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Showing posts from November, 2009

The New Virus on the Street

The unprecedented growth in asset prices, before the October 2008 collapse, was funded in substantial measure by the yen carry trade . A zero interest rate policy of the last decade, pursued by the Bank of Japan, led ultimately to the re-emergence of Japanese industry but also came with collateral damage. Hedge funds and other investors borrowed heavily on the yen, at negligible interest rates, and invested in US treasury with a clear 4-5% spread. They also placed punts on a diverse array of asset classes such as Icelandic bond-markets; global currencies; Dubai real-estate and emerging market stocks. They enabled the funding of large acquisitions and basically drove asset prices truly beyond what fundamentals could justifiably support. A crippled Japanese banking system and a continuing perception of zero interest rates to support a weak yen policy, hedged all downside risks. However, the Bank of Japan eventually hiked interest rates and the currency strengthened against the dollar lea