S2007S Registered: Aug 2006 Posts: 5861 03-20-07 12:37 AM how long can the Yen carry trade last??? Seems that its working so well that the BOJ would never decide to raise rates. Edit/Delete ⢠Quote ⢠Complain ByLoSellHi Registered: Jul 2006 Posts: 3459 03-20-07 12:43 AM No one knows, but Japan is running massive deficits, growing with each year as more and more people retire into the nest egg of their socialist-welfare golden years, and fewer young people exist to replace them in the workforce. Rest assured, there is a huge struggle behind the scenes between Japanese officials and their foreign counterparts, with a discussion of the devastating effects a quick appreciation of the yen would have on global financial/equity markets. The BOJ is at the center of a global hurricane brewing right now. In the mean time, Australian treasuries are paying 7.5%, and all seems well in the world, as arbitragers sleep warmly nestled in their beds - for now. Edit/Delete ⢠Quote ⢠Complain
S2007S Registered: Aug 2006 Posts: 5862 07-05-07 12:58 AM Very interesting article, many people are ignoring the Yen Carry Trade, the strength of this trade is incredible and a very risky one to the global market. The Croesus Chronicles A Meltdown From The Yen-Carry Trade? Bob Lenzner 06.28.07, 6:00 AM ET Bob Lenzner Global markets got totally spooked in May 2006 when the Bank of Japan withdrew excess liquidity by 12.2 trillion yen--equivalent to the Fed taking $200 billion out of excess U.S. liquidity. This inexplicably oafish move by the Japanese government caused an instant implosion. Stocks, commodities and markets everywhere collapsed as everyone ran for cover. A reduction in global liquidity on this scale panicked the hedge funds, the mutual funds, everyone. Emerging markets like India gave up 30% in a month. U.S. stocks fell. Gold and oil retreated fast. Why the panic? It looked as if the Bank of Japan wanted to push up the value of the yen and warn investors not to count any longer on borrowing cheap yen and putting it to work without risk in higher-yielding securities denominated in other currencies. In other words, stop the so-called yen-carry trade in its tracks. Putting a crimp in the yen-carry trade would mean that everyone would have to move fast to cover his short positions. All it took was a move of over 5% in the yen, and the yen-carry trade would become a losing proposition. Many bankers think it's a ridiculously risky gamble anyway. Somehow the Bank of Japan woke up to the panic it had triggered and began to put back into the global monetary system a portion of its excess liquidity. You may remember that traders breathed a sigh of relief, and between July and October 2006 most global markets retraced their steps back to the old highs and then even further. Merrill Lynch estimates that about $1 trillion worth of yen is being borrowed and then turned into higher-yielding investments. It looks like a sure thing. You borrow yen in Tokyo at 0.5% and use the money to buy U.S. Treasuries yielding 5%. Sounds like shooting ducks in a barrel, doesn't it? Seems plenty of ordinary Japanese have even been doing it with their savings. They're banking on Japan's need to keep its currency low to make its exports competitive in world markets. So, the yen-carry trade is a bet on a political-economic priority, which doesn't exactly qualify it as a sure thing. Actually, there are no accurate figures on the yen-carry trade. Brad Setser, my guru on global liquidity, thinks the "visible" part of it is only $300 billion. Could investors get their hands on $300 billion yen to reverse their arbitrage trade? So what if they didn't? I don't see the world falling to pieces because of one large, very risky trade. You want to worry? In March Merrill Lynch's Jesper Koll, an economist based in Japan, wrote that "global banks may have much higher yen asset exposure than generally assumed. ... The unwinding of the yen-carry trade is not just about paying back short-yen currency positions. Surely, global funds leveraging in yen to buy Japanese stocks and real estate must be considered part of the carry trade as well." This part of the trade remains invisible to us worrywarts. The recent weakness in the yen has caused more investors globally--including individual Japanese--to borrow yen and invest in U.S. dollars or many other currencies that have interest rates well above Japan's 0.50%. Quite a bit of the trade is taking place in the derivatives market, which suggests that the yen-carry trade has reached another all-time high. To hedge the wide spread between the costs of borrowing in Japan and investing abroad, Howard Simons of Bianco Research in Chicago, my choice as top U.S. expert in the yen-carry controversy, suggests buying a three-month forward option on the yen at the Chicago Mercantile Exchange for an annual cost of 108 basis points. For the moment, this leaves a net profit of almost 300 basis points if the yen stays weak--attractive if you're doing it with borrowed funds. Today it's 122 yen to the dollar. But unhedged, you lose your 450-basis-point spread between the cost of borrowing the yen and investing in the dollar if the yen goes to 117, which is possible. Simons warns that the Bank of Japan is making hostile warnings about the yen-carry trade, the effect of which is to trigger an exodus of money from Japan into other nations. Squelching the yen-carry trade remains one goal of the Bank of Japan. Simons warns that tightened credit and restricted money supply could be in the offing. The Bank of Japan wants capital back to buttress its economy. Look for a rate increase from Japan in the early fall. While the yen-carry trade is a "celebrity" transaction that has received more scare publicity than it deserves, there's no such thing as a free lunch. Playing the wide spread between the cost of money in Japan and other, higher interest rate markets in the end may turn out to be truly a fool's game. Edit/Delete ⢠Quote ⢠Complain
I totally agree.. What the hell are they doing lowering the discount rate .25 on sunday night? What do they think they are achieving? Bernanke just totally lost all credibility (if he had any left). He just said loud and clear, I HAVE NO IDEA WHAT TO DO ANYMORE!!!!!. This guy is not equiped for the job. Period! end of story!
They are telling you they fucked up, and we're doomed. Soon, the DOJ will be going into the firms, the SEC, Finra, or whatever they call it, and leading peopleout with handcuffs. In the meantime, watch for short squeezes of huge magnitutes, especially in BB's, as the Primes, with the few scheckles they have left, reign in the offshore bandits. I am very, very happy. These animals needed to be stopped before they entirely ruined the system. As it is, it 's going to look like Dresden Germany in 1945. This too shall pass. Regulation will increase tenfold, and this won't happen again for 30 years. Lots of folks are going to visit where I've been. Let's see how they handle it.
You have another chance to book profits (assuming you can) and get the hell out of this market. It's a gift, really. The market rallied back some after the initial 2/28/08 post I first made, giving you a wide open door to exit before the truly terrible fundamentals of this economy really start to effect earnings, radically distorting p/e ratios. Nearly every rally has been really low volume. Commodities have been so manipulated, you'd be insane for going long (with a few exceptions). The next leg down is going to be much sharper and deeper. Hold cash and wait for capitulation. Don't buy into false capitulation. It may take a while. If you have a knack for it, pick off high fliers that are vulnerable here with short positions. p.s. - $4 and up gasoline is baked into the structural cake of the refining structure. The spillover effect of $4+ gasoline in the midwest, and $5+ gasoline on the coasts, can not be underestimated, given the already extremely gloomy mood of the legendary American consumer, especially as they see their housing equity vaporize, and watch in awe as food and energy inflation runs over them like a freight train.
Agree, this 800+ point rally in the dow is yet another gift to book profits for those who bought long under 12k, the bottom is certainly not in. Many think capitulation occured last Monday after BSC was bought for a few dollars, thats a joke, fed comes in on Tuesday and lowers rates another 75bp to save the market, complete joke.....
A better advice might be : Wait for another sell-off, may be a re-test of the current lows (1260 on the S&P) and then load up for another bounce. Taking a directional view at these levels either way might be the wrong thing to do.
What, you want yet another test of the Jan lows? Doubt the market will accommodate the bears anywhere near that extent simply because there are so many of them. I plan on adding more longer-term exposure on the next selloff but I fully expect it to bottom well north of last week's lows.
Case in point: My heating oil cost 1 month ago was $3.25PG, this month was $3.66, or a 12.5% increase in one month and I am paying about 20-40c less than most residential customers as I buy the oil through a commercial account.