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New Deadly Dollar Carry Trade

By Jim Willie CB      Printer Friendly Version Bookmark and Share
Sep 24 2009 10:39AM


A powerful hidden engine existed for close to 20 years called the Yen Carry Trade. The engine produced tainted trillion$ for its priviliged participants, whose access to cheap money was assured and whose control of government policy was tight. The engine served two important purposes. It kept the Japanese Yen currency exchange rate low, sufficient for maintaining the export juggernaut that sent products around global supply routes with names like Toyota, Honda, Komatsu, Mitsubishi, Nikon, Toshiba, and Fuji for a string of years. It also supplied a torrent of funds to feed both the Japanese and Western (think US, UK, Europe) financial markets its most important channel in existence. The Yen Carry Trade was that important. The Bank of Japan and a host of Tokyo-based financial firms relied upon this carry trade for basically free money. This important money making machine required Japanese interest rates and currency to remain low, and USTreasury Bond yields and US$ currency to remain high. Those halcyon days are largely done, since the Yen is on a rising uptrend and the US$ is on the falling downtrend, even as US long-term rates are stuck below a defended steel bar. Nowadays, the insider firms are struggling to avoid a wrestling match with a grim destiny.

In the last two to three years, a significant portion of this carry trade has been unwound. In fact, when the US stock market went from Dow 14000 to Dow 7000, it was widely believed that the unwind of the Yen Carry Trade coincided with the decline, thus ending an era. Not to be denied, foreigners tapped into the easy money game during the longstanding era. Wall Street, London, and several European finance centers exploited the opportunity also. When the US$ exchange rate topped in year 2001, and when the US stock market topped in year 2007, the exits became crowded with Japanese and Westerners alike, as they dismantled their leveraged machinery designed to capture the easiest money in modern history. If these firms entered the mortgage bond torture chambers, they had to contend with floors that vanished, as well as swinging axes. Survival is a grand challenge when removing leveraged machinery.


The Yen Carry Trade worked like this in rough terms. The large financial firms borrowed Japanese money at the near 0% rate, a lot of money, and managed a Yen currency risk. They could either borrow cash from Japanese banks or integrate short Yen positions into contracts with equivalent risk exposure. They had liberty to invest in whatever instrument they wished, but the favorite in the last two decades had been the USTreasury long bond. They earned 4% to 5% vig on the difference, but required a rising USDollar and falling Japanese Yen. The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronic insolvent Japanese bank system. A critical characteristic of that carry trade was that is applied leveraged enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. The typical leverage acted like a crowbar (jimmybar) to apply 10x to 20x more force, deploying futures contracts. The leveraged gains were thus between 50% and 100% per year, dotted with some currency risk. Be sure to know that other objects of this leveraged game involved the purchase of US stocks, like in an S&P bundle, and UKGilt Bonds and even German Bunds. Speaking of German, the entire Yen Carry Trade concept was totally unknown to the venerable Kurt Richebächer, admitted in our conversations in August 2003. May he rest in peace.

The objective asset had to meet requirements. They required only strong currencies and hefty bond yields, an easy task to identify object assets to invest in. Since 2001 when the Gold price hit bottom, another object for investment had been the Gold asset. The Gold price has risen in part from the Yen Carry Trade. In fact, the unwind of the Yen Carry Trade might be a key factor to explain the Gold price consolidation since January 2008, nearly a two-year period. My belief is that the long consolidation has created a very strong foundation for a rise to $2000, not a ceiling to limit the Gold price as the clownish pundits claim who litter the compromised landscape. Since year 2003, when the USFed hit the floor with low interest rates, funds to power Gold investment have largely been drawn from the USDollar fountain. Since mid-2007 when the USFed took the official rate even lower, matching the 0% from Japan, against all promises to do so, the Gold investment has been powered clearly by funds in US$ denomination. That movement will surely accelerate.

The Yen Carry Trade decline and wind-down has been reported for the last few years. It has been attributed to the US stock downdrafts. It would be impossible to wind it down in a year or two, even three years. It was that big. Its size is estimated to be perhaps $2 trillion in magnitude. The unwind has a nasty blowback effect to be felt by Japan. The Yen currency rebounded in the last couple years, thus creating a foundation for a strong recovery. In the process, the Japanese export trade is threatened by a rising Yen, rendering its exported products more expensive. Japan must therefore manage a transition to a new major trade partner in China, which has actually eclipsed the US in recent months. During this transition process, Japan will gradually loosen high level corporate ties and important political ties with the Untied States. If the Yen rises faster than the Chinese Yuan, then the transition can be managed to mutual benefits between Japan and China. The only problem is that Japan might find itself becoming subservient to the Chinese in much the same way have been to the Americans for 50 years. The new Japanese prime minister elect Hatoyama has publicly stated his intention to strive for more balance.


Welcome a new carry trade to town! Here in the present, the new carry trade has begun to take root with the USDollar as its basis. The opening act was the Gold Carry Trade, executed in the 1990 decade, with 1% leased USTreasury gold sold into the market and USTreasury Bonds bought in return. That locomotive powered the Decade of Stolen Prosperity under the Clinton Admin. Since 2001, that wave is finished. The new carry trade has requirements simply stated. It needs a crippled bank system that offers a reliable 0% interest rate, a crippled currency that offers little risk of a rise in exchange rate, and plenty of targeted opportunities to invest in rising asset groups in competition. The gold asset is one such object asset. One is hard pressed to identify a sovereign bond security pitched by a government with any credibility. Their deficits, boatloads of bond issuance, and public statements in desire of weaker currencies tend to rule them out. So Govt Bonds are not a viable object. They are too busy ruining their currencies in the midst of the Competing Currency War.

Why just two weeks ago, the Swiss Govt announced their frustration at a rising currency, despite all efforts to undermine their Franc currency. They will be forced to redouble their destructive efforts. The Europeans did NOT want to reduce interest rates a year ago, but they did, a correct Jackass forecast that went directly against some banker contacts. That shows the power of the Competing Currency War, since the Euro currency had risen to 160, sufficient to render considerable harm to the European Union Economy in its export trade. With numerous currencies ‘frozen’ from programmed destruction, the time is ripe for the USDollar Carry Trade to be launched. It has been launched. THIS CARRY TRADE WILL PUNISH THE USDOLLAR BADLY AS ITS POLICYMAKERS SUFFER THE SHAME OF BEING CORNERED AND STUCK!

The ruinous bursted bubble from Japan around 1990 and the seemingly endless years of 0% Japanese money enabled the Yen Carry Trade against a backdrop of a chronically insolvent Japanese bank system. A critical characteristic of that carry trade was that heavy leverage applied enormous pressure in a way so as to maintain the low Yen currency and the high US$ currency. In the summer 2008 when the USFed took the official interest down to 0.25% and stuck it there, the USDollar Carry Trade was assured of a vigorous run through the financial factories. Here is what is so important about its upcoming entrenchment. The US$ exchange rates will be heavily subdued, with any rebounds totally smothered, resulting in a relentless Gold rise with gusto. The shorting of the US$ is key for the supply of funds. It comes as borrowed US$ funds used outside the US Sphere, thus net bearish. It comes as leveraged instruments designed to capitalize on a continued US$ decline integrated into securities like with short DX contracts.

The coordinated and systematic ruin of major currencies, through monetizations, through vast federal deficits, through sustained near 0% official rates, and through chronically insolvent national bank systems, will assure that the Gold asset will be a favorite for the USDollar Carry Trade for at least a couple years, maybe more. Furthermore, installation of the USDollar Carry Trade will assure that No Exit Strategy will be available to the USFed also. Wall Street firms will participate in this free lunch carry trade, just like all others. Wall Street will not permit a USFed rate hike to firm the US$ exchange rate. Talk about a strong  perverse factor behind the USDollar. This is every bit as powerful as the ‘Beijing Gold Put’ analyzed in the Hat Trick Letter issued in September.

Continued forces will be at work in a variety of ways to continue the thrust and duration of this new USDollar Carry Trade, sure to keep it badly subdued. The risk is so great that a USTreasury Bond default could even become the last stop on its pathogenesis pathway. Just today, the compromised erudite spokesman Lawrence Meyers actually said the USFed will probably remain on hold for its near 0% interest rate until the end of 2011. That is NOT a misprint!!! The USFed will justify its decision not to hike rates, not to halt money creation, all the while discussing theoretically an Exit Strategy. Try not to laugh too hard! Also, the US$ Swap Facilities are scheduled to end in October 2009. Their extension should be very harmful for the USDollar, from the bad publicity and the understood urgent implicit desperate need. The next wave of US bank losses will arrive to coincide with the falling of the leaves in autumn, an apt parallel. The inability of the USFed to conduct and execute any Exit Strategy at all is powerful impetus behind the development of the USDollar Carry Trade, and the powerful lift it gives the Gold price. They cannot raise interest rates. The Stimulus Bill has run its measly course. The monetary stimulus must remain in place. The Uncle Sam patient is imprisoned in the Intensive Care Ward.


The Japanese Yen bottom occurred in summer 2007, just about the time of the US stock peak. That is not a coincidence, since Yen Carry Trade funds propelled the US financial markets in a general sense. The continued breakout in the Yen beyond the January 112 highs will amplify the USDollar bear market, and push the US$ DX index to multi-decade lows. A panic comes, coordinated with a rise in the Euro, Yen, and other currencies.

The USDollar DX index will probably head below the critical support at 70 sometime early next year, or late this year. Its movements are increasingly volatile, in a bad way. A global revolt against the US$ is underway with full speed. The only US$ support comes from monetization and deception, as the Printing Pre$$ is active. The nation is insolvent in most every respect. No return to normalcy will come, despite the hopes and dreams of US leaders, unfortunately trapped inside the USDome, where perceptions are flawed. The US financial structure is permanently broken. In reaction to today’s FOMC decision to leave interest rates alone, the USDollar has resumed its decline. It will soon amplify its downward direction. While they spoke with optimistic words, the truth is that they are stuck without an Exit Strategy, which will become painfully clear over the passage of time.

Two weeks ago, a rather comprehensive list of reasons was provided for the Gold price breakout. Many factors were given to explain how and why the Gold price would march toward the $2000 level. THE ARRIVAL OF THE USDOLLAR CARRY TRADE IS A PRIMARY REASON FOR THE MARCH TO $2000 GOLD. Prepare for it, as the pundits will be made to squirm and eat crow! Almost all pronouncements, propaganda, and prattle must be ignored that come from the Pagan Paper Palaces that have wrought the current destruction and wreckage. The only factor they comprehend is the excessive printing of money and largesse from government budgets to aid the rescue and stimulate the moribund as well as to nationalize both the dead financial firms and their grotesque fraud laced with counterfeit.


The phenomenon will be much like a flesh eating bacteria. What is eaten during unbridled USFed money creation and USGovt debt issuance is the USEconomic capital, both industial capital and household capital. The most misunderstood aspect of the profound accommodation with near 0% rate of interest (ZIRP) and enormous mountains of printed money (QE) is the destruction of USEconomic capital. Not only is new capital formation NOT possible, but capital is liquidated and banks are hesitant to lend even to good customers. Zero Interest Rate Policy and Quantitative Easing serve as the most severe and formidable Weapons of Mass Destruction to capital that the modern world has ever seen. See small business sector, see the car industry & supply lines, see construction sector, and much more. Both the ZIRP and QE are fuel and lubricant both to power gold to the $2000 level, serving as vivid battle cries!

The latest shameful disgraces for the USFed are three. 1) The USFed monetizes USTreasurys during auctions by using the primary dealers as temporary holders before permanent open market operations, and by using foreign central bank sales of USAgency Mortgage Bonds in addition to the USDollar Swap Facility. 2) The USFed just admitted publicly that it had consistently been hiding its Gold Swap Agreements, thus rendering Greenspan a perjury perpetrator and the institution in violation of its contract. 3) New York Fed president Jan Hatzius (another GSax plant) expects the USFed balance sheet to expand by over $1 trillion more. The transgressions of the USFed ensure gold will hit $2000.


Jim Willie CB
Editor of the "HAT TRICK LETTER"
Hat Trick Letter



Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at