As most of you have already heard the central bank of Japan raised their benchmark interest rate late last week. For decades, the Japanese central bank has held interest rates at virtually zero. Large institutional investors have borrowed in the Japanese currency (Yen) and invested the borrowed money in other asset classes around the globe. This is referred to as the Yen carry trade. This has occurred for over a decade. So, when the Japanese central bank raised rates, it put pressure on the Yen carry trade and has caused institutional investors losses and therefore they must sell their positions to offset the losses or deposit additional funds.
This is like what happened to Long Term Capital Management in 1998. In short, they borrowed money from their investments and when the market went against them their account(s) blew up. You have two options sell your positions to cover your debt (if possible) or deposit more funds. Often institutional investors try to make it sound more sophisticated than it is…. They have borrowed large amounts of money, and the bet went against them and now it is time to pay up.
As of last week, we received more data showing the U.S. economy is slowing down and the Federal Reserve is likely to act and lower interest rates sooner than later. The market is now expecting the Federal Reserve to lower interest rates 1 to 1.5% by year end. We think the best course of action for investors is to stay invested through this drama and look to take advantage of high-quality companies.
Best,
Lawson Winchester Wealth Management
The views expressed are not necessarily the opinion of Cadaret Grant, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
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