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Authored by Tristan Greene via CoinTelegraph.com,

OpenAI’s GPT-4, a generative artificial intelligence (AI) model, has passed the Turing test, according to Ethereum co-founder Vitalik Buterin. 

The Turing test is a nebulous benchmark for AI systems purported to determine how human-like a conversational model is. The term was coined on account of famed mathematician Alan Turing who proposed the test in 1950.

According to Turing, at the time, an AI system capable of generating text that fools humans into thinking they’re having a conversation with another human would demonstrate the capacity for “thought.”

Nearly 75 years later, the person largely credited with conceiving the world’s second most popular cryptocurrency has interpreted recent preprint research out of the University of California San Diego as indicating that a production model has finally passed the Turing test.

Source: Vitalik Buterin

Researchers at the University of California San Diego recently published a preprint paper titled “People cannot distinguish GPT-4 from a human in a Turing test.” In it, they had approximately 500 human test subjects interact with humans and AI models in a blind test to determine whether they could figure out which was which. 

According to the research, humans mistakenly determined that GPT-4 was a “human” 56% of the time. This means that a machine fooled humans into thinking it was one of them more often than not.

Vitalik Buterin’s take

According to Buterin, an AI system capable of fooling more than half of the humans it interacts with qualifies as passing the Turing test.

Buterin added:

Buterin qualified his statement by saying, “Ok not quite, because humans get guessed as humans 66% of the time vs 54% for bots, but a 12% difference is tiny; in any real-world setting that basically counts as passing.”

He also later added, in response to commentary on his original cast, that the Turing test is “by far the single most famous socially accepted milestone for ‘AI is serious shit now’. So it’s good to remind ourselves that the milestone has now been crossed.”

The Turing test

Artificial general intelligence (AGI) and the Turing test are not necessarily related, despite the two terminologies often being conflated. Turing formulated his test based on his mathematical acumen and predicted a scenario where AI could fool humans into thinking it was one of them through conversation.

It bears mention that the Turing test is an ephemeral construct with no true benchmark or technical basis. There is no scientific consensus as to whether machines are capable of “thought” as living organisms are or as to how such a feat would be measured. Simply put, AGI or an AI’s ability to “think” isn’t currently measurable or defined by the scientific or engineering communities.

Turing made his conceptual predictions long before the advent of token-based artificial intelligence systems and the onset of generative adversarial networks, the precursor to today’s generative AI systems.

Artificial general intelligence

Complicating matters further is the idea of AGI, which is often associated with the Turing test. In scientific parlance, a “general intelligence” is one that should be capable of any intelligence-based feat. This precludes humans, as no person has shown “general” capabilities across the spectrum of human intellectual endeavor. Thus, it follows that an “artificial general intelligence” would feature thought capabilities far beyond that of any known human.

That being said, it’s clear that GPT-4 doesn’t fit the bill of true “general intelligence” in the strictly scientific sense. However, that hasn’t stopped denizens of the AI community from using the term “AGI” to indicate any AI system capable of fooling a significant number of humans.

In the current culture, it’s typical to see terms and phrases such as “AGI,” “humanlike,” and “passes the Turing test” to refer to any AI system that outputs content comparable to the content produced by humans.

A former diversity program manager at Facebook and Nike has been sentenced to five years in prison for stealing more than $5 million from Facebook and Nike while working as a DEI executive. 

Barbara Furlow-Smiles has been accused of " an elaborate scheme involving fraudulent vendors, fictitious paperwork, and cash kickbacks", a press release from the Department of Justice said this week.

U.S. Attorney Ryan K. Buchanan commented: “Furlow-Smiles shamelessly violated her position of trust as a DEI executive at Facebook to steal millions from the company utilizing a scheme involving fraudulent vendors, fake invoices, and cash kickbacks.”

“After being terminated from Facebook, she brazenly continued the fraud as a DEI leader at Nike, where she stole another six-figure sum from their diversity program. Her prison sentence reflects the consequences of her decision to orchestrate an intricate scheme to defraud two of her employers for personal profit,” he added.

Keri Farley, Special Agent in Charge of FBI Atlanta added: “As Lead Strategist at Facebook, Furlow-Smiles’ employer put an extreme amount of trust in her, only to have that trust completely violated.”

Farley continued: “After she was fired, she carelessly continued her fraudulent schemes at Nike, thinking she was untouchable. As a result, she not only threw away a lucrative career, but will serve time behind bars for her excessive greed.”

The DOJ commented in their release that Furlow-Smiles served as Lead Strategist and Global Head of Employee Resource Groups and Diversity Engagement at Facebook (now Meta) from January 2017 to September 2021. According to U.S. Attorney Buchanan, Furlow-Smiles misused her position to defraud Facebook by making payments for services never rendered and directing recipients to kick back the money to her. 

She linked PayPal, Venmo, and Cash App accounts to her Facebook credit cards to pay associates for nonexistent services, then submitted false expense reports to hide the fraud. The kickbacks were often returned to her in cash or through account transfers, with some payments concealed in packages sent by mail. 

Additionally, Furlow-Smiles onboarded vendors owned by friends and associates, approved fraudulent invoices, and received kickbacks from these payments. She recruited numerous individuals, including friends, relatives, and former interns, to participate in the scheme.

After leaving Facebook, Furlow-Smiles worked at Nike as Senior Director of Diversity, Equity & Inclusion from November 2021 to February 2023, where she was responsible for DEI initiatives and events, including a Juneteenth event in New York.

"In total, Furlow-Smiles stole more than $4.9 million from Facebook and over $120,000 from Nike based on fictitious charges and fraudulent invoices," the DOJ wrote. "She used the money to fund a luxury lifestyle in California, Georgia, and Oregon."

Authored by Steve Watson via Modernity.news,

Vivek Ramaswamy believes that the Democrats are allowing Joe Biden one last “Hail Mary” by allowing him to participate in a debate against Donald Trump, but that if he fails, as he inevitably will, they will swap him out for a new candidate.

During a Fox News interview, Vivek, who has access within the Trump camp, says he believes the sudden decision to have Biden debate is a “setup.”

“On one hand CNN is hosting it, they’re going to prop up Biden, try to make him look as good as possible. But also note this is the earliest Presidential debate in recorded American history, in June. Why is that?” Vivek stated.

“This is a Hail Mary attempt for Biden as his numbers are tanking,” Ramaswamy further urged, adding “this is their last chance to give him a desperate attempt to succeed, and if he doesn’t, as I expect will be the case, that gives them time to swap out somebody else for the nomination.”

“It’s part of a of a broader plot for a replacement plan they’ve been having in the works,” Vivek concluded.

Watch:

Here’s why the Democrats suddenly let Biden debate Trump: it’s a set-up. It’s their final Hail Mary for Biden. If that fails, they still have enough time to swap Biden out for a new nominee. That’s why it’s in June, the *earliest-ever* presidential TV debate in history. It’s… pic.twitter.com/zCsyXkags9

As we highlighted yesterday, the Biden campaign issued a list of conditions for the debate, and then accused Trump of “playing games” by asking for more debates.

One of the Biden conditions is that RFK Jr is not allowed to take part.

Trump, however, says he is happy for Kennedy to be involved, so long as he meets the support criteria to take part.

Trump told Scripps News on Thursday “I would have no problem if he got whatever the threshold is,” adding “But he’s very low and seems to be heading in the other direction, in the wrong direction.”

Trump followed up with a post stating that he believes Biden doesn’t want RFK in the debate because he is “sharper and far more intelligent than Joe.”

Crooked Joe Biden does not want RFK Jr. in the debates because Junior’ is far left him and they would be debating over the same territory, like ridiculous Open Borders and the Green New Scam, both of which are killing our Country. He’s also sharper and far more intelligent than… pic.twitter.com/siZWcu08VD

Kennedy himself said he will “meet the criteria,” and looks forward to taking part.

I’m happy to report that I will meet the criteria to participate in the @CNN debate before the June 20 deadline. I look forward to holding Presidents Biden and Trump accountable for their records in Atlanta on June 27 to give Americans the debate they deserve. #KennedyShanahan24

CNN has stated that in order to take part in the debate, candidates must receive at least 15% support in four polls and appear on enough state ballots to reach 270 Electoral College votes.

Kennedy’s campaign claims to be officially on the ballot in six states and expects to qualify for eight more.

RFK also accused Trump and Biden of “trying to exclude me,” which he says “undermines democracy.”

Presidents Trump and Biden are colluding to lock America into a head-to-head match-up that 70% say they do not want.

They are trying to exclude me from their debate because they are afraid I would win. Keeping viable candidates off the debate stage undermines democracy.…

Whatever happens, it’s going to be hilarious to watch:

*  *  *

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Authored by Zachary Stieber via The Epoch Times,

A doctor in Washington state has been fined for prescribing ivermectin against COVID-19. He must also take continuing education classes, according to newly filed documents.

Dr. Wei-Hsung Lin must pay $5,000, according to an order signed by the Washington Medical Commission on May 2.

Ivermectin is approved by the U.S. Food and Drug Administration for treating several conditions, including parasitic worms. Prescribing medicine for unapproved usage is common in the United States, but administration officials have warned against prescribing and using ivermectin as a COVID-19 treatment. Regulators have pointed to a database of clinical trials, some of which found ivermectin did not confer a benefit against COVID-19 and some of which found ivermectin was beneficial against the illness.

Dr. Lin, who also signed the order, admitted to prescribing ivermectin to five people without detailing how the prescriptions were off-label, the risks involved, and alternative treatments.

One patient, a 71-year-old female, tested positive for COVID-19 at the emergency room on June 23, 2021. She saw Dr. Lin in a telemedicine visit the following day. He prescribed her 12 milligrams of ivermectin daily for five days after stating that a “substantial body of literature” showed ivermectin was “effective as a one-day therapy or five-day therapy.”

The woman went back to the hospital after taking ivermectin for four days but not seeing improvement. She was ultimately discharged and recovered.

In another case, Dr. Lin prescribed ivermectin to a 69-year-old male for COVID-19. Dr. Lin prescribed extra ivermectin because the man’s wife also had COVID-19. Neither the husband nor wife ended up taking the ivermectin because they went online and “observed the warnings about ivermectin for COVID-19 as well as the possible negative effects for those with heart conditions,” the order states.

Dr. Lin’s treatment was “below standard of care” in part because he did not discuss alternative treatments, according to the document. No alternatives are listed in the document. In 2021, remdesivir was the primary government-approved treatment for some COVID-19 patients.

Authorities also faulted Dr. Lin for not discussing COVID-19 vaccines with his patients.

According to the order, Dr. Lin’s actions constituted unprofessional conduct, defined in state law as “any act involving moral turpitude, dishonesty, or corruption relating to the practice of the person’s profession, whether the act constitutes a crime or not.”

The order prohibits Dr. Lin from prescribing ivermectin off-label to patients in Washington state and from prescribing any medication or providing care for patients without first establishing a doctor-patient relationship.

It also requires him to review the U.S. Centers for Disease Control and Prevention (CDC) and UpToDate websites for current COVID-19 guidelines, take continuing medical education classes on preventing, treating, and managing COVID-19 and establishing a doctor-patient relationship, and write two papers of at least 1,000 words describing what he learned from the websites and classes.

The commission or its designee is also going to make annual compliance visits, including reviewing a random selection of records, and says Dr. Lin must appear within 12 months, and subsequently on an annual basis, at a date and location determined by the commission as part of compliance oversight.

Dr. Jane Orient, executive director of the Association of American Physicians and Surgeons, said that the conditions are “extremely onerous” and require work that would “enormously increase the burden of practice and probably drive most physicians out of practice altogether.”

“Ivermectin is an extremely safe drug—much safer than most drugs physicians prescribe without all the ‘informed consent’ discussions demanded here,” Dr. Orient told The Epoch Times in an email.

“As to informing patients of alternatives, the reasons patients were calling this doctor was likely that no alternatives were available. It was ‘isolate and go to ER if you get worse.’”

She recommended doctors avoid Washington state if they’re able.

The Washington Medical Commission did not return an inquiry.

Dr. Lin is employed by the Kadlec Regional Medical Center clinic in Richland.

“After being made aware of an alleged violation by one of our providers, we fully cooperated with the Washington State Department of Health throughout their investigation. While Kadlec does not recommend or allow ivermectin for the prevention or treatment of COVID-19, we respect the rights of patients and physicians to discuss and explore all available treatment options, based on patients’ unique health and medical situations,” a spokesperson for Kadlec told The Epoch Times in an email.

“We remain dedicated to providing high-quality care for all patients we serve, and we are pleased this matter has been resolved.”

If Dr. Lin had contested the allegations, the commission would have heard arguments and then ruled, potentially suspending his license. The commission has already ruled against several doctors who prescribed ivermectin for COVID-19, most recently forbidding pathologist Dr. Ryan Cole from practicing medicine in the state for five years.

“Dr. Lin was willing to fight this all the way but when we looked the risk-reward matrix we felt—and he felt—it was in his best interest to go ahead and settle,” Pete Serrano, an attorney with the Silent Majority Foundation representing Dr. Lin, told The Epoch Times.

“He was ready to kind of close the chapter and move on with his life,” Mr. Serrano added later.

Dr. Lin was initially facing a $25,000 fine and harsher repercussions but negotiations on the settlement ended up reducing some of the penalties.

Dr. Lin can petition to terminate the order in three years.

Authored by Ven Ram, Bloomberg cross-asset strategist,

Gold looks well poised to build on this year’s gains, with speculative momentum seeming to entice marginal buying and perpetrating a virtuous circle.

Bullion is on track for a fourth successive monthly rally, with its gains so far this year of over 15%.

While those gains appear stunning, in reality, gold adjusted for prices in the economy is far less impressive. At around $2400, it is in line with the 2011/12 highs after adjusting for inflation.

Gold must be viewed for what it actually is: an asset that delivers inflation-adjusted returns in fits and spurts with a highly inconsistent trajectory. Even so, given that we are now in a world where there is little conviction of returning to a 2% inflation regime anytime soon, bullion has room to grind higher.

Over in the US, the markets are again warming up to the idea of interest rate cuts from the Fed after the softer-than-forecast inflation prints for April. Traders now seem to be converging on September for a first reduction and are factoring in nearly two cuts by year-end. Whether or not that positioning proves accurate needs to be seen, but gold traders will be inclined to price those cuts into bullion pricing first and ask questions later.

And with geopolitical tensions staying elevated, gold will find the extra bid going in its favor.

Authored by Ven Ram, Bloomberg cross-asset strategist,

Gold looks well poised to build on this year’s gains, with speculative momentum seeming to entice marginal buying and perpetrating a virtuous circle.

Bullion is on track for a fourth successive monthly rally, with its gains so far this year of over 15%.

While those gains appear stunning, in reality, gold adjusted for prices in the economy is far less impressive. At around $2400, it is in line with the 2011/12 highs after adjusting for inflation.

Gold must be viewed for what it actually is: an asset that delivers inflation-adjusted returns in fits and spurts with a highly inconsistent trajectory. Even so, given that we are now in a world where there is little conviction of returning to a 2% inflation regime anytime soon, bullion has room to grind higher.

Over in the US, the markets are again warming up to the idea of interest rate cuts from the Fed after the softer-than-forecast inflation prints for April. Traders now seem to be converging on September for a first reduction and are factoring in nearly two cuts by year-end. Whether or not that positioning proves accurate needs to be seen, but gold traders will be inclined to price those cuts into bullion pricing first and ask questions later.

And with geopolitical tensions staying elevated, gold will find the extra bid going in its favor.

Last October, when we pointed out that China's FX outflows had just hit a whopping $75BN - the single biggest monthly outflow since the 2015 currency devaluation - we concluded that the "unfavorable interest rate spread between China and the US will "likely imply persistent depreciation and outflow pressures in coming months", or in other words, September's biggest FX outflow in years is just the beginning, and very soon - in addition to geopolitics and central banks - the world will also be freaking out about the capital flight out of China... not to mention where all those billions in Chinese savings are going and which digital currency the Chinese are using to launder said outflows."

We wrote that on October 20 when Bitcoin was trading just under $30,000, a level it had been for much of 2023. And, just as we correctly predicted at the time...

Clockwork: every time China FX outflows surge, bitcoin erupts.

From last Friday: China Capital Flight Panic Eruptshttps://t.co/j0eWLnbFMq

... following this surge in Chinese FX outflows, bitcoin - traditionally China's preferred means to circumvent Beijing's great capital firewall since gold is, how should one put it, a bit more obvious when crossing borders - promptly exploded more than 100% higher in the next 4 months.

And while conventional wisdom is that this surge in the price of the digital currency was largely due to the January launch of Bitcoin ETFs, what many missed was a Reuters story in January which reiterated our original thesis from back in 2015, according to which much more than ETFs, and much more than rapidly shifting sentiment or frankly any day-to-day newsflow, it is China's massive wall of inert capital that has been the biggest driver of bitcoin moves, and never more so than during periods of FX and capital outflows which usually precede some form of capital controls.

We bring all this up because seven months after our first correct prediction that China's spike in FX outflows would send bitcoin surging, it's time to do it again.

One wouldn't know it, however, if one merely looked at the official Chinese FX reserve data published by the PBOC, here nothing sticks out. In fact, at $3.2 trillion, despite a rather notable drop for April, reported Chinese reserves are now near the highest level in past four years, and monthly flows are very much stable as shown in the chart below.

The problem, of course, is that as we have explained previously China's officially reported reserves are woefully (and purposefully) inaccurate of the bigger picture.

Instead if one uses our preferred gauge of FX flows, one which looks at i) onshore outright spot transactions; ii) freshly entered and canceled forward transactions, and iii) the SAFE dataset on “cross-border RMB flows, we find that China's net outflows were a massive $86BN in April, up from $11BN in February and $39BN in March and the fastest pace of outflows since the September spike in FX outflows which we duly noted half a year ago.

Drilling down, in April, we saw $50BN in net outflows via onshore outright spot transactions, and $1BN outflows via freshly entered and canceled forward transactions. Another SAFE dataset on "cross-border RMB flows" showed outflows of $35bn in the month, suggesting net receipt of RMB from onshore to offshore, likely on the back of Stock Connect outflows, but the "unusual flow" really could be anything including the unexplained  capital flight into gold and bitcoin. Ours - and Goldman's - preferred FX flow measure therefore suggests FX outflows were really $86BN in April, more than double the official net FX outflows of $39BN in the month.

How did we get this number? First, the portfolio investment channel showed net outflows in March after adjusting for cross-border RMB receipts. Stock Connect flows showed around US$9bn outflows, vs. US$8bn outflows in March. Foreigners kept buying RMB bonds - the bond market saw US$7bn inflows in April, vs. US$6bn in March.

Finally, the current account channel also showed faster net outflows. Despite a sizeable goods trade surplus in April, we saw a small outflow of $2bn related to goods trade in April vs. an inflow of $14bn in March. The services trade deficit widened to $22bn vs. $18bn in March. The income and transfers account showed outflows of $5bn in April, faster than the $2bn outflows in March.

At the time when FX outflows were re-acclererating, the broad USD strengthened further in April, and more importantly, the USDCNY spot drifted higher, as one would expect when there is capital flight... Oh, and Bitcoin traded at its record high above $70K.

And while Chinese policymakers are still keen on maintaining FX stability (or at least create that impression) as the countercyclical factors in the daily CNY fixing remained deeply negative and front-end CNH liquidity tightened notably in recent weeks, the reality is that with China desperate to boost its exports at a time when its great mercantilist competitor, Japan, has hammered the yen to the lowest level in 3 decades, it is only a matter of time before the currency devaluation advocates win, as they did in 2015. 

We hope that we don't have to remind readers that the first big trigger for bitcoin's unprecedented eruption higher starting in 2015 was - you guessed it - China's August 2015 FX devaluation, as we correctly noted at the time when we predicted that bitcoin would explode from $250 to the tens of thousands.

So don't be surprised if in the next 6 months Bitcoin doubles again, and the move has nothing to do with ETF inflows, the halving, or frankly anything else taking place in the US... and instead is entirely driven by China's massive wall of money which at last check was almost 3x bigger than the US.

Last October, when we pointed out that China's FX outflows had just hit a whopping $75BN - the single biggest monthly outflow since the 2015 currency devaluation - we concluded that the "unfavorable interest rate spread between China and the US will "likely imply persistent depreciation and outflow pressures in coming months", or in other words, September's biggest FX outflow in years is just the beginning, and very soon - in addition to geopolitics and central banks - the world will also be freaking out about the capital flight out of China... not to mention where all those billions in Chinese savings are going and which digital currency the Chinese are using to launder said outflows."

We wrote that on October 20 when Bitcoin was trading just under $30,000, a level it had been for much of 2023. And, just as we correctly predicted at the time...

Clockwork: every time China FX outflows surge, bitcoin erupts.

From last Friday: China Capital Flight Panic Eruptshttps://t.co/j0eWLnbFMq

... following this surge in Chinese FX outflows, bitcoin - traditionally China's preferred means to circumvent Beijing's great capital firewall since gold is, how should one put it, a bit more obvious when crossing borders - promptly exploded more than 100% higher in the next 4 months.

And while conventional wisdom is that this surge in the price of the digital currency was largely due to the January launch of Bitcoin ETFs, what many missed was a Reuters story in January which reiterated our original thesis from back in 2015, according to which much more than ETFs, and much more than rapidly shifting sentiment or frankly any day-to-day newsflow, it is China's massive wall of inert capital that has been the biggest driver of bitcoin moves, and never more so than during periods of FX and capital outflows which usually precede some form of capital controls.

We bring all this up because seven months after our first correct prediction that China's spike in FX outflows would send bitcoin surging, it's time to do it again.

One wouldn't know it, however, if one merely looked at the official Chinese FX reserve data published by the PBOC, here nothing sticks out. In fact, at $3.2 trillion, despite a rather notable drop for April, reported Chinese reserves are now near the highest level in past four years, and monthly flows are very much stable as shown in the chart below.

The problem, of course, is that as we have explained previously China's officially reported reserves are woefully (and purposefully) inaccurate of the bigger picture.

Instead if one uses our preferred gauge of FX flows, one which looks at i) onshore outright spot transactions; ii) freshly entered and canceled forward transactions, and iii) the SAFE dataset on “cross-border RMB flows, we find that China's net outflows were a massive $86BN in April, up from $11BN in February and $39BN in March and the fastest pace of outflows since the September spike in FX outflows which we duly noted half a year ago.

Drilling down, in April, we saw $50BN in net outflows via onshore outright spot transactions, and $1BN outflows via freshly entered and canceled forward transactions. Another SAFE dataset on "cross-border RMB flows" showed outflows of $35bn in the month, suggesting net receipt of RMB from onshore to offshore, likely on the back of Stock Connect outflows, but the "unusual flow" really could be anything including the unexplained  capital flight into gold and bitcoin. Ours - and Goldman's - preferred FX flow measure therefore suggests FX outflows were really $86BN in April, more than double the official net FX outflows of $39BN in the month.

How did we get this number? First, the portfolio investment channel showed net outflows in March after adjusting for cross-border RMB receipts. Stock Connect flows showed around US$9bn outflows, vs. US$8bn outflows in March. Foreigners kept buying RMB bonds - the bond market saw US$7bn inflows in April, vs. US$6bn in March.

Finally, the current account channel also showed faster net outflows. Despite a sizeable goods trade surplus in April, we saw a small outflow of $2bn related to goods trade in April vs. an inflow of $14bn in March. The services trade deficit widened to $22bn vs. $18bn in March. The income and transfers account showed outflows of $5bn in April, faster than the $2bn outflows in March.

At the time when FX outflows were re-acclererating, the broad USD strengthened further in April, and more importantly, the USDCNY spot drifted higher, as one would expect when there is capital flight... Oh, and Bitcoin traded at its record high above $70K.

And while Chinese policymakers are still keen on maintaining FX stability (or at least create that impression) as the countercyclical factors in the daily CNY fixing remained deeply negative and front-end CNH liquidity tightened notably in recent weeks, the reality is that with China desperate to boost its exports at a time when its great mercantilist competitor, Japan, has hammered the yen to the lowest level in 3 decades, it is only a matter of time before the currency devaluation advocates win, as they did in 2015. 

We hope that we don't have to remind readers that the first big trigger for bitcoin's unprecedented eruption higher starting in 2015 was - you guessed it - China's August 2015 FX devaluation, as we correctly noted at the time when we predicted that bitcoin would explode from $250 to the tens of thousands.

So don't be surprised if in the next 6 months Bitcoin doubles again, and the move has nothing to do with ETF inflows, the halving, or frankly anything else taking place in the US... and instead is entirely driven by China's massive wall of money which at last check was almost 3x bigger than the US.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Every year, investors anxiously await the release of Warren Buffett’s annual letter to see what the “Oracle of Omaha” says about the markets, the economy, and where he is placing his money.

“One of the longest-running traditions in modern finance is that every year, one Saturday morning in late February, the world’s financial class – from professionals to mere amateurs – sit down as they have for the past 65 or so years – for an hour and read the latest Berkshire annual letter written by Warren Buffett. In that letter, the man seen by many as the world’s greatest investor, wrote down his reflections, observations, aphorisms and other thoughts which are closely parsed and analyzed for insight into what he may do next, what he thinks of the current economy and market climate, or simply for insights into how to become a better investor.” – Tyler Durden

This year’s letter was no different, with various tidbits about the current market and investing environment for investors to digest. The one thing that got most of my attention was his comments about the recent surge in cash holdings. Buffett’s cash and short-term investments (read T-bills) exceed $189 billion as of Q1, 2024.

To put that into context, that $189 billion cash pile alone would make Berkshire the 58th-largest economy in the world, only slightly smaller than Hungary.

There are two critical messages regarding Buffett’s cash hoard. The first is that due to the size of Berkshire Hathaway, which is approaching a $1 Trillion market capitalization, acquisitions have to be of substantial size. As Warren previously noted:

“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others. Some we can value; some we can’t. And, if we can, they have to be attractively priced.”

Such was an essential statement. One of the most intelligent investors in history suggests that deploying Buffett’s cash hoard in meaningful size is difficult due to an inability to find reasonably priced acquisition targets. With a $189 war chest, there are plenty of companies that Berkshire could either acquire outright, use a stock/cash offering, or acquire a controlling stake in. However, given the rampant increase in stock prices and valuations over the last decade, they are not reasonably priced.

In other words:

“Price is what you pay, value is what you get.” – Warren Buffett

The Valuation Dilemma

The problem with the valuation dilemma is that historically, such has preceded market repricings.

One of Warren Buffett’s favorite valuation measures is the market capitalization to GDP ratio. I have modified it slightly to use inflation-adjusted numbers. This measure is simple: stocks should not trade above the value of the economy. The reason is because economic activity provides revenues and earnings to businesses.

As discussed in “Stock Markets Are Detached From Everything,” the current environment is anything but opportunistic for a value investor like Warren Buffett. To wit:

“While stock prices can deviate from immediate activity, reversions to actual economic growth eventually occur. Such is because corporate earnings are a function of consumptive spending, corporate investments, imports, and exports. The market disconnect from underlying economic activity is due to psychology. Such is particularly the case over the last decade, as successive rounds of monetary interventions led investors to believe ‘this time is different.’”

There is a correlation between economic activity and the rise and fall of equity prices. For example, in 2000 and again in 2008, corporate earnings contracted by 54% and 88%, respectively, as economic growth declined. Such was despite calls for never-ending earnings growth before both previous contractions.

As earnings disappointed, stock prices adjusted by nearly 50% to realign valuations with weaker-than-expected current earnings and slower future earnings growth. So, while stock markets are once again detached from reality, looking at past earnings contractions suggests such deviations are not sustainable.

With the current market capitalization to GDP ratio data outside the historical range as economic growth slows, you can understand Berkshire’s dilemma of deploying cash.

The risk of overpaying for assets comes down to sustaining current profitability.

Berkshire’s issue of finding “reasonably priced” acquisitions is not just one of being overly picky about opportunities. After more than a decade of monetary infusions and zero interest rates, most companies are priced well beyond what economic dynamics can support.

The second message from Buffett’s cash hoard was more of a warning.

Buffett’s Cash Looking For A Crash?

“Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally sound businesses to be strikingly mispriced. Indeed, markets can – and will – unpredictably seize up or vanish as they did for four months in 1914 and a few days in 2001. If you believe American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitates instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often – but they will happen.

Berkshire’s ability to immediately respond to market seizures with both huge sums and certainty of performance may offer us an occasional large-scale opportunity. Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than when I was young. The casino now resides in many homes and daily tempts the occupants.

One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.” – Warren Buffett

In other words, he holds such high cash levels to take advantage of market dislocations. Such is what happened in 2008 when the prestigious “white shoe” investment firm of Goldman Sachs came begging with “hat in hand” for a bailout to avoid bankruptcy. Buffett was glad to oblige by providing a massive infusion of capital at lucrative terms. During a crisis, those who “have the gold make the rules.”

Is there such an opportunity coming in the future? The answer is most likely yes. If we examine corporate profits as they relate to economic growth, we find another measure of excess. The chart below measures the cumulative change in the S&P 500 index compared to corporate profits. Again, when investors pay more than $1 for $1 worth of profits, those excesses are eventually reversed. The current deviation of the market from underlying profitability suggests that eventual reversion will be pretty unkind to investors.

The correlation is more evident in the market versus the price-to-corporate profits ratio. Again, since corporate profits are ultimately a function of economic growth, the correlation is not unexpected. Hence, neither should the impending reversion in both series. Currently, that ratio is approaching levels that preceded more significant market reversions to realign the markets to profitability.

As noted, the high correlation is unsurprising. Investors should expect an eventual reversal with the market on the more extreme end of the valuation spectrum. However, those reversals can take much longer to occur than logic would assume.

Investors believe the deviation between fundamentals and fantasy doesn’t matter as long as the Fed supports asset prices. Such a point remains challenging to argue.

However, as is always the case, the reversion of excesses will occur. Buffett’s cash hoard suggests that he realizes that such a reversion is not unprecedented. More importantly, he wants to capitalize on it when it occurs.