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Japan's ticking time bomb |
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The "carry trade" is unwinding… A "financial San Andreas fault-line"... Have you heard of the "Presidential Bypass"? It's a legal loophole the rich use to keep their money. And though you might not know it, you can use the same exact loophole to slash your taxes. Legendary investor Robert Kiyosaki gives the details here.
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Dear reader, |
Bloomberg: |
Inflation, long dormant in Japan, has taken hold and, moreover, Prime Minister Sanae Takaichi is pushing fiscal stimulus plans that would swell a government debt pile that is already uncomfortably large. As a result, investors have been frantically sending bond yields up to levels once unthinkable — more than 4% on the longest-dated JGBs. |
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Just so. Yet why should soaring Japanese bond yields be your concern? |
Has not the United States bond market its own concerns? |
The answer begins with the yen "carry trade." By way of background: |
For over three decades, Japan has spent money like the intoxicated mariner ashore on leave. |
It borrowed much of that money. |
The Bank of Japan printed money to purchase government debt… and depressed interest rates to zero. |
And so the carry trade was birthed. |
Easy Money |
Yet what precisely is the carry trade? In brief, it is this: |
Investors borrow Japanese Yen at severely depressed interest rates — rates often approaching zero. Investors convert those yen to a foreign currency yielding a greater interest rate, such as the United States dollar. Investors invest these dollars in stocks, bonds, cryptocurrencies, etc. Investors later sell these assets. Investors proceed to buy back Yen. Investors profit from the spread between them.
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Or as ChatGPT styles it: |
The yen carry trade is an investment strategy where traders borrow Japanese Yen at low interest rates and then convert it to another currency, like the US dollar, to invest in higher-yielding assets. This strategy is based on the difference between the low Japanese interest rates and the higher rates available elsewhere, aiming to profit from this interest rate differential. |
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Extremely Lucrative — Until It Isn't |
The carry trade can be wondrously lucrative. |
For example: From 2000-20024, the yen-peso carry trade yielded more juice than the Standard & Poor's 500. |
And the Standard & Poor's 500 yielded vats of juice from 2000-2024. |
Yet the carry trade requires severely depressed Japanese interest rates. |
Should those rates increase decisively — which they have — the carry trade collapses at its foundations. |
That is because the mathematics invert… and investors confront losses as rates on the Yen increase. |
They proceed to unload the assets they acquired through the carry trade… to close out their carry trade positions… and avoid losses. |
Assets under pressure include United States stocks, bonds and the rest. |
Thus what was once the sweet cherry becomes the hot potato. |
That is because in today's interlocking markets the foot bone is connected to the thigh bone is connected to the hip bone is connected to the backbone. |
Thus the carry trade's unwinding could compel a substantial selloff of these assets — and a sharp decline in United States markets. |
Selling Begets Selling |
Reports CNN Business: |
This is where it gets messy… |
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The carry trade relies on borrowing, which means it's a leveraged position. (As a general rule, whenever you hear of leverage in finance, think "high risk"). |
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Once even minor losses start to accrue, lenders are going to demand that you pony up more cash to cover your potential losses, a process known as a margin call. That may mean selling stocks to raise cash, or closing out the position completely. |
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"Not everybody will have a margin call at once, but the riskiest people might, and then they start to liquidate," John Sedunov, a finance professor at the Villanova School of Business said. "And then that creates losses for people down the chain, and then they have to sell things, and then it's just this kind of spiral." |
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Is the worst over? |
A "Financial San Andreas Fault-Line" |
"It's a new era," claims a certain Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management, adding that: |
I don't think Japan's yields have gone far enough yet. This is just the beginning — there's a chance that bigger shocks will happen. |
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The business could result in a substantial increase of United States interest rates… which would horrify the Trump administration that rages against them. |
Mr. Anthony Doyle, chief investment strategist at Pinnacle Investment Management: |
If the yen slides hard, Japan has to defend it, and the fastest lever is selling reserves, including Treasuries. That's how a Japan problem turns into higher US yields at exactly the wrong moment. |
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As I stated: In today's interlocking markets the foot bone is connected to the thigh bone is connected to the hip bone is connected to the backbone. |
Meantime, T. Rowe Price's Arif Husain labels Japan's rising rates a "financial San Andreas fault-line." |
How Long Can We Avoid "the Big One"? |
I do not know the magnitude of this tremor — or even if it will rise to the level of tremor. |
Time and time again I have climbed atop my roof to holler about an approaching financial quake. |
And time and time again the "quake" passed without incident. |
Thus I confine myself to my recliner on this occasion. I hazard no prediction of doom. |
Yet a "financial San Andreas fault-line" is a zone of high instability. |
We have to date avoided "the big one," it is true. |
Yet will our luck endure? |
Brian Maher |
for Freedom Financial News |
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