Thursday, October 23, 2008

The Debts of the Lenders: The End of the Carry Trade Part 1

The leveraged bets of hedge funds on cheap Yen are self destructing.

A strong dollar is DESTROYING the carry trade, the practice of borrowing low interest bearing currencies and using it to "flip" into higher interest bearing instruments....such as emerging market debt.

There is a chain reaction going on as hedgies and other institutions cascade from the highest bearing junk rated debt to cheaper, lower interest bearing debt. And what can have lower interest rates than the USD?

Answer: Nothing. This is why the dollar is rallying in spite of all the massive debt Uncle Sam is accumulating. The cycle perpetuates itself by encouraging Bernanke and Paulson to keep printing more money. In the end, they are really executing their own friends on the Street.


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