The High Cost of Cheap Money

Japan: A Cautionary Tale [The Daily Reckoning] August 07, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The High Cost of Cheap Money Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, The stars were once again in their courses yesterday… oil was poured upon troubled waters… the dip was bought. All was peace. Following Monday’s sharp unpleasantness, the stock market went trampolining back. Yet gravity reasserted itself today. The Dow Jones Industrial Average fell 234 points earthward. With it came the S&P 500 and Nasdaq Composite. The first dropped 40 points. The second, 171. Yet a question arises: What explains Monday’s severities? Why did a Japanese sneeze give the world a 24-hour influenza? And can you expect a relapse? Today we take up an inquiry. Look to the “Carry Trade” We begin with the “carry trade,” so-called. What is it? And how did it carry over to global markets Monday? Stock Talk: [image 1] Thus the sweet cherry — yen — becomes the hot potato. More Lucrative Than the S&P! Bloomberg columnist John Authers notes the following: Since 2000 the yen-peso carry trade has yielded more juice than the Standard & Poor’s 500. And the Standard & Poor’s 500 has yielded tubs of juice. Yet this year the Bank of Japan put a kink in the hose. Inflation has been on the jump and the Bank of Japan sought to choke it off some. In March — for the first time in 17 years — Japan’s central bank imposed an interest rate increase. Last week it imposed a second. It was a modest increase of 25 basis points. It was an increase nonetheless. And it shook the world. Early Monday Japan’s Nikkei index absorbed a 12% whaling. It then fanned into existence a nearly perfect global typhoon… assaulting each corner of Earth at electronic velocities. [“Black Pattern” Forecasting Major Market Crash]( The world’s most accurate crash indicator is flashing its most critical warning in decades. I call it "The Black Pattern." [And it is the only one that is 100% accurate at predicting a market crash.]( Ever since the 1950s… Whenever this Black Pattern has appeared, stocks have crashed – sometimes by 50% or more. And now… It’s telling us that 2024 could be the worst year you and I have ever seen for the stock market. [Click Here For Full Details]( “This Is Where It Gets Messy” Reports CNN Business: Meanwhile, the dollar weakened as the Federal Reserve strongly hinted at looming rate cuts, and U.S tech stocks declined. If you’re a carry trader, you headed for the exits. But so did everyone else. This is where it gets messy… 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”). 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. “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.” 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. Before a fellow knows what has struck him, a rumpus in his foot bone has his backbone in siege. This we witnessed on Monday. Asia, Europe, the United States and more endured a mighty yet brief backache. Is the ache over? Or are we in for a relapse? Not Done by “Any Stretch” “We are not done by any stretch,” warns Arindam Sandilya, co-director of JPMorgan Chase’s global foreign exchange strategy. “The carry trade unwind… is somewhere between 50–60% complete,” he adds. TS Lombard, meantime, says: Our analysis of past volatility bouts shows that equities take four–five weeks, on average, before a sustained recovery begins. Markets tend to rebound on oversold conditions such as the current ones, but investors often sell into that strength, which can lead to a relapse. This is what happened, for instance, in 2018, an episode that bears strong similarities to the current one. We may not have our answer — in this telling — for four–five weeks. Goldman’s crackerjacks tremble that "we are not going down because of recession but because of an unwind of circa 20 trillion carry trades. “Only BOJ can stop this," they add. [Offer Pending: Please confirm your address…]( Your name is on a list of people eligible to claim the [“most dangerous book in America.”]( Here’s how to claim your copy: - [Click this link to watch Jim's short message.]( - Review your account information. - Confirm you’d like to accept Jim’s offer. [Click Here To Learn How To Claim Your Copy]( The Bank of Japan Picks Its Poison Poor Japan. Poor, poor Japan. It has squirmed itself into a lovely pickle jar. It has engorged itself upon cheap money for so long… it cannot even withstand a pinprick interest rate increase against inflation… without harpooning global markets. Its debt-to-GDP ratio comes in at a cosmic 265% or some such. Any ratio above 90%, research indicates, swamps an economy. It cannot much expand. Imagine then a 265% ratio. As events stand presently, Japan must gulp poison one — inflation — or poison two: global market collapse. On Monday poison one went down the gullet. The Bank of Japan chose inflation. Bank of Japan Deputy Governor Shinichi Uchida pledged to refrain from additional hikings while markets remain unstable. Yet last week’s hiking was itself the mother of the instability. How then can he hike again? Here is the short answer: He cannot. Do you prefer the long answer? Here you have it: He cannot. Turning Japanese This morning colleague Sean Ring of The Rude Awakening half-quipped that the Bank of Japan’s director must have received blizzards of very sharp telephone calls from around Earth on Monday. “Don’t you dare do that again!” We hazard Mr. Ring is correct. Thus Japan pays a steep, steep price for decades and decades of currency debasement, interest rate manipulation and kicking cans down roadways. Yesterday’s difficult choice becomes today’s more difficult choice becomes tomorrow’s impossible choice. Japan is in an impossible fix today because it refused to confront yesterday’s difficult choice. Only by happy accident — boasting the world’s premier reserve currency — has the United States avoided an identical fix. Yet as the world attempts to wriggle itself out of the dollar, that happy accident may switch to an unhappy accident in the years ahead. On some semi-distant tomorrow… the United States may well and truly turn Japanese… Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) Editor’s note: Before you hit the panic button and sell everything… [there’s something you need to see.]( Months ago, Jim Rickards warned about a [“Black Pattern”]( that was forecasting massive volatility this year. So Jim’s not surprised at all by the recent sell-off in stocks — nor the looming recession that now appears almost certain. But while most investors are panicking…you don’t need to. That’s because Jim has a [crisis strategy that was custom-made for this moment.]( It is designed to target gains of 100% in a month … or even up to 1,000% in a year when stocks are in freefall. In fact, one of Jim’s trades is up more than 90% in two weeks But this could just be the start. [Go here to see why the “Black Pattern” is warning this could be a 2000- or even 2008-level sell-off.]( And if it is … you need the right strategy to survive and prosper. Crisis trading moments like this can actually be very fruitful if you have the right tools. So again, before you panic and sell everything, make sure you take a look at this information now. [Go here.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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