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why are markets absolutely collapsing what is this Japanese carry trade we're going to talk about that and explain it in this video so you fully understand the Japanese carry trade everybody keeps talking about and why Japan could be leading markets to crash in America of course it could also be that we are now under an imminent threat of an Iranian and Hezbollah Leed attack against Israel which threatens to be larger than anything Israel has ever seen before with Israel now warning that Israelis could be without power for 3 days as they face a multi-pronged attack expected to begin within the next 24 hours if not tonight then tomorrow night just crazy world that we're in or is it just that the US might be going into a recession or D all of the above H well in this video we're going to start by talking about the Japanese carry trade and trying to explain it now let's be clear right at the start the Japanese stock market ain't doing too well just in the last 12 hours the Japanese Market well let's just put it this way their topics index circuit breaker hit no more trading for a period of time bond market circuit breaker hit no more trading for a period of time South Korea in sympathy for what's going on in Japan just decided you know what nobody's allowed to sell after The Cosby's down 4.6% zoom in on Japan for a moment nay down over 65% the Nay 225 Nintendo stocks down 11.3% but who cares about Nintendo what are the banks doing in Japan oh the second largest bank in the country down 15.5% the largest bank in the country like the equivalent of a JP Morgan down 12.2% well at least Gold's up real gold not digital gold because bitcoin's down 11% at the down 21% in the overnight trading app Robin Hood you could look at Tesla down 6% Apple down 6.9% Nvidia down 6.75% and all Futures are red LED by no joke small caps and NASDAQ 100 and you've got the S&P down 1.42% Dow future is also down 77% so this just a quick little rundown on what the heck is going on here this is a lot of pain why what is going on well let's start with the carry trade let's explain this so everybody knows that the entire world has been facing a lot of inflation except for Japan they've basically stagnated since the 90s and they've faced issues of too much deflation maybe they're not having enough babies maybe they're not having enough Innovation who knows but they did not have the inflation problem of the rest of the world this meant that while Japan Japan was actually lowering rates and had negative interest rates everyone else was Raising interest rates now this does something very interesting because when interest rates go up in let's say the United States it becomes more attractive to buy the 10-year treasury bond so for example if the 10year treasury is trading for 3.76% just like it is now and the Japanese 10 years trading for 82% which Bond would you rather have the 10year debt paying you 3.7% guaranteed and backed by the full faith and credit of the US or the Japanese 10e paying you just 82% it's a no-brainer an absolute no-brainer you're going to buy the US Bond and if you have any other currency you're going to sell that other currency you're going to go buy US Dollars and you're going to go invest in that us bond this creates a lot of selling pressure on currencies like the Japanese Yen so the Japanese Yen goes down in value which enables something unique called the carry trade okay now you're going to have to roll with me on this one because it's a little complicated but I'm going to make it as simple as possible okay here's an example of what a carry trade looks like and and let's just start extremely simple let's just say right now you want to take on a margin loan on stocks in America it might cost you 65% in the US but what if you could go to Japan and in Japan you could borrow at 1.5% oh well that's a lot more desirable why don't I go borrow in Japan and then go invest that money in either us treasuries which are literally yielding more than what I'm paying on my debt or how about mag six stock or mag s stocks whatever you want right mag 6 mag 7 the biggest stocks in America buy some Nvidia buy the diot some Tesla whatever this is essentially an Arbitrage of interest rates that's what this all comes down to now how does this go wrong well first of all to understand how it goes wrong let's understand how it goes right let's say I borrow oodles and Boodles of money in Japan and that oodles and nooodles just to make math simple right now we're just going to call it $11,000 I go borrow $11,000 or I'll call it ,000 Yen uh $1,000 worth of Yen that's what we'll call it $1,000 uh worth of uh Japanese Yen and I'm going to take that money and I'm going to use it to go buy us assets well if the Japanese Yen keeps going down in value it's actually going to be a lot cheaper for me to pay off that money like let's say I take that ,000 and I put it into us treasuries over here well every single year I'm getting my 3 or 5% yield on money markets or treasuries maybe even a little bit more so maybe let's say over here I've all of a sudden after a year got 1,050 bucks and the Japanese Yen fell 20% in value so I actually only have to pay back $800 worth of Yen over here this is great I picked up 50 bucks very cheaply in America so I'm plus 5050 over here and I can now pay that Yen back with $200 fewer dollars so I pick up $200 over here let's go baby I just made 250 bucks 25% chit Ching investing on the fact that the Japanese yen is going down and guess what the Japanese Yen usually goes does like what is the Japanese Yen usually do well because they're facing deflation and stagnation it's usually either stable or it goes down with the exception of very rare cases the Japanese Yen usually just loses lots of money it's just kind of unfortunately the way it's worked so for example if you pull up the US uh to uh Japanese Yen valuation over here you can see there are very rare cases where the Japanese Yen spikes once over here in '95 over here in 2011 you can see over here the Yen's actually been plummeting so it's actually made the the carry trade more desirable I mean you've dropped 27% in the value of the Yen so that example I just gave on the iPad over here this has been printing money it's been absolutely minting minting minting yeah to close this door I here the children again hold on a sec double I got two two sound doors over there let's close this stuff anyway so you've been printing money doing this carry trade because the Japanese y just go down down down so people keep adding to their bets adding to their bets adding to their bets adding the bets okay cool like you're winning that's wonderful like Kevin what's wrong with this ah yes yes there has to be a downside of any trade right of course there is so let's say you decided to take your $1,000 over uh in Japan so you're going to borrow $1,000 worth of uh Japanese Yen okay so we take our $1,000 over here $1,000 worth of Japanese Y and now what we're going to do is we're going to invest that into the dip on Tesla okay and let's just say we bought Tesla just for Giggles because this could be anything okay you're like man Tesla's going to the Moon baby I'mma buy it at 270 and then of course you know Elon rug pulls you and you know delays the robo taxi event whatever okay we we don't you put any placeholder there this is not a Tesla video is could be anything it could be Nvidia at darn things down like 25% from its peak you know it could be Tesla obviously you're going to be down about 30ish per it does not matter what it is or you have a leverag position doesn't matter what it is let's go with you buy Tesla at 270 okay you know what forget even what price it is you just put $11,000 into Tesla stock right here because you borrowed $1,000 worth of Yen you put it all into Tesla stock but wait a minute if you put $1,000 into a broker in America why are you just going to use $11,000 come on man reg te margin 50% down I get to buy $2,000 of Tesla with $1,000 of a deposit right that is a typical margin Loan in America so now I borrowed the money cheap over here the money that I borrowed very cheaply in Japan I'm now going to leverage again in the US Stock Market but why was this matter I mean the Japanese currency keeps devaluing everything should be fine oh but wait then all of a sudden Japan says hey look everyone we finally got it up let's raise interest rates because inflation is finally moving up uh what yes this is exactly what Japan did last week they raised interest rates 25 basis points and they were already at positive so they just went up another 25 BPS and what happens when countries raise their interest rates that's right their bonds become more desirable especially since Japan is now going up and everybody else is cutting so you're getting more of a yield in Japan so what all of a sudden happens to the value of the US dollar when yields go down oh the dollar goes down the Japanese Yen goes up which exacerbates the spread because you're going in both directions and so oh over the last month so over the last 30 days the Japanese Yen has appreciated 10% o o oh but wait a minute I borrowed $1,000 worth of Yen over here how many dollars do I need now to repay that loan in Japan well now because it's 10% more expensive I need $1,100 to repay my loan in Japan no problem no problem what's my Tesla stock doing oh God it's down 30% and I'm on margin oh okay so just to make math a little fun here actually the example I did is I went with 35% so let's assume it's down 35% that's down $700 on $22,000 so that means all of a sudden I have $1,300 left over here but wait a minute I'm such a dgen i also borrowed over here so I actually only have $300 of equity $300 of equity out of the $2,000 of stock I bought is 15% oh who's that calling oh it's Mr margin calling a now you get liquidated sure you get your $300 back but you got liquidated which contributes to more selling pressure in the United States oh no but wait a minute bro now I only have $300 left and I have to pay an a an $1,100 loan off in Japan and now Japan is going hey bro margin's calling and you're like what why because sir you have $300 of collateral left on the $1,100 loan you just took out because we could see what you did with your money we want our money back you're at margin levels and you're like okay guess I'm filing BK and getting host boom now you have to either borrow more from somewhere else to pay off that $1,100 loan or you're defaulting and you're destroying the banks which now it totally makes sense why the banks are collapsing in Japan well their stock valuations are collapsing because they are getting burned over here on their debt as well so they burn us in our stock market and they get and they burn the banks over over there now how big is this trade well nobody really knows Kathy Wood thinks it could be as much as 10% of the United States stock market that's massive like as much as1 trillion of Leverage in all risk assets risk assets crypto stocks doesn't matter okay this is always funny because I talk about this in my course member live streams and people are like oh you know sometimes people are like oh but Kev crypto is not a a a risk asset like it is the definition of risk asset why do you think gold is up and bitcoin's down 11% right now your boy Kevin by the way uh let's just say this is not an advertisement or anything but I've been talking about this for for a couple weeks now since probably since about July 11th like everything really hit the fan but um on on the fund I manage we're NE we're like 5% short Bitcoin I wish I had more short Bitcoin right now because that's going to do really freaking well tomorrow remember if you want any might buy sell alerts or anything meetkevin.com you can learn everything in the courses I'm building your with you should be part of the course member live streams because we talk about this kind of stuff on a daily basis or even chat in our Discord server uh but anyway what is next well maybe Japan can just print more money right and they could sort of solve this issue right well so far the uh Japanese cabinet is saying they're watching Market moves with a sense of urgency and uh don't worry share prices are determined by determined by a variet of forces and um yeah we're just going to keep watching that doesn't really inspire a lot of confidence so what about the money printing part Kevin like when when are they just going to turn the printer on again and make all this pain go away ah okay well in order to understand that we have to consider what Japan's debt to GDP is and compare it to where everybody else is in the rest of the world so we have a lot of debt in the United States we know a little over 100% here Japan's debt to GDP sits around 263 per.
that is higher than Venezuela and it takes the number one spot for being the most indebted country in the world as it compares to GDP that's pretty pathetic so I don't think they're turning on the money printer anytime soon because they freaking can't add to this the fact that an attack by Iran is likely imminent and add to this that people are pricing in re recession fears in America and you've got a whole heck a lot of uncertainty now does that necessarily mean that the United States stock Market is going to sell off on Monday well the Futures Market says so but that was during the Japanese stock market open maybe cooler heads will prevail and everything will be hunky dory in the morning everything will start going up again we'll have a nice little rebound and maybe we'll open up to just a little byy the dip opportunity and nothing else to see here everything's fine or things will completely panic and everybody will take every opportunity at a bounce just to sell more stock because this is a sinking ship and everybody sees the exit over there well according to a poll I ran on X the ladder doesn't seem to be the big priority in fact according to a poll I ran on X which you should follow me there at real meet Kevin with 6,761 results 44.6% of you said yes Kevin by the dip 34.3% of you said I'm holding and only 21.2% of you suggested that you were selling also when I suggested that Bitcoin might be a risk asset somebody replied to me and said but Kevin they're investing in Bitcoin for the tech right that's going to help save you in these Market moves it won't anyway so I'm curious what do you all think what are you all going to do I will make the argument that probably the safest investment right now is Cash followed by treasury bonds which might continue to collapse in yields now you might be thinking oh but Kevin the Federal Reserve is going to come bail us out right well this is where you have to ask yourself what does the FED care more about avoiding recession or avoiding inflation H see I ran that poll as well and the vast majority of people said oh the the FED wants to avoid a recession and to that I say I'm out of a drink you're wrong the FED cares way more about destroying inflation because inflation ends countries recessions are healthy so buckle up buckle up the FED ain't coming to bail you out anytime soon now if you want to know exactly what I'm trading make sure you're part of those courses over at Meek kevin.com always make sure to hit that subscribe button we're about to cross 2 million subscribers so if you haven't hit that button yet and you're not part of the pre-2 million subscriber Clan I don't know what yall waiting for we got a great Clan going on here okay the mkk I mean the MKC it's great come join thank you so much for watching and we'll see you all in the next one goodbye and good luck by the way if any of this makes you nervous you life you can Apple pay or Android pay for it it's what Lauren and I use and it takes as little as5 minutes to sign up that's metkevin.com life see you all by
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