The carry trade is dead. Long live the carry trade.
Subscribe to enjoy similar stories. The carry trade is an intriguing concept—both easy and difficult to grasp at the same time. Easy because, in essence, it involves borrowing money where it’s cheap and deploying it where returns are higher.
But it’s difficult because of the delicate balance required for success. Interest rates, exchange rates, and investment opportunities must align perfectly for the carry trade to be profitable. In fact, it might be easier to fund a unicorn startup than to execute a profitable carry trade.
Yet, there has been one rare and highly profitable carry trade that has persisted for years—centred on Japan, the originator of cheap funds. Japan’s low-interest environment allowed funds to flow to other countries, hoping to capture the spread. For die-hard value investors who might wonder what all the fuss is about, consider this: Warren Buffett himself tapped into Japan’s super cheap funds, reportedly borrowing billions at just 0.5% per annum to invest in Japanese stocks.
So, kind of a carry trade, but of a simpler kind, perhaps. But then simplicity has always been Buffett's hallmark, hasn’t it? Read this | Dear value investor, welcome to perplexing times The carry trade is indeed legitimate—endorsed by none other than the Sage of Omaha himself. However, this remarkable era of cheap money seems to be nearing its end as Japan raises interest rates and its currency strengthens, both of which erode the profitability of the carry trade.
The impact has been clear, with money flowing back and stock markets selling off sharply. More here | Yen yorker: What is the 'yen carry trade’ that’s causing a global stock rout? For now, that particular carry trade seems to be over. If you’re interested in more
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