Carry Trades
Carry trades at first glance look like a arbitrage situation, you cannot lose but look again some of the biggest financial catastrophes have been a form of a carry trade, now let’s not confuse a pure carry trade with a arbitrage in regard to interest rates.
Of course the mother of all bad carry trades is ICELAND, I know you will say that was different and was not a carry trade, I totally disagree with that argument, any time a individual company, fund, corporation or bank try’s to create wealth from nothing it leads to danger. A pure leveraged carry trade which is what a carry trade is leverage, a pure trade is an arbitrage let’s not confuse the two.
If you do not think the whole world hinges on economic policies in NEW YORK CITY AND WASHINGTON think again. Tell that to ICELAND when they tried the high rate vs. the over used ridiculous U.S. rate, everyone from Joe the plumber to Tony the banker was running in to American or European banks and borrowing against their home @ 5 or 6% putting the money in Iceland banks @ 10 11 12 %., pushing home prices to the stratosphere, of course we all know how that ended or is ending.
If you borrow at a bank and carry trade to a foreign interest rate you are taking huge risk. And if you say it’s a one day trade THAT IS NOT A CARRY TRADE THAT IS A ARBATRAGE. Very different products I have been an arbitrage specialist for decades. They are not carry trades not even close.
I believe the credit default nightmare in the U.S. and for that matter European housing bubble was no more than carry trades gone WILD, home owners and bankers and any speculator you can dream up where using leveraged carry trades, THEY got burned.
My conclusion is the same as always my Daughters always tell me I am way to Freudian; my response is; I take that as a complement. CONCLUSION any time wealth personal or corporate is created form the ability to borrow with no underlying asset can be a receipt for disaster if the trader and or firm is not extremely sophisticated in that instrument. It is no different than the options and futures markets you better know what you are doing.
Kevin Dwayne blanch 10/14/10
