The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (BUSINESS BOOKS)

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In this world, with the dominance of the Fed and the dollar, and the liquidity of the S&P 500 derivatives markets, the S&P 500 has evolved to become itself a carry trade at the centre of the global carry regime. A sudden crash in the S&P 500 crashes the global economy. The Fed then reacts by becoming a giant carry trader itself, replacing the private sector carry trade and ultimately reinforcing the carry regime. Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy - and the meteoric rise of carry.

To sum up the “anti carry” regime, it is essentially a world where inflation is alive and even potentially hyperinflationary. The authors seem to believe this as a solution can help clear up the debt burden in real terms and restore growth in the economy. The actual issue is far more complex and the only way to grow out of a debt overhang is real productive growth in the economy not by monetary inflation. a guy i'm on a first date with wrote this book with his dad. he keeps wiggling his eyebrow at everything i say. Financial instability has thus risen as the carry trade has grown. The Rise of Carry does not estimate the size of the market, for which reliable data do not seem to be available, but the authors argue convincingly that it is very large and has expanded greatly in recent years. They also point to the risk that volatility in different financial assets may be contagious: “There is also evidence of a growing correlation between currency and equity market carry, suggesting that a single global volatility risk factor may be a driver of all forms of carry in the future. If this is true, future carry crashes may impact on all asset classes at the same time.” 7 Jamie Lee works for investment guru and philanthropist Jeremy Grantham, focusing on environmental research and volatility trading. He previously worked as economist and analyst for asset management companies in Boston and London. These data show that daily price changes of U.S. equities followed a random walk when measured over the whole span from 1927 to 2020. The actual variance over periods of one to thirty-two days is almost exactly the same as that implied by the daily variance (vari­ance, the square of the standard deviation, is a measure of volatility). Price changes do not, however, show a consistent pattern when measured over shorter time periods: since 1945 there has been a sharp positive serial correlation for one-day changes measured over periods of one to eleven years, but steady negative serial correlation there­after. Yet the authors are correct in claiming that daily price changes have shown a negative serial correlation since 1987.Implications of the book are interesting, but the writing is unconscionably bad. Yes, it’s a book about carry, you should have one cohesive definition and explanation of what it is, you don’t need to repeat at the beginning of every chapter what carry is. Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy—and the meteoric rise of carry.

Holding a short position in volatility, by contrast, produces steady profits at the expense of occasional large losses. In the event of higher volatility, those who provide insurance against such an increase have a high risk of going bankrupt—a risk that is amplified if, as seems most often to be the case, they are leveraged. Thus a rise in volatility has the potential to set off a vicious cycle: when volatility rises, the cost of insuring against both gamma and vega risks will likewise rise; as a result of this increased cost, the market will become less liquid, and the decline in liquidity is itself likely to enhance volatility.The Rise of Carry provides foundational knowledge and expert insights you need to protect yourself from what have come to be common market upheavals—as well as the next major crisis. This stems the immediate crises but, below the surface, also serves to truncate losses for carry traders. By truncating losses, central banks encourage further growth in carry trades, requiring larger central bank intervention during the next crisis. Simply put, carry trading is now the primary determinant of the global business cycle--a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises. Both the extremely high level of the equity market, which cur­rently matches the previous peaks of 1929 and 2000, 18 and the low level of volatility over the past decade, indicate that we face a high risk of a major bear market. The Rise of Carry provides a timely des­cription of how this situation has arisen and an urgent warning of dangers ahead. This article originally appeared in American Affairs Volume V, Number 2 (Summer 2021): 46–59. The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy - until now.

What effect does a short volatility trader have on the market? The authors are not explicit here, but a simple thought experiment may help. Consider first the delta hedging trader. If the market rises, they are forced to buy. If it falls, they must sell. Their actions will increase market volatility. Interestingly, if they have sold their option to another delta hedged trader, then their actions will be exactly mirrored by the buyer. There is zero net effect on the market, since their trades will exactly offset (assuming the same hedging strategy is used). the markets triggers central bank action to stabilize markets, reduce volatility, and ultimately truncate losses for some carry traders who would otherwise have been bankrupted (p. 37, LL&C). We will only delve on as much history as needed to construct the foundation. At the precipice of the 2008 GFC, liquidity seized, and interbank trust evaporated. The fed’s immediate actions of: Tim Lee is the founder of the independent economics consultancy pi Economics, serving financial institutions from hedge funds to traditional asset managers. Previously he worked for global asset managers including GT Management and Invesco in Hong Kong and London. He is the author of the highly regarded Economics for Professional Investors (2nd edition, 1998) and his commentaries and analysis have been widely quoted in the media. Tim was educated at Magdalene College, Cambridge University.that this is all counterproductive stuff to the real economy due to moral hazards / inefficient allocation of capital / zombie companies not allowed to die and be cleaned up and