Buffett Steps Down as Berkshire Chairman, Japan Raises Rates (And Why That Matter to You)

Zaid Admani (0:00)

Public.com presents The Rundown. Your daily market update in 10 minutes. My name is Zaid Admani, and today is Friday, September 18th. In today's episode, we'll break down why stocks rallied the day after a rate hike, and why bond yields are falling. We'll also tell you why the Bank of Japan raising rates matters to your portfolio, and Warren Buffett's announcement to step down as chairman of Berkshire Hathaway. Then stick around to the end of the show to find out why Apple is spending billions of dollars making award-winning TV shows that almost nobody is watching. We got a great show for you today.

Let's go.

Stocks bounced back big time on Thursday. The S&P 500 jumped 1.1% and the NASDAQ was up by 1.7%, both indices having their best day in about six weeks. Tech was the best-performing sector yesterday and every one of the MAG-7 stocks finished higher. So just one day after the first rate hike by the Federal Reserve in three years, stocks rallied as if nothing happened. On the surface, it seems like a pretty weird market reaction. Normally higher interest rates are supposed to be bad for stocks, especially expensive tech stocks, but I think the market is looking at this rate hike a little differently. The market is treating the Fed hike like medicine. The Fed is basically saying the economy is strong enough to handle these higher rates and get inflation back under control, and the market is buying that argument. I mean, just look at what the 10 year Treasury yield did yesterday. It fell dropping from 5% on Wednesday to around 4.95% on Thursday. That's a sign that the bond market thinks the Fed hiking cycle will actually cool inflation long term. You know, the 10 year Treasury yield is really two things. It's the interest rates you expect over the next decade, plus insurance against inflation eating your returns. So the fact that bond yields fell is a sign that the bond market thinks that inflation will be lower long term. So I think the falling yields were the main reason for the stock market rally yesterday, especially tech stocks. And look, it probably helps that oil prices are falling too. Brent crude is down to $102 a barrel, which is a slight relief from the $108 a barrel highs from earlier this week. And I think oil prices will be the key thing to watch moving forward. There's still a ton of uncertainty on what could happen with the war. I saw a report from JP Morgan where their oil analysts are basically admitting that the Iran war has gotten so unpredictable that it's becoming incredibly difficult to model where oil prices will go from here. So I think that's gonna be the big thing to watch the rest of the year. If oil keeps cooling off, that should take some pressure off inflation, we should take some pressure off bond yields, which is exactly what the stock market wants to see. So we'll continue to stay on top of all those factors. So if you're new here, definitely get subscribed to the podcast if you haven't already and tune in every day to stay in the loop.

Let's run through some headlines, starting with Japan. The Bank of Japan just announced that they were hiking interest rates to 1.25%. That is the highest rate Japan has had since 1995 Now, before you hit the skip button, I know what you're thinking. Why should you care about what the Japanese central bank is doing right now? Well, here's why it matters to you and US investors in general. A quick history lesson first. For about 30 years, Japan was the land of free money. Rates in Japan were at near zero, sometimes below 0%. The reason Japan kept interest rates so low for so long was because they were fighting deflation. And since money was basically free to borrow in Japan for so long, global investors were going to Japan to borrow money in yen and then taking that money out of Japan and putting into higher returning assets somewhere else like US bonds and stocks. That is called the yen carry trade. It's been happening for years now. At the same time that was happening, Japanese investors themselves sent a ton of money overseas because returns at homes were so low. Today, Japanese investors own around $2.5 trillion worth of US stocks, bonds and other assets. In fact, Japan is the single largest foreign holder of US treasuries with roughly $1.1 trillion. But now that Japan is raising rates, that equation starts to change. If Japanese bonds start paying more money, Japanese investors have less reason to send all their money overseas, so some of that Japanese money that was going into US stock and bond markets will just stay home in Japan. And if there's less Japanese investors buying US treasuries, well, that could push treasury yields higher. And we've already talked about how higher yields can be a headwind for the stock market. Now, the other issue overhanging all of this is the yen. The yen has been getting crushed this year. We talked about this a few times on the show. The yen hit 40 year lows earlier this summer. So the Japanese government has been stepping in to try to prop up the currency and the way they do that is by selling billions of dollars in US treasuries and using that money to buy yen. So that's selling by the Japanese government is also putting pressure on bond yields causing them to go up. And that's why Treasury Secretary Scott Vestent has actually been encouraging Japan to raise rates because he wants a stronger yen so the Japanese government doesn't have to keep selling US treasuries today and putting pressure on yields. So it's a very interesting dynamic playing out in Japan right now. Like on one hand, higher rates in Japan could strengthen the yen and reduce the need for intervention by the Japanese government. And that should put less pressure on bond yields in the US today. But at the same time, those higher rates also make Japanese bonds more attractive, which could mean less Japanese money flowing into US treasuries and stocks. So I know it's kind of a nerdy topic, but to me it's a very interesting dynamic playing out. Now we'll have to see what kind of impact this ends up having on the stock and bond market here, but clearly it's caught the attention of the Treasury Secretary. And you know, I'm also curious what's going to happen long term now that Japan is no longer going to be the source of cheap money. So this might be a long term thing to keep an eye on. Let's shift gears and talk about Warren Buffett. The investing legend just announced that he is stepping down as chairman of Berkshire Hathaway, effective immediately. Now, remember, Warren Buffett already stepped down as CEO of Berkshire at the end of last year. He handed the keys to Greg Abel. And I think some people thought that he might stick around as chairman of the board for a while. But nope, he's walking away now. And in his letter, he said that father time always wins. He has, however, been generous with me. I got to say, that's a bar right there. So one of the greatest investors to ever do it is walking away at 96 years old. And I don't really blame him. He probably doesn't want to be attending board meetings or hopping on Zoom calls to talk about AI investment strategies. By the way, Warren Buffett's son, Howard Buffett, who is 71 years old himself, will be taking over as chairman of the board. And I'm really curious to see what happens to Berkshire Hathaway now that Warren Buffett is fully out. You know, I think Warren Buffett was a big part of Berkshire Hathaway's aura. Now that he's out, like is the investing world gonna care that much? I mean, just looking at Berkshire stock this year, it is flat while the S&P 500 is up 12%.