US dollar carry trade ready to bust

[North4st]

Mother of all carry trades faces an inevitable bust
The Globe and Mail, Nov 2, 2009
http://www.theglobeandmail.com/globe...rticle1347932/

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

The article predicts a sharp cruel drop in all asset prices, "equities, commodities, emerging market asset classes and credit instruments."

UPDATE: corrected year date error

[Raz]

Re: US dollar carry trade ready to bust

Here's an excellent article on the same subject - and more - by Andy Xie.



Andy Xie: Central Banks, Arsonists and Playing with Fire

10-28 09

Money supply growth has sparked an asset market boom that supports the economy, not the other way around. Don't get burned.

By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.

(Caijing Magazine) Is money demand efficient? The answer could help decide what's best for monetary policy. Moreover, as financial institutions have demanded more money to support their leverage, money demand efficiency has become equivalent to financial system efficiency.

I think the answer is no. Monetary authorities and central banks have a responsibility to take this reality into account. Their best approach would be to limit the deviation of monetary growth from nominal GDP growth. In particular, sustained deviation should be corrected -- even if the underlying economy suffers in the short term.

This is a serious academic topic these days. Some of the world's most prominent economists hold different views. Why discuss it here? First, it's important to everyone. After all, retail investors dominate China's asset markets, and most base their investments or speculation decisions on expectations that the government will not let asset prices fall. The credibility of this expectation depends on whether money available for government spending is limited. A discussion on monetary expansion's limits can help Chinese investors assess the risks of their investment decisions.

Second, money supplies worldwide are rising much faster than nominal GDP growth rates. That is, monetary growth is being used to support leverage, mostly in the financial sector. Of course, the reason is central banks have responded to the financial crisis by cutting interest rates and sometimes force-feeding banks with liquidity in hopes more lending will boost the economy. But instead, money has flowed into and led to buoyancy in asset markets (stocks and bonds in developed economies, and almost everything in emerging economies).

Buoyant asset prices have stabilized the global economy. Most analysts say buoyant asset markets reflect correct expectations of a buoyant global economy. I don't think this is true. As we saw in the past decade, the latest asset market boom is supporting the economy, not the other way around. In other words, it's a bubble. ...

http://english.caijing.com.cn/2009-10-28/110296451.html

[goadam1]

Re: US dollar carry trade ready to bust

Some of us have been talking about this since Spring. Won't it end when the U.S. has to or is forced to end re-flation? Plus this article is dated 2010.

[pianodoctor]

Re: US dollar carry trade ready to bust

Plus this article is dated 2010.

Time is just dragging these days.....