Bullish on Berkshire; Japan’s Big Shift; Good Morning Vietnam!

Trust Fukuyama; Joseph Kennedy and the Shoeshine Boy

Today at a Glance:

·       One Strategy: Bullish on Berkshire

·       One Big Shift: Sunrise in Japan

·       One Market: Good Morning, Vietnam

·       One Lesson: Trust Fukuyama

·       One Bubble Indicator: Joseph Kennedy’s Shoeshine Boy

One Strategy

Bullish on Berkshire

Shares of Berkshire Hathaway closed at a record high of $362.58.

This marked its first new all-time high since March 2022.

Berkshire announced over the weekend that it ended the quarter with a $36 billion profit and a record $147 Billion cash pile.

Here are the three most important takeaways from recent news from Warren Buffett and Berkshire Hathaway:

1. Undeterred Confidence in U.S. Treasuries: Despite the recent downgrade of the U.S. by Fitch Ratings, Buffett remains steadfast in his support for U.S. Treasuries.

Berkshire's $147 billion cash pile is primarily invested in short-term Treasury bills.

This bet on Treasuries reflects Buffett's enduring faith in them as a stable investment vehicle.

As Buffett emphatically stated, “Berkshire bought $10 billion in U.S. Treasuries last Monday. We bought $10 billion in Treasuries this Monday. We will continue to do so."

2. Surge in Profit Boosted by Core Operations: Berkshire Hathaway swung to a profit of $35.9 billion from a loss in the previous year.  

The company's operating earnings rose to just over $10 billion.

If you assume Berkshire is a microcosm of the broader economy, there’s a bull case for the broadening out of the stock-market rally away from just tech stocks.

3,   Cautious Yet Opportunistic Investment Strategy: Berkshire's second-quarter results revealed a cautious but opportunistic investment strategy. The company spent $1.4 billion on share buybacks, a decrease from the previous quarter. It continued to keep substantial cash reserves. Buffett's approach to maintaining a high liquidity level, investing in short-term Treasuries, and keeping funds at and for acquisitions suggests that he sees few opportunities that beat a 5% risk-free return on Berkshire's cash.

One Big Shift

Sunrise in Japan

With the Bank of Japan's (BoJ) recent pivot on its decade-long ultra-loose monetary policy, the world's third-largest economy finds itself at a critical junction.

Here are three pivotal aspects of this change global investors should pay attention to:

1. A Strategic Shift in Yield-Curve Control (YCC): The countdown to a new era has begun with last week's announcement by the BoJ, altering the strict 0.5% cap on ten-year government bonds to a more flexible approach. This shift allows Governor Kazuo Ueda more leeway in intervention and marks a profound change from an era of -0.1% short-term interest rates. It's a step towards a future where Japan's monetary policy is aligned more closely with other major economies.

2. The Global Impact of Japan's Investment Behemoth: Japanese investors have amassed more than $3 trillion in foreign assets over the past decade. This includes over $1 trillion in U.S. Treasury bonds. Significant repatriation of these funds could trigger a considerable sell-off in government and corporate bonds across the U.S. and Europe. This shift will not only raise funding costs but also reshape global financial dynamics.

3. An Opportunity for Japan's Equities and Economic Strength: Japan's stock market has been a remarkable performer this year, soaring by 25%, partly fueled by the nation's low-interest-rate environment. The end of this era might slow the rally. But a stronger yen, greater focus on domestic, and the tightening of monetary policy suggest a robust economy and a diminishing threat of deflation. This shift in sentiment may cause a re-rating of Japanese stocks, reflecting newfound confidence in Japan's economic prospects.

In sum, the recent policy tweak by the BoJ symbolizes more than a mere change in numbers; it's a herald of transformation in Japan's financial landscape and its role in global economics.

I am long on Japan through the iShares Currency Hedged MSCI Japan ETF

One Market

Good morning, Vietnam

Vietnam's star has never shone more brightly in the global economic theater. This dynamic nation has surged ahead, bucking trends and displaying resilience in an era of global challenges. The land of breathtaking landscapes is now becoming a land of burgeoning opportunities. But like all tremendous economic tales, Vietnam's story has its intricacies, nuances, and challenges.

Let's explore three essential facets shaping this new Asian tiger's narrative.

1. The Economy's Remarkable Growth:

"Vietnam's economic moment has arrived," declares the Financial Times, and the numbers echo this sentiment. Asia's fastest-growing economy last year, Vietnam has managed the extraordinary feat of "two consecutive years of growth" since Covid. The secret? Global giants like Dell, Google, and Apple are diversifying their supply chains and establishing new production lines within Vietnam's borders. Regional examples like Malaysia and Thailand serve as a cautionary tale, having once been fast-growing but succumbing to the notorious “middle-income trap.”

2. The Challenges and Headwinds:

Success never comes without its hurdles. For example, the VN-index of local shares suffered a staggering plunge of almost one-third in 2022; an anti-corruption crackdown and regulatory measures on real estate have sent shockwaves through the system. But it's worth noting that despite these challenges, “the basic Vietnam growth story is intact.” There's turbulence, yes, but the long-term trajectory remains positive.

3. The Opportunities and Future Prospects:

Vietnam is still classified as a frontier market by MSCI. Yet an upgrade to the main emerging-market index could unleash billions in investment inflows. Achieving this status by 2025 might be optimistic. Still, interest rate cuts by the central bank, low inflation, and attractive valuations have lured investors back. The VN-index may still be short of its early 2022 peak.

I am long the Vaneck Vietnam ETF (VNM) which offers an easy way to invest in Vietnam's vibrant growth story.

One History Lesson

Trust Fukuyama

In The End of History and the Last Man,  Stanford political scientist Francis Fukuyama argues that in a post-communist world, all countries would converge to Western-style free markets and liberal democracies.

As the cases of Putin’s Russia and Communist China confirm, Fukuyama was far too optimistic.

In his subsequent book Trust: The Social Virtues and the Creation of Prosperity, Fukuyama makes a more realistic — and relevant — argument for investors.

Fukuyama compared a group of “low-trust societies” (France, southern Italy, and China) with three “high-trust societies” (Japan, Germany, and the United States).

His conclusion? Low-trust societies don’t work. High-trust societies do.

Drop your wallet in Switzerland, Norway, or the Netherlands. Chances are it will be returned to you. Drop that wallet in China? Well, you can pretty much kiss it goodbye.

Fukuyama also points out that there are different capitalisms in different places. Each version of capitalism is shaped by each place’s history and sociology. “Free markets” look very different in Africa, Latin America, Asia, and formerly communist countries.

As a lawyer in central and eastern Europe, I helped privatize many state-owned enterprises. I learned this: Exporting Western laws to prior communist countries won’t turn them into prosperous capitalist democracies.

I also learned that investing in emerging markets based solely on conventional financial measures is naïve. Look at tried and true financial measures like price-to-earnings (P/E) and cyclically adjusted price-to-earnings (CAPE) ratios.

You can naively conclude that the U.S. stock market is overvalued compared with the Czech Republic or Greece. But to expect U.S.-style management, disclosure, and profits from a Czech or Greek company is foolish.

That doesn’t mean you can’t make money with a well-timed investment. Even Warren Buffett made billions by betting on PetroChina and selling out at the height of the China bubble.

Just don’t expect the next Silicon Valley to emerge in India or Brazil.

One Bubble Indicator

The Shoeshine Boy

In 1929, Wall Street’s bankers and investors were making a killing as share prices soared ever higher.

One of these Wall Street titans was Joseph Patrick "Joe" Kennedy, Sr. JFK's father.

One day, Kennedy went to get his shoes shined near the New York Stock Exchange.

As the young shoeshine boy dutifully buffed his wingtips, he began chatting excitedly about the stock market.

He pointed out hot companies and offered tips on what stocks Kennedy should buy.

Kennedy rushed back to his brokerage firm and gave the order:

"Sell every stock we own!" As the stock market crashed in the following months, Kennedy made a fortune shorting the overvalued market.

And his timely exit based on the "shoeshine boy indicator" became the stuff of Wall Street legend.

You can read more about this episode in The Bubble Blog.