“Buy Anything With a Yield, Capture the Spread”

David Stockman has an excellent 15-minute interview up about the great carry trade on his website.

The core concept to understand about how the financial markets are behaving now is that certain market participants are able to borrow enormous amounts of money, which they can then funnel into assets that they deem to be low-risk. These actors then use the profits from this carry trade to re-invest into riskier assets that have a yield.

That’s not just the Yen carry trade, but other ‘risk-free’ trades involving quantitative easing schemes that essentially allow the primary dealers (and their friends) to issue treasuries and then sell those same treasuries back to the Fed (and its friends) at a profit.

[I disagree with the linked Forbes investment-newsletter writer about what the Bank of Japan is likely to do: I doubt that they will raise rates to curb price increases… they’re more likely to just grind the Japanese into fancy wagyu beef burger by further debasing the Yen. Chomp chomp nom nom nom. Delicious Japanese-meat.]

Understanding this simple concept can save you a lot of time that would otherwise be spent trying to suss out why financial markets are behaving in the way that they are.

If you’re one of the primary dealers, you enjoy a privileged market position relative to everyone else. It grants superior access to credit that, under the rule of the post-crisis Central Bank regime, enables them to dictate the directions of different markets.

This Matthew Lesko economics of infinite free paper money to favored trading houses is a frequent choice employed by failing governments to buy more time to resolve their issues. This delaying technique creates insupportable economic trends in various unrelated markets, through the direct and indirect issuance of new credit.

It is also a method of enriching connected financiers at the expense of the underlying economy. This, in turn, annihilates the public trust in the financial system, thereby weakening the entire social and political structure that makes a complex economy feasible.

The credit issuance must find a market to deploy it in, pushing more investment activity than consumers are actually likely to be capable of supporting — this is the predicament that the borrowers and entrepreneurs caught in this bear-trap are now squealing about.

Creatures caught in traps are there to be gobbled by hungry beasts; not rescued by sympathetic financial hippies with bailouts.