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mother of all carry trades


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Roubini seems very much to me to be a broken clock. He cannot espouse anything that is not dire and negative.  Reading through that piece made me chuckle as one of his 'bearish catalysts' was that the US GDP growth may surprise to the upside... which would lead a covering of the dollar, which would depress asset prices due to carry trade unwind... etc etc etc.


Who is this guy?  His negative catalyst is now stronger than expected growth?


It's easy for people who borrowed at 0% to buy risky assets as stupid carry traders, but I guess it's quickly forgotten that the carry trade hasn't exactly been considered the no-brainer strategy during the last 6 months.  Now that massive profits have been made by making timely (maybe wise, maybe not...) bets, now it's all so obvious why this is happening?


I don't get it.  


I'm not saying our system is healthy.  I'm not saying the carry trade isn't in force.  I just don't get what Roubini adds to the discussion.  You could have said the same thing in 2003.


Maybe he is really just focusing on the big picture of our government meddling in markets and throwing various monetary and fiscal measures around to manipulate things.  I agree.  That is happening.  It's been happening for years.


Sorry for the rant finetrader, I just don't see the value of Roubini, but no offense to you intended.  My lack of insight may be my own problem, but I'd have a lot more respect for Roubini if he would have called this carry trade 8 months back... telling me what I already see is happening isn't too useful to me. :)



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Ben,  I was also sort of dismissing Roubini as a broken clock economist.  I had recently read "Fooled by Randomness" where Taleb is borderline spiteful towards economists and the 'sound bites' they produce.  His point was that they are just commentators not traders, so really what they get paid for is sounding good and maybe being right, but not making money.  And there is a big difference between being right and making money, and also between sounding smart and making money.  But I digress.  The thing that sort of flipped it for me was that I read Taleb say that Roubini was one of the only economists he thought did a good job.  That's about as high a compliment as I could imagine him receiving so it gave me pause...

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It seems to me that his (Roubini's) argument is totally reasonable. Certainly, according to Marc Faber, for example, we are in an overbought in many, many markets and the dollar is over sold in the near term.


It sounds to me as if you guys are saying you don't like the message so shoot the messenger.


I'd have a lot more respect for Roubini if he would have called this carry trade 8 months back

8 months ago the carry trade was not happening.  Now that it (presumably) is happening you should be prepared for the unwind.  Yes that was also the case with the yen-carry trade that went on for far far longer than certainly many, including me expected.  Were you expecting him to tell you to execute the trade 8 months ago?


Remember he is just the weather forecaster, it's up to you to build the ark!  Now of course he could be totally wrong and for the general outline of how other crises have played out, you can do worse than read the new book by Rogoff. it is a heavy slog,though.  For a shortened version try the World Bank paper on crises or Kindleberger.  To mix the metaphor-- djust because we bounced off the bottom doesn't mean we are out of the woods.  So look to what asset prices have done after other severe downturns.

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Guest kawikaho

The dollar is very much inversely correlated to the S&P, and it is oversold.  The probability of the dollar dropping another 50% is low.  I see the dollar rallying by next year, and that doesn't bode well for other asset prices.

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I liked Taleb's book a lot, but his opinion's about who I should respect are quite a ways down my list of relevant data inputs. :)




I totally agree with Roubini in that the carry trade will unwind.  Is anyone really not aware of this??  People borrow cheap when things are stable to buy risky assets... when something changes (the stability, or the rate of cheapness on the borrow, etc) things unwind.  How is this new information?  We all lived through the housing boom right?  His commentary about the effective cost to borrow being -20% or whatever is only relevant after the fact, and since he didn't predict this situation, his 'forecasting' on where we are today may be right, but his value to us is zipo.


I have no issue with the message, I just don't believe it's intellectually challenging to come to the same opinion (early than Roubini)... people on this very board have talked about borrowing at 2% to invest in various risk assets paying more (like various bank preferreds)... this is just the nature of the financial markets.


We clearly all have to make our own investment decisions.  I don't believe Roubini's statements have helped anyone with that task though.  His commentaries about zombie / insolvent banking system during March were some of the biggest contrarian signals I've ever seen in my investing career.  The government was printing printing printing and facilitating liquidity causing EXACTLY what he is blabbering about now, and he just kept talking about the system near collapse.


I'm sure he is very smart, I just don't think he adds 'any' value for investors who can do their own legwork and research.



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Quote from Roubini:


Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.


Non-rhetorical question -- who exactly is lending out dollars at low rates to facilitate this supposed dollar carry trade?


Most banks are apparently hoarding cash rather than lending capital to real businesses.  They are also apparently investing a good portion of their freed up funds (principal repayments and financial assets sold into the market) into "non-risky" assets like treasuries.  Presumably, this means that banks are not lending out money to investors to facilitate carry trades.


So if hedge funds and other investors are really levering up, who the hell is funding their leverage?  Is it foreign dollar holders?  Why would they lend money to hedge funds at this time?  Aren't they purchasing commodities and U.S. equities and bonds?


Also, I thought that everyone has been delevering, including the asset management industry.  Surely, pension funds and endowments are reducing their leverage?  Could the hedge fund industry (which includes GS) really be levering up given the havoc that just occurred due to everyone and their mom having too much debt?


I don't get how this dollar carry trade is supposed to work.  Please chime in to help me understand how this is possible.




Another quote from Roubini:


The Fed and other policymakers seem unaware of the monster bubble they are creating.


This was a totally surprising statement to hear from a well-regarded economist like Roubini.  My understanding is that the Fed has actually been counting on financial markets being pumped up with printed money in order to allow banks and other financial companies to unload assets and repair their balance sheets.


Aren't our policymakers well aware that they have been pumping up financial assets?  Again, my understanding is that reflating the financial markets through printing money (a la Fisher) combined with fiscal spending (a la Keynes) is the medicine that Dr. Bernanke has prescribed for forestalling deflation.


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To your first question, see here: http://www.interactivebrokers.com/en/accounts/fees/interest.php


Borrow from any prime broker at very low rates, invest abroad... your liability is in USD, then sell USD to buy Foreign denominated assets AUD, RMB, etc.


Rinse, repeat.  The FED is funding the lending indirectly via the funding provided to banks (assuming SHORT Term variable borrowing is what we are talking about - FED / PRIME rates are the benchmarks).  There is much untapped leverage in the world (not suggesting it SHOULD be tapped...), just through margin brokerage accounts I'm sure there is untapped credit lines of >$1-2T.  I know my credit lines are relatively untapped...


This was a totally surprising statement to hear from a well-regarded economist like Roubini.
  There were many comments in that blog that were surprising to me, this was among them.  Economists like him shouldn't use that much hyperbole, and if it's not hyperbole, than I think think he is less important than I gave him credit for because that comment makes no sense.


Aren't our policymakers well aware that they have been pumping up financial assets?
  Yes.  Every market participant who is paying attention is aware of this.  Wonder why Gold and Silver are flying - cause velocity+Mx is ramping back up.  The FED is openly talking about these issues and to suggest they UNDERestimate the problem, may indeed be fair.... to say they are UNAWARE of what they are doing strains the reasoning a 3rd grader could put to this topic.




In general I agree.


I hope I don't come across as berating these points too hard, but I think there is some seriously intellectual laziness going on by a lot of folks in the media and just cause you have a fancy degree and credentials doesn't mean you should get a pass.







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Ben, thanks for the response.


I didn't realize that prime brokers lend money out to traders at such low rates.  I use a discount broker, and I've never actually used margin before, so I'm not familiar with the rates for borrowing against equity or debt securities.


So it sounds like you are saying that the prime brokers fund their margin lending operations by borrowing from banks at low rates.  Do you know why are they able to borrow at such low rates?  I understand that the prime brokers hold the securities as collateral, which sort of explains why they might charge low rates to the borrowing trader.  But what makes banks agree to lend to prime brokers at low rates?


Do most prime brokers have banking affiliate subsidiaries?


This is all very confusing.




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Txlaw, ask yourself why are Money Market rates so low?  Then ask yourself what money markets are (they are just commercial paper)...


See here: http://www.federalreserve.gov/releases/cp/


Rates are like gravity... all companies may not get the Fed Funds rate, but quality companies can borrow (in very safe, short term ways) very cheaply.


I can't tell you the mechanics of how this borrowing works, but LIBOR, FED Funds, Commercial paper rates, and 1 year note rates are all related (for all companies).  Solid institutions can pass that savings on if they choose.  Some like IBKR use this as a loss leader to get business and give their funding away at cost.  Maybe they net that against other clients who are in cash, maybe they borrow via a banking subsidiary (they don't in this case) or maybe they roll 30 - 60 day commercial paper... of maybe it is just the company lending surplus cash to a VERY SAFE client.  It's very safe because the loan is fully collateralize and can be liquidated any time they choose.  That margin loan looks cheap to me, but for a company with excess cash, loaning to me at 1.00% may be better than investing in T-Bills (maybe).


Someone else more familiar with typical brokerage mechanics can step in... but when MM rates are 0.5%, don't forget that MM loan money to corporations so there is a direct connection.





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Ben, I understand why money market rates are low, but I figured that after Lehman commercial paper caused the Reserve fund to break the buck, prime brokers would not necessarily get to borrow short term funds at low rates. 


But maybe Lehman was different because it was also an investment bank, CDS buyer/writer, and toxic asset owner.  I guess if all you have is brokerage operations, you're a much better credit, since all your lending is secured by collateral.  Also, you pointed out that these brokers can also lend out their own cash or clients' cash.


Okay, I think I am beginning to understand how this carry trade works.  Thanks for your input.

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I think it's dangerous to dismiss the current comments of a Professor of Economics just because he was as caught up in the madness of the March lows as anyone else.


Before I read this article yesterday, forwarded to me from another source, I was looking at a few different things.


1. Chart of the USD vs. CAD. Amazing spike in value going into the crisis and amazing decline in value coming out of the crisis. One would have made (ballpark) 70% by exiting the CAD for USD in September last year and reversing the trade in March.


2. Chart of the inverse correlation between the USD and global equity markets. I can't imagine what returns are like for US investors should they have exited the USD in March and bought Canadian investments.


3. Goldman Sachs' investment Returns.


Today’s filing showed the weighted average interest rate paid by Goldman Sachs on its unsecured short-term borrowings dropped to 1.70 percent in June from 2.14 percent in March and from 3.37 percent in November.

I think there is no doubt that these are the guys that are running the show.  But as Roubini points out in his article "The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time."


To sum up the argument and to agree with Roubini, USD is a funding currency at present. If there is a catayst to cause a need to repatriate capital quickly global markets will take a kicking. If something will happen inevitably - it's a matter of when and not if. It doesn't necessarily matter if things are good or bad.


The issue with investing is timing. I remember reading articles about derivatives written by buffet in 2003/2004 a full 4 years before the ticking time bomb blew up. The same about articles about Squanderville. It took a while for the street to realise that he was right, but there was a hell of a bull market to get through before all the gains were erased.


This article is wonderful not because Roubini is giving us timely advice, when to buy, when to sell. He is giving us a heads up about a real issue that may ultimately come to haunt those that aren't prepared for it. 





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Estimated Profit,


I think it's dangerous to dismiss the current comments of a Professor of Economics just because he was as caught up in the madness of the March lows as anyone else.


I just re-read the thread and I don't see a single statement dismissing Roubini's comments, I am dismissing the man himself as a source of wisdom.  The particular article linked has much truth in it.  It just isn't insightful.  And on top of that, he continually spins things to be bad which just bothers me because it feels like he is pimping himself.


Just wanted to clarify my point.  Roubini has many comments I have disagreed strongly with, but this (at least the carry trade / unwind comment) was not one of them.


As you, and almost every intelligent bond investor I follow has pointed out, there is much truth to what he says.


I (I'm assuming you were addressing me) have been questioned twice now on this thread for disagreeing or dismissing comments that I actually AGREE with.  I am curious because I wonder if it's my writing not being clear, or something else.  I honestly think I have clearly stated my thoughts on this thread but I feel my point is being inverted.


To be clear, the Carry Trade is in full effect.... but this was started in April / May so I'm confused as to his commentary now... In April / May he was still talking about the "insolvent" banking system.



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Ben. It's difficult sometimes to communicate via blog or any other written medium as it's so difficult to emphasise what you wish to and sometimes it's hard to support your thesis with arguments when we all have a tendancy to digress from our points. At least that is what I experience.


I guess this was your main point:

Roubini seems very much to me to be a broken clock. He cannot espouse anything that is not dire and negative.


I can't disagree with what you said above. But sometimes we get frustrated with pundits and stop listening to them entirely even when they have something valid to contribute.


It's easy for people who borrowed at 0% to buy risky assets as stupid carry traders, but I guess it's quickly forgotten that the carry trade hasn't exactly been considered the no-brainer strategy during the last 6 months.  Now that massive profits have been made by making timely (maybe wise, maybe not...) bets, now it's all so obvious why this is happening?



This is a great point. 6 months ago it wasn't the no brainer strategy. And this is where Roubini and his comments are valuable in spite of his posturing. What he does in this article is demonstrate to us that the brilliance of the trade is over. This is where the dumb money comes in and rides the wake of the wave of smart money.


6 months ago huge bodies of smart, cheap, leveraged money jumped into the pool and started the massively profitable waves of the carry trade.  Roubini points out that anyone to enter this trade now is chasing it. The "easy" money has been made by those that could see and have the capital to make this trade possible.  As the dumb money jumps in the pool after the smart, the bubble will keep inflating. With the Feds comments last week I see no reason why it will stop here.


The value of Roubini's comments are that he connected the dots that were swirling around in my brain. They had no form before now and I'm greatful for the article because I'm better poised to see the danger signs coming (hopefully) and I can try to position myself closer to the door in the event that a stampede for the exits begins.



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EP, this will be my last post on this thread just due to my excess blathering, but I wanted to address one comment only out of your post, and thank you so much for you well thought out answer to my post!:


What he does in this article is demonstrate to us that the brilliance of the trade is over.


I 100% disagree.  Roubini made no case for any of the following:


1) The trade was ever smart to begin with (was it, was it always stupid, or was it genius for those of us going all in in March?  I don't know.)

2) The trade is now long in the tooth (I think it may be, but I'm not certain, and it's certainly not my game to play)

3) The trade is at the end of it's life (maybe it has 3-5 years left which would make this mirror the '02-'06 period - I don't know)


He simply inferred that it can't go on forever, but he didn't make any compelling argument for why it is out of equilibrium other throwing the word bubble around.  Again, I'm not asserting he is wrong, not at all.... but...


During the downturn when asset prices were collapsing people talked a *bit* about the fact that DE-leveraging is just the carry trade unwinding.  The Yen was rocketing and so was the dollar (for the same but opposing reasons).  It was simply the process (roughly) of the last 6 months in reverse.  Maybe what we have today is just a reversion to the mean... where are we on the mean is the question?  The FED has been trying to start the leverage, velocity, carry trade machine again, and it looks like it's finally running...


Roubini never said the DE-leveraing was unsustainable... presumably because he felt more unwinding, deleveraging, etc was required so he AGREED with the market.  Roubini is not using data here to support his views, he is describing what is happening, but he is not describing an equilibrium point we should reach (fair value, fair leverage ratios, etc etc etc).  This makes his statements conversationally appealing but intellectually devoid (if others can point to where Roubini has gone into the valuation / fair equilibrium statements please attach... unsurprisingly I have spent my many hours a week of reading focusing on other more relevant (to me) pundits).


I contrast Roubini (a blowhard economist with no market sense) with Jeremy Grantham who actually backs up his commentary with math, ECONOMICS, and market history.  There needs to be some discussion of fundamental valuation levels with Roubini but his commentary is always devoid of it.  He talks of bubbles but I struggle with defining ANY of the world markets as bubble (overvalued by 20%?  SURE!!!).  I almost think he is losing his mind when I read his articles.


My suggestion:  Read Grantham, read Accrued Interest, read some of the smart conservative/smart guys on this board like Mungerville.  These guys know their sh1t, they are fair and balanced, and you will learn a lot (take it all with a grain of salt of course).  Listen to economists at your own risk.  The profession is broken.


Just my 2 (maybe it's only 1) cents.


Thanks, everything I've said is just my opinion obviously.  I hope I didn't offend anyone or come off as anything other than just being me.  I've seen too many people take the words of experts without data for too long and I've been getting a little bit more frustrated lately so I speak my mind when the topic comes up.



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