The tweet below is a retweet of his July 5th prediction here:
I will be proven right about Japan.
I will be proven right about the reverse carry trade.
I will be proven right about that being the spark to a global margin call.
I will be proven right about a credit event.
I will be proven right despite it all. pic.twitter.com/2OGKQ87gf4
— Michael A. Gayed, CFA (@leadlagreport) August 1, 2024
@leadlagreport has been calling Japan for a year and nobody wanted to listen. So happy for him!!
— MB (@marksyny) August 5, 2024
All truth passes through three stages: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as self-evident. – Arthur Schopenhauer
I have suffered long enough.
Welcome to stage 3.
— Michael A. Gayed, CFA (@leadlagreport) August 5, 2024
Synopsis:
“Japan’s government is engaged in a massive $20 trillion
‘carry trade’ – the funding of loans and foreign assets by
borrowing low-cost yen …”
https://www.business-standard.com/economy/news/japan-s-20-trn-carry-trade-poses-risks-amid-central-bank-s-policy-shift-123111400696_1.html
“The rising yen has fueled speculation about whether this
could mark the end of the popular so-called “carry trade” —
wherein an investor borrows in a currency with low interest
rates, such as the yen, and reinvests the proceeds in a
currency with a higher rate of return.”
https://www.cnbc.com/2024/08/02/carry-trade-how-japans-yen-could-be-ripping-through-us-stocks.html#:~:text=monetary%20easing%20programme.-,Kazuhiro%20Nogi%20%7C%20Afp%20%7C%20Getty%20Images,a%20higher%20rate%20of%20return.
nationalcollapse
250 points 5 hours ago
For people who are looking at global markets right now and
thinking “hmmm, what the heck is going on?”
I’ll explain it as I understand, but if I’m a bit wrong
please correct me in the comments:
Japan has a massive (over 200%) public debt to GDP ratio.
In 2010, the Bank of Japan reduced its headline interest
rates to zero:
https://tradingeconomics.com/japan/interest-rate
From early 2016 to the beginning of this year, they were
actually below zero.
This has allowed individuals and institutions to borrow
trillions of USD worth of yen, convert it to dollars, and
buy assets (stocks ect.) They owe the debt in yen with
extremely low (or possibly negative) interest rates. It’s
free money! Estimates vary hugely, but I’ve seen guesses of
around $20 trillion plus entering global markets from this
inflow of “free” money.
But wait.
Then inflation got bad in Japan.
Bank of Japan raised rates to 0.25% a few days ago.
This caused the yen to rapidly strengthen.
Now all the yen-denominated debt is very very toxic.
Institutions that borrowed yen to buy dollars (or other
national currencies) and then stocks, bonds, ect. under the
assumption that yen only goes down are forced to sell as the
yen appreciates.
An especially interesting scenario: let’s say markets
continue crashing badly and the US Federal Reserve does an
emergency rate cut in response. That normally helps, right?
Usually, yes.
But this time a US rate cut would almost certainly further
strengthen the yen against the dollar, causing this cycle to
exacerbate even further.
h/t dr0id