Thursday, December 17, 2009

The Great (Two Week Glimpse of What Can Happen) Unwind

As detailed in early November in my post Did We Learn Anything: Carry Trade Edition:

The issue is that at some point the dollar will stabilize (or gain in value), increasing the "real" cost of borrowing the dollar.

BUT... if the correlation of assets purchased is near one on the way up, it is sure as hell going to be that high or higher on the way down. And what happens to all these investors that are attempting to leave the same exit door at the same time? Massive re-purchasing of the dollar and massive selling of any risk asset... joy.

While I still do not think this is the official end of the carry trade, the last two week's give a glimpse into what can happen.

Interesting (to me) is that equities have held up relatively well over this period.

Source: Yahoo


  1. I completely agree with your comment on equities and was wondering the same thing. This is a bullish signal in my view but I think It might be getting ready to catch up with the commodities. Buying the Dippers / Hedge Fund loading up on securities before year end could be the case...

    What do you think?

  2. thinking those investors involved in the carry trade were making a strong bet against the dollar, thus more likely to invest in gold or oil with the cheap financing (a more pure weak dollar play) then in equities.

    i would agree that buying into these dips is probably a good way to play the dip, though i am doing it with options as this has the potential at some point to explode down...