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Guest Post: The Carry Trade Is Now In Trouble
Submitted by Yves Lamoureux of Blackmont Capital
I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. Good news about this will also turn out to be bad when the party is up.
The party by the way is almost up.The not so smart money of 2008 might be getting its mojo back.If the commercials are getting it right in the futures market then they might as well be calling the top of many markets.
One huge problem is that the bulk of the long side is now carried by speculators with cheap money.A simple rule of WallStreet where bulls die from their own weight my apply right here. Its all about mechanics rather than economics and becomes self-reinforcing. Thats been my point throughout 2007. Perhaps an early call but the right one nevertheless.
We have come full circle once again. Leverage has been put back on as if nothing ever happened. I have underestimated the great desire of participants for suicidal tendencies.
The cracks starts to appear in select markets first.We have observed a number of those already.
We did fire our first gold warning recently even though we have been long term bulls.
The second warning concerns the Japanese currency. I show a timing model based on expansion/contraction of the Japanese monetary aggregates. The recent stimulus from Tokyo is too small to make a large contribution to things. However it is relevant to us because money is already expanding and just might act to depreciate the yen at a faster rate.
You can see here another version of the same timing model showing the recent bump up in monetary aggregates. I have been a very long term bull on the yen. If relative money expands in Japan while American money contracts then you have us bullish on the USD to come.
I have studied the behavior of commercials in the futures market for a long time. They usually have a success rate of over 8/10. The year of 2008 was not so gracious to the not looking so smart anymore crowd. The commercials would appear to have got their mojos back.
They are relatively short in big ways in too many market. For that reason alone it bears watching as this is a significant development.
The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends…..
Yves Lamoureux, Investment Advisor, Blackmont Capital inc.
The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CIFinancial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.
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Perhaps. But I see this "unwind" as taking months, not days. I also see the price of oil being bounced off of $70 so GS can reach their $85 goal for the year. There are a lot of countries and a lot of traders counting on that. So goes oil goes the market.
The unwind will take days at max. Hours is more likely. Everybody running to exit door as fast as they can. There will be no orderly carry trade unwind.
"From my perspective it is here and now that the carry trade ends….."
I wouldn't say he hedged his words. I tend to agree, but the bulls have extended this party at least an additional two months longer than I thought possible. The best thing anybody could do know is to be sure NOT to be long. Doesn't mean you have to be short, just don't risk your capital at these nosebleed levels.
But be long Gold.
Thanks for reinforcing my thinking. Normally, I prefer it when the vast majority of investors disagrees with me but well thought out validation is always helpful to foster staying power. In my mind, when this thing breaks through support levels, the market will have no floor for all the reasons you cited.
This rally has lasted longer than I expected and I've suffered underperformance for one of the few times in my career but I stayed conservative because of the nature of this expansion - the serial extinction of short sellers. Without short sellers, there is no natural buyer on a correction and this suggests to me that the next drop will be far more severe, and damaging to investor psyche's, than 2008. In good conscience, I couldn't put aggressive money to work given those parameters.
I hope the architects of this strategy are aware of their achilles heal - recent trading patterns that rarely include down days of more than 100 points on the Dow suggests they do. Unfortunately, to gain an advantage on the battlefield, one has to leave himself vulnerable at some critical point. This rally is extraordinarily vulnerable to a wave of selling.
Regarding the yen - I agree completely - the Japanese economy is literally imploding before our eyes. They're high cost, value-added exporters in a low cost, trade contracting world. I got off the yen bandwagon last year. Good luck and thanks for sharing your thoughts.
How is that possible if the Fed has the interest rate at 0%?
Take a look at Japan. ZIRP has been their 'strategery' for a long time.
our rally has been funded by a AUD/USD carry trade
the eur/jpy has been in a 128/138 channel since april.
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