Housekeeping: Good Morning.
Gold Revaluation is happening (quite literally) before our eyes
Today:
Commentary: Yen Carry Trade
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Equity Recap:
US equities advanced on Tuesday after sharp losses in prior trading sessions amid recession concerns and the yen carry trade unwinding. Real estate (+2.30%) and financials (+1.46%) outperformed the broader market indices, while energy (+0.40%) and health care (+0.48%) lagged. The Nasdaq gained 1.03%, while tech added 1.36%. The VIX declined 28.16% to 27.71.
Premium Markets: Yen Carry Trade
First, Watch this excellent explanation by Kyle Bass tying together Yellen’s Stealth QE and the Yen Carry trade
Now get a real perspective on crowded trades and why they end…
What is “Carry”
What carry literally means
What carry assumes- no change in asset prices
Economic arbitrage
Geopolitical Arbitrage
Why is it done in currencies?
Perceived economic stability
Why is it heavily leveraged
Perceived Nation-state stability of currency
Government policies move slowly and trend for long periods
What are the risks?
Everyone does it, becomes a crowded trade on exit
Government policies change abruptly- geopolitics
Risk manifested. Why they exit
Leverage: 2% to 20%
government policy changes
a change from 0.1% to 0.25% is a borrowing cost increase of 150%.. reduces “edge”
Leverage of 20x that 150% increase is much worse
Crowded trade plus deleverage equals panic
The Hidden Problem: Lemmings
Doing them just to do them
cheap financing that everyone does. and job security
Borrowing the money, then looking for something to spend it on
The AI example- carry trade determines where you borrow…. hot story determines where you invest
And that is why they need to slow the unwind down.
Create artificial differences in economies
Turn a blind eye to opportunist leveraging the difference
Hope it works out
Slow it down when it doesn’t
Gold And Open Interest
Market News:
"China on Tuesday launched its first batch of internet satellites that will form part of a constellation it hopes will rival SpaceX’s Starlink. The constellation, known as “Thousand Sails,” is a low-Earth orbit set of more than 15,000 satellites that China has said will create global internet coverage. By 2025, China is aiming to deploy 648 satellites in the first phase of the constellation’s build-out to create an internet network with global coverage." Source: CNBC
"Airbnb warned on Tuesday that more cautious US consumers would weigh on sales in what is normally its peak quarter, in the latest sign of how the impact of faltering demand is being felt by companies across the economy... Source: FT
Politics/Geopolitics:
Israel estimates that Hezbollah will attack before Iran, according to Israel's Kann News.
White House said the US has seen some volatility in the economy but the broader economy is resilient and the economic team is going to monitor the ongoing situation.
US Election Poll showed Harris leads Trump 51% to 48% in National NPR/PBS/Marist poll.
US Democratic Presidential nominee Harris confirmed Minnesota Governor Walz as her running mate, according to CNN
Some headlines via NewSquawk or DataTrek
Data on Deck:
MONDAY, Aug. 510:00 am ISM services July 48.8%TUESDAY, Aug. 6 8:30 am U.S. trade deficit June
WEDNESDAY, Aug. 7 3:00 pm Consumer credit
THURSDAY, Aug. 8 Initial jobless claims Aug. 3 10:00 am Wholesale inventories June -- 0.6% 3:00 pm Richmond Fed President Tom Barkin speaks
FRIDAY, Aug. 9 None scheduled1
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