August 5th, 2024
By Clint Gharib
If you looked at the markets this morning or listened to news at all during the day today, you may be wondering what caused the plunge in stocks today. A big culprit for the plunge at the open today being repeated by many in the media was the great unwind of the Yen Carry Trade. The Yen Carry Trade is where investors (mostly large institutions) borrowed Yen at the prior low rates and then used the money to buy high growth ideas like tech stocks, especially the biggest names (i.e. Apple, Amazon, Nvidia, etc). So, if Japan raises their interest rates the value of the Yen would go up versus the US dollar thus causing the Yen Carry Trade to lose money. Per The Motley Fool article by John Rosevar today, “Consider: If you had borrowed 10 million yen a month ago and immediately converted it to U.S. dollars, you’d have had about $62,000. But given the way the yen has surged recently, you would need about $70,000 to pay back that loan today — even without taking interest and fees into account. Put another way, you need to have made roughly 13% on that borrowed money in one month just to break even on the loan. That’s a much bigger deal than the Bank of Japan’s 0.15% interest rate hike.”
On the heels of Friday’s mini tantrum sell off, Japan raised rates 0.25% and then said that they see further rate hikes. This sent those in the Yen Carry Trade scrambling for the exits ushering in heavy selling of large growth stocks. Then as stocks indicated lower, computer trading programs added to the selling pressure, with investors piling on top creating a real sense of panic at the open today. So to wrap this all together, basically, the market had a mini tantrum this past Friday that the Fed didn’t lower rates, worrying that the Fed is holding rates too high for too long. Then when Japan raised their rates, the Yen Carry Traders panicked. In my opinion this was the match and gas simultaneously thrown on top of existing worries. So in my simple terms, fear begot more fear leading to panic.
Yes there are signs of a weaker economy, but I can find nearly as many positive signs as negative signs. Remember, that many market analysts predicted in January that we could see 6-7 rate cuts this year. Earlier this year, many were worried inflation was getting too hot, now the fear is the economy plunging. I’ve said repeatedly throughout 2023 and earlier this year, I did not expect rates to be lowered. I still don’t. At most I believe we could see a 0.25% rate cut this year to “make up” to the markets.
As I wrote last month in my July 4th Market Update ‘Choppy Waters’, “I believe during the lead up to the election in the back of Q3 the markets will be especially choppy as investors and traders jockey back and forth on headlines and polls trying to gleam the yet unknown result of the election. In my experience, unless someone is near-perfect in their trades, it’s usually been better to simply ride through the chop and look to pick up shares of highest-conviction ideas on days of “panic”. This is a key reason why I like to keep a chunk of cash in accounts when heading into volatility.” This is the very type of panic day I have been awaiting to invest more. Many times, my best gains have come after taking advantage of short-term fears to acquire long-term potential. I can’t say this is the bottom of the season, but it sure seems an attractive opportunity to me to selectively invest more into best-ideas that have long runways of business growth potential.
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