Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Gib Bogle who wrote (14089)	2/5/2007 5:29:38 AM
From: TobagoJack	Read Replies (2) \| Respond to of 217734

rgemonitor.com The Yen "Carry Trade" Unraveling Saga: A Deja-Vu Nightmare and a Cautionary Tale... Nouriel Roubini \| Feb 01, 2007 Let me tell you a cautionary tale for 2007. The Yen has been weak and has kept on depreciating sharply for the last few months relative to the US dollar. Still mixed and weak economic data are coming out of Japan and short term interest rates there are still 0.25% while they were closer to 5.5% in the US; so the yen is weak and weakening. Massive amounts of carry trades using the yen ¡V and the swiss franc ¡V as the funding currency have been going on for months now leading to sharp increases in leveraged positions by investors who have been shorting the yen to play the carry trade bet. Then, the yen starts to appreciate again ¡V by a sharp 9% in one month - when a small emerging market economy defaults (Ecuador soon?) and a large hedge fund goes belly up (another Amaranth?). Then, suddenly one piece of good news comes out of Japan (a growth pickup?) and in a matter of 72 hours the yen appreciates by 12%. Then a major global macro hedge fund loses $2 billion dollars in 48 hours on the yen unraveling and decides to close shop ; another one loses billions too and decides to restructure its operations. Carry trades unravel rapidly, margin calls are triggered, levered positions go belly up and the entire financial system goes into a seizure. Then the Fed is forced to cut the Fed Funds rate in between meetings by 75bps (in spite of still good US GDP growth) in order to avoid a financial meltdown, a collapse of US financial markets and a global recession. Readers of this blog may think that the first paragraph above describes very precisely the current situation of the yen and of the global financial system in the last year. Indeed, news reports have been endlessly talking about the yen carry trades driven by low Japanese interest rates. Readers of this blog may also think that the second paragraph above is a typical Roubini "doom & gloom" fear mongering and describing a scenario that is totally unlikely to occur in 2007. But what I was describing in the first two paragraphs above is not 2006 and a fear mongering scenario for 2007 but rather what actually and exactly happened in August-October 1998. During the Asian crisis the yen weakened all the way to 147 to the US dollar by late August 1998; and the BoJ reduced its policy rate to 0.25% (the same level as today). Then in August 1998 Russia defaulted (this time around it may be Ecuador this month) and this default triggered a seizure of global financial markets as major players with levered position started to get margin calls, had to dump their assets to cover their margin calls and started to cover their yen carry trade shorts. LTCM then was hit by this liquidity seizure and avoided a near default in late September 1998 via a private sector bailout coordinated by the NY Fed. In the month between the Russia default and the near LTCM default the yen went up from 147 to 134, a 9% appreciation as some of the carry trade were unwound when the hedge funds had to reduce their leveraged positions after the Russia losses. Then, on October 5 th a minor piece of good news came out of Japan: the Japanese government came out with a plan to recapitalize its problem banks. This mildly yen-positive news led to an appreciation of the yen that was massive: in a matter of 72 hours the yen went from 134 to the dollar on October 5 th to 118 to the dollar on October 8th, a whopping 12% increase. And on the peak day of the yen correction ¡V October 6th - the dollar, the US equity market and the US bond market all fell rapidly on the same day. The dollar/yen rout was triggered by the rush to the exits of all those who had shorted the yen and played the carry trade. They all massively tried to cover their shorts exacerbating the yen appreciation. Julian Robertson's Tiger Fund lost $2 billion on the unraveling of that carry trade; and allegedly even other large macro hedge funds has massive losses. LTCM lost more money on that yen unraveling that then led to another liquidity seizure in US capital markets. Greenspan then declared that the world was facing a global credit crunch and worries about a world recession mounted; soon after the Fed reduced the Fed Funds rate by 75bps. So this is what actually happened in 1998 and how the yen carry trades dramatically unraveled in a matter of 72 hours triggered by a real minor piece of news out of Japan. Then, the relevant question from this 1998 cautionary tale becomes: could the yen carry trade unravel as fast today? The similarities to 1998 are amazing: massive carry trades on yen and other low yielding currencies like the Swiss franc; massive and increasing amounts of leverage as credit derivatives are creating a credit house of cards; complacency and mispricing of risk; rising Values at Risk and loosening of risk management standards; Ecuador on the verge of defaulting (ok Ecuador is not as systemically important as Russia - and Russia's default was a surprise - but Russia in 1998 had a GDP of only $400b, the same as Netherlands). And now everyone is starting to worry about a shock that would lead to the unraveling of the yen carry trades. As in 1998 every individual investors thought he or she was smart enough to be able to cover its yen shorts before everyone else did and before the yen moved too fast. But of course in equilibrium not everyone can get out of the same position at the same time without sharply moving market prices. When everyone rushes to the doors at the same time in a stampede lots of blood is spilled and the pain is massive; Tiger lost $2 billion in 48 hours; many more losses did occur on those yen carry trade unraveling. And the lesson of 1998 is that it often takes a very small piece of news to unravel such carry trades. Today the conventional wisdom is that the yen carry trades will continue as long as the BoJ keeps rates at 0.25% or raises them slowly over the next few months; this conventional wisdom also argues that as long as macro news remain weak in Japan expectations of BoJ policy will not change much and the yen will remain weak. But the lesson of 1998 is that unchanged macro outlook and unchanged BoJ policies may still trigger a rapid unraveling of yen carry trade if some minor yen supportive news occurs. When everyone is short on yen and doing the carry trade they are looking for some extraneous piece of news that becomes a focal point for covering such shorts. Then, any relevant news can become such focal point. And once can think of plenty of news of surprises that would lead investors en masse to start covering their yen shorts today. So, could what happened in 1998 happen again today? Only fools would argue that this is fear mongering and that this could not happen. The same fools that lost their shirts and billions more in 1998 and that with their reckless behavior triggered a global financial crisis and worries about a global recession in 1998. So only reckless fools such as Michael Lewis can argue that worrying about system financial risk is for "Wimps, Ninnies and Pointless Skeptics" and that "real macho men" take levered risks. The same arrogant Lewis-style "masters of the universe" were cockily playing with massive amounts of leverage in 1998 and are doing it again today. The same macho men were then and they are now again ridiculing the concerns of the wise folks (Summers, Trichet, Stark, Rattner, Knight, Rhodes, Dallara, etc.) who soberly worry today about systemic risk, leverage, carry trades, the surge in credit derivatives, and the increasing opacity of financial markets. It was then up to those sober policy makers to pick up the pieces of the royal mess that such "masters of the universe" (they were more like weapons of mass destruction) wrecked on the financial markets and on the global economy. So I am happy to be a member of the Club of "Pointless Skeptics".

To: Gib Bogle who wrote (14089)	7/12/2008 9:30:58 AM
From: elmatador	Respond to of 217734

We either lead, or we get left GORDON SMITH From Thursday's Globe and Mail July 9, 2008 at 9:07 PM EDT ELMAT: Canada gets ready to accept the shirtless :-) Canadian prime ministers have been part of the summit process now known as the G8 for two decades. This has allowed us to punch above our weight – something that may not be the case for much longer. In an article on who should be at the summits, and who should not, the Forbes website stated: “Though it currently ranks near the top of the G8 in job growth and currency stability, the outlook for Canada as an economic world power is somewhat grim. It's losing manufacturing jobs to emerging markets in India, Mexico and Brazil, which will soon vault over Canada in the world GDP rankings. Canada's membership in the G8 makes the exclusion of those more prosperous nations even more egregious.” Then, of course, there is China. One of two things is likely to happen. The first is that the feeling that the wrong countries are meeting will develop to such a point that the summit will be reconstituted ab initio. Several countries will be dropped – Canada and Italy are the top candidates; others will be added, with China, India and Brazil the bare minimum. Enlarge Image (Anthony Jenkins/The Globe and Mail) Related Articles Recent Discussion: Gordon Smith: Reconstruct the G8 The second possibility is that the +5 or Outreach 5 (Brazil, China, India, Mexico and South Africa) will be added as full-time members. This is the position of President Nicolas Sarkozy of France and Prime Minister Gordon Brown of Britain. The French President has gone one step further, suggesting that an Islamic Arab country also should be added. Another leader who has spoken of the need to grow summit membership is President Dmitry Medvedev of Russia. The group's enlargement, beyond Russia's inclusion a decade ago, has not occurred as a result of opposition by the United States, and also by Japan. Chancellor Angela Merkel of Germany also hasn't been enthusiastic at the prospect. The U.S. position, however, is about to change. Republican presidential candidate John McCain advocates dropping Russia from the G8 and creating a concert or league of democracies. While the idea of sitting only with other democracies may sound agreeable, it is hardly the way to break major global deadlocks. The countries that count must be around the table. For his part, Democratic presidential hopeful Barack Obama understands the need for the leaders of key countries to be at the table. He has proposed precisely this to deal with the challenges of climate change. The heads of China, India, Brazil, Mexico and South Africa are becoming increasingly frustrated by their roles at summits. They have now taken to meeting on their own, mirroring the heads of the G8 countries. This is half the world's population. What this leads to is the G8 coming up with a position on a critical issue like climate change, then trying to sell it to the others. It doesn't work very well. The leaders of the five countries don't want to be treated as second-class citizens. Who can blame them? As the world becomes increasingly interdependent, a “steering committee” is required. The G8 has been too slow to recognize the new realities of the world; we are very close to institutionalizing a G5 alongside the G8. This division is the last thing we need. Instead, we need to engage key countries in an equal manner in solving global problems. Canada has long prided itself on being a leader in building international institutions and, more broadly, an international order. The summit in Japan is now history. The next summit in Italy will be very important. A new U.S. president will be there, probably with other new faces around the world. President Sarkozy has said the +5 countries will be included for a full time, not just “for dessert,” as was the case. This will give Canada the opportunity to go all the way in 2010. We took a leadership role in bringing Russia in. Now, the same needs to be done for China, India, Mexico, Brazil and South Africa. As well, there probably should be an Islamic Arab country – Egypt, perhaps? If we don't help reconstruct the summit architecture, we soon may find there's no longer space for us in the building. Gordon Smith directs a research project on summit reform at the Centre for Global Studies at the University of Victoria.