Those who predicted last Monday's market crash made millions.
You can also predict and profit from it.
Here’s a guide to what happened, how to foresee it, and how to profit from it 🧵👇
Lessons from the Subprime Crisis
The subprime mortgage crisis was caused by risky mortgages, and those who predicted it, such as the characters in "The Big Short," made millions by betting against these loans.
A similar opportunity presented itself last Monday, this time in the yen carry trade.
What is the Yen Carry Trade?
Japan has long used a near-zero interest rate policy to combat deflation and stimulate its economy.
The yen carry trade involves borrowing yen at a low interest rate, converting it into other currencies and then investing it in higher-yielding assets.
Profits come from interest rate differentials.
example
Suppose I do the following:
Borrow 15 billion yen at 0% interest
Convert 15 billion yen into 1 million U.S. dollars
Buy US Treasury bonds with an annual yield of 5%
In one year, you will be making $50,000 with almost no effort and for free!
Yen exchanged for USD can even be used in DeFi.
This is possible because of the interconnectedness of the Japanese and Western (American and European) economic systems.
This is not feasible in African currencies, for example, as these cannot be converted into US dollars.
The only way to convert these currencies into US dollars is through the black market or commodity trading.
Risks of Trading
The Yen Carry Trade was amazing, until it wasn't anymore.
Yen carry trades can quickly lead to losses if:
- Japanese yen yields rise
- The yen strengthens against the dollar
- US yields fall
Last Monday, all three of these things happened at the same time!
The yen rate rose from 0.1% to 0.25%. Although it seems small, it is not the whole story.
Meanwhile, the yen has risen more than 10% against the dollar.
In addition, U.S. Treasury yields and stock prices both fell.
These factors combined to lead to the market crash last Monday.
Revisiting the example
Remember, we owe 15 billion yen.
But we no longer have 15 billion yen, we have national debt.
Therefore, we have to convert it back into USD (losing money) and need to pay back more since loan yields also go up.
This triggered a chain of liquidations, with investors suffering heavy losses and having to sell other positions to balance their losses.
- Crypto assets are sold
- Stocks are sold
- Everything is sold off
All of this is inevitable and will happen sooner or later.
You can easily see that Japan's outbound investment has surged in recent years, clearly showing that hedge funds are the main beneficiaries of Japan's low interest rate policy.
Furthermore, many indicators show a strong correlation between the U.S. market and the Japanese yen.
This shouldn't happen, but since the yen is simply free money used to invest in the U.S. market, this correlation occurs.
Many economists have written articles warning of this.
An estimated $2.5 trillion is spent on yen carry trades, a sum that could trigger a chain reaction of liquidations.
Warren Buffett anticipated this by selling all of his Apple stock.
Market recovery
What happened next was that, as always, they injected liquidity out of thin air to save the market.
This is only a temporary solution, don't be fooled.
in conclusion
Market ups and downs often hide huge opportunities. Just as those who predicted the subprime mortgage crisis and last Monday's market crash made millions, you can also predict and profit from a market crash. The key is to understand market dynamics, identify potential risks, and develop an investment strategy accordingly. By constantly learning and observing market trends, you can improve your ability to predict market crashes and profit from them. Remember, opportunities always come to those who are prepared.
