Carry Trade Fiasco Continues: Did Warren Buffett and Mark Cuban Get Caught in the Storm?

The stock market has been buzzing with the latest developments surrounding the unwinding of the yen carry trade, which triggered one of the largest intraday routs last week. The market decline has sparked concerns regarding a potential correction, with the benchmark S&P 500 index down by nearly 5% over the past month. 

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What Happened? 

Japan's Yen has long been hailed as one of the prominent currencies for carry trade. The Bank of Japan has held key interest rates at ultralow levels for over a decade. Given its low borrowing costs, prominent financial institutions and investment gurus have practiced carry trade, borrowing in Yen and investing the proceeds in other currency markets to profit from the interest rate differential. 

Legendary investors, including Warren Buffett and Mark Cuban, have often touted the benefits of this investment strategy. 

However, the Japanese central bank raised the key interest rate by 10 basis points to 0.25% last month, bringing its short-term policy rate to the highest since 2008. This marked the Bank of Japan's second rate hike in 17 years. 

Buffett's Big Bet 

Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has credited a substantial chunk of his profits to carry trades. The late Charlie Munger, Buffett's longtime business partner, described the investment in Japan as a rare opportunity that comes along perhaps two or three times in a century. 

In 2020, Berkshire Hathaway made headlines by acquiring 5% stakes in five major Japanese trading companies – Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. With Japan's historically low interest rates, Buffett capitalized on the opportunity to borrow in yen, hedge currency risk, and invest in stable assets with promising dividends.

Buffett's strategy seemed foolproof. By borrowing yen at an average cost of just 0.5% and investing in companies with earnings yields of around 14%, Berkshire appeared to be in a win-win situation. The falling yen only sweetened the deal, reducing the cost of debt while boosting returns.

However, the recent appreciation of the yen has caused a shift in the landscape. Many analysts have speculated that Buffett's recent decision to downsize his stake in Apple, Inc. AAPL might be linked to his exposure to the yen carry trade. 

Furthermore, Wall Street expects Berkshire Hathaway's earnings to suffer in the third quarter due to the yen’s strength. 

Mark Cuban's Yen Play

Mark Cuban, the billionaire entrepreneur and owner of the Dallas Mavericks, also found himself linked to the yen carry trade. Cuban famously converted the loan he used to buy the Mavericks into a yen-denominated loan, taking advantage of the same low interest rates Buffett utilized in Japan. 

Cuban expressed satisfaction with his decision in a 2013 interview, stating, “I’ve been really happy with it.” 

Cuban's yen play has been a quieter story than Buffett's high-profile investment in Japan, despite his strategy to refinance the entirety of his debt to the Japanese yen in 2013. 

However, Cuban's exposure to the yen is unknown, as the billionaire sold 73% of his stake in the Dallas Mavericks late last year. 

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Further Room to Run

Goldman Sachs strategists warn that despite the significant moves already observed, the recent unwinding of this trade may have further to go. The sharp sell-off in USD/JPY and the decline in Japanese stocks are signs of stress in the system.

Goldman Sachs highlights that while speculative short positions in the yen have been significantly reduced, there is still substantial exposure in the market. 

"We are skeptical that the Yen has been used so extensively as an outright funder of longs elsewhere, especially in the case of U.S. tech stocks," Goldman Sachs strategists stated. 

Nonetheless, the Bank of Japan's Deputy Gov. Shinichi Uchida stated that the central bank would not raise key interest rates soon when global financial markets are unstable. 

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