- My Forums
- Tiger Rant
- LSU Recruiting
- SEC Rant
- Saints Talk
- Pelicans Talk
- More Sports Board
- Coaching Changes
- Fantasy Sports
- Golf Board
- Soccer Board
- O-T Lounge
- Tech Board
- Home/Garden Board
- Outdoor Board
- Health/Fitness Board
- Movie/TV Board
- Book Board
- Music Board
- Political Talk
- Money Talk
- Fark Board
- Gaming Board
- Travel Board
- Food/Drink Board
- Ticket Exchange
- TD Help Board
Customize My Forums- View All Forums
- Show Left Links
- Topic Sort Options
- Trending Topics
- Recent Topics
- Active Topics
Started By
Message
Explain to me like I'm a college grad how the Yen carry trade initiated the sell off?
Posted on 8/6/24 at 8:45 am
Posted on 8/6/24 at 8:45 am
I understand that many entities (finance companies) would exchange their currency for Yen, then borrow in the Japanese very low interest rate environment then loan back into high interest rate environment like here in the U.S. and take advantage of the spread.
But why did the Yen carry trade initiate the sell off on the Nikkei and then create a contagion around the world? Were some of these financial intuitions collateralized with Japanese equities and they got margin called?
ETA: I'm just trying to forensically piece it together.
But why did the Yen carry trade initiate the sell off on the Nikkei and then create a contagion around the world? Were some of these financial intuitions collateralized with Japanese equities and they got margin called?
ETA: I'm just trying to forensically piece it together.
This post was edited on 8/6/24 at 8:49 am
6
Posted on 8/6/24 at 9:06 am to GumboPot
Timing.
BOJ tightening because of currency concerns. The move was telegraphed, but after decades of ZIRP, that's going to move the needle regardless. Remember, hikes are used to SLOW the economy and the Nikkei responded in-kind.
--AND--
The jobs numbers Friday with everyone's favorite new "Sahm Rule" put recessionary fears back into everyone's minds here in the U.S. -- coupled with the ongoing Ross and Rachel type will they or won't they decision from the Fed (which, by the way, the only way we get a normalized yield curve is with a recession).
--SO--
Both sides of the currency exchange were moving in the opposite direction at the same time. It was a squeeze.
--AND--
John Tuld: "There are three ways to make a living in this business: be first, be smarter, or cheat."
It's a crowded trade. A lot of people were trying to be first.
BOJ tightening because of currency concerns. The move was telegraphed, but after decades of ZIRP, that's going to move the needle regardless. Remember, hikes are used to SLOW the economy and the Nikkei responded in-kind.
--AND--
The jobs numbers Friday with everyone's favorite new "Sahm Rule" put recessionary fears back into everyone's minds here in the U.S. -- coupled with the ongoing Ross and Rachel type will they or won't they decision from the Fed (which, by the way, the only way we get a normalized yield curve is with a recession).
--SO--
Both sides of the currency exchange were moving in the opposite direction at the same time. It was a squeeze.
--AND--
John Tuld: "There are three ways to make a living in this business: be first, be smarter, or cheat."
It's a crowded trade. A lot of people were trying to be first.
Posted on 8/6/24 at 9:31 am to Hand
Posted on 8/6/24 at 11:10 am to Hand
This and people had loans in yen they needed to sell positions to cover.
Posted on 8/6/24 at 11:15 am to GumboPot
quote:Yes. Borrow in a ZIRP currency, take those funds and invest them in things like US equities. When the numbers change, need to liquidate assets to pay back the loan.
But why did the Yen carry trade initiate the sell off on the Nikkei and then create a contagion around the world? Were some of these financial intuitions collateralized with Japanese equities and they got margin called?
Posted on 8/6/24 at 11:48 am to GumboPot
I've read 5-6 articles about what happened yesterday and, other than here, I've yet to see a single person mention the BOJ move as the driver.
I'm sure people on here know what they're talking about but it's still odd that Barron's, WaPo, NYT, CNN, and Reuters all said the move was due to uncertainty around the American economy without a word about Japan.
I'm sure people on here know what they're talking about but it's still odd that Barron's, WaPo, NYT, CNN, and Reuters all said the move was due to uncertainty around the American economy without a word about Japan.
Posted on 8/6/24 at 12:37 pm to mmmmmbeeer
quote:
I'm sure people on here know what they're talking about but it's still odd that Barron's, WaPo, NYT, CNN, and Reuters all said the move was due to uncertainty around the American economy without a word about Japan.
I don't believe uncertainty around the U.S. economy is invalid at all and a healthy correction is probably needed to deflate the bubble especially in the top 7 stocks carrying Wall Street. Wall Street sellers just needed an excuse to sell and bank profits. The collapse on the Nikkei was the catalyst.
ETA: 7 stocks, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
This post was edited on 8/6/24 at 12:39 pm
Posted on 8/6/24 at 12:48 pm to GumboPot
Best way I heard the description of the situation. When the US economy sneezes the rest of the world gets pneumonia.
Posted on 8/6/24 at 1:17 pm to GumboPot
> Japan had low interest rates.
> Borrowing Yen was super cheap “free money”.
> $20 trillion was borrowed and invested.
> That’s called a carry trade.
> Borrow free low-interest money, and use it to get high-interest-yielding assets or investments.
> Japan then raised interest rates.
> This wasn’t expected and everyone doing this carry trade was caught offside.
> The Yen dropped in value.
> The “free money” is suddenly not free anymore.
> Everyone caught offside ($20 trillion) had to quickly unwind their positions to pay back their borrowed Yen.
> Unwinding positions so quickly in that magnitude led to risk assets plummeting.
> Borrowing Yen was super cheap “free money”.
> $20 trillion was borrowed and invested.
> That’s called a carry trade.
> Borrow free low-interest money, and use it to get high-interest-yielding assets or investments.
> Japan then raised interest rates.
> This wasn’t expected and everyone doing this carry trade was caught offside.
> The Yen dropped in value.
> The “free money” is suddenly not free anymore.
> Everyone caught offside ($20 trillion) had to quickly unwind their positions to pay back their borrowed Yen.
> Unwinding positions so quickly in that magnitude led to risk assets plummeting.
Posted on 8/6/24 at 1:41 pm to Konkey Dong
quote:
Konkey Dong
Just wanted to say I really appreciate the sequential nature of the information in your post. Thanks for taking the time to structure it that way. Was much easier to follow.
Posted on 8/6/24 at 1:56 pm to Konkey Dong
I think the only thing you misstated was the yen increased in value.
It can be counterintuitive, but the big “fall” was the Yen strengthening vs USD.
It can be counterintuitive, but the big “fall” was the Yen strengthening vs USD.
Posted on 8/6/24 at 2:12 pm to GumboPot
quote:
top 7 stocks carrying Wall Street
quote:
ETA: 7 stocks, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
Tech, tech, tech, tech, tech , tech, tech
That's scary af
Posted on 8/6/24 at 2:15 pm to Konkey Dong
quote:
> Borrow free low-interest money, and use it to get high-interest-yielding assets or investments.
> Japan then raised interest rates.
Are these borrowed funds floating rate loans?
I mean if you borrow at 0% and you invest/lend on a return at 7%, WTF does it matter if your borrow at 0 goes to 0.25?
It's a little margin squeeze but panic the entire financial world? I don't get it.
This post was edited on 8/6/24 at 2:18 pm
Posted on 8/6/24 at 2:43 pm to Meauxjeaux
The yen remains the only major currency with a negative real interest rate, making it unlikely that it will strengthen against the USD as much as it did in 1995 and 2011. The carry trade will not end. We are not in unprecedented territory.
The BOJ move isn't earth-shattering.
The market acted like the Great Depression just took hold when we had a slight miss on a single monthly employment report.
Tough business conditions reported by the ISM manufacturing report doesn't explain it.
It's difficult to take calls for a recession seriously when earnings are growing double digits.
Someone was probably was caught on the wrong side of the yen carry trade, needed to cover, spiked the yen, and started an algo cascade.
My prediction is that this will unfrick itself sooner rather than later.
The BOJ move isn't earth-shattering.
The market acted like the Great Depression just took hold when we had a slight miss on a single monthly employment report.
Tough business conditions reported by the ISM manufacturing report doesn't explain it.
It's difficult to take calls for a recession seriously when earnings are growing double digits.
Someone was probably was caught on the wrong side of the yen carry trade, needed to cover, spiked the yen, and started an algo cascade.
My prediction is that this will unfrick itself sooner rather than later.
Posted on 8/6/24 at 2:53 pm to Meauxjeaux
quote:
Are these borrowed funds floating rate loans? I mean if you borrow at 0% and you invest/lend on a return at 7%, WTF does it matter if your borrow at 0 goes to 0.25? It's a little margin squeeze but panic the entire financial world? I don't get it.
If the rate goes up AND the currency appreciates nearly 10% against the dollar in 2-3 weeks, the math gets really fricky.
Making 7% and buying back your loan at 110% (10% premium) isn’t going to work.
This post was edited on 8/6/24 at 11:07 pm
Posted on 8/6/24 at 3:45 pm to Konkey Dong
quote:
> Japan had low interest rates.
> Borrowing Yen was super cheap “free money”.
> $20 trillion was borrowed and invested.
> That’s called a carry trade.
> Borrow free low-interest money, and use it to get high-interest-yielding assets or investments.
> Japan then raised interest rates.
> This wasn’t expected and everyone doing this carry trade was caught offside.
> The Yen dropped in value.
> The “free money” is suddenly not free anymore.
> Everyone caught offside ($20 trillion) had to quickly unwind their positions to pay back their borrowed Yen.
> Unwinding positions so quickly in that magnitude led to risk assets plummeting.
Posted on 8/6/24 at 6:31 pm to RoyalWe
quote:
My prediction is that this will unfrick itself sooner rather than later.
We won’t know how many funds blew up for a few days. Most settlement is t+2. There will be bodies from Friday and Monday. They can pay interest to buy a few days but it’ll all come out eventually. Then a few more days until we find out who their counterparties were. This isn’t over.
Posted on 8/6/24 at 7:04 pm to GumboPot
If you are asking questions like this you will probably like listening to breakdowns from Jeff Snider, Brent Johnson, and George Gammon.
They are very on top of the movements of money that caused a lot of market effects
They are very on top of the movements of money that caused a lot of market effects
Posted on 8/6/24 at 8:41 pm to mmmmmbeeer
quote:
I'm sure people on here know what they're talking about but it's still odd that Barron's, WaPo, NYT, CNN, and Reuters all said the move was due to uncertainty around the American economy without a word about Japan.
A lot of financial reporters are idiots.
Zerohedge was posting about it at 8am on Monday.
Zerohedge
Page 1 of 1
Popular
Back to top
Follow TigerDroppings for LSU Football News