The Yen Carry Trade And Other Ridiculousness
“I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise and that prosperity in this country must necessarily diminish and recede in the near future.”
--- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
It appears the restless natives have been calmed by our devoted leadership telling us all is well and good. We simply had an unwinding of the Yen carry trade. 500 point down days are good for the markets because we were getting a little frothy. There was a glitch in the computer system in the NYSE or Dow Jones or whatever. That glitched caused the Russian exchange to drop about 30% and every other market across the globe to shudder. Anything else you want to know?
Now, let's be serious. There are people out there with no direct knowledge telling us the carry trade is unwinding. Maybe it is. How do they know? Because someone started a story and it sounds plausible. A little mind engineering perpetuated by the media? Funny, that it coincides with a statement made by a Bank of Japan official basically saying things never last forever in regards to the carry trade. The reality? No one knows how big the carry trade is, what it's invested in, when it will unwind and what the ramifications are. Estimates place the trade at somewhere in the $100 billion to $400 billion range but there no absolutely no way to measure it. Borrow money in yen at a low rate and invest it elsewhere. How much of any such trade is invested in equities? U.S. equities lost more than $1 trillion alone. Frankly, I would assume most of any carry trade would be tied up in other asset classes such as bonds. Corporate and emerging market bonds haven't really budged through any of this. In other words, they aren't unwinding. The sum total of data available makes me very, very dubious of these claims that this was a temporary phenomenon or based on the Yen carry trade. Don't confuse correlation with causation. That's an infamous Wall Street trick. That is, unless you believe everything you are told.
Let's say this was based on the Yen carry trade for arguments sake. And? So what's the point? Is that some how supposed to make me feel better? A rationalization? Just like the rationalization made by the President of the NYSE in 1928 as quoted above? There's always a rationalization for any market moving event. Did those rationalizations ever make you money? I really like the rationalization that the Plunge Protection Team is holding up U.S. equities because it is self evident the end of the U.S. is nigh. I guess the Fed's "invisible hand", to bastardize a phrase coined by Adam Smith, reaches well beyond the U.S. shores because he's propping up nearly every global equity market, commodities, global real estate, art, and everything else money can buy.
The more plausible reality is that very smart money has decided to take some risk off of the table. Now, here's what you should be really asking yourself. Why? If all is well and good, why would money capable of creating such an enormous single day loss be reducing their risk exposure? Maybe they were attempting to shake out the weak hands. Maybe they hit their profit or price targets. Maybe they realize a highly correlated investment world is on borrowed time.
I've even seen many a professional contemplating this as a climactic down day with such a high TRIN reading. Well, that's novel. The difference between what happened a few weeks ago and those other high TRIN readings of the last half century is this TRIN reading came within days of a multi-year market high. In addition, high TRIN readings tend to come in clusters. In other words, life could remain interesting. Not a whole lot of precedence for such a lopsided dump as markets are making multi-year highs. In fact, none that I know of. What does that tell me? The force and speed with which fast money can move global asset markets is frightening. Why is this so? For reasons I've previously mentioned. Many enormous financial institutions are now trading their own money as a greater source of income than the money earned managing client assets. Therefore, if one wants to compare this to any historical period of time, it should be the 1920s when rampant speculation and trading by large financial institutions and stock pools was legal. I wrote of stock pools and their effects here. In addition, there is simply a massive amount of money focused on short term performance through hedge funds. There seems to be little tolerance for investing in the world of dementia defined by the highly sophisticated trading community. Finally, smart money knows the party is going to end at some point. If the world's assets do not find a way to become uncorrelated in a profoundly benign manner, we are still in for a serious mess. Whether it results in a bout of full fledged deflation or rampant inflation is the real question. Have bonds been telling us the answer since 1997? I do chuckle at those who say deflation is an impossibility given central banker's authority. I guess they forget about Japan's multi-decade deflationary funk. We are seeing examples of asset deflation all around us. The equity bath in 2000, the housing bust of today, equity market busts in the Middle East and low bond yields. I can assure you a fact as clear as the sun rising tomorrow is that copper prices at $3 a pound when it costs 7 cents to mine is about as sustainable as locomotion by horse and buggy was a century ago. And, the associated equities of commodities are going to suffer asset deflation accordingly.
So far, the bulls in the S&P have held their ground. That is where the smart money roams. My intermediate term model has weakened significantly and has toyed with a sell signal for months. But, not yet. I see people citing alot of sentiment data including the put/call ratio as a sign of bearishness. Well, I can cite other sentiment that isn't bearish. The put/call statement is made with the assumption dummies are buying options. As individual and professional investors become more sophisticated in their use of derivatives and asset protection, I wonder when we will see an erosion of this doodad. I suspect it is only a matter of time. Otherwise, if we are down about 5% and the put/call ratio is negative enough to fuel a substantial rally, we are in a new environment where this phenomenon will continue ad infinitum therefore fueling a rally in perpetuity. Or, as John Maynard Keynes once quipped (paraphrasing from memory) before 1929, we won't have any serious stock market corrections ever again. What's the reality? Smart money never forgets the tripod of investing mechanics includes sentiment, fundamentals and technicals. In other words, there is significant historical precedence for sentiment to turn bearish and stay bearish. Those using sentiment as their primary investing tool are showing complete disregard for the long term investing thesis. In other words, they aren't the smart money. So, go back to eating your brie and drinking your Riesling because life is still very good.
--- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
It appears the restless natives have been calmed by our devoted leadership telling us all is well and good. We simply had an unwinding of the Yen carry trade. 500 point down days are good for the markets because we were getting a little frothy. There was a glitch in the computer system in the NYSE or Dow Jones or whatever. That glitched caused the Russian exchange to drop about 30% and every other market across the globe to shudder. Anything else you want to know?
Now, let's be serious. There are people out there with no direct knowledge telling us the carry trade is unwinding. Maybe it is. How do they know? Because someone started a story and it sounds plausible. A little mind engineering perpetuated by the media? Funny, that it coincides with a statement made by a Bank of Japan official basically saying things never last forever in regards to the carry trade. The reality? No one knows how big the carry trade is, what it's invested in, when it will unwind and what the ramifications are. Estimates place the trade at somewhere in the $100 billion to $400 billion range but there no absolutely no way to measure it. Borrow money in yen at a low rate and invest it elsewhere. How much of any such trade is invested in equities? U.S. equities lost more than $1 trillion alone. Frankly, I would assume most of any carry trade would be tied up in other asset classes such as bonds. Corporate and emerging market bonds haven't really budged through any of this. In other words, they aren't unwinding. The sum total of data available makes me very, very dubious of these claims that this was a temporary phenomenon or based on the Yen carry trade. Don't confuse correlation with causation. That's an infamous Wall Street trick. That is, unless you believe everything you are told.
Let's say this was based on the Yen carry trade for arguments sake. And? So what's the point? Is that some how supposed to make me feel better? A rationalization? Just like the rationalization made by the President of the NYSE in 1928 as quoted above? There's always a rationalization for any market moving event. Did those rationalizations ever make you money? I really like the rationalization that the Plunge Protection Team is holding up U.S. equities because it is self evident the end of the U.S. is nigh. I guess the Fed's "invisible hand", to bastardize a phrase coined by Adam Smith, reaches well beyond the U.S. shores because he's propping up nearly every global equity market, commodities, global real estate, art, and everything else money can buy.
The more plausible reality is that very smart money has decided to take some risk off of the table. Now, here's what you should be really asking yourself. Why? If all is well and good, why would money capable of creating such an enormous single day loss be reducing their risk exposure? Maybe they were attempting to shake out the weak hands. Maybe they hit their profit or price targets. Maybe they realize a highly correlated investment world is on borrowed time.
I've even seen many a professional contemplating this as a climactic down day with such a high TRIN reading. Well, that's novel. The difference between what happened a few weeks ago and those other high TRIN readings of the last half century is this TRIN reading came within days of a multi-year market high. In addition, high TRIN readings tend to come in clusters. In other words, life could remain interesting. Not a whole lot of precedence for such a lopsided dump as markets are making multi-year highs. In fact, none that I know of. What does that tell me? The force and speed with which fast money can move global asset markets is frightening. Why is this so? For reasons I've previously mentioned. Many enormous financial institutions are now trading their own money as a greater source of income than the money earned managing client assets. Therefore, if one wants to compare this to any historical period of time, it should be the 1920s when rampant speculation and trading by large financial institutions and stock pools was legal. I wrote of stock pools and their effects here. In addition, there is simply a massive amount of money focused on short term performance through hedge funds. There seems to be little tolerance for investing in the world of dementia defined by the highly sophisticated trading community. Finally, smart money knows the party is going to end at some point. If the world's assets do not find a way to become uncorrelated in a profoundly benign manner, we are still in for a serious mess. Whether it results in a bout of full fledged deflation or rampant inflation is the real question. Have bonds been telling us the answer since 1997? I do chuckle at those who say deflation is an impossibility given central banker's authority. I guess they forget about Japan's multi-decade deflationary funk. We are seeing examples of asset deflation all around us. The equity bath in 2000, the housing bust of today, equity market busts in the Middle East and low bond yields. I can assure you a fact as clear as the sun rising tomorrow is that copper prices at $3 a pound when it costs 7 cents to mine is about as sustainable as locomotion by horse and buggy was a century ago. And, the associated equities of commodities are going to suffer asset deflation accordingly.
So far, the bulls in the S&P have held their ground. That is where the smart money roams. My intermediate term model has weakened significantly and has toyed with a sell signal for months. But, not yet. I see people citing alot of sentiment data including the put/call ratio as a sign of bearishness. Well, I can cite other sentiment that isn't bearish. The put/call statement is made with the assumption dummies are buying options. As individual and professional investors become more sophisticated in their use of derivatives and asset protection, I wonder when we will see an erosion of this doodad. I suspect it is only a matter of time. Otherwise, if we are down about 5% and the put/call ratio is negative enough to fuel a substantial rally, we are in a new environment where this phenomenon will continue ad infinitum therefore fueling a rally in perpetuity. Or, as John Maynard Keynes once quipped (paraphrasing from memory) before 1929, we won't have any serious stock market corrections ever again. What's the reality? Smart money never forgets the tripod of investing mechanics includes sentiment, fundamentals and technicals. In other words, there is significant historical precedence for sentiment to turn bearish and stay bearish. Those using sentiment as their primary investing tool are showing complete disregard for the long term investing thesis. In other words, they aren't the smart money. So, go back to eating your brie and drinking your Riesling because life is still very good.
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