When the world’s most-followed investor doesn’t feel comfortable investing, should the rest of us be worried?

Warren Buffett , who has quipped that his favourite holding period for a stock is “forever,” continues to have substantial money at work in American companies. But he has never taken this much off the table either—a whopping $325 billion in cash and equivalents, mostly in the form of Treasury bills.

To appreciate the immensity of that hoard, consider that it would allow Berkshire to write a check, with change left over, for all but the 25 or so most-valuable listed U.S. corporations—iconic ones such as Walt Disney, Goldman Sachs , Pfizer, General Electric or AT&T. In addition to letting the dividends and interest pile up on its balance sheet, the conglomerate has aggressively sold down two of its largest shareholdings, Apple and Bank of America, in the past several months. And, for the first time in six years, it has stopped buying more of the stock it knows best— Berkshire Hathaway.

Does that mean mere investing mortals should be cautious about the market? Maybe, but it tells us even more about Berkshire.

Buffett and his late business partner Charlie Munger didn’t outperform the stock market 140-fold by being market-timers. Probably Munger’s most famous quote is his first rule of compounding: “Never interrupt it unnecessarily.” Investors who follow Berkshire closely and hope for a bit of its magic to rub off on their portfolios pay very close attention to what it is buying and selling, but much less to when.

Yet the seemingly always optimistic and patient Buffett has turned cautious before, famously shutting his extremely successful partnership in 1969 when he said markets were too frothy and also building up substantial cash in the years leading up to the global financial crisis—money he deployed opportunistically.

“He’s cognisant of the fact that markets gyrate and go to extremes,” says Adam J. Mead, a New Hampshire money manager and Buffetologist who is the author of “The Complete Financial History of Berkshire Hathaway.”

Stock values being stretched doesn’t mean they are on the precipice of a crash or even a bear market. Instead, zoom out and look at what today’s valuations say about returns over the next several years, which will include both good and bad periods. Goldman Sachs strategist David Kostin predicted recently that the S&P 500’s return over the next decade would average just 3% a year—less than a third of the postwar pace.

Kostin’s report went over like a record scratch at a time of high investor optimism, but it is consistent with other forecasts. Giant asset manager Vanguard recently predicted an annual return range of 3% to 5% for large U.S. stocks and just 0.1% to 2.1% for growth stocks over a decade. And Prof. Robert Shiller ’s cyclically adjusted price-to-earnings ratio is consistent with an average return of about 0.5% a year after inflation —similar to Kostin’s projection.

Then there is the even simpler “Buffett Indicator,” which the Oracle of Omaha once called “probably the best single measure of where valuations stand at any given moment.” There are variants on the theme, but it is basically a ratio of all listed stocks to the size of the U.S. economy. Taking the Wilshire 5000 Index as a proxy it is now around 200%, which would leave it more stretched than at the peak of the tech bubble.

With T-bills now yielding more than the prospective return on stocks, it might seem that Buffett has taken as many chips off of the table as possible since there is no upside in risky stocks. But he is on record saying that he would love to spend it.

“What we’d really like to do is buy great businesses,” he said at Berkshire’s 2023 annual meeting. “If we could buy a company for $50 billion or $75 billion, $100 billion, we could do it.”

With Berkshire now worth $1 trillion, it would take a deal of that size to move the needle. Mead explains that a transaction matching acquisitions like 2010’s Burlington Northern Santa Fe deal or the 1998 acquisition of insurer General Re would be worth $100 billion scaled to today’s balance sheet.

Could it also mean that Buffett sees value in keeping dry powder ahead of the next crisis or general froth in the market? Yes, but he isn’t saying, and individual investors also have more options than he does. First of all, we don’t have to pay a 20% or more premium to the market price to invest in a business like Berkshire would in a takeover. We also can sail in much shallower waters and smaller ponds. For example, Vanguard’s 10-year projections range from 7% to 9% a year for non-U.S. developed market stocks and 5% to 7% for U.S. small capitalisation stocks. Other than a very profitable bet on Japanese trading companies in recent years, though, Buffett has kept his money mostly stateside and likely will continue to do so.

Changes at Berkshire are inevitable, though—and not just because the 94-year-old is nearing the end of his remarkable career. Buffett hasn’t hesitated to return cash to shareholders, almost exclusively through stock buybacks, yet he clearly deems even his own stock too pricey for that.

Berkshire also has reached a size at which it can’t replicate its long-run record of deploying its profits and handily beating the market. It is going to have to hand money back somehow—probably through a dividend, reckons Mead. Eventually it becomes necessary to interrupt compounding.

Wall Street’s verdict is clear: A second Trump presidency is likely to deliver a blow to an export-dependent European Union that is struggling with sclerotic economic growth and ever-multiplying political crises. Whether it will finally spark some change is the question for patient investors.

Since Wednesday, the day after the election, the S&P 500 has gained 3.7%. Meanwhile, the Euro Stoxx 50 and the FTSE 100 are down. Among those to shed the most market value have been clean-energy firms such as Vestas, carmakers such as BMW , consumer-goods companies such as Nestlé and Unilever and sellers of pharmaceuticals such as Roche. They all sell a lot to the U.S.

The U.S. is the top goods export market for the European Union, and for Germany, with pharmaceuticals, machinery and vehicles topping the export list.

During the campaign, President-elect Donald Trump floated a 60% tariff on Chinese imports and a 10%-to-20% levy across the board. The think tank German Economic Institute estimates that such a measure could make the German economy between 1.2% and 1.4% smaller than it would have been by 2028.

The core of the European Union’s export machine has been plunged into difficulties because of the end of cheap Russian energy, delays in joining the electric-vehicle revolution and an over reliance on selling to China.

Volkswagen last week announced the closing of at least three plants in Germany. According to FactSet, American customers make up 18% of its sales, about the same as the German market.

“I want German car companies to become American car companies,” Trump said last month while holding a rally in Savannah, Ga. “If you don’t make your product here, then you will have to pay a tariff, a very substantial tariff,” he added.

On Wednesday, Oliver Zipse , chairman of German carmaker BMW, underscored that the company has a plant in Greer, S.C.

“The most demanded vehicles in the United States, we produce there,” he told analysts Wednesday in a conference call. “So there is some natural cover against possible tariffs.”

Volkswagen and Mercedes-Benz have factories in Chattanooga, Tenn., and Vance, Ala., respectively. Manufacturers Airbus , Siemens and BASF also service the U.S. market from within, as do Nestlé and Unilever.

Much depends on details. In early 2021, Airbus’s assembly line in Mobile, Ala., was forced to pay tariffs for its shipments of fuselage, wing and tail components from France and Germany, as part of a World Trade Organization dispute. An agreement was quickly reached to suspend them.

Regardless, building up capacity to service all types of American-based demand would be hard. The Mobile plant makes A220 and A320 jets, but A330 and A350 wide-bodies are assembled in France. Volkswagen uses Chattanooga for the Atlas SUV, the Passat sedan and the electric ID.4, but the bestselling Tiguan and Jetta are built in Mexico. Roughly a quarter of U.S. imported cars originate there, and Trump has suggested that a 200% tariff could be slapped on them.

And when it comes to high-performance models, most EU firms still make them domestically and ship them over. Exports to the U.S. amounted to about 800,000 cars in 2023.

To be sure, EU leaders have struck a conciliatory tone with Trump this week, suggesting that a more amicable endgame such as the 2018 trade deal between the U.S., Canada and Mexico is possible.

Another risk is that China would send even more cheap goods to Europe if the U.S. ratchets up its trade war with Beijing. Yes, recent experience shows that China often just reroutes exports through third countries—and, as of recently, faces higher tariffs for electric vehicles in the EU anyway—but even small shifts could have big effects.

For a decade and a half, the 27-nation bloc has limped along, fostering just enough political change to avoid a painful breakup during the debt crisis of the 2010s and the 2020 pandemic, but never enough to truly invigorate its economy. Attempts by France’s Emmanuel Macron and Germany’s Olaf Scholz to change course have ended in paralysis. Scholz’s three-party government collapsed this week, after years that saw the coalition’s pro-austerity member blocking efforts to spur domestic industry with public spending.

Yet the first Trump presidency did galvanise some early support for a cohesive industrial strategy in Europe. The long-term bull case for European equities is that Trump 2.0 will be a catalyst for further transformation. European Central Bank President Mario Draghi published a report in September urging less red tape, state aid to key sectors and, where appropriate, harsher tariffs, all of which has buy-in from officials in Brussels.

On a small scale, the impulse toward a European industrial policy is already playing out. European defence contractors such as BAE Systems, Rheinmetall and Thales have seen their shares jump on the expectation that less American military involvement in Europe will force governments there to rely on their own capabilities. By 2030, the EU wants members to direct 50% or more of their procurement budgets toward European contractors.

Elsewhere, substituting foreign markets for domestic consumers will prove much harder, though providing advantages to buyers of electric vehicles has proved extremely effective in Norway. They now outnumber cars that run on gasoline.

Caught between the U.S. and China, Europe’s economic strategy is soon to face its biggest challenge since the eurozone crisis. Investors are right to be wary.

US: The Federal Reserve approved a quarter-point interest-rate cut Thursday, the latest step to prevent large rate increases of the prior 2½ years from weakening the labour market as inflation eases.

The decision, coming the same week as the election of Donald Trump to a second presidential term, followed an initial cut of a half-point in September and will bring the benchmark federal-funds rate to a range between 4.5% and 4.75%. All 12 Fed voters backed the cut.

Officials have said those moves are warranted because they are more confident that inflation will return to the central bank’s target and because they believe rates are still high enough, even with the latest cuts, to dampen economic activity.

The move was expected. Stocks and Treasury yields were steady after the announcement.

“We are committed to maintaining our economy’s strength,” Fed Chair Jerome Powell said at a news conference. He said officials are confident that with an “appropriate recalibration of our policy stance,” inflation can continue heading lower with a solid economy.

Trump’s election victory this week has the potential to reshape the economic outlook, with presumed GOP majorities on both sides of Capitol Hill enabling a broad shift on taxes, spending, immigration and trade. Economists are divided over whether the mix of policies will boost or weaken growth and drive up prices.

The shift in the outlook, in turn, has fuelled questions on Wall Street over whether the Fed will alter its earlier expectation that rates could be steadily dialled lower over the coming year or two.

Powell said it was too soon to say how the next administration’s policies would reshape the economic outlook.

“We don’t guess, we don’t speculate, we don’t assume” what policies will get put into place, Powell said. “In the near term, the election will have no effects on our policy decisions.”

Powell also said he had no intention of leaving the Fed before his four-year term as chair expires in May 2026. “Not permitted under the law,” Powell said when asked if he believed the president could remove him or other Fed personnel from their positions before their term expires.

Since the Fed cut rates in September, longer-dated bond yields have climbed notably, meaning the cost to borrow for a mortgage or car loan has gone up. Yields have increased in large part because better economic data has led investors to reduce their worries about a recession, which could have triggered larger rate cuts.

But some analysts think the bond-market selloff may also reflect concerns by some investors about higher deficits or inflation in a second Trump administration.

Either way, the market has generated an unusual result: Borrowing costs rose after the Fed cut rates. The average 30-year mortgage rate has jumped since mid-September, to 6.8% this week from 6.1%, according to Freddie Mac.

Over a similar time frame, investors in interest-rate futures markets have steadily reduced their expectations over how much the Fed will cut rates over the next year or so. They now see the Fed cutting rates to around 3.6% by 2026, up from an estimated trough of 2.8% in September, according to Citi.

Officials are trying to bring rates back to a more “normal” or “neutral” setting that neither spurs nor slows growth. But they don’t know what constitutes a normal rate. Policies that boost economic activity or prices could also lead officials to conclude that they should maintain a moderately restrictive rate stance. That means they would hold rates somewhat higher than a normal or neutral level.

Before the 2008-09 financial crisis, many thought a neutral rate might be around 4%, but after the crisis and an extremely sluggish recovery, economists and Fed officials concluded the neutral rate might be closer to 2%.

Interest-rate projections that officials submitted in September show most of them expected that if the economy expanded solidly with inflation continuing to cool , they could cut rates to around 3.5% next year.

Inflation based on the Fed’s preferred index was 2.1% in September, from a year earlier. A separate measure of so-called core inflation that strips out volatile food and energy prices was 2.7%. The Fed targets 2% inflation over time.

Because officials don’t have much conviction over where the neutral rate sits, they are likely to be guided by how the economy performs in the months ahead. If inflation keeps slowing and the demand for workers looks soft, officials could conclude it makes sense to continue cutting rates along the path they envisioned in September.

“We’re going to move carefully as this goes on so we can increase the chances that we get it right,” Powell said. “We’re trying to steer between the risk of moving too quicky…or moving too slowly. We’re trying to be on a middle path.”

If inflation progress stalls or ebullient financial markets raise concerns that inflation might get stuck above their target, officials might face more reservations around continuing to cut rates at a steady, meeting-after-meeting clip.

The most immediate focus is whether the Fed will cut again at its upcoming meeting in December. In September, 19 participants were about evenly divided over whether to cut rates one or two more times this year. Nine of them penciled in no more than one cut in either November or December, while 10 penciled in two cuts.

“There’s a lot to learn between now and the December meeting,” said Diane Swonk, chief U.S. economist at KPMG. “They can’t leave the door wide open, but they can’t close the door either.”

Powell said Thursday it was too soon to rule anything “out or in” at that meeting. Slowing down the pace of rate cuts is “something we’re just beginning to think about,” he said. “We’re on a path to a more neutral stance. That has not changed at all since September. We’re just going to have to see where the data lead us.”

Even before the election result, recent data suggested that cutting again would be a finely balanced decision because inflation looks like it might end the year slightly above officials’ projection, while the unemployment rate has edged lower recently, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

The election result— which sent stock markets to new highs while raising the prospect of stronger growth, higher inflation and better labour-market outcomes—boosted the odds that the Fed forgoes a cut next month, he said.

“Those could present a strong case from a risk-management perspective to potentially skip that meeting,” said Luzzetti.

Countries in Asia-Pacific will need to spend big to adapt to climate change. But the cost of inaction could be higher, according to a new report by the Asian Development Bank.

Left unchecked, climate change could punch a 17%-sized hole in the region’s economic growth over the next decades, the Manila-based bank said Thursday.

“The window to stay within the 1.5°C target of the Paris Agreement is rapidly closing,” the ADB said.

The international treaty aims to limit the average rise in global temperatures to that threshold, beyond which experts expect climate change to have increasingly disastrous consequences. In the nine years since the agreement was adopted, inaction has put that goal nearly out of reach, the multilateral bank said.

With greenhouse-gas emissions reaching record highs, nations need to dramatically increase—and immediately start delivering—efforts to get on track for 1.5°C, a United Nations Environment Programme report said last week. Failure to do so will lead to debilitating impacts to economies, the report said.

Asia-Pacific’s position in the climate crisis is a tricky one: it’s both home to some of the most vulnerable economies and a major polluter, contributing over 50% of global GHG emissions.

If emissions breach critical levels, ADB estimates climate change could reduce Asia-Pacific’s gross domestic product by 17% in 2070. Rising sea levels threaten coastal assets and populations, while heat waves would sap labor supply and productivity, and climate-dependent sectors like agriculture, forestry, and fisheries face shocks that will stifle output.

Estimates from the Deloitte Economics Institute calculate that about 75% of Asia-Pacific’s GDP is at high risk of climate disruption. This stands to affect at least half of the world’s labor force, which is in the region and in vulnerable industries. Climate inaction could lead to regional economic losses of about $96 trillion by 2070, the institute said in a report.

Asian countries have made strides toward decarbonising, but just maintaining policies implemented so far will lead to dangerous levels of global warming, the ADB said.

Taking the right type of action won’t come cheap. Estimates for Asia vary widely, in part due to different geographical definitions, but consensus is that funding is well below where it needs to be.

The ADB report estimates Asia-Pacific needs to invest anywhere from $102 billion to $431 billion annually to adapt to climate change. That far exceeds the $34 billion committed over 2021-2022.

Globally, the U.N. calculates the net-zero transition needs $0.9 trillion to $2.1 trillion a year between 2021 and 2050. That “is substantial but manageable in the broader context of the close-to-US$110 trillion global economy and financial markets.”

It remains technically possible to get on a 1.5°C pathway, as solutions like solar and wind power hold promise for fast, sweeping emissions cuts, the U.N. report said.

Getting back on track could be a big boost for Asia-Pacific economies.

The region is well-placed to benefit from the energy transition, the ADB said. It has massive potential for renewable-energy generation and can produce some of the world’s cheapest renewable electricity, it said. Advantages like fast-growing economies, a large workforce and strong manufacturing base equip Asia to develop the technologies needed for global decarbonisation.

That presents a wealth of opportunities for investors.

If governments formulate consistent policies and build climate-oriented financial systems, that can draw the private capital that’s key to plugging the funding gap, ADB said.

Policy uncertainty over could deter investment, particularly in the case of a change of political administrations. Investors hold more sustainable assets when countries adopt climate laws, and misaligned policies reduce incentives for private investors, ADB said.

That is particularly relevant in a year that has seen elections across Asia, including in India, Indonesia and Japan. The upcoming presidential election in the U.S. is in especially sharp focus as the outcome has implications for climate-change efforts.

That’s because of the U.S.’s role as a key player in green innovation and international cooperation on climate commitments and financing, as well as a major trading partner, said ADB principal economist Shu Tian.

Policy uncertainty from a key player can significantly affect the international climate agenda, she said.

“The U.S.’s stance on climate action influences the low-carbon transition through market mechanisms, affecting consumers, suppliers, and investors,” she said. “This, in turn, could impact climate investments across the [APAC] region.”

SYDNEY—Fitch Ratings affirmed Australia’s AAA sovereign credit rating with a stable outlook, even as it highlighted that the country’s high debt relative to countries with similar ratings.

Fitch said the country retains a commitment to the same rules for fiscal sustainability that helped to underpin close to 30 years of economic expansion before the pandemic.

“Australia’s rating is underpinned by the country’s high income per capita and sound medium-term growth outlook, as well as strong institutions and an effective policy framework,” Fitch said in a statement on Monday

It warned that Australia’s fiscal metrics are set to weaken modestly in the next two years. But it anticipated deficits and overall debt would be contained over the medium term, supporting the stable outlook.

The affirmation of the top rating comes despite ongoing concerns about the pace of spending over the past year as the federal government deals with an explosion in costs linked to the national disability insurance scheme while at the same time cutting income taxes.

Government spending measures aimed at cushioning the rising cost of living on households, and falling commodity prices, will put pressure on the budget, Fitch said.

Australia’s general government deficit, which consolidates federal, state and local governments, will reach 2.6% of GDP in the 12 months through June, 2025, from 1.6% in fiscal 2024 and 0.8% in fiscal 2023, Fitch said.

“Aggregate state deficits have been high over the past couple of years, offsetting surpluses at the federal level,” Fitch said. “We also forecast deficit reduction at the state level to be gradual, given a still-large infrastructure development pipeline.”

Rising aged care and the NDIS will continue to pressure the budget, though efforts are under way to contain these costs, it added.

Fitch forecasts economic growth to slow to 1.1% in 2024, from 2.0%, but expects a gradual acceleration in activity from late this year, driving growth to 1.7% in 2025 and 2.1% 2026.

“A recovery should be supported by income tax cuts, probable monetary easing in 2025 and a healthy labor market, which should buoy household balance sheets,” the ratings agency said.

Fitch expects the Reserve Bank of Australia will start to cut interest rate cuts in February, with the policy rate reaching 3.50% by the end of next year, after being on hold at 4.35% since November 2023.

Underlying inflation appears set to trend down to the RBA’s 2%-3% target band by end-2025, from 3.5% in the third quarter, the ratings agency said.

“Still, risks tilt toward delayed cuts given persistent services inflation and a still-tight labor market, with brisk employment growth, low 4.1% unemployment rate and a record participation rate in September 2024,” it added.