If you listen to Tom Lee, the Fed is going from QT to QE, and the market liquidity should go up with money going into stocks.
CNBC did not ask him on his thoughts of how the Japanese carry trade figures into this.
All things being equal, a rate cut, and the Santa effect should move the markets up in the second half of December.
But, the carry trade, and its affects, are looming.
30 years of borrowing money at zero interest, converting into dollars, and buying US assets and bonds. Free money.
Now, for the first time in 30 years, the Japanese 10 year is getting up to near 2%. It's no longer free money.
It could keep on keeping on, as the Yen is weak. If the yen gets stronger, then we have a real unwinding of the carry trade. Why?
Because those that borrowed free money for 30 years and moved the loans into dollars, will have to pay back the loans in Yen. If, a big if, the Yen goes up (due to higher interest rates), the Yen loan to be repaid back is more expensive as dollars are converted back into yen. Well, you all can look it up.
Some say, with derivatives, its about a 20-30 $T market. If it cracks, we all crack. I'm not saying its going to happen, but it could, and its lights out.
I think the Yen will get weaker, to limit the reversal of the carry trade. But, with the interest rate differential getting smaller, there will be less interest in propagating the carry trade going forward. Which will result in a tightening of the previous liquidity.
If the Japanese interest rates continue to go up (they are doomed), and ours go down, and the Yen goes up (which makes no sense), then we are doomed. But, stranger things have happened. In the end, the US is better situated than Japan. I never though oil could ever go negative, either. |
