The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (BUSINESS BOOKS)

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The financial crash in February-March does not need coronavirus to explain it. It was predictable based on an understanding of the carry regime. But unlike in previous carry crashes, extreme central bank (and government) action has seemed able to rescue the financial markets but this time not necessarily the economy. The carry regime tends to increase inequality and the much more extreme situation we find ourselves in now raises a question mark as to its sustainability. What comes next is uncertain but there are pointers that can provide strong clues to the bigger picture. Kevin has an MBA from London Business School and a BSc in Finance from the Pennsylvania State University. Tim Lee Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy - and the meteoric rise of carry. Leverage also forms an important part of the definition of Carry as defined by the authors. FX carry trades often yield a desultory sum, like the 2% a year currently available from the USD/EUR pair. This would need to be leveraged several times to get a reasonable return. Naturally, option selling is an inherently leveraged activity. As the authors rightly say, the use of leverage is a key characteristic of carry trades. A carry trader who uses no leverage can ride out any storm. But with high leverage, the slightest adverse price movement will wipe them out. Carry as trading strategy

The main reason for the surge upwards in the indicator, to unprecedented levels, is the collapse of money supply, with my estimate being that for Q1 M2 will be -2.6% year-on-year, unprecedented in modern history.Possibly overblown! Possibly very very very important! I need to read it again to determine the exact ratio. Simply put, carry trading is now the primary determinant of the global business cycle--a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises. Robin Wigglesworth, “Jane Street: The Top Wall Street Firm ‘No One’s Heard Of,’” Financial Times, January 28, 2021. When the music stops, in terms of liquidity things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. In my own career I’ve come across it many times. As an inexperienced investment bank trader I was admonished by a senior trader for being ‘short naked gamma’: selling options in the market without the safety net of delta hedging, an especially dangerous variation of the carry trade. A few years later in 2008 I was managing a hedge fund carry strategy which lost a third of it’s notional capital in a matter of weeks. Thankfully, we had reduced it’s risk allocation for unrelated reasons, saving our clients hundreds of millions of dollars. I still trade carry today, although only as a minor component in a diversified portfolio of strategies.

We will only delve on as much history as needed to construct the foundation. At the precipice of the 2008 GFC, liquidity seized, and interbank trust evaporated. The fed’s immediate actions of: The central thesis of the book is as follows. The financial authorities of developed countries artificially suppress volatility in financial markets. In the past few decades, selling volatility has been too profitable. The buyers of put option made significant profits in those rare periods when the bubbles collapsed. However, even despite it, buying volatility has been too unprofitable. The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy--until now. Interestingly, this expectation of ample liquidity runs counter to what has actually transpired when consensus views have changed and investors have sought to reposition their portfolios accordingly. In May–June 2013, when Chairman Bernanke uttered that famous word — “taper” — and raised questions about the Fed’s continuous support for markets, many investors were unable to complete their desired transactions for even the most vanilla-type securities (p. 115, El-Erian) Volatility insurance differs in one important respect from other common forms of insurance (such as life, home, and vehicle insurance), which allow the specific risk of events to be pooled. In these forms of insurance, the aggregate risks taken by insurers are significantly less than the sum of the individual risks. Homeowners who buy fire insurance, for instance, pay regular premiums and are pro­tected thereby against loss. The number of houses destroyed by fire annually does not vary much from year to year, and so the insurance industry’s total income is sufficient each year to pay for the individual costs without being at risk of significant overall loss, although profits will fluctuate as fire damage varies from year to year. But this common sort of risk pooling is not characteristic of the carry trade, in which the aggregate risk is systemic rather than specific.

My Book Notes

Simply put, carry trading is now the primary determinant of the global business cycle—a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises. Now, if you believe everything that was previously said, and thereby having established a coherent link between carry trades and the dual prongs of the fed, you come to some sobering realizations; namely: Alle hieronder opgesomde data zijn beschikbaar met de Open Data Commons Open Database Licentie. Het staat je vrij de data te kopiëren en te distribueren, om afgeleide producten van deze data te maken, en om de data aan te passen en transformeren. Wij vragen wel dat je altijd verwijst naar de brondatabank, je afgeleide producten ook onder ODbL vrijgeeft en geen enkele technologie gebruikt om deze datasets weer gesloten te maken (zoals bijv DRM). that serial reflations of ever increasing sizes lead to systemic overleverage and debt overhang which is ultimately deflationary (eg Japan and now much of developed world)