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Carry Trades Could Reverse Over The Next Few Days-Video Update
I'm aware this may seem to contradict my previous post-so let me clarify. While I do believe that nothing can "stop" the carry trade, I also am fully aware that there likely will be times when some serious unwinding can occur. While I still don't believe the carry trade can be "stopped", it certainly could hit a few potholes. It hit a big one in February and recovered. I believe it would recover again. However, we could be at such a point right now-a pothole. I'm not saying it definately will happen-but I am saying that the situation bears careful watching. I'm concerened by two things-the Bear Sterns situation, which is far from fully played out and the movement seen in equity and bond markets on Friday afternoon. Bear loaned money to its own fund and that may stop the bleeding for now. The problem lies with how the underlying securties that the fund (and many other hedge funds as well) invested in may come to be re-valued. The underlying securities-the CDO's-are collateralized with sub-prime mortgages. We know those are going bad and are likely to get worse before they get better. The CDO market is estimated to be a $1T market-perhaps even more. The CDO's could be devalued by 30%-that's $300B of devaluation, a lot of money in anyone's book. Becasue the market is thin, collective selling (if that occurs) will drive prices down even further as buyers will be very hard to come by. That 30% loss might start to look good by comparison. Let's turn to Friday afternoon in equity and bond markets. Forget the Dow and S&P taking big losses-what has really caught my attention is the rise in bond prices. That indicates a flight by the professional money out of equities and into a safe investment-bonds. It's a move to avert risk. As all currency traders should be aware of-risk aversion means carry trade unwinding and the more risk is averted-the bigger the unwind will be. Now i'm not predicting that this will happen. What I am saying is that there are some strong indications that it could. Therefore, you want to be there on Sunday when Asian equity markets get going and you want to be alert for similar equity and bond movement. I'll be there-for sure.
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