Ballooning US debt is a big worry, stocks may get squeezed, and Warren Buffett's Occidental bet is a master stroke, veteran investor Tom Russo says (2024)

• Tom Russo told Insider he's extremely concerned about the long-term fallout from exploding US debt.
• The fund manager warned stocks could feel the pinch from higher interest rates.
• Russo touted Warren Buffett's Occidental Petroleum bet as a hedge against oil prices rising.

Tom Russo has raised the alarm on the national debt, warned stocks may get squeezed, and explained why Warren Buffett's massive investment in Occidental Petroleum is a master stroke.

Russo — the managing member of Gardner, Russo & Quinn — told Insider in a recent interview that he's deeply worried about the US government's aggressive borrowing, and its long-term consequences for Americans.

The US government breached its $31.4 trillion borrowing limit in January, and could run out of cash by June unless lawmakers strike an agreement to lift the debt ceiling. But even if the deadlock is resolved, there will still be a vast amount of debt that "our future generations will have to reckon with," Russo said.

Stocks have a tough road ahead

In response to inflation hitting 40-year highs, the Federal Reserve has hiked interest rates from virtually zero to about 5% within the past 14 months. Russo outlined why that may be bad news for stockholders.

For one, a company's stock is typically valued based on the estimated size of its future cash flows. Those potential profits are worth a lot less when prices are surging today, and higher interest rates have boosted the risk-free return from a 1-year Treasury to almost 5%, Russo said.

Higher rates also encourage saving over spending, and raise borrowing costs for consumers and businesses, which tends to dampens spending and investing. Reduced demand usually translates into slimmer corporate profits, and increases the risk of a recession, both of which typically weigh on stocks and other assets.

Rate hikes also weigh on bond prices — a key driver of the current banking turmoil, which is fanning fears that jittery lenders could pull back and cause a credit crunch.

However, Russo argued that worries about the economy tanking and lending drying up may be overblown.

"It's going to be hard for a credit crunch or a recession given all the money that's still splashing about," he said.

Russo noted there's so much cash in the system that stocks are still fairly expensive despite the current headwinds, and asset-price bubbles remain in multiple industries.

Buffett's brilliance

Gardner, Russo & Quinn's oversaw a $9 billion portfolio of US stocks at the end of December, and counted a $1.7 billion stake in Buffett's Berkshire Hathaway as its number-one holding, SEC filings show.

Russo praised the famed investor's patience and financial discipline, noting Buffett is willing to sit back and let Berkshire's massive cash pile grow for years until the right bargain or deal crops up.

He also detailed one reason why Buffett may have poured more than $11 billion into Occidental Petroleum over the past 15 months.

The Berkshire chief may view his company's almost 24% stake in the oil-and-gas company — excluding $10 billion of preferred stock and warrants to buy another $5 billion of Oxy's common stock — as a hedge against higher energy costs, Russo said.

For example, a spike in oil prices would raise fuel costs at two of Buffett's biggest businesses, Berkshire Hathaway Energy and the BNSF Railway. However, the increases will now be partially offset by Occidental selling its oil for a higher price and collecting bigger profits — especially as Berkshire owns enough of the fossil-fuel company to account for a proportional share of its earnings as its own.

Russo described Berkshire staking a claim to Occidental's "huge pool of oil" as a shrewd and unorthodox move. He compared it to Buffett's investment of "float," or the money left over after premiums are collected and claims are paid out by his insurance companies.

The fund manager also issued a caution to Buffett. He urged the billionaire to keep a close eye on technological threats, and pointed to Wayfair's disruption of Berkshire-owned Nebraska Furniture Mart as an example.