Berkshire Hathaway leading a Directional Impulse? (East over West)
Bull Steepeners more likely in the West
The benefit of not writing as frequently is that you don’t have to marry a position or a view, you can see how things develop. A disadvantage is that you completely lose the flow of your writing style. What style, I hear you snigger? Its been an interesting month with a number of twists and turns and the odd geopolitical storm in a tee cup.
So as the markets appear to climb the wall of worry, I thought I’d look at some alternative thinking and turn to the relatively boring and steady Berkshire Hathaway, but focus on their Japanese investments.
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In many regards I’ve been trying to wrap my head around the Berkshire Hathaway investment in Japan’s Leading 5 Market Cap Companies. Why did Buffett go learning Japanese after decades of focus on the US Economy? And why after diversifying out of the US Economy, did he specifically pick Japan to hang his cap?
Berkshire holds stakes in
Itochu Corp. YTD +44.48%
Marubeni Corp. YTD +68.32%
Mitsubishi Corp. YTD +14.58%
Mitsui & Co. YTD +48.11%
Sumitomo Corp. YTD +44.38%
Buffett, the chairman of Berkshire, said in April that the firm would boost stakes in the Japanese companies, prompting their stock prices to rise to record highs and judging from the performance year to date there are a happy couple of people in Omaha despite USD/JPY strengthening YTD by 9.08%
Warren Buffett Raises Stake in Five Japanese Trading Houses
US Federal Reserve Bank Yield Curve
FOMC met 14th June this month and it was a skip not a pause as the Powell narrative is created that the Fed will be back with two more rate hikes this year if the Dot Plot is to be believed. Somehow the new SOFR Futures (replaced the Eurodollar Futures) don’t agree with rates set to remain largely flat (10bp movements) from now until December.
What does that mean for the US Yield Curve, well its still inverted and shows no signs of abatement since the 2s/10s inverted back in March 2022, some 15 months ago.
Bank of England
Governor Andrew Bailey and BoE members decided to increase interest rates by 50bps further pushing the short end of the curve higher than 1 and 6 months ago.
Bank of Japan
With the emergence of their new BoJ Governor Kazuo Ueda (71) on the retirement of perma QE Governor Kuroda, the question remains outstanding whether there will be a sea change in Japanese Monetary Policy.
They have now long established yield curve control and have sacrificed the Yen to USD, bringing pressure onto their Asian neighbours, is this policy about to change? As I write we are probably looking at a FX intervention with USD/JPY at 144.2 level and the JPY10YR at 0.385% (selling off from 0.35% earlier in the week).
One thing is certain is that the yield curve is not inverted, in fact the short duration rates are still negatively yielding. Typically history shows the biggest recessions and perhaps from an investment stand point the largest crashes occur at the bull steepener. I.e. when the Yield Curve returns to its conventional shape (re-inversion)
So what we learn from the US and UK charts is that there will be a bull steepener in the future (timing unknown) and their equity markets will likely crash once the Fed actually cuts interest rates - that being the trigger for the short end to drop faster than the long end.
I’ll proffer that Japan will most probably not experience the same level of a crash in equities than the US or UK, as it will not experience a bull steepener given its yield curve is correctly positioned. At the same time USD/JPY is near ATHs at $144.2 and a reversion to the mean could be a possibility getting closer to $100.
If these events play out and the market reacts as I’ve suggested, the Berkshire Hathaway trade will look both profitable, protective with the added bonus of having a free currency carry trade.
Maybe it is time we started learning Japanese, I really think so.
NB: I have zero Japanese exposure and this is not financial advice.