Editor’s Note:
Earlier this morning, we published an article titled “The Fear of Recession: Navigating Market Manipulation and Opportunities in 2024”. In that piece, we discussed the current economic landscape and highlighted the role of market manipulation in creating recession fears.
This follow-up article aims to further support our view by providing additional insights into the recent market crash, emphasizing that the primary cause is the unwinding of the yen carry trade rather than a contagion effect. However, it is also important to note that the yen carry trade might be the initial trigger, but short sellers and other market makers are joining in on the action, amplifying the market volatility. The predictions and analysis provided by the BIS underscore the complexities of the current economic environment and the potential actions central banks might take to mitigate these challenges. By understanding these dynamics, we can better navigate the opportunities and risks in 2024.
Recent Actions by the Bank of Japan and the Yen Carry Trade Issue
The Bank of Japan (BOJ) recently raised its main interest rate on July 31, 2024, for the second time in decades, which has significant implications for the yen carry trade. This strategy involves borrowing in Japanese yen at low-interest rates to invest in higher-yielding assets abroad. The rate hike has strengthened the yen, making it more expensive to maintain these positions and potentially forcing the unwinding of carry trades, leading to increased market volatility.
The equity markets have experienced substantial movements, with the Dow Jones Industrial Average currently at 39,737 and the NASDAQ Composite at 16,776. These levels reflect ongoing volatility, primarily driven by the impacts of the yen carry trade unwinding. As the yen appreciates, investors who have borrowed in yen to invest in equities are forced to cover their positions, leading to sell-offs in the stock markets. This dynamic is causing significant fluctuations and heightened sensitivity to the carry trade’s shifts. Reports from Saxo Bank highlight how the unwinding of carry trades can lead to increased volatility and reduced liquidity in global markets. The appreciation of the yen causes investors to withdraw capital from other global markets, decreasing global liquidity and making it harder and more expensive for companies and governments to access funding. This reduction in liquidity can increase volatility and reduce the availability of credit in global markets, which is currently being observed as substantial fluctuations in equity indices.
The Japan News also reported on the significant rise in the yen’s value against other major currencies, which has contributed to this volatility. The strengthening of the yen, driven by the unwinding of carry trades and anticipation of BOJ policy changes, has led to substantial movements in global financial markets, impacting investor sentiment and leading to sell-offs in equity markets.
In the crypto markets, Bitcoin has experienced a significant crash, falling to $53,000. This decline is closely linked to the unwinding of the yen carry trade. As investors who have leveraged their positions in the crypto market through yen-denominated loans face higher costs due to the yen’s appreciation, they are forced to liquidate their crypto holdings to cover these loans. This mass liquidation has led to a sharp drop in Bitcoin prices and created a bearish outlook for the short term. According to Cointelegraph, much of the recent sell-off in Bitcoin can be attributed to the pressures from the yen carry trade unwinding. Analysts have noted that the increasing costs of maintaining yen-denominated loans due to the yen’s appreciation have forced investors to liquidate their Bitcoin positions, leading to a significant drop in prices. The Tech Report also supports this analysis, highlighting that the unwinding of these positions has created a bearish outlook in the short term, with key support levels around $50,000 being critical to watch.
What Is the BIS?
The Bank for International Settlements (BIS) is an international financial institution that serves as a bank for central banks. It fosters international monetary and financial cooperation and serves as a bank for central banks. The BIS’s role includes promoting financial stability, conducting research and analysis on monetary and financial issues, and providing a forum for central banks to exchange information and collaborate on common issues. The BIS is headquartered in Basel, Switzerland, and was established in 1930.
Key Points and Quotes
In a recent episode of Coin Bureau, host Guy Turner delves into the alarming predictions made by the BIS regarding the global economy. The discussion highlights various macroeconomic factors and their potential impact on future economic stability. Despite current successes in taming inflation, the BIS warns that significant challenges remain.
Guy Turner begins by noting the relatively stable state of the global economy, considering the recent global pandemic, geopolitical conflicts, and political instability. However, the BIS stresses that these challenges are far from over, with authors of the report highlighting, “Challenges remain, and that is an understatement.”
The report commends the success of monetary policy in controlling inflation, hinting at possible future interest rate cuts by central banks, even though inflation remains above the 2% target. Fiscal policy, or government spending, has played a crucial role in keeping the global economy afloat. Turner points out, “Many governments have been spending more than they did during recessions or even during wars, despite the global economy reportedly being just fine.”
Turner addresses the March 2023 banking crisis, which the BIS report cautiously labels as a one-off event. However, the report acknowledges that many banks are sitting on significant unrealized losses. The divergence in central banks’ policies, with some like the European Central Bank (ECB) cutting rates, the Federal Reserve (Fed) maintaining them, and the Bank of Japan (BOJ) raising them for the first time in decades, adds another layer of complexity.
The BIS report highlights the significance of the BOJ’s interest rate hikes, which could disrupt the yen carry trade—a strategy where investors borrow in Japanese yen to invest in higher-yielding assets. Turner explains, “If the BOJ starts raising interest rates in a meaningful way, this could cause the so-called yen carry trade to unwind, causing global market volatility.”
The BIS identifies the unfathomable amount of debt in both the private and public sectors as a major risk to achieving a soft landing—where inflation is controlled without significantly slowing the economy. The report also raises concerns about inflation driven by supply chain issues, rising labor costs, and potential spikes in commodity prices due to geopolitical tensions.
A significant part of the report criticizes the interference of fiscal policy with monetary policy. Turner elaborates, “Governments keep printing money while central banks are trying to stop the printing.” This dynamic could lead to a resurgence in inflation and complicates the efforts of central banks to stabilize the economy.
The BIS suggests that a boom in productivity could alleviate some debt issues but notes that productivity is currently slowing. They call for structural reforms focusing on better income distribution. Turner summarizes, “The BIS wants governments to take from the rich and give money to the poor. In theory, this would solve the problem, but in practice, the rich will find loopholes.”
The report predicts that interest rates, which have been on a long-term decline since the 1980s, may now be on an upward trajectory. Turner provides historical context, “In the 1950s, European stocks were all the rage; in the 1960s, American stocks; in the 1970s, commodities. Now, we might be seeing a return to a commodities boom.”
Personal Insights and Anecdotes
Turner shares his perspective on the BIS’s insights, emphasizing the importance of understanding these macroeconomic trends and preparing for potential market volatility. He also humorously notes the apparent contradiction in central banks’ actions, saying, “It’s almost as if the central banks wanted this inflation to occur.”
Conclusion
The BIS report paints a complex picture of the global economy, with significant risks related to debt, inflation, and geopolitical instability. Turner concludes with a warning, “What comes next will be a new generational cycle of genuine growth, prosperity, and equality. So make it count.”
Countermeasures by Central Banks
In response to the unwinding of the yen carry trade and its impacts on global markets, central banks might take several countermeasures. These could include coordinating interventions in foreign exchange markets to stabilize the yen, adjusting interest rates to manage economic stability, and implementing policies to ensure sufficient liquidity in financial markets. Central banks might also increase communication and transparency to manage market expectations and reduce uncertainty.
For more details and to watch the full episode, visit the Coin Bureau YouTube channel.