[MonteQuest]

$this->bbcode_second_pass_quote('threadbear', 'H')ow could the topic depletion economics, remain purely about that topic without easily straying further afield. I would say, just by virtue of the fact that most people here think there is something to peak, all of their financial machinations and manueverings are taking this into account.

Can't they be of benefit to others who may not necessarily wish to invest, but shelter their money in a safe haven, as the economy is hit by both peak related and unrelated events? I haven't seen anyone pushing stock here. It's not an investment club. It seems like an investment averse club. This thread is like one long subvertizement for Wall Street.

[MrBill]

This was in a personal message. But I may as put it in this thread as well. Now, seriously, this is my last post until I am back.

$this->bbcode_second_pass_quote('', 'H')ello,

....as for the yen carry trade I can answer you quickly because I have to prepare for my business trip right now.

Many assume it is simply a risk free arbitrage where banks borrow yen cheaply to invest in higher yielding government bonds. Some do. They borrow at 0.25% p.a. (now 0.50%) and re-invest at 8% p.a. in some EEMEA bond thereby locking in a profit of 8 - 0.25 = 7.75%. Well, with a little leverage you can do that all day long and make a nice living. Think of the US treasury trader that has to scrap over every single last 0.25% to make their money!

However, the real yen arbitrage or carry trade goes much deeper. In order to make money, you have to take one of four kinds of risk.

FX risk
Interest rate risk
Counterpart or credit risk
Price risk

With low risk government bonds it would appear that this risk is minimal, but that is why govies usually yield so little. If you want to go down the credit curve to buy corporate bonds or riskier sub-investment grade bonds then you definitely take credit risk.

I have not written about this yet, but a bond is no safer than a stock. Ultimately they are both based on the corporate's ability to pay. But bonds have some particular risks that equity does not have. And vice versa. However, that is off-topic and I will save it for another post another day.

Interest rate risk is whenever you borrow short to buy long. Or vice versa. Interest gap risk is the time difference or mismatch between your assets & liabilities. For example, using on demand deposits to buy 10-year US treasuries mean that US treasuries may go down in value, while the bank has to give back deposits at 100% principle plus any interest promised. That creates liquidity risk and interest rate risk.

So with the yen carry trade by definition you have two of the four risks. You always have the yen FX risk. The risk that the yen will appreciate against whatever currency you invest in, so that your investment is worth less yen making the loan in yen more expensive to repay. AND you have either price risk (the price of gold), credit risk (GMAC bonds) or interest rate risk (fixed versus floating) for example.

Therefore, we see the yen carry trade is not the riskless or risk free trade we are often led to believe. In fact, with so many traders and investors on the wrong side of the trade it creates liquidity risk and asset price contagion risk as well if they all have to close their positions (by selling an underlying asset) and repaying their yen loans at the same time (by buying yen).

Many dopey traders were thinking. "Duh, the BOJ will raise rates from 0.25% to 0.50% by signaling their intentions well ahead. But the extra 0.25% will not hurt my carry trade. Just make it slightly less attractive."

But that was never the real risk. The real risks were all the assets were positively correlated in value with one another. So when someone starts selling they all go down at the same time. Notice how the price of gold AND the price of stocks went down over the past two weeks when there was a panic sell-off.

Secondly, the risk was not that the BOJ would raise rates by 0.25%, but that the yen would quickly rise in value by 15-20% wiping out the paper profits of all those carry trades. The 8% - 0.25% = 7.75% yield does not look quite so clever if the yen appreciates by 15-20%.

The Economist calculated the yen iwas/is 40% undervalued on a trade weighted or PPP basis. There was a lot of upside when it got oversold. Record short yen against euro trades pushed EURJPY to 159.80 before it dropped back to the 150.50 area. In a week! Other smaller currencies faired worse.

Also, it is a wide entrance, but a very narrow exit. As traders put on yen carry trades they borrow yen, sell it to buy USD or EUR or whatever, driving the yen FX rate down. This flatters their profits in the beginning. But as everyone unwinds it goes into reverse. As they sell USD or EUR or whatever to buy yen to pay back those loans then it puts more upward pressure on the value of the yen. This hurts the last man out (as usual) not the first one.

Plus, all these trades were put on with leverage. So this magnifies the return, but also the losses when it all goes pear-shaped. So what looks like a simple carry trade is actually a web of interconnected investments.

As volatility fell and yields compressed traders increased their bets to make the same amount of money. But the same amount of money with more risk. That is just poor risk management. Nothing mysterious about that?

"The bulls make money. The bears make money. And the pigs get slaughtered." As the saying goes.

Thanks for your message. Have a nice weekend and speak to you in 10-11 days. Cheers.

MrBill.

[ohanian]

Honey! I lost 6 percent in 6 days!

23th July 2007 1 Aussie = 107 yen

30th July 2007 1 Aussie = 100 yen


Boy do I have a yen for losing money!!!

[MrBill]

The current rally that started in EUR/JPY at 150.70 topped out near 169. It is in the process of retracting as many lift their yen carry trades.

One, because they feel the BOJ may raise rates in August. And second, they are becoming risk adverse. Less speculative positions means less yen needed to fund those views. The yen carry trade has become a global proxy for risk. Next stop 160 in the EUR/JPY. At that level the yen will still be over-valued, but it just won't be over-bought.

Its going to be hard for EUR/USD or XAU to rally so-long as this JPY trade is unravelling. Its very healthy. We should encourage the exit of the speculative longs and their over-leverage along with dangerous mismanagement of risk in general. Good riddance! ; - )

[Iaato]

I hesitate to bump this up, because I don't care to read more wrangling about why the carry trade has to do with peak oil economics. And I don't want to get into anymore small-scale, short-term economic discussion, which is pretty meaningless during massive large-scale system change like we're seeing now. The only way to survive this is to keep your eye on the wave; this is not the time to watch the crab scuttling around at your feet.

I am bringing this back up because these two quotes from different authors on another board got me thinking:

"A collapse of the dollar will bring down the gigantic derivative house of cards, carrying with it the global financial system and the global economy

The plunge of US dollar must be stopped at any cost, and lower interest rates in US will only pour oil on the fire.

The only one can save the day is Japanese Government

- ...by buying an enormous amount of dollars, probably near 1 trillion dollars this time, to prevent the outright collapse of the dollar.

The last time that Japanese Government played a thankless pivotal role was during the reckless 1% interest rate adventure of FED in 2003. Japanese Government bought 400 plus billion dollars to prevent the wholesale collapse of the dollar.

Of course, that 400 plus billion dollars become the seed money to inflate the mortgage and the debt bubble further that is now deflating painfully.

Another such dollar buying spree of Japanese Government will have an even worse long term effect than the one in 2003, but to save the life of a patient is apparently more urgent than the consideration of the long term effect of the treatment.

JAs has been pointed out in Comment 28, everyone is already deeply trapped in the web weaved by the irresponsible and ill-thought-of globalization process with no exit in sight"

and

"Ultimately, we suggest that the country's [Japan's] financial system was not able to adapt adequately to a rapidly changing domestic and international setting. This created a powder keg for ill-considered fiscal and monetary policy (surpluses and high interest rates) and fertile ground for the financial crisis that took root in 1990 and persists to some extent today. To answer the second question, we draw parallels between events leading up to Japan's 1990 stock market crash and events in the United States and Canada today, with particular emphasis on the current policy stance in both countries toward budget surpluses and inflation. We argue there are good reasons to be concerned that history may be about to repeat itself."

JLEI Working Paper #303 (secondary source because the other stuff on the page is good, too)

Japan's monetary crisis and descent are directly related to their historical lack of resources and reliance on others for those resources. Their development of the carry trade can be seen as a way to attach to the coattails of the US dollar hegemony and to siphon off some gains in order to purchase resources. It appears that the carry trade game is just about over? What will Japan do for an encore with no resources and now a diminishing desire of resource-exporting countries to sell abroad?

I see the US headed down the same road, about 20 years behind Japan in terms of loss of resources and reliance on others. Except that the global peak oil situation is different. Can Japan bail us out again this time with more USD purchases? Can the inflation party continue, given that the only avenue for reflation is debt? I say no way, unless everybody takes total leave of their senses and suspend all rationality. Plus there is no superpower left to provide flexibility and resiliency with additional resources for us as there was for Japan in, say, 1990.

With the loss of the US dollar hegemony, will we be able to attach to the coattails of China with some sort of currency carry-trade type game? Will we become the new Japan? This will only work in the very short-term, of course, but it looks like the Fed is all out of ammo, otherwise. If all countries are inflating rapidly at the same time, currency chaos will result and stable con games like the carry trade are out. I think the jig is up. As Clinton said rather sadly last year (I paraphrase), "Globalism and the fact that we are all tightly connnected is a two-edged sword." The carry trade appears to have worked a bit like osmosis, easing balance of trade abnormalities and equalizing disparities in resource deficits for countries on the way up economically. On the way down, as countries recede into isolationism, one by one, these globally connected monetary games will disappear.

[roccman]

The final act before the Amero is rolled out...

[GreyGhost]

Please try to improve the quality of threads about news articles. Don't resort to misleading bait-and-switch sales tactics to sucker us in.

You called the thread topic "US$ Next Carry Trade" and you called the link label some kind of tinfoil about the Amero. You got me interested, until I wasted time discovering that in reality, the article doesn't mentioned EITHER of these things.

[roccman]

$this->bbcode_second_pass_quote('GreyGhost', 'P')lease try to improve the quality of threads about news articles. Don't resort to misleading bait-and-switch sales tactics to sucker us in.

You called the thread topic "US$ Next Carry Trade" and you called the link label some kind of tinfoil about the Amero. You got me interested, until I wasted time discovering that in reality, the article doesn't mentioned EITHER of these things.