The Japanese Carry Trade is Ruining the Stock Market

Oh, Pokeballs. I don't think anybody

came back from Thanksgiving thinking all

of a sudden we would have a tank to

start the day in markets. And that's

kind of exactly what we're seeing. And

it all sort of started right around

here. What happened here? Like did just

some whale sell or what's going on? Uh

let's put it this way. The Japanese are

back and the problems that we feared two

weeks ago have just really come to

fruition. I'll explain. Uh, quick

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Kevin.com. Houseack.com. That's it.

Let's focus instead on what happened. So

folks, it's the Japanese carry trade.

Yes, it is back. Now, two weeks ago,

what contributed to selling was the

following. And I wrote this down just to

try to simplify it a little bit. Look at

this. JPY strengthening equals a risk

moment. Now, the JPY was not actually

strengthening. uh two weeks ago the JPI

why was weakening

but it was weakening because you had a

uh well essentially government in Japan

that said hey we're going to stimulate

we're going to just kind of keep

cranking the money printer and the bond

market is like no no stop and they're

like we're still printing money over

here cuz Japan is trying to stimulate

their economy you know they had the last

decade you know that for a very long I

mean you could have invested in Japanese

stocks in the 80s and you may have just

broken even like last month crazy that's

that's a very long period of time and

you're talking 40 years up to 40 years

in some cases here depending on when you

bought in Japan right uh so Japan has

been trying to stimulate growth but now

they're going a little overboard and

they've had you know new elections and

all of a sudden their new government is

like yes yes yes more print and it turns

out that their prior government was

actually less kind of kooky with the

money printer than the new government.

So you have on one hand this political

atmosphere that has shifted from man we

thought the last guy was stimulative.

Now we're really seeing the money

printer run the money stimulus running.

Okay. The money printer is just a

euphemism for we're going to do whatever

we can to fiscally promote spending. So

using government via stimulus checks or

sector stimulus or whatever to get

people and businesses to spend money on

goods and services, right? That's how

you get the economy to hopefully move.

Now, the bond market uh as of a couple

weeks ago was going, "No, no, this this

is not going to end well. This is this

is bad." And the way this plays out is

you end up seeing the JPY weaken. So if

you type into Google USD to JPY,

uh you'll end up seeing and you go over

the last year here, you could see that

the JPY has actually been weakening. Now

this I know is ironic. You just have to

think about it as when you type in one

US dollar, how many JPYs are you going

to get? Right? So $1 has been buying

more JPYs for well especially here in

October quite quite a a surging amount

which basically means the JPY has been

weakening. It weakens when a country

doesn't care and they print more of

their currency. Exactly. So they print

more of their currency, the Japanese yen

you loses value. Okay, makes sense. Now

why all of a sudden do we care about

this? Well, we care because if we go

down to the five-day chart, oh crap,

it's reversing. See that tank here? Now,

why would it be reversing? Well, there's

only one reason it would be reversing,

and it's because the Bank of Japan

is now hawking to us. That's exactly

what the bond market was worried about

two weeks ago. So, two weeks ago, you

had the bond markets going, "No, no, no,

no, no. This money printing isn't going

to end well." bond markets basically

face palming going no no you're going to

force the Bank of Japan to raise rates

and so markets started sort of pre

FOMOing like fear of the crash maybe

those are the wrong words sort of anyway

I I'm not going to unberry myself out of

that analogy they were pre-Japanese

carry trade selling because the bond

market's like yo this is coming uh it's

just a matter of time before the bank of

Japan hawks to us Get ready for it.

Okay, so last week in the US stock

market, we didn't really have a lot of

news. We basically confirmed thanks to

John Williams and Mary Dailyaly that we

were going to get a rate cut in

December. We got the Fed yapping that we

thought we would get. We got it right

before the blackout window. Yes, Jerome

Powell talks later today, but it's

mostly going to be a memorial service.

May maybe maybe I'll cover it. I I

haven't even decided yet. I I always

cover JPAL. Come on. But anyway, uh, so

now you have the Bank of Japan flipping.

And by flipping, I literally mean the

Bank of Japan is saying, "Hey, we're

going to discuss rate cuts." And not

only are we, sorry, rate cuts. I'm so

thinking about Jerome Pal right now.

We're going to discuss rate hikes. Okay?

When you raise rates, what happens? You

strengthen the currency because more

people then want to buy that currency

because they want that higher yield. In

a weird way, Japan, if they keep raising

rates, might end up being in a place

where they actually end up having the

highest rates in the world. Not anywhere

close to that happening right now. I'm

just saying that's the trend. Japan is

raising rates and the rest of the world

is gutting rates, right? But that's

because they've been trying to stimulate

their economy. They've had the opposite

problem. So, uh, the Bank of Japan, uh,

uh, basically Bank of Japan governor,

uh, gave, uh, their clearest hint yet of

a possible BOJ interest rate hike. Uh,

this, uh, is, uh, has led to the highest

2-year yield since 2008. Uh, in Japan,

the 2-year yield is frequently seen as a

proxy for, uh, Fed policy. You could

kind of see that in the United States as

well. So if you type in like US 2year

Treasury, we usually think it's where

Fed policy is or should be. And so when

recessionary fears, for example, spike

in the United States, the 2-year

plummets very very quickly. The long end

usually follows. Uh but anyway, here our

our our 2-year has been slowly and

gradually coming down over the last uh

you know, well about 2 years here. And

that's because we've been getting into

that slow decline in the Fed funds rate

in the United States, right? Those 25

basis point cuts. The two years roughly

following that uh in the United States.

If you look at the 2-year uh Treasury in

Japan, uh you'll get to see a little bit

of that suddenenness uh of uh and the

opposeness of Japanese policy. Ready?

Look at this. It's up. That's what you

would expect, right? We're cutting rates

and they're raising rates. So, the

2-year, you can still see it's only 1%,

right? But people believe this could

actually, if they really unleash the

stimulus and inflation, genie, this

could end up going to 3 or 4%, which

many think will break the backs of

markets if we went that high. I mean

really right now they're only worried

about a 25 basis point increase but you

could actually inverse uh the desire for

people to buy or get these these higher

yields basically uh in Japan uh which

also creates weird complexities if

you're actually investing in the bond

market. I'm not saying invest in this

because this only goes up when the value

of those bonds goes down. Super

complicated. But just to keep it simple,

okay, if you're waking up going, "Yo,

what the heck? Why all of a sudden are

we seeing some red in the US market?"

It's because of those hawkish comments

from the F uh Japanese uh Fed. You can

see that spike right here in the 2-year.

Makes a lot more sense to see the

suddeness here. That's why Bitcoin

dropped. Now, that signals concern again

of the Japanese carry trade. Remember

the carry trade is basically when if

people are worried that it's going to

become more expensive to repay their

Japanese debt because all of a sudden

the JPY is weakening, they might try to

get ahead of that weakening and sell

their stocks ahead of time. Could that

have contributed to the 3-we selloff we

had in early November? Yes. Is that

what's contributing to a sell-off right

now where the Q's are down 89 basis

points, you've got Meta down 14. Uh, I

mean, it's not major. I mean, you know,

Hood's down 4%. It's going to hurt a

little bit. You know, it's a little bit

of a sting, right? Tesla's down 13. I

mean, yeah, it sucks, but obviously

we've had a nice little recovery last

week. So, to some extent, we're also

just giving back some of that. The

question is, is it possible though that

this then extends because people like,

oh my gosh, now we're going to get the

hike at the Bank of Japan and now all of

a sudden you get more uh Japanese

investors who are a critical source of

liquidity in the United States. Crazy

interconnected global environment. Uh do

they start dumping uh their US exposed

stocks because now they're getting hit

on both ends. they're getting hit a at

uh you know falling US stock values

self-fulfilling and b Japanese carry

trade issues. Yeah, sure. It's totally

possible. So, we need to monitor that

situation. And I I personally think the

easiest way to do it is just go USD to

JPY. If you just type those letters in,

you'll see this. If you go down to 5day,

you'll be able to monitor this. If this

stabilizes and doesn't keep tanking,

then maybe it's just not that bad,

right? Okay, great. You get your 25

basis point hike. Big deal. You move on.

So, monitor this chart. Welcome to Cyber

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>> Why not [music] advertise these things

that you told us here? I feel like

nobody else knows about this.

>> We'll we'll try a little advertising and

see how it goes. Congratulations, man.

You have done so much. People love you.

People look up to you.

>> Kevin Praath there, financial analyst

and YouTuber. Meet Kevin. Always great

to get your take.