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PaperclipPerfector  1mo ago (text post)   2236 thread views

Small-Scale Question Sunday for August 4, 2024

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My twitter is doom and gloom about the financial markets. Anyone have idea what is going on? And realistic evaluation how bad it is?

This is just how equity markets are. Sometimes they drop 10% for no apparent reason. It’s part of the risk premium.

The Chinese, Korean and Taiwanese markets all crashed overnight, the Dow and Nasdaq are all down, although seem to be recovering a bit from the opening bell. I think everyone is pricing in a war in the Middle East. Bitcoin is getting heemed.

I think it has more to do with the unemployment rate, I mean oil is staying relatively calm. Edit just read down thread about the carry trade that had been going on.

What I heard: The Japanese can no longer do "carry trades" where they got very cheap loans in Yen in Japan and could invest a lot of money in US currency + markets/other markets.

There's also fears of a US recession. Unemployment is up. Warren Buffett sold a ton of stock and is holding massive amounts of cash right now.

Crypto is crashing really hard. This might be partially because the funds buying them consider them their most risky assets and thus dump them at the first sign of trouble. Small savers who need liquidity might also sell their crypto sooner than anything else. Gold seems to be the safe port of choice still, not BTC or the like.

What I heard: The Japanese can no longer do "carry trades" where they got very cheap loans in Yen in Japan and could invest a lot of money in US currency + markets/other markets.

Yes. This is the proximate reason the market crashed.

For the last couple of years you could borrow money in Yen at 1% and buy risk assets (Nasdaq, Bitcoin, Japanese equities). This worked great because interest was minimal, the risk assets all went up, and the price of Yen crashed too. It was a win, win, win.

This trade unwound in a big way last week as the Yen increased in value by 10% vs. the dollar forcing margin calls.

Of course, the bigger backdrop is all-time high overvaluations in many risk assets as the world economy (especially China) enters a recession.

Weirdly, tensions in the Middle East barely register. The price of oil is actually down bigly the last few weeks. This seems short-sighted as Iranian energy assets could come into play in the event of a hot conflict.

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