Friday, August 10, 2007

CarryTrade and Global Liquidity

It's been my belief for a long time that global liquidity was really the only thing floating the leaky boat, aka, the US stock market.

Unfortunately, there is so much inflation built into the system that one can feel compelled to continue trying to "pick up nickels in front of steam rollers" -- nickel and diming the market, playing a dangerous game that works really well -- until it doesn't.

I've been looking for some indicator of global liquidity flows as a more reliable predictor of when the faucet is being turned on and off.

below is an idea that i stole from a currency trader posting as "hoz" on Interesting stuff. He believes that the marginal money coming into the US stock markets only after a series of carry trades is being carried out. The trades go something like this (according to him)

1) borrow moneys in Japan from bank
2)buy Euro sell Yen =EuroYen
3) buy British Gilts
4) buy US stocks with Gilts as your margin requirement

This url is to a graph of the EuroYen vs the SP500 for 1 yr.
The correlation is 0.94, from a practical viewpoint if the EuroYen is higher than the previous day the stock market is going up - no matter how much bad news is out there.

fwiw, i think we are very very close to a serious problem in the markets or the dollar. if/when the problems happen it could even take down the safe havens in the immediate term as leveraged players look to raise cash.


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