Connected Markets, Disconnected Risks

With the Japanese Yen carry trade unwinding, the volatility across global markets shot up. In the capital markets, people from all backgrounds come to make money. Not sure, if that’s advisable. Capital markets have people with all sorts of temperaments as well. There is a difference between speculator / Trader / Investor. It looks funny when channels talk about technical analysis terms and include the investor in the same sentence. Not sure Technical analysis also talks about carry trade strategy.

Since the dawn of 2008 recession, Quantitative easing in the buzz word. Central banks across the world reduced the repo rates which made sure people – both rich and poor and companies could borrow money at low interest rates. From 2008 till date, the buzz word didn’t loose its buzz.

Along the way, some traders – who should be handling a lot of money came up with this idea of borrowing from low interest rate currency and buying high interest assets. Not really sure the idea of borrowing to generate profit is a good one in the first place. And the scale of the borrowing is also very important. It is the scale that caused 2008 financial crisis.

The carry trade initiated is also on a huge scale which was able to spook the markets worldwide in August 2024, at the time of this writing. This episode once again highlights, “legal minimum” and “incentives” are very powerful concepts. This episode also highlights that an average person investing in emerging markets or mature markets can easily spooked by some unknown person / trading firms. The sad part is that average person might not know the exact reason or the nature of the spookiness.

While the markets are connected, the risk remains concentrated. Not every person bears the same risk in markets. Traders usually have more risky bets than a person investing in an Index fund. But because of the nature of the market, if the trader does something like a carry over trade and spooks the markets then the person investing in an Index fund is also affected for no fault of his own!