Friday, August 17, 2007

Busy watching the turmoil in the markets.....

Sorry I haven't updated my blog. I've been watching the convulsions in the financial markets. It is very interesting and terrifying at the same time. The "tiny" subprime mortgage problem has spread to something called the Yen carry trade.

You see the Japanese has been having super low interest rates for many years and some people found out you can make money by borrowing Yen, then converting it to US$ ...then you lend the US$ at a higher interest rate, say, for example to subprime borrowers. You profit from the interest rate differential. Some hedge funds also borrowed billions in Yen to invest.

Many analysts have predicted that the unwinding of the carry trade will result in a huge disruption of our economic system and currencies. ...that will trigger a failure that will result in the establishment of a new system.

For those who want to know more about this....here's an article from 2006 on the Yen carry trade.

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Collapse of the `Carry Trade'Will Blow Out the System

Feb. 26, 2006 (EIRNS)—The following release was issued today by the Lyndon LaRouche Political Action Committee.
On Friday, Feb. 24, the Daily Telegraph published a blunt admission that the entire global financial system is on the verge of disintegration, as the result of the imminent collapse of the yen carry trade. Ambrose Evans-Pritchard penned the Telegraph story, "Global Credit Ocean Dries Up," and quoted from a number of leading financial analysts, who warned that the entire system is jeopardized if Japan goes ahead and raises interest rates, thus shutting down the yen carry trade, which has fueled global hyperinflation and speculative bubbles for the past several years.

As the Telegraph defined it, "The 'carry trade'—as it is known—is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1 pc in Switzerland, to relend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities." Last week a crisis was triggered when the Fitch rating agency downgraded Iceland's sovereign debt. Interest rates in Iceland are 10.75 pc. The Bank of Japan has announced plans to abandon the zero interest rate policy, as early as next month. This has triggered the panic, cited by Evans-Pritchard.

Evans-Pritchard quoted a number of analysts. David Bloom of HSBC warned, "The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads; everything is poisoned. It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet. People have a Panglossian belief in the march of global capitalism but that will change as soon as attention switches back to US financial imbalances."
Stephen Lewis of Monument Securities was quoted: "There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable. When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

Stephen Roach, chief economist at Morgan Stanley, was even more blunt: "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions. History tells us that carry trades end when central bank tightening cycle begins."
LaRouche Says: Let It Happen

Political economist Lyndon LaRouche was far more plain-spoken and blunt. "The yen carry trade is in big trouble. The mere fact that such questions as those reported in the Daily Telegraph are being raised means that the carry trade is about to bite the dust. Iceland and other countries are going to go bankrupt. But the multiplier effect of the blowout of the carry trade is going to mean that the crisis hits with a magnitude far beyond any individual nation or currency. This will bring down the whole post-Bretton Woods floating exchange rate system."
But LaRouche added, "Let it happen. The system is doomed under any circumstances, and we know what must be done to create a new, stable financial system, based on the principles of Franklin Roosevelt's original Bretton Woods System. I am ready with a recipe for precisely how to solve this crisis.

6 comments:

Bart JP said...

There are conflicting takes on the carry trade. Some say the yen appreciation is evidence of unwinding. But. given the recent currency turmoil, there is less chance BOJ would up the rate. It should still be profit to "carry trade", but instead of US stocks, perhaps it will be parked with T-bills?

LuckySingaporean said...

Bart,

You're the man! You bought right at the bottom! I picked up some growth stocks at the end of yesterday ...but my investment last week didn't do very well but they should all rebound on Monday after the Fed cut discount rates.

I saw my Cisco investment which I bought last year getting pounded from $5.80 to $3.90 through this turmoil....that was a loss of Mercedes from the peak! Certainly makes me grouchy.

I spoke to a few people about the carry trade, most believe it is still alive. The Yen also also weaken yesterday which makes for a huge rebound

Next week I resolve not to watch any CNBC. I'm out of cash anyway and 'don't plan to sell no matter unless valuations get too high. This whole thing has affected my work, sleep, blog and my family has a history of heart problems...I need to get off this market watching thing.....

Bart JP said...

Wah Lucky, you are rich. One stock alone can lose a Mercedes.

I did buy some stocks near bottom yesterday it turned out. But my overall portfolio still down, but no where near your standard.

at82 said...

Hi lucky,

If there any chance that you will share how you valuated your stocks?

at82 said...

Found this off Mr Wang website. Maybe you will be interested.

http://suddendebt.blogspot.com/

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