On today’s show we are talking about a new paper published last Friday by Brent Johnson and Michael Peregrine of Santiago Capital. Brent Johnson is famous for his dollar milkshake theory.

This 44 page article is a deep dive into the Japanese carry trade. Many of you might remember a banking crisis that erupted in Japan last month as a result of the implosion of widespread carry trade activity.

While the Yen is likely to rise in the short term when the carry trade truly blows up, it is probably going to fall after that. As I said, the BOJ can protect the bond market or the currency, but not both.

So why do we care about this? If Japan dumps a trillion dollars worth of US Treasuries in a short time period, we could see the supply of US Treasuries exceed demand. That means a sharp and unexpected rise in the yield for US Treasuries which will impact the cost of borrowing for real estate investors. Just because the Fed is in a lowering cycle for the Fed Funds rate, doesn’t mean that the cost of borrowing for real estate investors will follow suit.

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Consequence Of The Japanese Carry Trade