Tuesday, May 23, 2006

Finance Wonk = Wall Street Journal psychic?

I have no idea how many people actually are investing alongside me in the BUYs I call (visible in the right-hand column), but be assured that I keep a close eye on related news to the various BUY positions and will post here when I believe it is time to get out of any position.

Some readers may have noticed a Wall Street Journal Article today (May 23rd) called "Jitters over rising interest rates send emerging markets tumbling." If you read this page though, you basically read the same thing here, only I wrote it April 19th as something I expected to happen soon.

My favorite part of the WSJ article is this paragraph:

A big contributor to the rout in emerging-markets stocks can be traced to Japan, where central-bank officials earlier this year indicated they were preparing to end a long period of near-zero interest rates. Those extraordinarily low rates -- part of Japan's effort to pull out of a decade-long economic slump -- had become an important and lucrative tool for savvy global investors in recent years. Many investors had been borrowing money in Japan (at almost no cost to them), and then investing in high-yield debt in New Zealand, Iceland, Turkey and other overseas markets. The popular maneuver became known as the "carry trade."

One of the first signs that the prospects of higher interest rates were unraveling this strategy....



Compare this to the second half of my article from over a month ago:

During the last few years (maybe 2001-2005) a lot of hedge funds took note of an odd international fact: one could borrow short term money in Japan at less than 1% interest, and one could loan long term money in some places (like Iceland or the middle east) at 5-8%. So the carry trade became very popular. The hedge fund would sell bonds short in Japan (paying the 1% interest) and buy bonds elsewhere that pay a higher rate -- making money on the difference. The move is not for amateurs though, because if suddenly the yen and kroner currencies reverse you might not be able to pay back the money you borrowed, but modern finance markets make it possible to make all these moves in dollar denominated instruments, at the cost of some of your income.


Now we fast forward to the present (2006) and interest rates are finally rising in the US and Japan and it's time to unwind the carry trade before a widening yield curve takes away all your money!


So maybe I should start advertising the Finance Wonk page as the Wall Street Journal, only published a month earlier!

More seriously though, the point of bringing this up is just that the bond market is moving exactly as I expected. This means I am even more certain now that buying RRPIX was and is the right thing to do. If you bought with me you have noticed that RRPIX, an inverse bond fund, hasn't really moved in the last month. Don't worry about it, bond markets move very slowly at times and so far everything is proceeding exactly as I expected. If you want to refamiliarize yourself with my call on RRPIX, now might be a good time. If you bought already, be reassured I'm keeping a close eye on things.

Invest well.
Click back to the main page!

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