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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: Hello from Hong Kong, David Gura, What hi, Hello from

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Speaker 2: New York. It is great to talk to you across

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Speaker 2: the ocean. And it looks like if I squint here

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Speaker 2: and look at my zooms when you're having dinner in the.

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Speaker 1: Studio, very good eyes, I am. And it's at the

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Speaker 1: heart of our episode today. It explains the rocking global

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Speaker 1: currency markets. Right now, let me show you what I'm

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Speaker 1: having so you can drool over it through zoom. You

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Speaker 1: see here, see if you can see this, can you see?

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Speaker 2: I just look at that chopsticks in hand, and it

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Speaker 2: looks like a dumpling. Is it a dumpling?

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Speaker 1: It is, But it's not just any dumpling, David. This

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Speaker 1: is a Shao longboo, a soup dumpling, right. It's got

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Speaker 1: yummy broth inside, and it's from a famous Taiwanese restaurant

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Speaker 1: called Didn't Tai Phong. They've got branches in New York

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Speaker 1: and here in Hong Kong, all over the world.

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Speaker 2: And let me get this straight. Their soup dumplings are

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Speaker 2: behind what's rocking the global currency markets.

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Speaker 1: They are in a way. I'll let Shuley Wren explain

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Speaker 1: she's a Bloomberg opinion columnist to covers Asian markets.

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Speaker 3: Yes, so the challona in it's kind of like the

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Speaker 3: big mag indecks that tests out the purchasing power of

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Speaker 3: the world's biggest the cosmopolitan cities. Ding Typhoon was expanding

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Speaker 3: outside of Taiwan and the opening restaurants in the biggest,

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Speaker 3: the most posh cities. And the idea is that if

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Speaker 3: you look at the global cosmopolitans like Dubai, Hong Kong, Singapore, London,

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Speaker 3: New York, the cost of Shallon Bau should be the same,

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Speaker 3: and the it turns out they can be quite different.

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Speaker 1: So, David, we would have ordered you some dumplings from

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Speaker 1: the DN Typhoon in New York apparently, but apparently they

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Speaker 1: don't do takeout or delivery. And get this, you have

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Speaker 1: to book seats at midnight a month and.

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Speaker 2: A month in advance. My gosh, how good are these dumplings?

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Speaker 1: They are very delicious. Luckily for us here in Hong Kong,

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Speaker 1: they're much easier to get a hold of, so I

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Speaker 1: use the equivalent of ten US dollars to buy Dntai

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Speaker 1: Fung dumplings and I got around six shallong bows. Right,

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Speaker 1: And even though we didn't manage to get dumplings delivered

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Speaker 1: to you in the studio there, we did we will.

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Speaker 1: At some point we did look up the price and

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Speaker 1: get this, you'd only get about five dumplings.

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Speaker 2: Only five, only five.

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Speaker 1: But in Tokyo, once you traded your ten US dollars

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Speaker 1: for Japanese yen, you'd get around eight dumplings.

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Speaker 2: Okay, So ten US dollars goes further in Japan, and

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Speaker 2: I guess that's a sign that maybe the yen is

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Speaker 2: just a little bit undervalued. Oh, I get it. This

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Speaker 2: is all about all the carry trade news.

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Speaker 1: That's right. Carry trades, right, they're pretty technical inside market stuff.

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Speaker 1: You don't usually hear it in the broader news. But

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Speaker 1: recently a whole bunch of carry trades went south and

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Speaker 1: took the markets with them.

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Speaker 2: Yeah. I've watched the value of the en rise quite

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Speaker 2: a bit against the dollar, and that hammered a bunch

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Speaker 2: of these trades.

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Speaker 1: That's right. Not mentioned it left a lot of investors

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Speaker 1: with balance sheets that looked a little bit like, you know,

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Speaker 1: the watery inside of a soup dumpling.

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Speaker 3: Here.

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Speaker 1: So today, as part of our ongoing series. Bloomberg explains,

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Speaker 1: we're talking about carry trades, how they work, what went wrong,

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Speaker 1: and why it hammered global markets.

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Speaker 2: I'm one huh, and I'm David Gerret and this is

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Speaker 2: the big take Asia from Bloomberg News.

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Speaker 1: So, David, the news has been full of carry trades lately.

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Speaker 1: They've been making a lot of headlines.

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Speaker 2: Yeah, they're new to a lot of people, but the

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Speaker 2: trades themselves have a long history.

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Speaker 1: Here's Shuley renagain, a Bloomberg columnist who covers Asian markets.

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Speaker 3: Carrie trade has been going on for a long time.

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Speaker 3: It's really simple. It's basically taking out cheap loans from

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Speaker 3: countries that have very low interest rate, and then the

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Speaker 3: investors in turn exchange it into another currency and invest

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Speaker 3: in countries that have much higher yielding assets.

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Speaker 1: I've got to really simple example, David. Let's say I

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Speaker 1: borrow one thousand dollars worth of Japanese in from a

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Speaker 1: Japanese bank. Let's say you're that bank.

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Speaker 2: Okay, I'll lend you that one thousand, and I'm going

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Speaker 2: to charge you a little interest for that loan.

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Speaker 1: And in Japan it's very little interest, right, So for

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Speaker 1: a long time, the Bank of Japan's main interest rate

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Speaker 1: was basically zero. Now, assuming I get that rate, I'll

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Speaker 1: convert this money I've borrowed into US dollars and lend

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Speaker 1: out that money at around five and a half percent,

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Speaker 1: which is the rate in the US at the moment.

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Speaker 2: This sounds like a pretty good deal for you.

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Speaker 1: It is. Now, when the person I lent money to

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Speaker 1: pays back my loan, I get back that one thousand

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Speaker 1: dollars plus interest, let's say it's one thousand and sixty dollars.

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Speaker 2: Now you pay me back one thousand dollars I lent you,

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Speaker 2: but I didn't charge any interest or very little interest.

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Speaker 2: And assuming and this is a big assumption here, that

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Speaker 2: the exchange rate stays the same when you pay me back,

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Speaker 2: you get to keep that sixty bucks.

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Speaker 1: Right, not a bad profit?

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Speaker 2: Right, not at all. And that there is the appeal

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Speaker 2: of the en carry trade.

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Speaker 1: It's got a funny name. Why is it called a

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Speaker 1: carry trade?

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Speaker 3: It's an esoteric name. The traders like to use the

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Speaker 3: word carry. Basically Carrie Mings earning interest rate differentials, and.

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Speaker 1: You're essentially carrying that until you make.

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Speaker 3: A profit, yes, like you're carrying a baby. It's like

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Speaker 3: a pregnancy carry out baby.

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Speaker 1: A little profit baby, the kind the markets really love.

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Speaker 1: As Shirley said, the carry trade has been around for

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Speaker 1: a long time, but.

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Speaker 3: The most famous carry trades are done by the Japanese

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Speaker 3: retail investors, the so called a missus u watanabe.

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Speaker 1: The so called missus watanabi refers to Japanese housewives. It's

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Speaker 1: kind of hard to trace when the term started to

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Speaker 1: first be used, but we do know that the newspaper

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Speaker 1: The Economist popularize the current use in the late nineteen nineties.

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Speaker 1: That's when the Bank of Japan, desperate to stimulate economic activity,

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Speaker 1: turned to a policy of keeping interest rates near zero

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Speaker 1: or even get this negative.

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Speaker 3: So the missis wanta nabbies, they will be actually managing

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Speaker 3: the family wealth, right, and then they know that you

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Speaker 3: cannot put money in the bank because you're not getting

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Speaker 3: any interest in return. So what they do is that

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Speaker 3: they invest their money in other countries, and they were

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Speaker 3: actually quite adventurous. They will buy Mexican passle, Turkish lira, Indonesia, rupia.

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Speaker 3: These are all the emergent market currencies that they can

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Speaker 3: earn a higher interest rate from.

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Speaker 1: But it wasn't just the missus wattonabbies who saw opportunity

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Speaker 1: with the weekend. The yen carry trade, in its various permutations,

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Speaker 1: is now carried out by hedge funds, investment firms, and

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Speaker 1: traders all over the world.

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Speaker 2: And these trades have only gotten bigger and more popular

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Speaker 2: in the past few years as the Japanese yen has

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Speaker 2: weakened against other currencies. You could get more yen for

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Speaker 2: your dollar, your euro, pound, sterling, or.

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Speaker 1: More soup dumplings. That's right, And just like the soup dumplings,

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Speaker 1: people were saying that the yen were undervalued a great

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Speaker 1: deal for investors, so they began to borrow even more

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Speaker 1: yin and use that money to fund all kinds of trades.

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Speaker 1: According to Shuley, Now some economists say that carry trade

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Speaker 1: is a strategy that really shouldn't work. What do they

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Speaker 1: mean by that?

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Speaker 3: Economists like to look at things in the long term,

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Speaker 3: and that basically they will say the value of a

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Speaker 3: currency should reflect it's a purchasing power at home and

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Speaker 3: the interest rate that it earns. So in the purchasing

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Speaker 3: power parody situation, it doesn't matter whether you hold the

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Speaker 3: Japanese yen or the US dollar, you will be able

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Speaker 3: to get the same amount of goods.

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Speaker 2: But as we've demonstrated clearly, there isn't parody, and that's

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Speaker 2: why you can get more soup dumplings in Tokyo compared

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Speaker 2: to New York. And it's also why the Japanese yen

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Speaker 2: has been a popular currency for carry trades. But it's

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Speaker 2: far from the only currency that can be used to

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Speaker 2: make a carry trade.

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Speaker 3: It can be anything. Any currencies that have lower interest

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Speaker 3: rates can be used as a funding currency. For instance,

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Speaker 3: like I say, perhaps a decade ago, the US dollar

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Speaker 3: was not yielding any interest rates right, and there was

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Speaker 3: a very popular funding currency for traders to buy into

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Speaker 3: emergent market currencies such as the Indonesian rubia, the Turkish lera,

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Speaker 3: and the Mexican petzil.

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Speaker 1: And it's really hard to know how much money is

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Speaker 1: parked in carry trades because they're conducted via currency transactions

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Speaker 1: that aren't easy to track. Not to mention there's no

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Speaker 1: one central authority keeping tabs.

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Speaker 2: This lack of transparency was one contributing factor to the

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Speaker 2: market turmoil this summer, because no one knew just how

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Speaker 2: much money was in yen carry trades and how many

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Speaker 2: positions would need to be unwound.

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Speaker 1: And if we know one thing about markets, David, it's

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Speaker 1: that they hate uncertainty. After the break, we'll look at

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Speaker 1: whether this summer's meltdown has stopped the rising popularity of

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Speaker 1: carry trades or if they'll carry on nice sorry coundry resist.

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Speaker 1: So to recap, one of the most popular carry trades

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Speaker 1: of the past few years was the yen carry trade,

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Speaker 1: when investors all over the world were making a ton

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Speaker 1: of money barring Japanese yen at an interest rate of

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Speaker 1: almost zero and then lending it out for profit or

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Speaker 1: investing it.

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Speaker 2: Basically, as long as Japan kept its interest rate near zero,

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Speaker 2: and again this is the key point. As long as

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Speaker 2: the en was undervalued, these en carry trades were reliable,

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Speaker 2: little profit machines.

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Speaker 1: What possibly could go wrong?

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Speaker 4: Coming into the meeting, we actually had economists surveyed by

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Speaker 4: Bloomber thinking that the consensus would be no change in

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Speaker 4: the interest rate policy. But then this morning we woke

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Speaker 4: up to news that they were discussing a rate high.

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Speaker 3: Surprise, surprise, the Bank of Japan raised the interest rate

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Speaker 3: by twenty five basis points and that called a lot

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Speaker 3: of people by surprise.

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Speaker 1: Oh my goodness, it's a awful time.

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Speaker 4: I think to be at the Bank of Japan right now,

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Speaker 4: because they are in the between a rock and a

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Speaker 4: hard place.

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Speaker 2: I mean they have been now.

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Speaker 1: To be clear, an interest rate of zero point two

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Speaker 1: five percent is very low compared to most countries. But

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Speaker 1: that's not the only thing that happened. The yen strengthened

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Speaker 1: against a basket of currencies at nearly its fastest pace

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Speaker 1: in two decades. So a combination of the Fed cutting rates,

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Speaker 1: with the Bank of Japan raising rates, and a strengthening.

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Speaker 3: Yen led to panic selling, and the brokers started to

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Speaker 3: give our margin cause and a lot of the hatch

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Speaker 3: fans had no choice but to unwind their trades.

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Speaker 2: Hedge from sold stocks in Japan at the fastest pace

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Speaker 2: in more than five years. It is looking ugly out there.

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Speaker 2: Age inequities have been selling off aggressively.

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Speaker 3: This carry trade, which seemed like the easy trade, is

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Speaker 3: no longer, so you start exiting fast and it starts

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Speaker 3: to be self fulfilling.

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Speaker 2: On wines and on wines and on wines.

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Speaker 1: Billions of dollars worth of carry trades went up in smoke.

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Speaker 1: So here's what happened, David. Remember that thousand dollars loan

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Speaker 1: I took out from you.

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Speaker 2: Yes, I'm running the Japanese bank. I lent you one

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Speaker 2: thousand dollars worth of yen at basically no interest rate.

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Speaker 1: Right, and then I turned around and loaned that one

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Speaker 1: thousand dollars out in the US at an interest rate

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Speaker 1: of five and a half percent.

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Speaker 2: I remember, now you made sixty bucks. I think that's right.

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Speaker 1: But now when I borrow money from you, I won't

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Speaker 1: pay an interest rate of zero. I'll have to pay

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Speaker 1: you zero point two five percent on that loan.

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Speaker 2: Well, point twenty five percent is still a lot lower

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Speaker 2: than five and a half percent, So you would make

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Speaker 2: less money. But it does seem like you'd still make money. Right.

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Speaker 1: Well, you would be right about that, except that something

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Speaker 1: else happened. When Japan raised interest rates. The value of

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Speaker 1: the yen went up by a lot.

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Speaker 2: So when you convert your US dollars back to yen

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Speaker 2: to pay me back for that loan I gave you,

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Speaker 2: your US dollars aren't worth as much. A thousand US

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Speaker 2: dollars doesn't buy as much yen as it used.

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Speaker 1: To, exactly, so when I paid back that one thousand

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Speaker 1: dollars loan, I might have to pay more like eleven

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Speaker 1: hundred dollars now, So.

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Speaker 2: Between a higher interest rate from me and your dollars

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Speaker 2: buying fewer yen, that's sixty bucks you made in profit

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Speaker 2: on your carry trade is basically gone vanished.

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Speaker 1: If I'm lucky, I might actually now have lost money

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Speaker 1: on this carry trade. Shuley Wren said, it's like that

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Speaker 1: famous Warren Buffett quote about what happens to people who

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Speaker 1: haven't prepared for market change.

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Speaker 3: So basically, it's like a tide coming to the beach

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Speaker 3: and then stop, and then that tie suddenly receded, and

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Speaker 3: then we got to see who was swimming naked. Basically,

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Speaker 3: we actually see that the yen's movement was highly colerated

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Speaker 3: with the movement of NESTAC, so Japan's currency is affecting

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Speaker 3: US stall market.

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Speaker 2: For a long time, carry trades were mostly done via

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Speaker 2: bonds and other currencies like the yen peso carry trade,

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Speaker 2: But over the past few years, traders have been borrowing

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Speaker 2: yen to buy American tech companies, juicing their returns, which

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Speaker 2: was why the decision to unwind those trades sparked a

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Speaker 2: selloff on the Nasdaq a few weeks ago.

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Speaker 1: Now there must have been a lot of upset investors

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Speaker 1: when the Bank of Japan raised rates and the markets crashed.

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Speaker 1: Was there a lot of criticism of what the Bank

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Speaker 1: of Japan was doing.

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Speaker 3: Yes, there was a lot of criticism saying that the

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Speaker 3: Bank of Japan was bearing it it's head in the sand,

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Speaker 3: that it was raising interest rates too early.

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Speaker 1: But I have to.

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Speaker 3: Say that you know, this one sided bet on the

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Speaker 3: yen has been going on so long.

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Speaker 1: So it sounds like you think it was bound to

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Speaker 1: happen this correction.

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Speaker 3: Yes, it was already getting too big.

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Speaker 2: So now that the correction has happened, where does all

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Speaker 2: of this leave the yen? Carry trade?

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Speaker 3: The carria trade will only get very popular if people

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Speaker 3: can see it's a one way back and that that's

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Speaker 3: probably not what the Bank of Japan wants the yen

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Speaker 3: to behave, right, And then that's a problem that the

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Speaker 3: other central banks have seen as well, because if the

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Speaker 3: carry trade is too popular and the central bank suddenly

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Speaker 3: changes its interest rate regime, we will see this kind

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Speaker 3: of violent wine that we saw in August.

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Speaker 1: So there you go, David.

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Speaker 2: The carry trade, the carry trade, the en carry trade

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Speaker 2: in particular, was going strong on the idea that interest

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Speaker 2: rates in Japan would remain relatively low even as central

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Speaker 2: banks in the US and the UK cut rates, and

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Speaker 2: that would continue to make the en week relative to

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Speaker 2: other currencies, so borrowing money would essentially be much cheaper there.

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Speaker 1: In other words, people would be able to pay for

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Speaker 1: five dumplings and get eight.

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Speaker 2: Speaking of dumplings, Wind, any chance you could FedEx me

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Speaker 2: some of those dumplings. It doesn't look like I'll get

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Speaker 2: a reservation here in New York at any times.

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Speaker 1: Sued that will cost you a little more than ten dollars. David, Okay,

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Speaker 1: I'm going to go dig into one of these Shollong

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Speaker 1: bows before they get cold my permission.

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Speaker 2: I'm so jealous right now.

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Speaker 1: This is the Big take Asia from Bloomberg News.

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Speaker 2: I'm wanh and I'm David Gerre. For more on the

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Speaker 2: Carrie trade blow up, you can listen to our sister podcast,

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Speaker 2: Odd Lots. Tracy Alloway and Joe Wisenthal recently spoke with

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Speaker 2: Jon Song Shin of the Bank of International Settlements. That's

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Speaker 2: the bank of Banks that's been trying to track down

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Speaker 2: just how big the Yen Carrie trade is. You can

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Speaker 2: find that wherever you get your Podcasts.

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Speaker 1: This episode was produced by Young Young Name me Um,

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Speaker 1: Jessica Beck and Alex Huguiera, who also mixed it.

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Speaker 2: And Kim Gidtleson, who also edited this episode, along with

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Speaker 2: Stacy Vanick Smith, Nicholas Reynolds, and Caitlin Kenney. It was

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Speaker 2: fact checked by Eddie Dwan.

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Speaker 1: Our senior editor is Elizabeth Ponso, Nicole Beemster Bower is

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Speaker 1: our executive producer, and Sage Bouman is Bloomberg's head of podcasts.

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Speaker 1: If you like our show, please leave us a review

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Speaker 1: wherever you listen to podcasts, or tell your friends it

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Speaker 1: makes a big difference. Thank you and see you next time.