Posted on 08/08/2024 6:08:34 AM PDT by Miami Rebel
Around three-quarters of the global carry trade has been removed, JPMorgan strategists said in a Wednesday note.
In their recent report, JPMorgan noted that the risk-reward for global carry is low due to the upcoming US elections and the potential repricing of funders on lower US rates. Also, they pointed out that rates momentum is expected to turn more significantly against G10 carry, which favors a rotation to value.
"Our view remains unchanged for both, but carry baskets already suffered a significant drawdown following the tech sell-off," strategists said in the Wednesday note.
For G10, EM, and global portfolios, the drawdowns have been roughly 10%, “which means that all positive year-to-date returns have been wiped out,” they wrote.
“The losses have been ongoing since end of May for baskets with EM currencies but are more recent for G10. The drawdowns were large enough to significantly cut into the accumulated returns since end of 2022.”
The spot component of the global carry basket indicates that 75% of carry trades have been removed, although this is not a perfectly reliable measure, strategists pointed out.
JPMorgan observes that the strategy drawdown has been substantial compared to equities, undershooting the historical FX carry-equity drawdown relationship.
The Wall Street giant suggests that the combination of this element with a light central bank calendar next month might present a short-term opportunity to position for a repricing, despite the medium to long-term deteriorating backdrop they highlighted earlier.
The consequences of the recent carry sell-off for other signals have been straightforward. Value strategies have appreciated accordingly, FX rates momentum has regained a significant portion of its losses as currencies re-correlated with rates direction, and growth RV has held up well despite high volatility, strategists explained.
The lesson I took from that is that it's often the things we DON'T worry about, whether in investing or in life, that clobber us.
I’m moderately literate in stocks, but I had to look up carry trade.
“A carry trade is a trading strategy where an investor borrows at a low-interest rate and reinvests in an asset or currency with a higher rate of return1. Essentially, it involves profiting from the interest rate differential between two currencies or financial products. For example, someone might borrow in a low-interest rate currency and invest in assets denominated in a higher-interest rate currency. However, carry trades come with risks, including currency fluctuations and potential losses1. It’s a strategy best suited for sophisticated investors with a high risk tolerance1. 🌟”
And when you borrowed Japanese yen to buy US dollars, and you get a margin call on your loan, you are forced to sell the US stocks you bought with the money.
...and with an implicit government bailout.
Black swans ARE real (both in nature and in the course of human events,) but my take on Taleb’s work is that it’s not so much a refusal to recognize factors but that the nature of certain factors is that they are so rare and hard to predict as to make them incomputable.
I got out of the stock market just before the dot com bust. Ever since, I just see it as gambling. People invest way too much money in companies and cryptocurrency that don’t have any actual intrinsic value “right now”. It’s gambling.
Sure, stocks have always been a form of “gambling”, but there were fundamentals you could watch and drastically remove risk and, of course, to some degree, rewards. But now it’s pretty much just gambling.
Pity being “incomputable” doesn’t mean “impossible.”
Anybody with a functioning synapse saw the housing collapse of 2007-08 coming, though it may have been deemed “incomputable” because the dataset contained about about 40 years of history.
No one is getting a bailout for last week’s carry trade implosion. (By the way, it might not be necessary for me to say this, but the players who borrowed against the yen were predominantly US and European funds, not Japanese ones.)
“It’s a strategy best suited for sophisticated investors with a high risk tolerance1. 🌟”
Translation: Someone with the ability to move markets and that has insider information.
I think that there has always been a gambling element in the stock market and that this is true of every market going back millennia. I think the difference now is the enhanced volatility due to mechanized, algorithmic trading.
(That said, I’ve never heard anyone complain about volatility when it has an upward bias.)
If you doubt my belief about the gambling nature of markets, I encourage you to read Edwin Lefèvre’s account of the great speculator, Jesse Livermore, entitled, “Reminiscences of a Stock Operator.” (Livermore didn’t restrict his trading to stocks, but also plunged in the commodities markets.) The wikipedia article on Livermore is fascinating, if you’re looking for a short encapsulation.)
One of mine too.
Right, it isn’t the road less traveled, it is the road you never saw that gives problems and regrets.
if there’s a bank on one side of those trades there’ll be a bailout. If the funds are deemed “too big to fail,” there’ll be a bailout. In other words, if the damage is big enough, there’ll be a bailout.
There always is.
All roads in finance are seeable. That’s what money managers get paid to do: mitigate risk.
Hedge funds are the players. There are no counterparty risks. These bets are not of a magnitude to begin to affect the banks.
If you believe otherwise you should short JPM.
Then it’s not news, is it.
Only if you invest.
But they don’t. All the roads may be seeable but not all at the same time. The schemes are too many, too varied and too complex for anyone to see them all and evaluate the risks. Even on a seemingly unrelated path such as an ETF who sees the currency trade and includes it in the risk?
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