I have had a funny feeling about the yen of late so today I sold my personal position in the Currency Harvest ETF (DBV). I bought the fund in October at $25.48 and sold today at $26.11, really it was a push. I thought/think of it as aggressive cash and I think the 2%-ish return plus the little dividend I got seems about right in that context.
The drop of late in the yen seems strange to me and I am concerned it could be setting up for some sort of globally disruptive correction. I am not drawing a parallel to 1998 as Dr. Roubini has done but some sort of reaction that hits the high yielders is on my mind.
I never bought DBV for clients and their only obvious exposure to this is Australia where as I had DBV along with Australia and Iceland.
The sale can be completely emotionless because DBV and USD/JPY show no signs of trouble today and for all I know USD/JPY could go to 125 but I felt I was too exposed to a yen rally.
Wikinvest Wire
10 comments:
I think we are a ways off from 1998. But, it could happen. The Bank is going to move slowly. Back in 1998, there was a perception that the Bank would move very fast. Any carry trade unwinds are likely to be slow this time around. Besides, the Bank won't want to push their currency up too high too fast.
can't argue with the logic at all but if, big if it did get away from them a little faster than they want my DBV combined with the other things I mentioned would be too much.
I'd have to say you're WAY off. WAY.
Going into the 1998 incident, the S&P 500 had average four consecutive years of +20%+ gains. Let's go over that again – four consecutive years, measured from the date just before it happened, 1998, 1997, 1996, 1995 – annual return over 20% each time – and the four-year gain on the index just before then was over 150%. THAT was overstretched. Today, we are sitting at maybe 73% for four years, it's been basically three years since we had a year over year change of +20% on the SPX, so it is hardly overstretched by historical standards.
Also in 1998, the Yen had been falling for what, four consecutive years? Double-digit falls each year on the $XJY? Whereas now, the $XJY has been just bouncing around in a range for four years.
Y'all need some historical perspective, it seems, and so does Roubini. "Globally disruptive correction?" Puh-leease.
For those of us uninitiated in the art of intermarket relationships, could you provide a little insight into why/how a strengthening Yen will hurt the high yielders? Is it simply because you fear the demand for Yen would mean funds flowing out of other high yielding currencies?
Many of us have a long way to go in analyzing the big picture and knowing some of the mechanics from a practitioners standpoint would be very useful.
To Thanks In Advance;
This post is about the carry trade which is defined as borrowing or shorting yen (because the interest rates are so low) and then investing the proceeds in a currency that has a high yield like the kiwi, the Icelandic kroner or the turkish lira to name some but there are more.
Yen strength played a role in the risk aversion correction from last spring. The yen was weak into year end 2005 then traded sideways to start 2006 and then rallied hard before various stock market corrected late spring.
Perhaps the re-alignment of Asian currencies is not so much a single nation whim as a non-coordinated, but necessary regional action to acknowledge the cost of doing business with new sources of labor (Viet Nam, Laos, Cambodia), competition for capital and hedging against the potential for regional hot or cold conflict (Koreas, Taiwan,Indonesia and China) assuming a weakened United States and a stronger China.
The complexities of currency manipulation is one reason I bow to more clever investors,
preferring to place bets elsewhere.
The primary difference between 1998 and today is that yen weakness represented a run on Japan. Securities houses were failing, Japanese banks had to borrow (in yen!) at a higher rate than non-Japanese banks, the Nikkei was getting killed, and it was primarily foreigners who were selling yen short to fund other, more high-yielding positions.
Fast forward to today. The banking sector has been cleaned up to a large degree, which has led to a normalization of the economy. Japanese banks now borrow yen at a lower rate than non-Japanese banks (i.e., TIBOR is lower than yen LIBOR). OK, the Nikkei has not done particularly well, but therre is no aggressive selling by foreigners. Most important, however, is that it is the Japanese themselves who are selling yen. Something like 52% of Japanese household assets are in deposits, which pay close top zero. It is evident that the BOJ is not going to change that any time soon. Mrs. Watanabe wants to earn a little more return, but has been scarred by the Nikkei bubble of 20 years ago.
So what does she do? She buys foreign currency time deposits denominated in AUD, NZD, or the like that pay her 6% or 7% rather than 0.1%. She buys investment trusts that invest in global or Asian equities.
Mrs. Watanabe's utility function is clearly different from those of Soros or Tiger or Tudor-Jones in the late 1990's. So the contagion risk is substantially lower now than it was then.
Does this mean that the AUD, NZD, and GBP are immune to yen strength? Of course not. Frankly, all three of those currencies are drastically overvalued and overdue for a substantial correction. To a degree, however, that correction is already underway. There may be more pockets on yen or CHF strength and high -yielder weakness in the run-up to next weekend's G7 meeting. However, this weakness should probably be bought, as it is unlikely that the yen will get an official mention. Europe is clearly upset with EUR/JPY, but that is a euro story, not a yen story per se. As such, the US doesn't care enough to switch away from China as its primary target.
Thanks in advance, a description of the basic FX carry trade can be found here:
http://macro-man.blogspot.com/2007/01/carry-me-home.html
macro man, good stuff.
there are porbably more differences between today and 1998 than you cite. My concern is more along the lines of a move to something like 108 or 109 faster than the market is ready for.
I got burned in May/June when the carry trade started moving sharply, and my EM stocks tanked. Happened before when I had Icelandic Krona in 2005, same thing. It's fast, fickle, and huge amounts of hot money move very quickly. It can ruin your day. Put stops on your more risky high yeilding investments, is a good strategy.
It takes very little to trigger such a move, maybe just a little move in the Yen or some good news about Japan. Over at Brad Setser's blog he cites an article in the Economist, worth a look. $1 trillion in hot money? If all that moves on a whim out of high yield investments it'll ruin your day. As it has mine, more than once. OldVet
The problem with Messrs. Roubini and Setser is that they are paid to create waves and be interesting, not necessarily to be right.
Roubini's recent warning is well off the mark, particularly when he claims that the 'similarities to 1998 are amazing.' As noted above, there are more dissimilarities to 1998 than there are similarities.
While OldVet is correct that timing is everything, it also pays to know in advance what could derail market positioning. In the current environment, the single largest threat to equities and carry is a blow-out in inflation expectations/breakevens.
Barring a blowout in those, it is unlikely that we will see a multiweek bout of risk aversion /position adjustment.
With stuff like Iceland and Vietnam, you are exposed to more idiosyncratic country risk (as well as liquidity risk, naturally.) Indeed, one of the interesting developments of the last year has been to de-linking of the ISK with other carry trades- the day-to-day correlation is very, very low.
I am still not convinced that the rewards from Iceland are commensurate with the risk, but admit that there are others who are and have done very well ouyt of the trade.
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