Survival Report

[Smurf1976]

http://www.agorafinancial.com/THE_PUBS/SUR.../April2006.html

Sorry if this has already been posted. It's from the US and covers quite a few topics including oil production falling, interest rates, house prices falling etc. All happening it seems just as predicted on HPC.

[Bloodnuts]

Smurf1976

Now that was an report worth reading!

Some good points on the current commodity boom - maybe that's where Treasurer Costello sourced his material warning investors/speculators to be cautious on expecting further material gains in commodity shares!

QUESTION

Is 'Carry Trade' the same concept as those foreign currency loans alot of Australian farmers took out in the mid 1980s (eg borrow swiss franc loans because the interest rate is low but forget that the A$ can depreciate making repayments even higher? - a lot of unhappy farmers I recall)

cheers

[Smurf1976]

A carry trade is when one thing is borrowed in order to buy another. In this case it has involved borrowing Japanese Yen at 0.1% interest in order to invest in other currencies such as, for example, the New Zealand Dollar. Since NZ interest rates are about 7.25%, doing this makes a substantial profit on your borrowed money just by literally banking it in another country.

The very low interest rate in Japan has provided the source of funds for the carry trades thus enabling large investments to be made in the currencies of other countries. It's highly profitable untill that source of funds starts to dry up, as the Bank of Japan (equiv the RBA in Oz or BoE in UK) are now implying will happen. Then it's game over and the unwinding of all those speculative positions is likely to mean selling a lot of non-Japanese currency thus reducing its value and in due course putting pressure on other central banks (eg RBA, BoE) to raise their interest rates also (in order to keep their currencies attractive). A global trend of rising interest rates is thus born.

What the Australian farmers did in the 1980's was similar but not the same. They borrowed in foreign currencies to take advantage of low interest rates (just like those borrowing from Japan recently). But unlike those investing in currencies, they invested the money in actual business - farming - which isn't easy to quickly liqidate in order to repay the loan. Hence they became trapped by rising interest rates and a falling Austrlian Dollar sending their repayments through the roof. Similar in that foreign borrowing is involved but the end use of the money was different to the carry trade.

Borrowing heavily to invest in real estate is also a form of carry trade although it's not the generally accepted meaning of the term. You borrow from a lender with the intention of making a profit which exceeds the interest paid. Just like the currency carry trade only you invest in property instead of bonds.

Bonds? Bonds as in long term debt. Bond prices move inversely to interest rates - if bond prices fall then by definition the interest rate on those bonds (yield) has risen. It's the bond prices which ultimately set interest rates in the market. Since the carry trade money is substantially invested in bonds, a sell of has serious implications for interest rates globally. Indeed bond prices are already falling (interest rates rising).