Subject: Re: OT: Jim's take on the market
It's somewhere between touching and scary that anyone thinks I know what might happen next : )
I have no crystal ball. The future will be what it will be.

That being said, as always I'm never at a loss for an opinion.
Never let the lack of facts stop you!

I do think an upcoming US recession seems all but assured.
If I had to guess, I would imagine the official kickoff will end up being called for winter, sometime maybe November-April.
But a recession is very different from a bear market, so even if that's correct it's no help for investments.

If you're one who cares about the level of the broad US market, I wouldn't lose sleep just yet.
It is extremely rare to see a market drop that is both big and lasting so soon after fresh recent highs.
And market breadth has been quite good lately.
So it's probably safe to play in the water for the next little while, with or without swimming trunks.
(a plunge is always possible, but when it's soon after fresh highs it tends not to last long).
Usually market tops are squiggly but beyond the short term squiggles they mostly roll over pretty slowly.

However, that happy prognosis is pretty short term. What will happen 3-12 months from now, I have no idea.
My rule of thumb: the longer it has been since a fresh recent high, the lower the expected AVERAGE rate of return in the next month.
Risk rises gradually, because exuberance fades gradually.

There have been many chipper pronouncements from investment banks about the real estate problems having fizzled out already--"the worst is behind us".
I'm not buying it. I think the rumbling effects of the rise in interest rates will continue for a very long time, and more localized explosions would not be unanticipated.
Falling real estate prices, though probably pretty slowly.
A whole lot of people built business plans on the assumption of free capital, and they will need new plans. Not to mention new capital which won't be forthcoming.

I think Berkshire will continue to make money, and grow in value on trend. Valuation isn't stretch, at most just a hair above post-crunch multiples.
We had a couple/few above average years, and now we'll have a couple of below average years, but the long run real trend remains remarkably intact.
Still, things could be a bit better.
If there is anything disappointing to me, it's the recent operating earnings.
There is the optimistic expectation that good business units have pricing power and can plow through bouts of inflation by pushing through price increases.
If that isn't true, it's a problem.
Offsetting that is the merely cyclical problem that business is getting a little bit tough in many areas, so a bit of a cyclically slowdown wouldn't be a worry.
I'm a little on the fence trying to allocate my observations between those two interpretations.
I keep track of what I call the "steady things": after tax income on rails, utilities, manufacturing/service/retail, and a proxy number for cyclically adjusted underwriting profit.
I then apply a seasonal adjustment, and set the absolute value based on the last year or two of results. This is all done after inflation adjustment.
This is usually a pretty good predictor, since (as mentioned) this is just the "steady things".
But the predictions have been consistently low for the last four quarters. Earnings are emphatically NOT keeping up with inflation.
These are the recent figures, in end-March dollars:
Expected $4754m, actual $4126m, lower than expected by -$628m
Expected $5382m, actual $4553m, lower than expected by -$829m
Expected $4473m, actual $3988m, lower than expected by -$485m
Expected $4387m, actual $3944m, lower than expected by -$443m
Total shortfall $2.195 billion in after-tax earnings in a year.
Each quarter is scaled based (mainly) on the prior four quarters, so a rescaling blip should disappear quickly. But it isn't.
So...I think Berkshire will do fine, and it's still my biggest investment by a vast margin, but the short term progress in observable value isn't great just lately.

Anecdotally, individual stocks seem to have a wide dispersion of valuation levels.
Some things seem implausibly cheap, some things seem implausibly expensive.
I try to keep my portfolio concentrated a little more on the former, but of course reality often disagrees with me about what the prospects of a firm might be.
Mostly I don't play the index any more, even for hedging. Oddly, many individual firms seem far more predictable.

Jim