Talking stocks, trading, and investing in general

[double00]

I have a different take on the transaction. If by "yield" you mean "interest rate" then you have that part correct. As to your claim about currency fluctuation, you say if yen weakens the trade is less lucrative. You may be correct, so help correct my faulty thinking.

I borrow 100 yen and buy with it $1 USD to invest. During the course of the loan the yen weakens and it only takes 80 cents to pay off that 100 yen loan. I don't claim any level of financial sophistication, but it would seem to me this is a profitable situation, one that became more lucrative over the course of the loan.

Conversely, I borrow 100 yen and buy with it $1 USD to invest. During the course of the loan the dollar strengthens such that it only takes 80 cents to pay off that 100 yean loan. Again, simple man that I am, it would seem this transaction has also became more lucrative.

There's no doubt that tech stocks hurt markets on Monday but it was Japan that dropped so precipitously that triggered the global worries. Probably just a coincidence that the big unwind of yen carry trades happened too?

🤷‍♂️

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yes , yield = interest rate . let's chop this up a bit more . i'll try my best to stick with your example :

you borrow 100 yen @1% for a year. you take your loan and use it to buy $1usd which you then lend at 5% . at the end of the year you take your $1.05 and repay the yen . you started with nothing except to qualify for the loan and ended up with 4 yen , and it actually doesn't matter what the comparative yields are on the back end b/c this is all by contract .

in this scheme , the wider the spread that you can contract the juicier the deal ; plug in .5% and 8% you end up with 7.5 yen . conversely if the spread is narrower the juice gets thinner . that the strong yen is a cornerstone of the scheme is probably why it's referred to as yen carry trade .

anyways that dynamic has changed , which is why Japan is seemingly on sale lately ( why do I have the impression that you vacayed in Japan recently ? I know you do love a bargain ) , my read is that this is due to the same post-pandemic rephasing that every economy has had to absorb , but the past two years in Japan have been characterized by rising inflation and which is why BOJ is hiking interest rates rn . meanwhile the dollar is strengthening .

my biggest question in terms of your op ( is yen carry trade responsible for Monday ? ) is why or how would currency contracts implicate the price of assets ? even if there is an iceberg of yen carry contracts I find the idea dubious . from what i've read this week I believe the nikkei is following investor pessimism around a US recession .

 

[gettoasty]

Sentiment is a fickle thing. On Monday as stocks swooned the headlines and talking heads were acting like a global recession was a sure thing. Certainly, the correction in the markets was painful with some notable losses in most risk assets on Monday:



S&P 500 -3.0%

NASDAQ -3.4%

Mag 7 Index -3.8%

Russell 2000 -3.2%

Bitcoin -12.1%

Nikkei -12.4%



We’ll come back to that last one in a minute.



Some high-profile analysts/market mavens/pundits were calling on the Fed to cut rates soon. A quarter-point cut was guaranteed at the next meeting in September some argued. But they should cut half a point at the next two meetings, others said. A well-known talking head was even talking about the need for a 75bps ‘emergency’ cut immediately. Really? A mini panic day and we need an emergency rate cut? Generally, inter-meeting cuts come after real emergencies – Russian default/Long-Term Capital blowup, 9/11, Lehman failure. But a 3% selloff?



But sentiment is fickle. By Thursday the recession was canceled after a better-than-expected jobless claims number, and for the week the markets were little changed week-over-week. All the talk about the need for an inter-meeting rate cut disappeared.



Looking at the bigger picture, the correction in the market over the last few weeks is about on par with the average correction in the average year.

Another way to illustrate this is by plotting the return for the S&P 500 this year relative to the average year and different decile years. Before a couple of weeks ago the returns this year were top decile. Now they are about average.

This isn’t to say that we can’t or won’t experience a recession in the next few quarters. Only that Monday’s volatility was just that, volatility. We can’t even be sure why the markets went down!!! To think the sell-off is sending some deep economic signal is probably to give the markets too much credit.



Made in Japan?

The decline on Monday was unprecedented in one way – the single day increase in volatility was off the charts. The VIX is a measure of market volatility derived from the options market, and what we saw Monday was bigger than previous spikes.

Needless to say, this seems a bit much considering there wasn’t a real economic shock.



What gives?



There are a lot of theories floating around, but the fact that the Japanese market was down over 12% on Monday might be a clue. When a big developed stock market goes down that much in a single day without any real major news (like maybe an alien invasion), then you know someone, or a lot of someones, screwed up. After all, the daily loss in the Nikkei was the largest single-day decline in the post-war period.

So what was the bet that blew up? We can’t be sure, but everything we read seems to point toward the so-called yen carry trade. Briefly, it works as follows:

• Years of negative policy rates enticed Japanese households, pension plans, state-owned banks, and the Bank of Japan itself to invest overseas.

• A lot of hedge funds did the same – they borrowed in yen at next to nothing and invested in assets around the world.

• Many, if not most, of these trades did not hedge the currency risk. It costs money to hedge and that would eat into profits, or make the trade unfeasible.

• When the Fed began to hike in 2022, the Japanese carry trade began to accelerate, pushing the Yen to its weakest level since 1986.

• But recently, rising inflation and wage negotiation outcomes in Japan finally prodded the Bank of Japan to raise rates just as the Fed is projected to begin easing, driving up the Yen sharply. The recent Yen rally is the third largest in over the last 40 years. That’s not good. Now you are losing on the currency translation leg of the trade.

• This starts the dominos falling - some traders sell the assets in this trade to pay back the loan. This drives down asset prices and drives the yen up even more. Rinse and repeat until panic sets in.

There’s no easy way to quantify any of this. The numbers are really opaque. This week J.P. Morgan estimated that private investors have about $4tn tied up in the carry trade, but this is a guess and does not include Japanese banks, pension plans, etc. By way of reference, Japan’s GDP is about $4tn, so the numbers we are dealing with are large.



Maybe a simpler way to visualize what’s going on is to look at the performance of the Magnificent 7 stocks in the U.S., but denominate the index in yen. This is what a Japanese investor would have experienced in the Mag 7 in their own currency. They are down about a quarter from the high. Monday may have been one giant trade unwind/margin call.

So What?

Well, that’s all well and good, but what does it mean?



Nothing in the yen carry trade discussion deals with the real economy or corporate fundamentals. So to the extent this trade was behind Monday’s decline, it’s probably a mistake to extrapolate that single day’s volatility into either the recession call or the request for large rate cuts.



By the end of the week it seemed as if the forced sellers had flushed themselves from the system. Financial asset prices can certainly feed back into economic fundamentals, but so far this doesn’t seem likely. The odds of a recession are still relatively low. Oxford Economics publishes a model that has a decent track record, and other models come up with similar numbers. Basically, there’s a chance, but it doesn’t seem like the most likely scenario over the next six months.

 

[Piobaire]

that the strong yen is a cornerstone of the scheme is probably why it's referred to as yen carry trade .

You see what others do not.

Thank you.

 

[double00]

You see what others do not.

Thank you.

ngl i'm still trying to figure out how the yen ends up at 80 cents on the dollar in your examples . or what the borrowed yen actually buys for that matter .

 

[Piobaire]

ngl i'm still trying to figure out how the yen ends up at 80 cents on the dollar in your examples . or what the borrowed yen actually buys for that matter .

I get it; no one said math was going to be involved.

 

[ValidusLA]

My version of the yen carry trade is going to Japan 3x in the last 18 months and carrying back pewter, silver, ceramics, and incense.

 

[Texasmade]

My version of the yen carry trade is going to Japan 3x in the last 18 months and carrying back pewter, silver, ceramics, and incense.

3x to Japan and you didn’t commission any bespoke shoes or suit? wtf kind of forum member are you

 

[ValidusLA]

3x to Japan and you didn’t commission any bespoke shoes or suit? wtf kind of forum member are you

So! My build does not lend itself to japanese tailoring. On the Dec bros trip I did take 2 guys to Ring Osaka and get a full mtm set up for them going.

Was only in Tokyo for 3 days total. And that was on tail end of third trip with wife and daughter which was sort if of an apology trip for the December bros trip. Was tempted to try to sneak off to see Hiro, but wife would not have approved. We had been in Taipei as well that trip and I already spent an unacceptable amount on fountain pens between Taipei and Osaka.

 

[Texasmade]

So! My build does not lend itself to japanese tailoring. On the Dec bros trip I did take 2 guys to Ring Osaka and get a full mtm set up for them going.

Was only in Tokyo for 3 days total. And that was on tail end of third trip with wife and daughter which was sort if of an apology trip for the December bros trip. Was tempted to try to sneak off to see Hiro, but wife would not have approved. We had been in Taipei as well that trip and I already spent an unacceptable amount on fountain pens between Taipei and Osaka.

Quit being poor.

 

[ValidusLA]

Quit being poor.

I live in So Cal and kid goes to private school.

I'll be poor forever.

 

[HRoi]

Maybe one of you fine arbitrageurs could bring me back some Kapital

 

[brokencycle]

I live in So Cal and kid goes to private school.

I'll be poor forever.

How does So Cal middle class compare to NYC middle class? I need objective numbers.

 

[Piobaire]

Thoughts on buying some protective November puts on SPY sometime in October?

 

[grio1212]

Thoughts on buying some protective November puts on SPY sometime in October?

Doubt it'll take that bad of a hit to warrant puts. Or maybe I just dont know too much about puts lol

 

[Piobaire]

If we hit a Constitutional crisis I could see a double digit drop. Just looking at the IV and strike prices for November…