Is this the start of a global financial crash?

Bozzio · Post by **Bozzio** » 01 Mar 2007, 21:40

Let's not forget that last May, the FTSE 100 lost 9% of its value falling from 6100 points to less than 5600 points in three weeks. The initial drop was almost as steep as the one we've just witnessed. I believe this to be a correction by the markets after a period of very active investment.

ianryder · Post by **ianryder** » 01 Mar 2007, 22:42

We'll see, we didn't have the credit crunch then we're about to have. Lenders are already making it harder to get money at the risky end so it's bound to have knock-on effects. As a wise person said, interesting times

EmptyBee · Post by **EmptyBee** » 02 Mar 2007, 00:58

Here's an extremely doomerish article on the current state of play:

Mike Whitney wrote: The real problem is deep, systemic and difficult to understand. It relates to basic monetary policy that has been tragically mishandled by the Federal Reserve. A healthy economy requires that the money supply not exceed the growth of real GDP, otherwise inflation will ensue. The Fed has been cranking up the money supply at a rate of over 11% for the last six years, ensuring that we will eventually face a cycle of agonizing hyperinflation.

Link

SunnyJim · Post by **SunnyJim** » 02 Mar 2007, 14:04

Even the BBC mention the 'R' word....

http://news.bbc.co.uk/1/hi/business/6410629.stm

Post by **mikepepler** » 02 Mar 2007, 17:44

mikepepler wrote:A good example is the unravelling of the "Yen carry trade". This was already a bit closer after Japan's interest rate went from 0.25 to 0.5%, but look at these figures for various currencies against the Yen (data from http://www.oanda.com/convert/fxhistory for historical and BBC for latest)

Thought this was worth updating:
Dollar:
02/26/2007 121.1300
02/27/2007 120.8150
02/28/2007 119.7810
03/01/2007 118.3670
03/02/2007 118.1210
latest today 116.5450

Pound:
02/26/2007 237.8230
02/27/2007 237.1980
02/28/2007 235.2700
03/01/2007 232.1110
03/02/2007 231.7450
latest today 226.7500

Euro:
02/26/2007 159.4570
02/27/2007 159.1630
02/28/2007 158.1780
03/01/2007 156.4470
03/02/2007 156.1020
latest today 153.7300

Looks like an accelerating trend to me. Are people bailing out of the Yen carry trade? Is there more trouble on the way in the near future?

Combined with the analysis showing that Saudi may be past the peak, I think I should have voted "yes" instead of "by hte end of the year"

Andy Hunt · Post by **Andy Hunt** » 02 Mar 2007, 18:13

mikepepler wrote:Combined with the analysis showing that Saudi may be past the peak, I think I should have voted "yes" instead of "by hte end of the year"

My thoughts exactly - I voted exactly the same way you did Mike, and now I am thinking I should have voted 'yes'.

Looks like we are both hopeless optimists . . .

MacG · Post by **MacG** » 02 Mar 2007, 21:10

mikepepler wrote:Is there more trouble on the way in the near future?

Err... I happen to think so...!

Ballard · Post by **Ballard** » 04 Mar 2007, 16:17

US triggers $11bn HSBC fall-out

EUROPE?s biggest bank, HSBC, is to write off $11 billion to cover mounting losses in its troubled American offshoot, HSBC Finance Corporation.

Stephen Green and Mike Geoghegan, the bank?s chairman and chief executive, are making the huge provisions ? which will be announced alongside tomorrow?s full-year results ? in an attempt to draw a line under the bank?s miserable experience since buying the business, then known as Household, for $14 billion (?7.2 billion) four years ago. The duo are under unprecedented pressure from shareholders over ballooning bad debts at its US mortgage business.

Are the signs increasing ?

Post by **mikepepler** » 05 Mar 2007, 09:31

Big falls for the pound and euro against the Yen, and falls for the dollar too. Will be "interesting" to watch this carry trade thing collapse...

Dollar:
02/26/2007 121.1300
02/27/2007 120.8150
02/28/2007 119.7810
03/01/2007 118.3670
03/02/2007 118.1210
03/03/2007 117.3840
03/04/2007 116.8150
03/05/2007 116.7930
latest today 115.3750

Pound:
02/26/2007 237.8230
02/27/2007 237.1980
02/28/2007 235.2700
03/01/2007 232.1110
03/02/2007 231.7450
03/03/2007 229.1820
03/04/2007 227.2730
03/05/2007 227.7900
latest today 222.1150

Euro:
02/26/2007 159.4570
02/27/2007 159.1630
02/28/2007 158.1780
03/01/2007 156.4470
03/02/2007 156.1020
03/03/2007 154.6360
03/04/2007 154.7820
03/05/2007 154.0370
latest today 151.4550

I notice the stock markets are all down again today as well.

Post by **mikepepler** » 05 Mar 2007, 09:34

http://www.ft.com/cms/s/a4370cfa-cac5-1 ... 10621.html

Rising panic over the potential unwinding of the yen ?carry trade? and the dollar?s sharp plunge against the Japanese currency provoked heavy sell-offs on Monday on Tokyo dealing floors.
...
Brokers blamed the wave of selling on a combination of factors, but viewed the effect of the supposed closing-out of the ?carry trade? as the most critical. Additionally, some believe that large hedge funds have financed stock purchases with the Japanese currency that they borrowed cheaply and will now be forced to sell some of those assets to cover their exposure to the rising yen.

Post by **clv101** » 05 Mar 2007, 10:20

If anyone's wondering about carry trade (I know I was) here's some info:

Carry Trade
A trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose(and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occured, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher.

Currency Carry Trade
A strategy where an investor borrows in a foreign country with lower interest rates than their home country and invests the funds in their domestic market, usually in fixed-income securities.

Notes:
It's like free money, right? Well, not quite. The big risk is the uncertainty of exchange rates. Remember, you've still got to pay back the money in a foreign currency. If your domestic currency falls in value relative to the currency you borrowed, then you run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

An example of a "yen carry trade" is borrowing 1,000 yen from a Japanese bank, exchanging the funds into U.S. dollars and buying a bond for the equivalent amount. Assuming that the bond pays more than the amount you must pay the bank for borrowing the funds, and the exchange rate does not move adversely, you will earn a profit.

Wikipedia
The term carry trade without further modification refers to currency carry trade: investors borrow low-yielding currencies and lend high-yielding ones. It tends to correlate with global financial and exchange-rate stability, and retracts in use during global liquidity shortages.

The risk of carry trades is that foreign exchange rates will change, and the investor will have to pay back now more expensive currency with less valuable currency. In theory, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the target currency, because investors sell what they have borrowed, and convert it into other currencies.

For example, a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Assuming the bond pays 4.5% and the Japanese interest rate is set at 0%, the trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Leverage can make this type of trade very profitable. If the trader above uses a leverage factor of 10:1, then he/she can stand to make a profit of 45% (4.5% * 10). However, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Furthermore, because of the leverage, small movements in exchange rates can magnify these losses immensely unless hedged appropriately.

As of early 2007, it is estimated that as much as US$1 trillion may be staked on the yen carry trade.

SunnyJim · Post by **SunnyJim** » 05 Mar 2007, 10:35

Markets still dropping today. I would have thought it was simply a quick readjustment of the markets then they would have gone up on opening today, but everythings falling and the yens still getting stronger. Looks like that carry trade is unwinding.

Does anyone know what kind of money is involved in the carry trade? i.e. how low could markets drop if the carry trade was hyperthetically totally unwound?

ianryder · Post by **ianryder** » 05 Mar 2007, 11:26

I don't think there's any easy way to know but some think it might be a trillion $
http://www.dailyreckoning.co.uk/article ... s0055.html

If you look at the Yen over the last 12 months it's gone from as strong as 202 to the ? to 241 at it's weakest. Over the last 5 years it's been a lot stronger as well (looked at graph somewhere last week but don't have it to hand now).

It's not beyond possibility for it to change an awful lot if the markets really get spooked...which they appear to be.

YossarianUK · Post by **YossarianUK** » 05 Mar 2007, 11:39

http://goldprice.org/bob/2007/02/dow-pr ... -gold.html

Reality is not always what most think it is. The Dow Jones Industrial Index has many prices: US dollars, Yen, gallons of gasoline, quarts of milk, gold, silver and more. Pricing the Dow (an index of 30 stocks) in gold is one of the ways to get a more realistic valuation of it, those poor souls who think that they are back into positive territory since 2000. They do not realize that the unit of measure/account aspect of the US dollar has changed since 2000, a lot, at about 8-10% per year. If the US dollar was a yard stick, then it's length has been shortened about 8-10% per year. Most people are still using the yard stick not realizing that it kept getting shorter every year since 2000.

Despite the Dow being up from its 2003 bottom to more than its 2000 high, the purchasing power of their investment in the Dow stocks is still way, way down from where it was at the Dow top in 2000. The NASDAQ and S&P 500 are in worse shape. This is what unrestrained creation of US dollars out of thin air can do. No wonder the US Federal Reserve Bank is illegal, unconstitutional.

This article shows an interesting graph showing the Dow index priced in Gold over the last few years, so that it is priced in real value, rather than paper currency. On this scale, the downturn has been consistent and ongoing for 7 years.

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Andy Hunt · Post by **Andy Hunt** » 05 Mar 2007, 14:36

clv101 wrote:If anyone's wondering about carry trade (I know I was) here's some info:

Thanks for the info Chris, this one was a new one on me too!