Submitted by Taps Coogan on the 20th of November 2018 to The Sounding Line.
CNBC’s Rick Santelli recently discussed the effects low interest rates and high liquidity levels have had on creating overly complex trades that are now being forced to unwind amid market and currency volatility.
“When we have low interest rates for so long, what ultimately happens is we created a world of complicated but very profitable trades. You could generically call them ‘carry trades.’ With low interest rates, there are so many ways to find and finance structures that benefit the fact that you could borrow at different places around the globe really cheap, and then by converting to different currencies to invest in different areas and sectors, the goal was you could make much more in your trading positions than the carry was in the borrowed structures that got you the capital to do it. But the problem is, ultimately, monetary policy started to get a little firmer, and it wasn’t only that, it was long periods of low volatility. So, basically you had redemptions that were the cause of much of the volatility. Investors just wanted out. Along with tighter monetary policy… So at various points around the globe the carry trade started to deteriorate and then we see that the pace at which (Fed Chair) Powell is tightening seems to be one of the critical issues that investors are bugged about… Too many borrowed dollars have found their way into markets where the old trades don’t seem to work as good as the new trades and when you add in all the redemptions and the momentum trades deteriorating, think FANG, what we have is a quick move to the dollar to the upside replacing some of those shorted dollars. Ultimately, I think the volatility wears away, but the problem is monetary policy between Europe, Japan, and the US will continue to widen, and that differential of interest rates will continue to pressure anyone who doesn’t have an ample supply of cheap dollars.”
Enjoy the video above.
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