Remember when investors would borrow in Japanese yen, at low interest rates, to invest in higher-yielding currencies such as the Australian and Kiwi dollars? For a long time it seemed like free money was just sitting there on the table.
Well, two days ago the Australian dollar dropped 12 percent against the yen and the Kiwi dollar dropped ten percent, both in a single day. Calculate that return on a yearly basis and you can see the problem; toss in leverage if you wish.
Here is one article on the destruction of the carry trade. I suspect they are not planning on awarding the Nobel Prize this year to Eugene Fama (is Bob Shiller a better bet?), but in fact the selection of Fama, despite his association with the "efficient markets" idea, would be quite timely.
The people picking up the pennies finally felt the steamroller’s wrath
We can all be heartened by the choice of Mr. Cash-Carry to manage that $700 billion!
I have been wondering whether the bailout and the subsequent inflation in the US would suggest better value of foreign stocks even if they fall the same percentage as their U.S. counterparts.
(I feel so much poorer these last two weeks)
My wife and I had a large bundle of yen sitting in the safe in Australia, deciding not to convert it because I knew the dollar was overvalued.
It was 84 yen to the dollar at the time.
It reached 107 yen to the dollar. Well, at least cash still has a positive real interest rate when the currency is deflationary.
Eventually, years later, my decision is vindicated suddenly, suddenly suddenly.
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