Britain after Brexit will not be alone, but it will be lonelier

The UK is entering a new world, going its own way while superpowers dominate

Martin Wolf

Brexit Road Drill
© James Ferguson

“At last we are alone.” My father told me he heard these words from an elderly gentleman sitting beside him on the London Underground in June 1940, just after the fall of France. The same insularity animates Brexit. It was an illusion then — it was not the UK alone, but an alliance with greater powers that won the second world war. It is an illusion now. The UK will not be alone, but it will be lonelier.

We cannot know what would have happened if the 2016 referendum had the opposite outcome.

That is the road not taken. But we know some results and may at least guess at others.

Brexit is a decision to separate the UK from the institutions governing the continent of which it is necessarily a part. One result is certain: British people will lose the right to move and work across the EU, as will citizens of EU members to live and work in the UK. That is a reduction in freedom. It is the result of insisting that one should not have both a British and a European political identity. This is a victory of narrowness.

The direct influence of British political choices on those of the neighbours will also vanish. British politicians will press their noses against the EU windows as decisions that affect them are made. Those decisions will determine the evolution of the single market and EU trade and climate policies.

Without the UK, the EU will still have 450m people and produce 18 per cent of world output. It will also remain the UK’s most important trading partner. The UK’s self-exclusion will matter.

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Moreover, never in my lifetime has a British government been so determined to inflict economic damage on its own people. The government’s own analysis, published in November 2018, concluded that, under a bare-bones free trade arrangement of the type the government seeks, UK gross domestic product per head is likely to be about 5 per cent smaller than it would otherwise be, over the long term.

Elimination of net immigration from the European Economic Area would increase the loss by 0.5 percentage points. It is possible that the UK will lose close to half of its potential increase in GDP per head over the next decade, with grim implications for government revenue and spending.

This ignores the short-term costs. Sajid Javid, chancellor of the exchequer, has told business to abandon calls for regulatory alignment with the EU, stating that they have had three years to prepare. That is nonsense. Nobody has known (or even now knows) what agreement, if any, will be reached. The combination of uncertainty about the outcome with minimal time for adjustment is grotesquely irresponsible.

Brexiters will claim that, freed of the “dead hand” of EU regulation, the UK will thrive. This is likely to prove a fantasy. One reason is that the UK already has a highly deregulated economy, notably in the labour market. Is the UK going to abandon current regulations over the environment, product standards, financial soundness and so forth? That is very unlikely.

Moreover, the big failings of the UK — its ultra-low investment rate, weak productivity growth, poor infrastructure, high regional inequality, and long educational tail — have nothing to do with EU membership. Brexit may eliminate many excuses. It will not solve any of these problems.

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That is far from all. If there is no trade agreement with the EU, or one that proves disruptive, a blame game is sure to ensue. Within the UK, Remainers will blame Leavers and vice versa.

More important, the government might blame the EU for an unhappy outcome, and vice versa.

Such discord could well take on a life of its own, driving Britain and the EU further apart. It is even possible to imagine an angry and destructive UK seeking to co-ordinate with Donald Trump’s US against the EU. The consequences would be devastating.

The UK’s departure, let alone the nightmare of prolonged hostility, is also likely to shape the future EU. Britain played a central role in promoting the single market and a liberal EU trade policy. Its departure is likely to weaken the influence of more economically liberal northern countries against the others.

The EU is then likely to be more inward-looking than it would otherwise have been. Yet it is also likely that Brexit will reinforce the solidarity of a more beleaguered EU. Either outcome will much affect the UK.

The UK is also likely to find it hard to exercise much independent influence upon a world entering an era of great power rivalry. Next to the US, China or the future EU, it is an economic minnow, albeit a large one. In such a world, reliance on multilateral institutions is likely to prove futile.

Again and again, Britain will face choices over which side to choose in struggles, perhaps over technology or standards, that are occurring far over its head. All this will be very uncomfortable. Not least, the UK will frequently find itself a supplicant in relations with powers greater than itself. It will have to be nimble and humble. That may work. But the control it is allegedly taking will be illusory.

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The UK is entering a new world. It is forcing its people to abandon their rights in Europe. It is standing aside from the European project of structured and peaceful co-operation. It is choosing to be an independent island next door to what seems likely to remain an integrated European giant.

It is deciding to go its own way in a world dominated by rivalrous superpowers. It is doing so on the promise of greater control over its own destiny. It is, not least, acting against the wishes of the majority of its own young people.

Will this separation endure? Nobody can know. But it is quite likely to last a long time. In my own view, it is a huge blunder. But the moment is now upon us. We must live with its consequences.

A Global Economy Without a Cushion

From 1990 to 2008, annual growth in world trade was fully 82% faster than world GDP growth. Now, however, reflecting the unusually sharp post-crisis slowdown in global trade growth, this cushion has shrunk dramatically, to just 13% over the 2010-19 period, leaving the world economy more vulnerable to all-too-frequent shocks.

Stephen S. Roach

roach111_westend61_getty images_shipping trade

NEW HAVEN – With the benefit of full-year data, only now are we becoming aware of the danger the global economy narrowly avoided in 2019. According to the International Monetary Fund’s latest estimates, world GDP grew by just 2.9% last year – the weakest performance since the outright contraction in the depths of the global financial crisis in 2009 and far short of the 3.8% pace of post-crisis recovery over the 2010-18 period.

On the surface, 2.9% global growth doesn’t appear too shabby. But 40 years of perspective says otherwise. Since 1980, trend world GDP growth has averaged 3.5%. For any economy, including the world as a whole, the key to assessing growth implications can be found in deviations from the trend – a proxy for the so-called output gap. Last year’s shortfall from trend (0.6 percentage points) brought growth uncomfortably close to the widely accepted global recession threshold of approximately 2.5%.

Unlike individual economies, which normally contract in an outright recession, that is rarely the case for the world as a whole. We know from the IMF’s extensive coverage of the world economy, which consists of a broad cross-section of some 194 countries, that in a global recession about half of the world’s economies are typically contracting, while the other half are still expanding – albeit at a subdued pace.

The global recession of a decade ago was a notable exception: by early 2009, fully three-quarters of the world’s economies were actually shrinking. That tipped the scales to a rare outright contraction in world GDP, the first such downturn in the overall global economy since the 1930s.

For global business-cycle analysts, the 2.5-3.5% growth band is considered the danger zone. When world output growth slips to the lower half of that range – as it did in 2019 – the risks of global recession need to be taken seriously. As is typically the case for official, or institutional, forecasts, the IMF is projecting a modest acceleration of annual world GDP growth in 2020 and 2021, to 3.3% and 3.4%, respectively.

But as the physicist Niels Bohr once said, “Prediction is very difficult, especially if it is about the future.” Just ask the IMF, which has revised down six consecutive iterations of its global forecast. Obviously, there is no guarantee that its latest optimistic projection will be realized.

Downside risks are especially worrisome, because a 2.9% growth outcome for the world economy underscores the lack of a comfortable cushion in the event of a shock. As I noted recently, predicting shocks is a fool’s game.

Yet the draconian measures that China is now taking to contain the lethal Wuhan coronavirus only serve to remind us that shocks are far more frequent than we care to think. A few weeks ago, it was the possibility of a hot war between the United States and Iran. And before that, there was the increasingly contentious US-China trade war.

The point is that below-trend global growth, especially when it moves into the lower half of the 2.5-3.5% range, is nearing its stall speed. That leaves the world much more susceptible to recession than it would otherwise be in a more vigorous environment of above-trend global growth.

The same message comes through loud and clear in gauging the risks to the global trade cycle – long the major engine of global growth in an increasingly integrated, supply-chain-linked world economy. The IMF’s latest assessment put global trade growth at just 1% in 2019 – its seventh consecutive downward revision. Indeed, last year was the weakest trade performance since the historic 10.4% plunge in 2009, which was the worst contraction since the early 1930s.

Compared to the 5% average over the 2010-18 period, the slowdown of world trade growth to just 1% in 2019 is all the more alarming. In fact, it was the fourth-weakest year since 1980, and the three worse years – 1982, 2001, and 2009 – were all associated with global recessions.

Global trade growth has never recovered to its pre-crisis pace, a shortfall that has been the subject of intense debate in recent years. Initially thought to be a consequence of unusual weakness in business capital spending, there can be no ignoring the impact of protectionism following the start of the US-China trade conflict.

Now that the two sides have agreed to a truce in the form of a “phase one” trade deal, there is hope that the trade prognosis will improve. Reflecting that hope, the IMF’s January update calls for a modest rebound to 3.3% average growth in world trade over the 2020-21 period.

But with the average US tariff rate on Chinese imports likely to remain at about 19% after the accord is signed – more than six times the pre-trade-war rate of 3% – and with worrisome signs of escalating US-Europe trade tensions, this forecast, like those of the past several years, may turn out be wishful thinking.

All this bears critically on the precarious state of the global business cycle. Historically, the rapid expansion of cross-border trade has been an important part of the global growth cushion that shields the world economy from all-too-frequent shocks. From 1990 to 2008, annual growth in world trade was fully 82% faster than world GDP growth.

Now, however, reflecting the unusually sharp post-crisis slowdown in global trade growth, this cushion has shrunk dramatically, to just 13% over the 2010-19 period. With the world economy operating dangerously close to stall speed, the confluence of ever-present shocks and a sharply diminished trade cushion raises serious questions about financial markets’ increasingly optimistic view of global economic prospects.

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

Argentina’s creditors fear the worst after IMF talks begin

Promise of ‘deep debt restructuring’ sent price of bonds lower last week

Benedict Mander in Buenos Aires and Colby Smith in New York

Concerns among investors were heightened after the new leftist president Alberto Fernández appeared to endorse anti-IMF comments by his vice-president

As Argentina attempts to win the IMF’s support for a $100bn debt restructuring, the sabre-rattling of the leftist government is stoking fears among creditors of a messy default.

Formal talks between the fund and Buenos Aires began last week and have already provided clues on how tough the process might be for bondholders. The price of Argentina’s government bonds sank after the 37-year-old economy minister Martín Guzmán told legislators on Wednesday that a “deep debt restructuring” would be required, and that the government would not try to balance its budget until 2023 at the earliest.

The country’s century bond — seen as a landmark in its economic recovery when it was issued three years ago — dropped almost 3 per cent the next trading day to 43 cents on the dollar, having started the year at more than 50 cents. The price of another government bond maturing in 2028 slipped to less than 45 cents. On Monday they remained close to these levels, which indicate a high probability of default.

Not everyone was convinced by Mr Guzmán’s tough rhetoric. “The youngster is living in Peronist La-La land,” said Walter Stoeppelwerth, chief investment officer at Portfolio Personal Inversiones, an investment bank. In Mr Stoeppelwerth’s view, neither the IMF nor the country’s creditors would accept a deal based on the government’s stated position.

However, concerns among investors were heightened after the new leftist president Alberto Fernández appeared on Thursday to endorse anti-IMF comments by his vice-president, Cristina Fernández de Kirchner. Ms Fernández de Kirchner, the combative former president from 2007-15, had remarked that the fund also needed to accept a “substantial” haircut, or loss, after lending Argentina $44bn since a 2018 currency crisis. The IMF’s managing director Kristalina Georgieva told Bloomberg on Sunday that a haircut would not be possible.

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Last week, too, Argentina unilaterally postponed interest payments on a local currency-denominated sovereign bond, after it failed to convince enough investors to accept a loss on the face value of their debts.

Patrick Esteruelas, head of research at Emso Asset Management, said the tough stance from the government — which insisted that it refused to be “held hostage” by foreign holders of the bond — was an attempt to clean up a “mess” created by a recent stand-off between the Province of Buenos Aires (PBA) and its creditors.

The local government had tried to postpone a $250m January payment until May, but failed to convince its largest debtholder, Fidelity, which owns about a quarter of the province’s 2021 bonds. In the end, the province agreed to pay the money owed and pledged to restructure its remaining stock of foreign debt.

Marcos Buscaglia, a founding partner of Alberdi Partners, an economic consultancy in Buenos Aires, said the PBA episode showed Argentine policymakers were “afraid of a default”, which could trigger a renewed run on the peso and push inflation — which exceeded 50 per cent in 2019 — even higher. Argentina’s economy is in its third consecutive year of recession.

But according to Mr Esteruelas, the government’s decision to play hardball with holders of the local sovereign bond shows that it “internalised some of the lessons” drawn from the PBA affair. “This resets the stage,” he said.

Investors now insist that the government must present an economic plan that would explain convincingly how it plans to repay creditors, if it wants a swift and amicable resolution to the stand-off. So far, it has refused to do so.

“When there is so much uncertainty on the delivery [of certain economic targets], if you go to investors with haircuts . . . it is hard for them to be receptive,” said Polina Kurdyavko, head of emerging markets at BlueBay Asset Management.

Few investors are likely to accept a haircut of as much as 40-50 per cent, as implied by Mr Guzmán’s spending plans. That could make it tricky for the government to resolve the debt crisis by its self-imposed deadline of March 31.

“It is going to be a tough sell because time is on the bondholders’ side,” said Gustavo Medeiros, deputy head of research at Ashmore Group, another bond investor. “If they come and say a 50 per cent haircut and no coupon payment [for a few years], forget about it. There is no deal.”

Despite clear tensions between the government and private creditors, the role of the IMF is more ambiguous. Buenos Aires has had stormy relations with the fund in the past, but its endorsement of the government’s financial programme would help to seal a deal with creditors.

Analysts suggest that the IMF may favour a bigger haircut on Argentina’s debt to ensure that its own loans can also be repaid. “Paradoxically, the IMF will be the government’s best ally in the negotiations with bondholders,” said Mr Buscaglia.

But that could change. If the government does not meet its March deadline for an agreement with its debtholders, the fiscal conditions put on the government by the fund “may grow”, said Eduardo Levy Yeyati, an economist in Buenos Aires.

How Dangerous Is the Wuhan Coronavirus?

By: Ryan Bridges

The political and economic effects of the new coronavirus – both in China and across the globe – hinge overwhelmingly on just how successful efforts to stop its spread are likely to be.

Forecasting these, therefore, requires us to take a closer look at the mechanics of both contagion and containment.

When determining how dangerous an infectious disease can be, microbiologists and epidemiologists need to know two numbers: R0 (called R-naught) and the case-fatality rate (which is actually a ratio, not a rate).

The former estimates how infectious the disease is, while the latter provides an insight on its virulence.

R0 is an attempt to calculate how many people will catch a disease from an infected person. An R0 of 2, for instance, means that an infected person will spread the disease to two other people. But this is not an easy number to calculate. A paper published in the scientific journal PLOS One describes two methods for finding R0.

One involves hunting down every contact of several infected people to determine how many get sick and averaging the results; the second involves calculating an estimate by plugging cumulative data into equations that serve as infectious disease models.

But, as an article in The Atlantic explains, R0 is even trickier than that. It can change depending on external circumstances. A public health campaign or an effective quarantine could lower R0, while the virus’ spreading to a region with poor health care could increase R0. Perhaps the most salient point is that an R0 greater than 1 suggests that the infection will spread, while an R0 less than 1 suggests it will fizzle out.

As its name implies, the case-fatality rate estimates the percentage of deaths that occur among infected people. The Wuhan coronavirus has an estimated case-fatality rate of about 2 percent, meaning that there are two fatalities for every 100 cases of the disease. Science News reports that “the [World Health Organization] says less than 2 percent of patients who have fallen ill with 2019-nCoV have died, most often from multi-organ failure in older people and those with underlying health conditions.”

But just like R0, this number can be tricky to calculate and interpret. First, the true number of cases is hard to know for sure, since people who contract a mild version of the disease don’t go to the hospital, don’t get tested, and don’t become tallied in the official statistics. Second, the case-fatality rate will vary inversely with the quality of a health care system. Wuhan was so overwhelmed by the coronavirus that hospitals were turning away patients.

It is quite likely that some people who died could have been saved had they received treatment. Combined, these facts would suggest that the case-fatality rate for the Wuhan coronavirus is lower than 2 percent, especially if an infected person is treated in an advanced nation with a good health care system. Indeed, an article in Reuters concluded that infections have been underreported. As of publication, data from Johns Hopkins show that of the more than 1,000 deaths, only two have occurred outside mainland China (in the Philippines and Hong Kong).

Despite the difficulty in calculating R0 and the case-fatality rate, these numbers are worth estimating because they help place a new disease in the context of what is known about other diseases. The R0 of measles could be as high as 18, while the case-fatality rate of seasonal influenza is approximately 0.1 percent.

Thus, preliminary numbers suggest the Wuhan coronavirus is less infectious than measles but deadlier than seasonal flu. But, because of the sheer number of cases of seasonal flu (which number in the millions), the global death toll from influenza is far greater, estimated to be approximately 300,000 to 500,000 deaths annually.

Containing the Coronavirus

The global economy surely will take a substantial hit from the coronavirus. This will be the result of China’s massive, citywide quarantines, a decrease in industrial output, and travel restrictions and supply chain disruptions. Many such efforts to contain the coronavirus are disproportionate to the threat.

China’s massive quarantines will probably work to an extent – after all, preventing people from traveling within and between cities will help curb transmission of the virus – but this measure cannot be implemented in free societies. In non-authoritarian countries, only individuals can be quarantined, and this has been adequate to prevent the spread of disease. (When Ebola came to the United States, it didn’t spread far thanks to effective treatment and isolation procedures.)

Citywide quarantines also aren’t necessary because the best way for uninfected people to remain that way is to wash their hands frequently and to avoid touching their face while in public. It’s difficult to say whether wearing a mask accomplishes anything. On the one hand, masks catch respiratory droplets, which is why sick people and those with whom they are in close contact absolutely should wear them.

On the other hand, viruses are so tiny, they can pass right through masks. To the extent that a mask prevents a person from touching his or her face, then a mask may provide some protection. However, the Centers for Disease Control and Prevention does not recommend that healthy people wear a mask in public.

While coronaviruses can spread via frequently touched fomites (objects, such as doorknobs, that can transmit an infection indirectly to another person), it is not known how long they can survive outside the body on surfaces.

While some scientists believe that coronaviruses can last only a few hours, a newly published literature review in the Journal of Hospital Infection concludes that they “can persist on inanimate surfaces like metal, glass or plastic for up to 9 days, but can be efficiently inactivated by surface disinfection procedures… within 1 minute.”

Because exports from China take 30 to 40 days to arrive in the United States (if shipped via ocean freight), there is virtually no chance that exported products could infect Americans – unless the export is an infected human, animal or animal product.

When Overreactions Are Rational

The most serious threat to the global economy is not from the virus itself but from overreaction. Chinese manufacturing plants sit idle due to sick or quarantined workers. Travel into and out of China has been reduced. These overreactions are understandable, however, because scientists and public health officials have expressed a lot of uncertainty about the virus.

When faced with uncertainty – particularly when that uncertainty potentially involves death – people (especially politicians) behave cautiously. (From the American perspective, restricting travel to China has the side benefit of squeezing that nation’s economy even further.)

The general public hates uncertainty. But scientists live in a world of probability and are very comfortable dealing with uncertainty. This is also why scientists rarely use words like "never" and "always." (We know better from experience.

At one time, we thought all swans were white, until we went to Australia and found black swans.) This difference between the public and scientific community on the relationship to risk creates a communication gap that further feeds the uncertainty.

Ultimately, the future of the Wuhan coronavirus is not knowable.

Like the other major coronavirus epidemics that preceded it, the Wuhan virus is thought to have jumped from animals to humans. SARS terrified the world, but then quickly vanished. MERS, on the other hand, is now endemic, meaning there are a few cases that occur all the time. The Wuhan virus could follow either path or some other path entirely.

Just like an economic recession, an infectious disease outbreak provokes strong psychological responses.

Life will return to normal when enough people believe that it’s okay to return to normal.

Is Berkshire Hathaway Antifragile?

by: Chris Wallendal CFA
- Berkshire Hathaway has amassed a record cash horde of over $128B, or greater than 23% of the company's current equity market capitalization.

- Berkshire Hathaway's large cash position should be viewed as a potential war-chest, not as a drag on the company.

- As explained by Nassim Nicholas Taleb, cash reserves are antifragile, whereas debt creates fragility.

- I conclude that the record cash pile lessens Berkshire's fragility, but there are still too many risks to label the company antifragile as a whole.

- Still, I believe that there is a better than not chance that the market will present Buffett an attractive investment opportunity in the not far future, and so I own BRK.B.
Berkshire's Cash Balance
Berkshire Hathaway (BRK.A) (BRK.B) has more than doubled its cash and short term investments over the past four years as its portfolio and subsidiaries continue to generate significant cash flows for the holding company. This is likely to have further swollen from the $128B reported in 3Q2019 as the company has not made any recent "elephant size" acquisitions. "Elephant size" may soon need to be upgraded to "whale size" if much of this cash is to be put to work in a single transaction, while the likelihood of Buffett suddenly finding multiple targets at attractive prices seems remote with equity prices near record levels.
This has led to calls for Berkshire to use it or lose it via dividends and/or large share repurchases. The current low returns on cash and equivalents adds to this sentiment. Others suggest that the company may simply be patiently waiting for more opportunistic prices, perhaps envisioning a grander repeat of the Goldman Sachs (GS) preferred stock and warrants deal from 2008.
I agree with the latter and want to expand further on how this is consistent with Warren Buffett's "Owner's Manual" for Berkshire shareholders and on how this relates to some of the insights of Nassim Nicholas Taleb, author of the Incerto Series (Skin In the Game, Antifragile, The Black Swan, Fooled by Randomness, and The Bed of Procrustes).
An Owner's Manual
Warren Buffett wrote "An Owner's Manual" in 1996 (with periodic updates) as a way to inform shareholders of how he and Charlie Munger would approach managing the holding company of Berkshire Hathaway. In Buffett's usual colloquial fashion, he describes the company's sparing use of debt as follows:
The financial calculus that Charlie and I employ would never permit our trading a good night’s sleep for a shot at a few extra percentage points of return. I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.
He goes on to describe how the "float" from the insurance subsidiaries and deferred taxes are two large sources of low-cost funding which, while creating liabilities, come without the drawbacks of debt. The majority of the operating subsidiary debt is matched to long term assets in the railroad and utilities businesses and is non-recourse to the holding company.
Regarding the stock market, Buffett describes his aim to collect assets at attractive prices over the long term as being aided, not hurt by, falling prices:
Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. So when the market plummets – as it will from time to time – neither panic nor mourn. It’s good news for Berkshire.
This applies to purchasing entire companies or marketable securities, as well as the ability for the portfolio companies to buy back their own shares at depressed prices.
This implies that Buffett is willing to retain earnings and wait for market opportunities. He does, however, have a mechanism to check that he is creating value:
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1? If these tests are met, retaining earnings has made sense.
So far, Berkshire Hathaway has met that test, so presumably we shouldn't be holding our breath for a dividend or large share repurchase.
The Opposite of Fragile
Please Mishandle Antifragile PackageSource: Antifragile: Things That Gain From Disorder
In Antifragile: Things That Gain From Disorder, Taleb explains that the opposite of fragile is not strong, robust, or unbreakable as most people seem to think. Rather, the exact reverse of fragile is that which benefits, i.e., is strengthened by stressors and shocks. This is such a foreign concept that Taleb needed to coin a new word for it - "antifragile".
However, he also gives many examples of how all living things and surviving systems must have some measure of antifragility in order to survive in an unpredictably changing environment. The stress of exercise makes us stronger, not just in our muscles, but also by increasing our bone density and causing a cascade of beneficial health effects which we cannot fully understand given the complexity of our biology. Another example can be found in psychology - while post-traumatic stress syndrome is well-known (fragile), much less discussed is post-traumatic growth, individuals who are psychologically stronger as a result of surviving a trauma (antifragile). Tom Brokaw used "The Greatest Generation" to describe those who grew up during the Great Depression and World War II. Taleb even points out how committing a crime can destroy a fragile professional, say a money manager, or enhance an antifragile actress by getting her more publicity.
This concept can also be applied to debt, which creates fragility. Sure, if all goes according to plan and the individual or company repays their debts, they will have benefited from the loan in terms of spending or investing power. However, they risk losing most or even all of their net worth if the unforeseen and unfortunate befalls them.
Cash savings are the exact opposite of debt. As such, it doesn't just create financial robustness, but can also be viewed as creating antifragile optionality for the saver. Taleb likens it to redundancy in a system. Just like having spare parts (two kidneys, or extra inventories of a commodity, for example), having extra spare cash can be highly beneficial when an unforeseen opportunity arises.
Is Berkshire Hathaway Antifragile?
From the above, it is obvious that having an enormous cash stockpile well in excess of its debt and operating/reserve requirements reduces fragility for the company.
In addition, the insurance and reinsurance businesses are also, if well-managed, capable of being antifragile. Why? Taleb points out that if they suffer losses (the stressor) which do not take them under, then they can often use the disaster which caused the loses as an excuse to raise premiums. However, the insurance underwriting business only accounts for 2.7% of Berkshire's total net earnings.
Taleb also points out that sheer size can create fragility, as in too big to fail interconnected banks. However, in Berkshire's case, this is mitigated by the largely decentralized and hands-off style of management at the holding company, allowing even the wholly-owned operating companies great freedom to run themselves.
Although utilities may hold up relatively well in an economic downturn, the company's railroads, energy, consumer products, building products, jet sharing, etc. would all take a hit along with the vast investment portfolio, which includes large investments in the very fragile banking sector. So taken as a whole, Berkshire Hathaway is not antifragile in the short run in the event of a shock or recession, but may prove less fragile than the market as a whole due to the cash pile. This could lead to antifragility in the longer term if the cash is well-invested at depressed prices before a market recovery. However, such "contingent antifragility" does not make sense as it requires future events which are impossible to accurately forecast.
Despite the fact that Mr. Buffett has lived for nearly nine decades and may live quite a bit longer, I do not believe him to be immortal. All individuals are fragile. So even though he has carefully thought about and planned for his succession, it is likely that his eventual removal will change investor sentiment towards the stock, at least among those who believe that his investment track record is the reason to own the stock. Taleb has much to say on the subject of past returns as well, especially in Fooled By Randomness, but for the purposes of this article, I'll limit my comments to just that thought. To repeat: if some owners of Berkshire Hathaway stock are there because they believe that Buffett's future returns will drive out-performance, then it seems to follow that his loss would change their sentiment in a negative way.
So although the company's growing stash of cash and Warren Buffet may both still be around for a future market crash, there is no way to forecast if and when he will make a whale of an investment or what the result will be over time. However, I am willing to bet a modest portion of my portfolio on the possibility that this will happen and I thus do own the stock.
Note that an investor can also replicate this less fragile composition of Berkshire to say, the S&P 500, by simply owning a smaller amount of stock and a large cash position in their own portfolios.