The Carry Trade and Bearings

Posted by Jeff 11/02/2016 0 Comment(s) The Bearing Market,

First, what is the carry trade? Any article explaining how the carry trade affects the price of ball bearings must first explain what the carry trade is.

 

The carry trade is something that started in Japan. Japan has been going down the road of cheap money much longer than the rest of the world. For years, they have been lowering interest rates in an attempt to juice their economy.

 

The story goes that Japanese housewives figured out pretty early on that they could borrow yen for a lower interest rate than they could get by buying other currencies—for example New Zealand dollars. So they would borrow a bunch of Yen at a Japanese bank and “carry” that money across the street to a Japanese branch of the Bank of New Zealand, convert the Yen to NZ dollars and deposit the money there. As long as the exchange rate remains stable, it's easy money through interest rate arbitrage.

 

This has been going on for decades and there are periods when, for whatever reason, the carry trade unwinds. Any reasons that will call for cash in Japan—for instance, a fall in the Japanese stock mark that prompts margin calls—will cause this carry trade to unwind. However, when the carry trade unwinds and large numbers of people are selling foreign currencies to buy Yen, it drives up the price of Yen.

Which is why, despite having a dismal debt to GDP ratio (far worse than Greece's), a rapidly aging population, a falling stock market and a stagnating economy the Japanese Yen is getting stronger.

 

So the carry trade results in a stronger Japanese Yen and a stronger Japanese Yen results in more expensive Japanese bearings, lower profits for Japanese bearing companies or both.

 

The carry trade also explains why the U.S. dollar has shown so much strength at times. When the U.S. reduced rates to near-zero, a lot of people borrowed dollars to buy other currencies to obtain a higher interest rate. As that trade unwinds, it has caused a lot of people to buy dollars.

 

Of course, there are other factors that determine the rise and fall of currencies. But the Yen carry trade has been huge and has done a lot to protect Japan from its shaky economic fundamentals.

 

And Japan has yet to unwind its huge purchases of U.S. treasuries, $1.2244 TRILLION by last count—surpassing China as the world's largest holder of U.S. bonds. That is a number that dwarfs the carry trade and is going to have huge consequences for the yen and the dollar.

 

And the price of bearings.

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