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The Mother of All Carry Trades has Started
I’m hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen.
Australia and China have already raised interest rates, to be followed by the US, and eventually Europe. With its economy enfeebled, the prospects of Japan raising rates substantially are close to nil, meaning the yield spread between the yen and other currencies is about to widen big time. In the case of the Australian dollar, that works out to 4% per annum. Leverage up ten to one, and pile on anticipated capital gains brought in by a weakening yen, and you have a real carry trade on your hands. That will generate hundreds of billions of dollars worth of cascading yen selling as hedge funds dog pile in. It’s macro investing at its finest.
Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank.
The national debt has rocketed to 190% of GDP, and 100% when you net out government agencies buying each other’s securities. Japan has the world’s worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency?
Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors. With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with.
That great bell weather of global risk taking, the Euro/Yen cross is telling us that the mother of all carry trades has already started. On the release of Friday’s surprisingly positive nonfarm payroll numbers, the cross popped from ¥120 to ¥123.5, sending shorts scampering. You also see this in the Ausie/Yen cross, and outright yen markets. I have been piling clients into short positions since Thursday at the ¥88 handle, and they have already bagged an instant profit of ¥2.
You could dip your toe in the water here around ¥90. In a perfect world you could sell it as it double tops at the 85 level. My initial downside target is ¥105, and after that ¥120. If you’re not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS). This is a home run if you can get in at the right price.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .
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"...Leverage up ten to one, and pile on anticipated capital gains brought in
by a weakening yen, and you have a real carry trade on your hands...."
"...You could dip your toe in the water here around ¥90.
In a perfect world you could sell it as it double tops
at the 85 level. My initial downside target is ¥105, and after that ¥120..."
Okay, so let's see: Leverage at 10:1 with a 5¥ "perfect world" drawdown.
For arguments sake, let's say 5 Yen equals 5.5 percent of 90 Yen.
At 10:1 leverage that's only a 55 Percent drawdown...hmmmm ??
Lets go more conservative at say 4 times leverage:
that's only a potential 22 percent drawdown...okay that's so much better.
WHAT ?
While I agree the Yen could very well do many things in the very near future
as Japan's fiscal year comes to a close and while 80 or 85 Yen is
just as possible as 100 from where it stands now (near 90),
that much leverage combined with that much uncertainty
should not be entertained without consideration.
To be clear, I see the potential too, as evidenced by the moves over the last few days
and I may participate on a clear sign that any move is sustainable,
I just think this is one environment where leverage should not be employed.
This risk is overwhelming.
yeah maybe you are right, but ... RBA raised rate and then what happened to AUDUSD? nothing ... so nothing is sure..if you look at cycles..we are in the middle of one for USDJPY.. finishing next year (?)
Don't worry, Japanese pension funds will come to the rescue!
When we opened our Japan Sub, we budgeted at 85-95cents CDN / 100yen. A year or so later, and we were funding the sub at 135cents / 100yen. Then the global crash...
Anyone want to buy a Japanese Subsidiary? If you trust this analysis that the Mother of all Carry Trades is happening, you could buy the Sub and leverage it up, leaving just a Daihyousha as the sole employee and make a killing :-)
The same elitists behind the great China pump are also behind Japans dump. The two markets could not dominate simultaneously and so a favorite was chosen; besides there was more potential growth in China of the early 90's than Japan's overheated BUT sustainable economy.
Buying into the Yen short could only hurt the US in the long run since it fuels what is already an oversized competitor both econmocally and politically. Western "capitalism" has chosen communism over democracy. I say "capitalism" since it's not in it's true sense when the government has a major hand in it.
I read this story thinking this is another amazing Godzilla story. Darn if I did not get teary eye upon learning the awful truth. BTW, according to wiki, "Godzilla is also the second of only three fictional characters to have won the MTV Lifetime Achievement Award, which was awarded in 1996."
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The prospect of Japan raising rates are nil.
Funny when I followed the Frontrunning link to UK's Telegraph, they had an article stating just the opposite.
http://www.telegraph.co.uk/finance/financetopics/recession/7393155/Why-the-sun-looks-poised-to-set-on-Japans-era-of-cheap-government-debt.html
Imagine a household squirreling money away for decades around the globe. If this household needs money, the logical process is bring the money back.
Now consider Japan's global asset position. Who is the largest holder of US treasuries? Japan clears almost $6B a month in trade. You go ahead and short the Yen.
Also consider Japan's trade surplus (over USD $70B last year) and inflation rate.
You may want to revisit your macroecon studies.
Don't you want something healthy on the other side of that trade?
I suggest that you take a look at the NIIP and then explain to me how the Yen falls.
The BOJ won't buy the debt because govt. debt:GDP is already very high and they will probably be downgraded as less political juice than the US against the rating agencies.
netting out fx reserves and other govt assets, the debt situation is not so bad but that doesn't make a good story
Japan still has a lot of technological know how-nuclear, robotic and environmental (water desalination etc)
looking at money supply numbers for US vs Japan, I wouldn't say the currency necessarily has to weaken, but as long as people THINK the US is in a recovery, then they will think fed funds will rise and this may weaken the currency in the short-term
what's your stop ?
Or is this one of those trades that just can't lose ?
Tatami matts...Love it!
It looks like a no brainer but Japan is the widowmaker and does have an economy behind it, I would prefere short Yen than long but for me I am staying on the sidelines, If the Yen goes to 80 then thats different, good luck.
You know someone in the BOJ a) knows something you dont about his economy and b) is really scared about it, when you see this.
http://www.businessweek.com/news/2010-03-01/japan-bank-approaches-vietna...
The market for wasabi lemons begins
Yen has yet to clearly break the trend line going back to June 2007. Until that happens, forget it.
An attempt at humor perhaps?
"Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors."
Why can't their BOJ just buy that debt like the Fed is buying treasuries?
Are U kidding? BOJ invented QE and continues to this day. THe problem with the short Yen trade is there has been massive repatriation and continues to be as there is a deleverage trade going down there....
Exactly. Japan's net non-Yen-denominated external debt is insignificant.
Well, they have done this a lot, explaining their public debt which I think is nearer to the 200pc than the 190pc.
Already told but the only lesson that Japan is about to give is that the theorical limit fixed by economists when it comes to an unsustainable public debt (something like 21xpc or so) is going to be broken by Japan and will be exposed as crap.
The only lesson in here.
Japan has nested their debt within the US debt. As long as the US boat rocks, the Japan boat rocks.
For sure....just wait until the doelarr and Yen are duking it out to see who can be the worst currentsea!
So... I guess they should have chose door #2 two decades ago eh?
HAHAHAHAHAHA - zing! poor bastards - oh well.
watch out on the ycs its a DAY TRADING instrument and is based on percentage change, each day is a new day. Make sure to read the prospectus! Not for holding long term! Other than that I agree.
So how much of a discount on the bid of our debt may this translate into....
I'd be a shame if Goldman tried to go long on this story.
a
At the "right price", isn't everything "a home run"?
What makes you so sure the U.S. will raise interest rates?