2025 and 2026. But the timing is critical. By the time growth came back, the price had already raced miles ahead of it. That is what Buffett looks for. He knows what happens next better than almost anyone. A great business can keep doing fine, growing its profit each year, and the stock can still crash. Why? Because the price was borrowed against a future that never arrived.
- [33:31]
Financial Analyst
That you must understand that when people are trading at the levels that they're trading now, what they're saying is, I believe that the future revenues are guaranteed. They are going to be massive. And so I'm willing to pay that money now for that long distance future. But remember, the price is only going to keep going up if we are inflating a bubble. So people just believe, oh, no, no, we're not like the revenues that are promised in 10 years. Forget that I'm willing to pay for revenues that are coming in the next 20 years. Forget that. I'm willing to pay for revenues that are coming in the next 30 years. That is where you get yourself into a bubble inflating territory. Because eventually somebody goes, I'm not willing to pay for revenue that's not coming for the next 20 years. There are too many things between here and there that could go wrong. Again, thinking about discounted cash flows, I don't buy that this is all going to come in the way that they say that it's going to. I think there's going to be competition. I think there are going to be changes that make them vulnerable. And so people start selling out. Obviously, Buffett is early to selling out, but that's really what ends up happening, is people just no longer believe that narrative because it's purely psychological. It is just right now people are desperate to put their money somewhere. They're desperate to get growth somewhere. But if the actual revenues of the business aren't growing now, you're just saying, I have more confidence in the future. But to be honest, I think it is just people going, where's everybody putting their money?
- [34:55]
Narrator
Right now?
- [34:55]
Financial Analyst
They're putting into tech. Tech is the bet. I've got to put my money somewhere, so I'm going to put it there. Most people do not have the discipline that Buffett has to say, okay, I'm probably going to miss out on some returns, but I'll be in a safer position if something ends up tanking, if the market tanks, if the bubble pops, whatever, I'm going to be in a much safer position. So it's somebody that is going to have to look his investors in the face and say, listen, guys, we're sitting in Treasuries, which are yielding, you know, let's say 4.755%, five and a half somewhere in there. And your friends are all getting a 17% return. That becomes very hard for them to justify for more than maybe a year. You can get away with it maybe two years, because people really believe in you, you're Warren Buffett. You start pushing into that third year, and people are like, yo, man, my money's just not. Shouldn't be with you. You're obviously getting something wrong. I need to start moving my money. And so that's where all of this gets tricky, is it's people saying the truth, which is nobody knows the future, nobody knows when this is actually coming, and I would rather be at risk. And so my advice to you guys is you don't have to use Buffett's metric, but I would have a metric. Like, what is your metric? What is the thing that you're like, okay, if this is met, then I'm going to do something different.
- [36:10]
Narrator
He was selling because the stock and the business were telling two different stories. some point, Buffett had to decide which one he believed. But Apple wasn't alone. The biggest tech firms poured more than $200 billion into AI gear in 2024. Microsoft, Google, Amazon, and Meta led the charge, building data centers and buying mountains of chips from Nvidia. It was an arms race of spending rarely seen, and the payoff, the actual profit flowing back from AI products. Goldman Sachs dug into it hard, and they found it painfully thin. OpenAI is the poster child for the AI boom. The world treats it as a money machine, yet its own numbers tell a darker tale. It pulls in billions in sales, but loses far more than it makes. For every dollar it earns, it burns through $1.25, and the money moves between those giants in a strange circle. Nvidia pours billions into OpenAI. OpenAI then spends that money buying Nvidia chips. Microsoft hands OpenAI billions of too. But a chunk comes as credit for Microsoft's own cloud service. The cash leaves one pocket and lands right back in another. None of it requires an actual outside customer to turn a profit. The money just spins from one giant to the next. It looks like a successful business ecosystem. Instead, it is just a closed loop of corporations paying each other. In the late 1990s, the.com boom laid mountains of fiber optic cable across the country. Firms bet Internet demand would explode, explode overnight. It didn't. At least not fast enough. Most of that cable sat dark for years, and the companies that laid it went broke. Buffett's late partner Charlie Munger said almost the same thing about the AI frenzy before he died. In his final interviews, he tore into the hype, calling it crazy and lining it up next to wild crypto bets. He spent his last days warning anyone who would listen. The tech world is laying dark Cable all over again, just faster. So what'll pull the plug this time? The warning signs were never in the stock market. They were in the job market. And Buffett's selling lined up with it almost perfectly. Claudia Somm, a former Federal Reserve economist, came up with one of the simplest recession warning systems ever devised. It watches just one unemployment. More specifically, it looks for a very particular shift in the unemployment rate, which has reliably shown up when the economy starts turning south. The the rule is simple. It tracks the three month average of unemployment and compares it to the low point from the past year when the average climbs half a point above low. History says a recession has likely already begun. In the 11 recessions since 1950, this alarm went off every single time. In August 2024, the alarm crossed its line again. The reading hit 0.53 points above the floor.
- [38:47]
Financial Analyst
This is one of the things that I've been saying for a while is that we're almost certainly in a stealth recession and have been for a while. You always have to be very careful about the way that people spend data because they've changed the number so many times in terms of how we track inflation. It made it look like we might not be in an inflationary space, but the reality is this is just shucking and jiving about what numbers we actually track. I forget if we actually hit 2/4 of down GDP or not to meet the official definition. But when you get to what is the official definition trying to express is trying to express that people are feeling poorer, that there's a contraction in the economy. And obviously I think people understand that people felt poor for a while. So that's why most people aren't going to give you more than to call it a stealth recession. But I think that that's pretty self evident. The labor market's gotten even worse. So yeah, if this is an alarm bell that should be taken seriously. Ooh, buddy.
- [39:53]
Narrator
Both Apple and Bank of America didn't bunch into the exact same window. He slashed his Apple stake by nearly 50% from April through June of 2024. Bank of America liquidations followed from July through September as the red line got crossed. At that precise moment, the most careful investor alive headed for the exit. The same jobs alarm rang again in 2001, 16 months after the dot com burst began in 2000. It rang again months after the great crash of 2008 started, and once more after the 2020 shock. Every time it sounded before the official numbers caught up. Stock prices can stay disconnected from reality for years. They can rise on Optimism, momentum, and the belief that tomorrow will be better than today. Hiring is different the moment real companies start cutting real jobs. Something has broken underneath the Somme rule triggered in 2024. But the recession everyone expected never fully arrived. Instead, the Federal Reserve cut interest rates, hiring stabilized, and the economy managed something closer to a soft landing. By early 2026, the indicator had eased back towards normal levels. Even SOM cautioned against treating it like a crystal ball. The post pandemic job market was unusual enough, she argued, that it might not follow the same patterns as past cycles if this was just a short term recession. Bet this was his moment to pile back in. He could have admitted his timing was early and he bought back into the market. That proved him wrong. Instead, he did the opposite. Berkshire Hathaway's cash pile swelled to its biggest size ever, long after the scare had supposedly passed. And that says a lot. The market was acting like the danger was over. Buffett was acting like it hadn't arrived yet. Buffett was supposed to have a sacred bond with the bank of America. Back in 2011, the institution was bleeding. Buffett rode in with a $5 billion lifeline and a public show of faith. That move steadied the whole bank. He was its white knight. He started dumping his stake in July 2024 and kept slicing it all the way into 2026. Buried in the bank's filings is an asset called held to maturity bonds. The bank snatched them up while interest rates sat near zero, planning to hold them for years. Then rates shot up and the market value of all those old low rate bonds collapsed. The damage was huge. By 2023, bank of America was sitting on more than $100 billion in paper losses. At the peak, it topped $130 billion. Imagine you buy a house at the of the top, top of the bubble and lock in a cheap mortgage. Then interest rates double and the housing market collapses. Your home is suddenly worth far less than you paid. You can't sell. Selling would lock in a big loss, enough to wipe you out. So you try to wait it out. You hold a thing that quietly bleeds value and you pray the market comes back first. That is the held to maturity trap. That $100 billion black hole was nearly seven times the loss that killed so Silicon Valley bank in 2023. The bank vanished in a matter of days. The moment depositors realized the danger, the pressure on the bank of America did not vanish. It lingered. This doesn't affect one bank. It is a threat to the whole system. Nearly every big American lender Loaded up on the same low rate bonds during the cheap money years. JP Morgan did it, so did the regional banks, and now they all sit on the same buried losses. By itself, the loss isn't fatal. A bank can simply wait for the bonds to mature and collect their full value. The problem is that banks don't control when depositors ask for their money back. And if withdrawals start piling up, the waiting is no longer an option. The bonds have to be sold and the losses stop being theoretical. Silicon Valley bank proved how fast that death spiral runs. It took days. Buffett knows banks better than almost anyone. He rescued the bank of America with his own money. He saw what was coming and then he walked away. For two years, everyone watched the inverted yield curve.
- [43:46]
Financial Analyst
A problem can happen in housing and you know, that could be really detrimental. Something that we actually had on the list to cover today, but didn't get around to it. The largest mortgage, the largest mortgage lender in the US right now is in trouble. So they're taking a stock hit, presumably based on bad reporting in terms of their numbers. So yeah, we have an ongoing issue. There it is right there. So there it is. Given the importance. So, yeah, the exact tweet reads, the largest mortgage lender in the United States, United Wholesale Mortgage, fell to an all time low after suffering its largest drop in history. And if you're looking at your screen, it's a rough drop, man, that is like off a cliff. Down 35% that trading day. Yauch, Yauch. In a single day. So if there's strain in the mortgage market, if they're strain, which we've covered before in the private credit market, which nobody knows how big that's going to be, but they know that there's a problem because they're some of the biggest companies like Blue Owl have just outright had to deny people the ability to take their money out of the program. So the program was originally designed to let people sort of come in and get their money whenever they wanted. The problem is it creates this mismatch between the amount of free cash that they have that they can actually make available to people and the rate at which somebody might want to come and get it. So you create the possibility of a bank run, which is exactly what they were just describing there inside of this private credit market. And so now we've got a shaky private credit market which has an unknown potential for massive systemic impact. And we've got the housing mortgage market, at least, you know, if the largest of them is any indicator, which of course it is. You've got some shakiness there. So, again, looking at something that these kind of historical things have happened before. And when we've seen problems in the housing market, it's been indicative of something much larger. Either that was building in the system before, or it was about to have a systemic knock on effect.
- [45:50]
Narrator
But the inversion is often just a warning. The real trouble tends to arrive afterward, when the curve begins to unwind and the economy catches up to what the bond market was signaling all along. Think of it as an earthquake warning system. The inversion is the early tremor, the long, low rumble that says pressure is building. Everyone braces during the rumble. But the real damage, the part that levels buildings, comes when the shaking stops and the ground suddenly settles. That settling is the UN inversion. The US curve entered exactly that phase in late 2024, climbing back towards normal through 2025 and into 26. The record inversion of 2022 and 2023 has now begun to unwind. That's the same sequence that appeared before the recessions of 2000 and 2008. Not because an uninverted curve is dangerous by itself. It's dangerous because of what usually causes it. The curve normalizes when the Federal Reserve starts cutting rates and the Fed does not reach for the emergency brake when the road is clear. The uninversion is not the cause of the storm. It's proof that the people with the most data have decided things are serious and they can see the cracks forming in real time. By the time the alarm stops, they have decided the ground is about to move and the everyday investor will watch the curve return to normal. And they feel relieved. To them, it's good news. Look at the whole timeline and the picture becomes clear. The jobs warning appeared in 2024. Buffett's biggest selling happened around that same period. The yield curve began moving back towards normal. Banks were still sitting on losses from rate shock. And quarter after quarter, Berkshire's cash pile kept growing. Any one of those things could be dismissed on its own. But together, they explain why Buffett wasn't acting like someone who thought the risks had passed. He was selling. He was raising cash. And he kept doing it, even as markets pushed to new highs. That is the part that matters, because Buffett isn't known for predicting crashes. He is known for refusing to pay tomorrow's prices today. And by early 2026, he was holding nearly $400 billion, waiting for something he believed was worth the wait. Now we're reaching Buffett's endgame. By late 2024, Berkshire's treasury bill holdings had reached roughly $288 billion. That was more short term government debt than the Federal Reserve itself was holding at the time. By the first quarter of 2026, Berkshire's total cash pile was approaching $400 billion. Buffett has spent his entire career telling investors that cash is a terrible long term asset. So why was he suddenly sitting on more of it than ever before? The answer is that Buffett has never viewed cash as an investment. He views it as buying power. When assets become expensive, cash looks lazy. When assets become cheap, cash becomes valuable very quickly. He has run that play before. In 2008, while the rest of the financial system was scrambling for liquidity, Buffett was one of the few people in a position to provide it. He handed Goldman Sachs A $5 billion lifeline. The terms were so good, they still teach them in business schools. He cut a similar deal with General Electric. He had cash in hand and the nerve to use it.
- [48:53]
Financial Analyst
This is the to bring it all together. You've got a lot of things going on in the economy that are red flags. It doesn't matter what flag you use. If you use the cape, if you use the Buffett indicator, if you use unemployment, if you use the limited number of stocks that carry the vast majority of the value, all of them are flashing red. So the question becomes, what are you going to do in this moment? Now, I am definitely not qualified to give you guys advice on, on that. You need to speak to a professional about what you think you should be doing with your money. But this feels to me like a highly consequential time. You've got what's his face, Ray Dalio saying that we're roughly 80% of the way through the bull market. So it's like there's some money left to be made, but it certainly isn't going to last forever. You've got all these indicators flashing red. You've got the fact that people really are just looking for a place to put their money. You've got massive uncertainty in the Middle east, which has historically caused problems. When we had a similar setup like this before, you've got problems in the mortgage market, you've got problems in private credit. So you've got everybody betting on AI, basically got one global bet being placed on AI. And historically speaking, when you have this kind of concentrated bet and people are building something with very expensive infrastructure where they're having to do it on debt, they haven't come in at the same time. So that first wave of investors usually gets wiped out and then it's the inheritance generation that comes along and they're able to pick up the dark fiber or the railway or in this case the data centers and make something out of it. So no one can see the future. Certainly not me. You have to be very, very careful. But like I said earlier today, this video really prompted me to reach out to my own investing team and to push the strategy that I'm using, which is optionality, which is what he was talking about here. So one, I want to be well diversified. I don't want to be tied, overly tied to AI or tech stocks. The Magnificent Seven. I don't want to be overly tied to the stock market. I want to be somewhat in the risk on space in equities because you never know. And so I don't want to be standing around, you know, sitting on my hands for three years and, and missing out. But at the same time I don't know if the crash is ever going to come. I don't know if it's going to come tomorrow. And so I want to make sure that I'm all weathered up so that no matter what comes, I'm going to for sure limit my upside, but I'm also going to limit my downside. So again, you guys need to make sure that you're building a strategy that makes sense for you. But there should be just so many warning signs, fragility, that unless you think you see something that nobody else sees. To me it's, it's time to be careful. It's time to make sure that you can move if the market does go down, that you've got the optionality to go back in if you want at really good prices. But yeah, this is a time to be very, very thoughtful. At an absolute minimum, figure out what your metric is. So if Warren Buffett uses discounted future cash flows, what are you looking at? Make sure you're looking at something. Make sure that emotions are not the thing that's driving you, that you have a very pre established metric that you're going to respond to that you decide on when you are emotionally sober. Don't wait till you're in the thick of it and either losing money or making money and then you can't see things clearly anymore because you're just so caught up in the feelings. I'm getting a bunch of the bros in the chat. Should I go to cash?
- [52:34]
Narrator
Should I go to gold? Should I do this?
- [52:35]
Financial Analyst
Should I sit on my hand? So knowing this, you're saying still invest, still buy assets, but just make sure you have an indicator that you're circling on your specific research that you need to understand why you're doing what you're doing. So remember, I. What I feel in these moments is uncertainty. I don't feel confidence. So I'm happy to talk to people about what I do, but the last thing I want is people misreading that. Oh, he knows. Oh, my God. He sees it clearly. Yeah, I should just do what he's doing. I'm not even certain in my own life. So people should be extraordinarily paranoid. But the way that I look at what Buffett is doing is there's a set of metrics that he pays attention to that have to do with the absolute foundational health of the business. When I look at the foundational health of AI, it's not there. When I look at the historical. And our entire stock market is predicated on AI. So I look at the fundamental health of the businesses that make up AI, the bulk of what people are betting on it isn't there. I look at historical trends of what these new technologies with massive infrastructure build outs look like. They turn into bubbles. The bubbles ultimately burst because there's so much debt that people have to take on that there's just. It's a real, like, physics problem in that you're going to have to pay for this debt, but you're not getting the revenues that you need to service the debt. So eventually people stop giving you the debt. Eventually people stop buying your stock. And so you're in a spot where you just go out of business. So this happened to WorldCom. This has happened to so many railway companies as those build outs have happened. So I look at that and I'm like, oh. I look at labor force participation, people are ejecting out. I look at our overall economic growth. It's very low. I look at instability in the Middle East. I look at the fact that the instability in the Middle east hasn't caused, caused a recession. So we were able for like the first time and God knows how long to actually reduce our demand for energy. Like, that tells you that something else is going on. I've obviously already talked about China. I think that they're struggling massively, but that means that now you've got the two biggest economies in the world, both on shaky footing. And so I just look at all these things and I'm like, okay, it's been an awesome bull run. I've made an obsession, obscene amount of money through this bull run. So now am I willing to step back for A little while. Not entirely, like I'm still going to stay in the stock market. But right now my direction of travel is to reduce my exposure to equities, especially not eliminate. Reduce my exposure as a percentage to equities, especially anything that's tied to AI because I think AI is going to be the most transformational technology ever. But I have a sense, and it's just that based on all the things that I just walked you through, I have a sense that this is ultimately there's going to be a gap between initial companies getting wiped out and then other companies coming along and learning from all those mistakes, taking advantage of what's been built and then moving forward. But because there'll be that period of disruption, there'll be an opportunity to buy back in at a lower price. And something we haven't talked about yet, when you're pulling, pulling forward all of this revenue and you're saying like, hey, this is gonna take 15 years before this is realized. That's exactly what we saw with Microsoft during the dot com boom. So it's like, yeah, Microsoft is a real company. It's absolutely phenomenal. And it did ultimately get back. It was like 15 or 17 years somewhere in there for them to get back to their highs from the 2000 bubble. So now imagine you don't sell. You're like, I'm just gonna ride this out. Microsoft's gonna be amazing. Nobody's gonna supplant them. The irony is you would be right. You would actually be correct. But it's going to take you 15 plus years to get back to that. You start running the math on that. You're in the 2000 40s, man. So like, are you willing to go, hey, I'm going to hold these stocks? Let's say you're right about anthropic or OpenAI or, or Nvidia or whoever. But let's say that just like in 1973 when the Nifty50 bubble burst and those stocks did eventually come back, but it took a very long time, are you going to be willing to say I don't have access to that money for 15 years? If you're willing to say, yep, I'm willing to have that tied up. I don't want to think about this. I'm not a day trader. I think Tom is crazy. Nobody can predict the future. Which by the way, I say and is very true. So I'm just going to let this ride. There's no problem here as long as I'm willing to wait. Great. If you're willing to hold that stuff. Phenomenal. It will. If you're broadly diversified enough, it will likely come back. I think they even ran the math on the Nifty50. If you had had a broad distribution across the Nifty50 and you were willing to wait the whatever, 15ish years for it all to come back, you ended up keeping pace. It was almost to the decimal point, identical to just being in the s and P500. So if you've got that kind of time and you're not worried about that money, great, nice and easy. And that's what I'll do with a meaningful amount of money. I'll leave it in the market. I'm not going to worry about it. I don't need to touch it for literally decades. And I will come out ahead. It's great. So this to me is an in market, out of market. This to me is. What are your percentages now? That's just me again. You guys need to have your own decisions. Do not blindly do what I do in case I'm way off here. What I'm trying to present to you guys is cause and effect. I'm trying to present to you metrics that are probably worth looking at. I'm trying to present you the context of one of the greatest investors of all time. What he's looking at putting it back into that historical context, of mapping it to that instead of conspiracy, you start putting all of the pieces together. And it feels like this is a time not to be on autopilot. Not that you should be racing for the doors, that it's a time not to be on autopilot, to make sure that you have a strategy based on metrics that you decided on when you were emotionally sober so that you're not making a decision in a time of panic. If you like this conversation, check out this episode to learn more. One of the most important things that any of us are going to be thinking about in this time is what is going to be the economic philosophy that we get behind once we understand that economics becomes warfare. Let's talk about a pattern that is guaranteed to be killing your progress. 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- [60:03]
Narrator
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