BREAKING: Yen Carry Trade Is Back!
Summary
TLDRThe video discusses the Yen carry trade and recent developments with Japan's Central Bank (BOJ) abandoning further rate hikes. This decision has significant implications for global markets, especially as the BOJ's previous rate hiking attempts caused the Yen to appreciate, affecting the carry trade. The presenter references insights from a hedge fund expert predicting the Yen's further decline and explores how the BOJ's actions may drive speculators to increase leverage, pushing U.S. assets higher. The conversation highlights broader economic impacts, including potential stock market bubbles due to the carry trade's revival.
Takeaways
- 💥 The Yen carry trade is back in focus after a blowup due to Japan's interest rate policy changes.
- 📉 Japan's Central Bank (BOJ) decided to halt rate hikes, which has caused the Yen to crater, leading to the return of the carry trade.
- 🎯 The market initially believed the BOJ would continue to normalize interest rates, but they've backtracked on this policy.
- 🤔 The carry trade involves borrowing Yen at low interest rates and converting them to dollars to invest in higher-yielding U.S. assets.
- 📈 Market forces often win over central planners' attempts to control currencies, according to a hedge fund manager's insights.
- 📉 Japan's efforts to raise inflation backfired, leading to higher costs of living and public discontent.
- 📉 Real wages in Japan have significantly declined, with inflation outpacing wage growth, further worsening purchasing power.
- 🔄 The BOJ's flip-flop on interest rate hikes led to the strengthening of the Yen temporarily, but the recent decision could push it to 200.
- 📊 The BOJ's inability to raise rates significantly compared to the U.S. has made the Yen carry trade more attractive to speculators.
- 📉 The Yen carry trade is likely to accelerate, potentially inflating U.S. risk assets further, creating a stock market bubble.
Q & A
What is the Yen carry trade, and how does it work?
-The Yen carry trade involves borrowing Yen at low interest rates, converting it into another currency, such as the US dollar, and then investing in assets that offer higher returns, like US stocks or treasuries. The profit comes from the difference between the low borrowing costs in Japan and the higher returns from the foreign investments.
Why did the Yen carry trade blow up recently?
-The Yen carry trade blew up because the Japanese Yen appreciated against the US dollar due to the Bank of Japan's (BOJ) rate hikes. This increased the burden of debt for those who borrowed Yen, leading to margin calls and forcing investors to sell their assets to cover the rising costs.
How did the BOJ's interest rate policy shift impact the market?
-The BOJ shifted its policy by halting further rate hikes, signaling to the market that they were done with normalizing rates. This led to a renewed interest in the Yen carry trade, as investors believed the risk of Yen appreciation had decreased, allowing them to borrow more Yen to invest in higher-yielding assets.
What prediction did the hedge fund manager, Steve, make about the Yen?
-Steve predicted that the Japanese Yen would continue to weaken and eventually reach 200 against the US dollar. He argued that central bank interventions to manipulate currency never work long-term, and market forces would eventually prevail.
How did Japan's intervention in the Yen market affect inflation and the government's stability?
-Japan's intervention, aimed at controlling the Yen's depreciation, led to inflation, which negatively impacted the standard of living. This sparked public outrage and contributed to the collapse of the Kashida government, as inflation eroded real wages.
Why did the BOJ decide to stop its rate hikes, and what impact does this have on the Yen carry trade?
-The BOJ likely stopped its rate hikes because it realized that further increases could harm the economy and fuel inflation. This decision reduces the risk of the Yen appreciating further, encouraging speculators to re-enter the Yen carry trade, driving it into 'hyperdrive.'
What impact does the Yen carry trade have on US risk assets?
-As investors borrow Yen to buy US assets, the increased demand can drive up the prices of US stocks and other risk assets. If the Yen carry trade intensifies due to low rates in Japan, it could act as a tailwind for US markets, potentially creating a bubble.
How does the US interest rate policy compare to Japan's, and how does it influence the carry trade?
-The US can maintain higher interest rates compared to Japan, as seen historically. This interest rate differential makes borrowing Yen more attractive for investors looking to invest in higher-yielding US assets, fueling the carry trade.
What is the potential downside of the Yen carry trade for investors?
-The potential downside is the risk of the Yen strengthening, which would increase the cost of repaying Yen-denominated debt. Additionally, a downturn in US risk assets could lead to margin calls, forcing investors to sell assets at a loss to cover their positions.
What are the next steps for investors in light of the BOJ's policy shift?
-Investors should monitor the Yen carry trade closely, particularly its influence on US markets. They should also keep an eye on the BOJ's future statements and any signs of changes in interest rate policy, as these could impact the profitability of the carry trade.
Outlines
💹 The Yen Carry Trade Blowup
The narrator discusses the recent Yen carry trade blowup caused by the Bank of Japan's (BOJ) interest rate policy. Despite prior rate hikes that strengthened the Yen, the BOJ has now signaled it will no longer pursue further hikes, reviving the carry trade. The narrator recalls a conversation with a seasoned hedge fund manager, Steve, who predicted the Yen would weaken to 200 against the dollar due to the failure of central bank interventions to control currency movements. This foreshadows a return of market forces that could drive the Yen lower.
📉 Japan's Struggle with Inflation and Yen Devaluation
This section highlights Japan’s attempt to combat deflation over the years by devaluing the Yen. After the Yen hit a 40-year low at 160 against the dollar, Japan's efforts to intervene led to slight improvements, but inflation began to rise, causing public dissatisfaction. This inflationary pressure, though modest at 2%, significantly impacted the standard of living and contributed to political instability, culminating in the collapse of the Kishida government. The narrator contrasts Japan’s inflation woes with the U.S., where past efforts also aimed to raise inflation, showing the unintended consequences of such policies.
🔄 BOJ Rate Hikes and the Yen Shorts' Annihilation
This paragraph outlines the BOJ’s surprise rate hike in July, which shocked the market and caused the Yen to strengthen, leading to significant losses for those shorting the currency through the Yen carry trade. Traders borrowed Yen at low interest rates, converted it to dollars, and invested in U.S. assets. However, the Yen's appreciation increased their debt burden, forcing asset sales to cover their positions. The narrator emphasizes that these market dynamics, particularly involving riskier assets, magnified the impact on global markets, including stocks in both Japan and the U.S.
📊 The BOJ’s Reversal and the Risk of Market Bubble
After briefly hiking rates, the BOJ reversed course, ending its rate hike cycle at a mere 25 basis points. This policy shift reduces the risk of further Yen appreciation, leading speculators to believe that the Yen carry trade will escalate dramatically. Traders are expected to increase their leverage, borrowing more Yen to buy U.S. assets without fearing higher rates. The narrator references historical trends where the U.S. raised rates more aggressively than Japan, further encouraging carry trade activity, which could inflate the already risky U.S. asset bubble.
📈 Speculation and the Future of the Yen Carry Trade
The final paragraph predicts that as the Yen continues to weaken, the Yen carry trade will grow, fueling U.S. risk assets, particularly stocks. The narrator stresses the importance of monitoring the Yen borrowings and how they correlate with the performance of U.S. markets in the coming weeks. The expansion of the carry trade could further contribute to a bubble in U.S. markets, driven by the BOJ's decision to keep rates low. The narrator ends with a call to action, encouraging viewers to stay vigilant and support free-market principles.
Mindmap
Keywords
💡Yen Carry Trade
💡Bank of Japan (BOJ)
💡Interest Rate Policy
💡Inflation
💡Deflationary Debt Trap
💡Real Wages
💡Normalization of Interest Rates
💡Margin Call
💡Risk Assets
💡Hedge Fund Managers
Highlights
The Bank of Japan (BoJ) has ended its rate hiking cycle, causing the Yen to crater and the Yen carry trade to return.
The BoJ's decision to halt further rate hikes reversed the Yen's prior appreciation against the dollar, a key driver of the carry trade unwind.
Historically, interventions by central banks to control currency fluctuations often fail, according to a top hedge fund manager with 40 years of experience.
The hedge fund manager predicts the Yen could weaken to 200 against the dollar, given Japan’s inability to sustain current policies.
The BoJ has intervened multiple times in the open market, attempting to prevent further devaluation of the Yen, which initially sparked inflation but led to economic challenges.
Japan’s real wages have declined significantly, despite nominal wage growth, as inflation has outpaced earnings.
The BoJ’s minimal rate hikes, only up to 25 basis points, have been a key factor in Yen depreciation and the return of the Yen carry trade.
Speculators can now leverage the BoJ's announcement, likely driving the Yen carry trade into hyperdrive with little downside risk.
The Yen carry trade involves borrowing Yen at low interest rates and investing in higher-return assets like U.S. treasuries, stocks, or riskier assets.
When the Yen strengthens or U.S. assets decline in value, it forces carry trade participants to sell U.S. assets to cover rising debt burdens.
The BoJ’s end of rate hikes is expected to reduce the risk of Yen appreciation, making the carry trade even more attractive for global speculators.
In past cycles, Japan has struggled to keep pace with U.S. interest rate increases, further widening the gap and incentivizing the Yen carry trade.
The BoJ’s failure to normalize interest rates, as previously expected, has made it clear to speculators that the central bank is unlikely to raise rates further.
The current environment may push traders to increase their exposure to U.S. assets through the Yen carry trade, leveraging Japan’s ultra-low interest rates.
The Yen carry trade could act as a tailwind for U.S. stock markets, potentially inflating the bubble in risk assets even more.
Transcripts
hello fellow Rebel capitals hope you're
well so everyone remembers the Yen carry
trade blowup from just a few weeks
ago but unfortunately we haven't heard
the last of the Yen carry
trade let's go right over to Zero Hedge
and I'll show you guys what I'm
referring to the Japanese Central Bank
the boj just came out with huge hugee
news about their interest rate policy
moving forward remember they've been in
a rate hiking cycle if you want to call
it that which led to this whole Japanese
Yen blowup because the Yen appreciated
against the dollar and Unwound a lot of
that carry
trade let's get right over to zeroedge
and check out what's going on
now so Yen craters
as Japan gives up on further rate
hikes Cary Trade is back with a bang so
what's going on here is everyone in the
marketplace believed the boj that they
were going to continue to hike rates
they were going to normalize
rates but if you guys
remember me well I've said this a few
times on the
channel where uh the last time I was in
St Barts actually the time prior I
apologize the time prior I was talking
to my good buddy Steve who has been one
of the top hedge fund managers he's
retired but was one of the top hedge
fund managers for 40 years in fact he
started in Japan in the late
1980s and this is right about when the
Yen was about 160 and the Ministry of
Finance came in and intervened in the
market to try to get the yen to
appreciate because it was declining
rapidly against the dollar and that's
when the Central Bank also started to
take interest rates up and I mean up I
mean from like 10 negative or 10
negative 10 basis points up to like
positive 10 basis points not really up
that much but they started this rate
hiking cycle if you want to call it that
which makes the Yen appreciate and
that's what blew up the Yen carry trade
but I was asking Steve I was like in
your experience over 40 years with
emerging markets and seeing the Japanese
do this and you know all of this
intervention by the central planners to
try to manipulate their currency how
many times has it
worked and he laughed at me and he said
it never works it never works he goes
this is the way it'll play out he goes
the central planners always come in and
try to do something to to combat What's
happen happening with the currency and
it'll work for a couple months and then
it'll just revert right back to where it
was before and inevitably eventually the
central planners will lose and the
market forces will win he goes that's
how it plays out every single time and I
said okay so what's the bottom line he
goes bottom line Yen's going to
200 that's that's exact ly what he said
he goes Yen's going to 200 there's no
way they're going to be able to continue
these policies they're going to have to
back off the Market's going to win so
it's funny to see this kind of playing
out because this is exactly how Steve
said it would play out but getting back
to the article here so let's go just go
back in time and revisit what happened
recall that four years on end the boj
and the government were doing everything
in their power to crush the Japanese
currency in hopes of sparking inflation
because remember this in fact you guys
remember prior to
co the uh Central planners in the United
States were doing the exact same thing
remember that was our big bugaboo in
2012 13 14 oh my gosh it's deflation
deflation deflation we have that
remember that the whole 2%
Target was not to get inflation down to
that Target it was to get inflation up
to the
Target remember that and that wasn't
that long ago and this is what Japan was
doing as well that deflation was the
enemy ah deflation ah scary we've got to
get we've got to raise consumer prices
because somehow that'll fix
everything all right so getting back to
the
article so the country they're talking
about Japan was stuck in a deflationary
debt trap seemed like the only possible
exit from its exis exist poal
implosion was to they're talking about
devaluing the Yen but then the Yen did
Crater to a 40-year low that's when I
was talking to Steve when it was at 160
and they were trying to intervene to
bring it down which they did which they
did obviously Japan scrambled to do the
opposite and intervened in the open
market on multiple occasions to contain
further selling of the currency as the
resulting inflation led to devastating
or devastated standards of living and
sparked outrage among local population
so they finally got the inflation they
had been trying to create over the last
20 years and they're like whoa uh sorry
I guess that wasn't such a good policy I
guess people don't like it when they
have to spend more and more and more of
their paycheck just to get the same
amount of stuff every single month who
would have known who could have guessed
so then they backpedal but in the
process I guess this really shook up the
government which is what Zero Hedge
talks about next
so they say uh sparked outrage among the
local population over runaway infl I
don't know if I call it runaway
inflation inflation got to like 2% but I
guess for Japan that's runaway
eventually resulting in the collapse of
the kashida
government which is they say what they
warned about last
June so here is just the real wages I
mean if you think real wages are bad in
the United States look at what they've
done here in Japan and so you can see
this blue line is nominal wage growth
let's oh shoot that takes us to Twitter
don't want to do that okay so this blue
line is nominal wage growth so the
politicians I'm sure were saying oh look
at this how amazing it is wages are
growing wages are growing wages are
growing but then it's like yeah but
they're not going up at the same rate of
inflation so what really matters is your
purchasing power which is represented by
this red line in Japan and you can see
that has gone straight down
getting back to zero Edge but it was
only when the boj decided to shock the
market with a surprise second rate hike
in
July even as the rest of the world was
aggressively cutting rates the Yen
soared so the Ministry of Finance
intervenes they probably sold dollars
into the market bought yen in order to
make the Yen appreciate from 160 so then
it goes from let's just say 160 to 150
but then the Central Bank comes in and
says yeah we're going to go on a rate
hiking cycle just so you guys watch
we're going to normalize interest rates
everyone's like oh my gosh the boj
they've done a complete 180 they're now
gonna fight inflation and they're going
to take interest rates up to three or 4
per. and so then the Yen strengthens on
the news and goes to let's say 140 and
then as Zero Hedge points out that's
when all the Yen shorts were annihilated
and it's not the people that were just
short the currency it's people that were
short the currency by and through the
Yen carry trade so they are borrowing
Yen over here at very low interest rates
they are taking the Yen turning that
into
dollars and then they're taking those
dollars and they're buying us assets as
an example I mean just look at the
spread let's assume the spread between
what they're borrowing at five basis
points and then let's say have to pay a
couple percent to transfer those yen
into Dollars okay fine but then what
happens is they're being paid let's say
5% on a treasury okay great we're
pocketing the
spread and what seems to be very low
risk
until the Yen strengthens and then what
happens is that makes the burden of your
debt increase to a point where you can't
pay it therefore you have to sell the
asset
to pay off the debt before you get
underwater a margin call if you will and
so this is what led to the the now I
just use treasuries as an example but a
better example would probably be even
riskier assets such as Clos just stocks
the NASDAQ
Etc the problem with this of course is
that not only do the Nik C crater
forcing the B to immediately come out
and defend the wealth
effect uh so but then stocks in the
United States o obviously got just
pummeled as
well but I want to point out before
moving for before uh moving further guys
is it's not just the Yen appreciate
appreciating which for forces those
people that took advantage of the Yen
carry trade to sell their us assets it
would also be a result of those assets
going down so you've got two pressure
points there you got two points of
substantial risk that would prompt that
Margin Call which would create this
unwind right now what I want to
do is I want to oh first this is
hilarious check out this chart
so this is
when H this is basically the boj and I
don't know if I've even told you the
punchline here but the boj came out and
said yep sorry we're not increasing
interest rates anymore we've done enough
we've done enough our rate hiking cycle
is over and so a few weeks ago when they
were saying you know real hawkish oh
we're going to take rates up to 1% two %
3% just you watch we're going to
normalize now just like my buddy Steve
predicted they come out and say well
actually um yeah that normalizing thing
yeah we don't really see a need for that
anymore so we're going to go ahead and
stop the rate hiking cycle you say wow
George that was how high did they get
with this rate hiking cycle right here
here Zero Hedge points out that they got
up to a whopping 25 basis points that is
one hell of a
cycle I don't know if I'd call that a
cycle or a a blip I think it's more of a
a rate hiking blip before they go back
down to inevitably what will be probably
negative which will take that Yen
straight up to 200 maybe who knows maybe
even higher but now let's get over
to kind of some Dynamics between or
behind the Yen carry trade go over to
Investopedia because
if the central bank has come out and
said okay the rate hiking cycle is over
what's that mean that means that the
risk of the Yen appreciating
further or creating an environment where
all those speculators let's say were
completely off sides the probability of
that is very low and as decreas
massively so one would
expect that all the speculators see this
they've called The boj's Bluff and now
that they have what are they going to
do they're GNA take that Yen carry trade
trade and it's going to go on to
hyperdrive because now you know they
can't increase
rates they can't do it and if you know
they can't increase rates then that
eliminates one of your risk pressure
points so if you were borrowing a
billion dollars let's say a few months
ago
now bye bye bye bye bye as Jim M Kramer
would say You're Gonna back up the
leverage Brinks truck you're going to
take that trade from a billion hell
you're going to take it up to 10
billion because now you have almost zero
downside with the Yen as it pertains to
the bank of Japan increasing
rates so then you got to think okay well
if now the Yen carry trade is going to
go into hyperdrive then what does that
mean for us risk
assets we're going to answer that
question or I'll give you my base case
here in a
moment but just as a review carry trade
borrowing at low interest rates and
investing the proceeds in an asset that
Pro provides a higher rate of return
borrowing Yen US Stocks let's
say but look at this chart this is what
I wanted to
highlight the pink shaded
area is or the I guess you want to call
it
the the purple line we'll say at the top
and the shaded areas the Delta between
that and the uh light blue line that
that's us interest
rates so this goes back to kind of what
Brent talks about all the time with his
dollar milkshake theory that the United
States likely can keep interest rates
higher not they can keep them high they
can keep them higher than places like
Japan and
Europe and we can see this really play
out there's a great visual with this
chart back in vulker days when the the
United States took rates up to 16% Japan
only took them up to
7.2 and you can see every single time
the United States has increased
rates if the boj has done the same they
haven't done it to the same degree not
even close and a lot of times when the
FED is in a quote unquote rate hiking
cycle the boj continues to drop rates
even further
I mean look at the GFC or prior to it
Greenspan took rates from call it 1% in
the United States all the way up to 5%
before everything blew up then while the
boj took rates from a
whopping
0.1% up to 80 basis points and what's
crazy what's crazy is they could at
least get them up to 80 basis points
back then now now they can't even get
him higher than 25 basis
points while the United States still has
the ability to take rates up to
5.25 so again if if I'm a Speculator if
I'm a Trader if I'm a like a Paul tutor
Jones type or a Stan dren Miller type
I'm looking at this and I'm licking my
chops I'm saying okay now the gig is up
with the boj they have shown me their
cards and their cards show they're done
they're done all this talk about rate
hikes it's all Bs and if anything
they're going to have to reverse course
so I am going to go to my bank and I'm
going to say how many trillions of Yen
can I borrow to buy us
assets that's official that officially
started today
today assuming that's when the boj made
this announcement let me make
sure because what we need to do guys is
we need to track when the boj made this
announcement and then what US assets do
over the next couple weeks because if
let's just say they respond positively
and we see a huge uptick in US risk
assets then there's a high probability
that this is a result or the Yen carry
trade was at least a
Tailwind to what is happening with risk
Assets in the United States that's very
important very
important okay let me I'm just scanning
this article guys to try to figure out
when they said it
assuming it was
today yeah I mean so this came out this
morning at 9:30 and this is actually let
me do this let me do
this let me just Google Bank of Japan
and then we'll look at the news from
today no rush to rate no
they keeping them
steady NOP zero Hedges on top of it this
must have been
something that they came out and
reported just this
morning I wish they would link to the
like the
Reuters press release or something like
that that shows
or maybe this is based on some of their
statements but the bottom line here is
this most likely came this news came out
either yesterday or today so over the
next two weeks we're going to have to
see how this impacts markets and what
I'm going to do once this video is over
is I'm going to try to figure out how we
can monitor how much yen is being
borrowed
and see we got to talk to Jeff about
that Josh you got to give us some
Insider information from Jeff because
I'm sure he has a trick of knowing to
what degree the Yen carry trade is being
put
on and so my point there is let's just
assume the NASDAQ goes up by 10% in the
next couple weeks well if no news has
changed based on my last video The
Narrative hasn't changed then and let's
just say the amount of Yen being
borrowed has skyrocketed and the charts
look the same we can assume that that
correlation might might be a result of
causation and then you say okay well if
the Yen continues to
plummet then the Yen carry trade is
going to get is going to continue to
increase which perversely is likely
going to give a Tailwind
to the stock market becoming even more
of a bubble than it already
is all right guys enjoy the rest of your
afternoon as always make sure that
you're standing up for Freedom Liberty
free market capitalism see you on the
next video
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