What is Carry Trade?

Definition
The definition of carry trade from Investopedia is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return. It is typically based on borrowing in a low-interest rate currency and converting the borrowed amount into another currency.

The Risk of Carry Trade
1. When the invested assets are declining sharply in price, carry trade investors should take risk.
2. Currency risk of invested currency will later be a burden. When the invested currency value tumbles, investor would have more deficit even thought the interest rates (rewards) are higher.

Japan is the best example of carry trade investment. Since natural disaster such as earthquake or typhoon is occurred frequently in Japan, indemnity insurance companies are obliged to compensate the losses. That is why Japanese investors were seeking for more gains, which later lead to FDI (Foreign Direct Investment) or foreign bonds. Recently, Japan is the largest net creditor country is the world. However, this kind of investment can negatively affect the economy.

For example, Japanese yen had reached about $1 trillion of carry trade investment due to its long low policy rate. However, when the global economy strikes to recession during 2008 financial crisis, the invested asset value was deteriorated. Japan started to sell off the foreign assets which is making Japanese Yen soars high.

It also happened during the worst earthquake (Kobe) in January 1995. Japanese Yen has tumbled until 1USD = 80JPY, due to withdrawal against carry trade investment. It was only 5 years after Japanese asset price bubble blasted, Japan had the worst domestic economy, troubled with insolvent assets. However, due to strong Japanese currency value, their exported started tumbling, making their economy go even worse. About 4 months later, Japan agreed to have anti-Plaza agreements, leaving Japanese Yen weakening its value.
(South Korea attempted to expand more on Capex investment since Japan had hard time with high JPY. They might have took it as great opportunity for their export. Unexpected anti-Plaza accord was one of the reason that lead South Korea in currency crisis.)

Stocks close lower despite the fall of unemployment rate? "Good is Bad"

U.S stocks slides amid the good news of declining unemployment rate. Why can it be possible? In Morning Brief session from Global Monitor mentioned a phrase, "Good is Bad". The good news can be bad news.

According to Department of Labor, initial jobless claims decreased to 963K from 1,191K ending a 20-week streak of results above 1 million. However, investors are concerned if job gains recovers, fiscal booster of giving extra $600 (stimulus package) will decline.

 

The S&P 500 has flirted with record levels in recent days but ended Thursday’s session down 6.92 points, or 0.2%, at 3373.43, still within 0.4% of its Feb. 19 record. The Dow Jones Industrial Average dropped 80.12 points, or 0.3%, to 27896.72, while the tech-heavy Nasdaq Composite index rose 30.27 points, or 0.3%, to 11042.50.

The yield on the 10-year U.S. Treasury note ticked up for the fifth straight session, to 0.714% Thursday from 0.669% a day earlier amid weak demand in a $26 billion auction of 30-year bonds. (Bear Steepening: 30-year bond yield has climbed due to less than expected demand for Conversion Issue)

In commodities, gold rose 1.1% to $1,956.70 a troy ounce as the volatility seen in recent days continued. “We keep gold because there are still uncertainties, real rates are low, inflation may be higher than expected,” said Luc Filip, head of private banking investments at SYZ Private Banking.

According to Professor Jeremy Siegel, bond yields will go higher in 2 or 3 years due to inflation. Investors will not seek for safe-assets, which means they will find riskier assets that compensate by providing higher returns. Inflation hedge assets such as Gold or TIPS can be one of them, stocks or high yield corporate bonds will be another.

Source 1: Weekly Unemployment Claims Drop Below One Million for First Time Since March
https://www.wsj.com/articles/unemployment-benefits-weekly-jobless-claims-coronavirus-08-13-2020-11597280120?mod=hp_lead_pos3

Source 2: Stocks Close Lower Despite Fall in Jobless Claims

https://www.wsj.com/articles/global-stock-markets-dow-update-8-13-2020-11597310515?mod=markets_lead_pos1

Source 3: Global Monitor Morning Brief

Source 4: I think we're going to have a spending boom in 2021: Wharton finance professor
https://www.youtube.com/watch?v=4oTFgqCXcyY

What is the 'Dollar's Smile'?

Brief explanation about Dollar's Smile.
U.S dollar tends to increase in value when the world economy is extremely weak or U.S economy becomes exceptionally stronger than other countries.
Suppose that there is a straight line. Two factors I mentioned above are at the end of the line which drags it upwards. Then the middle point would be relatively low which makes the figure looks like a smile. Let me give you three examples that influence on the moves of U.S Dollars.

1. When the U.S. economy is weak.
During the lowest bottom of real economy when the number of COVID-19 confirmed cases has spread, US Dollars became relatively stronger than other currencies. It is due to the increase in investors who are looking for the safest securities. Secured assets are mostly in U.S, so investors borrow or exchange into the dollars. Dollar's value surge up consequently. In extremely worst cases, investors withdraw cash from the safest assets such as U.S treasuries, which makes currency precious. (Cash is very important to compensate margin for leveraged loans. Margin calls are the most frightening signals for investor in risk of liquidation from investment bank.)

2. When U.S economy is stronger than other countries.
In fact, there are two cases that drive demand for U.S dollars. First, when U.S stock index rallies, investors all around the world will try to borrow dollars to buy the risky assets. When the economy overheats, FED will likely to increase FFR (Federal Funds Rate), which will look treasury bond attractive as yield increases. (Chance to buy bonds at relatively cheaper price) Recent days during FOMC, Fed announced to remain interest rate low until the inflation rate overshoots above 2% target.

3. When global growth especially on emerging countries strengthens.
Investors are on risk-on mode during the season when growth on global market boosts. Investors will look for more risky assets to have more capital gains and profits. Investors will sell safe-haven assets such as treasuries (bond, note, and bills) and exchange into risk currencies.

FYI: US dollar becomes strong during recession in US for two reasons.

1. When U.S consumption economy drop, then their import drops. This will lead to trade deficit drop. Supply of Dollar will drop which affects surge in USD.

2. U.S banks or financial institution will secure cash, which will lead to damage on carry trade investment. (In case of bank run) When U.S withdraws cash, then USD will be stronger. Other countries will suffer due to foreign exchange outflow.

Source 1: What Is the Dollar’s ‘Smile’?
https://www.wsj.com/articles/what-is-the-dollars-smile-11591539293#:~:text=The%20dollar%20smile%20is%20a,the%20smile%20on%20your%20face.

Source 2: Fed’s Kaplan Open to Overshooting Inflation Target to Provide More Support
https://www.wsj.com/articles/feds-kaplan-open-to-overshooting-inflation-target-to-provide-more-support-11594995860

U.S. Treasury yield recovers, challenging gold and silver's rally

U.S. Treasury yield rose on Wednesday in the NYSE bond market to 0.669% for the fourth straight session.

The yield's climb can be considered as the reason below.
1. Consumer Prices(CPI) and Core CPI(excluding foods and energy) each surged for 0.6 percent in July, the same increase as in June. Here is brief explanation of CPI from Investopedia.com. "The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them."

2. It was triggered by bond dealers' offering of new bonds, with their holdings and fund managers leaving room in their portfolios.
3. The decline in trading volume during the summer vacation season in the U.S. and Europe is also likely to have contributed to the decline.

The rise of treasury yield has curtailed investors's appetite of craving for Gold and Silver, which means that cash looks more attractive.

Source 1: Treasurys Stabilize After 10-Year Note Auction

https://www.wsj.com/articles/investors-shun-treasurys-ahead-of-massive-debt-sale-11597238313#:~:text=U.S.%20government%20bonds%20came%20under,of%20new%2010%2Dyear%20notes.&text=That%20marked%20a%20turnaround%20for,near%20record%20lows%20below%200.6%25.

Source 2: Rising Treasury Yields Challenge Precious Metals Rally

https://www.wsj.com/articles/gold-falls-on-likely-profit-taking-11597199510

Source 3: Consumer Prices Surge Again, Core CPI Jumps Most Since 1991
https://www.thestreet.com/mishtalk/economics/consumer-prices-surge-again-core-cpi-jumps-most-since-1991

Can Gold and Silver be considered as safe-haven asset or great hedge against inflation?

Gold and silver have been attractive asset to the investors recently as the central bank policy interest rates have been low after the emerge of COVID-19. It is considered as 'must have' assets among Robinhood due to their portfolio diversification.

In WSJ article, Jason Zweig calls Gold as yellow metal. Gold looks cheap for investors since they regard gold as extremely safe-assets. This ETF related to gold this year values nearly $215 billion; which is about 2 time more than a year ago. Around one-fifth of cash inflow to the gold asset has been made since January 1st 2020 as reported by World Gold Council.

Gold itself do not go up or down in its own value. The value of gold is relatively determined by the interest rate of cash. That means if Federal Fund Rate is set to be higher, then the value of cash follows that. (Interest rate means price of cash) If cash value increases, then the price of gold becomes relatively low. Gold shines brightest when the phase of inflation soars up due to devaluation of cash.

So investor regarded gold as 1. great hedge of inflation and 2. safe-haven assets. If economic downturns take place, people will look for gold. It makes sense however, not always. If the price of gold becomes relatively higher than other assets, then the price might fall due to the overheat of it.

I do not think gold and silver as very attractive assets than the stocks or bonds since it has storage cost, however produces no income like dividend or coupon(yields). The price of gold is also very uncertain against the economy. When economy recovers up and central banks pushes interest rate higher, then it will hurt gold. 

The similar characteristic asset that gold have would be TIPS (Treasury Inflation Protection Security).

However, I do not raise any problems about the possession of gold for the investment diversification.

Source 1: A Golden Rule From a Golden Fool
https://www.wsj.com/articles/a-golden-rule-from-a-golden-fool-11595599207

Source 2: Silver vs. Gold: How the Two Metals Compare as Investments
https://www.wsj.com/articles/silver-vs-gold-how-the-two-metals-compare-as-investments-11596899825

Source 3: Why Gold Prices Are Hitting All-Time Highs
https://www.wsj.com/articles/why-gold-prices-are-hitting-all-time-highs-11596533550

Good indicator of U.S-China relation? [HSBC]

HSBC is a good indicator of US-China relations since its main market is China and Hong Kong. Bank has lost more than half of its market capital since 2018. Now worth only $88bn, from $220bn in 2018 as Hong Kong's revenue accounted for 34% of the group's top line in 2019. Hong Kong share has slid to 9.5% in 1H, w/2Q bearing brunt. 

Twitter from Holger Zschaepitz

Source: https://twitter.com/Schuldensuehner/status/1293056550865719297?s=19

Turkish Lira hits historic low due to economic downturn

Lira vs HKD
The importance of foreign reserves. Lira and Hong Kong dollars faces profound trouble due to geopolitical issues, however what makes the currency in risk differs from foreign exchange reserves. Hong Kong's foreign exchange reserves are about $450 billion, while Turkey's foreign exchange reserves are only $49 billion, about a ninth of Hong Kong's.
The depreciation of the Turkish currency is making more difficult difficult situation now because it is exposed to the risk of outflow of its currency. Turkish central bank has no choice but to sell its foreign reserve, which is running out.

What is bad about depreciation
Depreciation of Lira can hurt their importing industry but more severe situation can lay out of more real debt to European banks. If this situation does not stop, Turkey will face extreme inflation (term stagflation) which will make Turkish citizen in despair.

Why is it weak
The country is earning less foreign currency due to weakening tourism industry due to COVID-19 and slump of export due to lessen global demand.  Recently Central Bank of Turkey has slashed about 3% of its interest rate this year to implement monetary policy. Lira has fallen 19% against US dollar this year.


Source 1: Turkish Lira’s Fall Drives Concerns for Euro

https://www.wsj.com/articles/turkish-liras-fall-drives-concerns-for-euro-11597070564?mod=markets_lead_pos3

Source 2: Turkish Lira Hits Another Historic Low Amid Pandemic

https://www.nytimes.com/aponline/2020/08/07/business/ap-eu-turkey-currency-1st-ld-writethru.html

Buy Now and Pay Later (Online POS loans) Industry and the most leading company [Affirm Inc]

"How can I buy expensive products such as Nintendo DS(for me it is regarded as very luxury good) or expensive cars like Lexus or Tesla at the moment on the payment site?" This is the question that comes out when I do not have enough rooms for capital. Back in my school days, my property all relied only on the allowance from my part time job or my parents'. I wish I could have credit card to buy now pay later. Unfortunately, all those goods that I was thriving for were only owned in my craving dream but not in my hands.

The times goes by, my dreams to own luxury goods faded away; did not really think about acquiring my own credit card.

One day, as I was checking which companies are about to be in IPO debut line-ups this year, I happened to find the company called Affirm Inc. I could check the company throughout Wall Street Journal down below.

The person in the picture looked very familiar to me and checked out.
He is Max Levchin, the founder of Paypal and Slide.com.
Paypal(1998) is very well known not only to the investors or traders but also to consumers in Western countries. Paypal is used for peer-to-peer payment mostly in B2B business. Their service include mobile payment software called Venmo, which is another popular payment tool for teenagers.
Slide.com(2004) is photo sharing software for social networking services. Later Google agreed to buy Slide.com in about $180m.

Affirm was founded in 2012; Max Levchin is now concentrating on installment payment service company.
I first wondered what Online POS loan meant. The industry was very new to me.

This is example of POS loans. Suppose a person needs Nintendo DS. He wants to buy the product in 360 USD, however, the capital is not enough for him. Affirm pays to the merchants for the consumers and later get the installment payment starting from 3 months to the most term 39 months. Well, that is good concept.
Then another question came out in mind, "what is the difference between credit card system?" and found out.
POS loans requires less credit, therefore less capital limits. Some installment loans do not charge late penalty fees. It is decoupling phenomenon from credit card ecosystem.

Partners
Affirm has more than 4,000 partners (my estimated calculation). Walmart, Expedia, and Shopify are one of the biggest partners. Affirm has also many partners of brand companies such as Peloton, Swatch, and so on.

Competitors
Then who are the competitors of Affirm? Maybe credit card companies like Visa, Mastercard are one of them, payment companies including Paypal or Square are another. But there are some companies which do almost exactly similar service with Affirm. Lets find out.

There are many companies like Sezzle, Splitit, Zip co, Klarna which offers installment loan service; among those, Afterpay is the biggest competitor. It is Australian company founded 2 years after Affirm and was listed in 2019 in ASX(Australian Security Exchange) market. Australia is the leading country which pioneered online POS loan industry.

This is the recent stock price of Afterpay and other competitors indicating the industry is growing up really fast. Maybe it COVID19 can be one of the reason to be benefited.

Well, Affirm is not listed publicly, however, by looking at the competitor's stock movement, investors can assume the industry is expanding and more users are looking forward for installment loans. I found the chart indicating Affirm.Inc has the most users among them.

This chart is limited in the U.S. market, since Afterpay takes over Oceania regions and Klarna (Swedish bank) is dominant in Europe. Nevertheless, U.S. has big consumers market. Investors will definitely crave for IPO of Affirm.Inc.



Source 1: It’s Layaway, But for a Post-Recession Economy
https://www.nytimes.com/2019/05/03/fashion/afterpay-quadpay-klarna-affirm.html

Source 2: Affirm Prepares IPO That Could Value Fintech Firm at Up to $10 Billion [WSJ]
https://www.wsj.com/articles/affirm-prepares-ipo-that-could-value-fintech-firm-at-up-to-10-billion-11596143292?mod=searchresults&page=1&pos=11

Source 3: ‘Buy Now Pay Later’ Is Having a Moment as Pandemic Changes Shopping Habits [WSJ]
https://www.wsj.com/articles/buy-now-pay-later-is-having-a-moment-as-pandemic-changes-shopping-habits-11594459800

Source 4: Eyeing That Sweater? It’s Yours in Four Easy Payments [WSJ]
https://www.wsj.com/articles/eyeing-that-sweater-its-yours-in-four-easy-payments-11569672000

The difference between Coupon Bond & Discount Bond / Investment-grade Bond & Speculative-grade Bond

Bonds are loans issued by the government, public organizations, and corporations to borrow relatively large amounts of cash from people. The most common types of bonds include treasury bonds, municipal bonds and corporate bonds.

The difference from stocks is that bond has maturity and interest, like bank deposits and savings. Stocks pay dividends to shareholders instead of interest, and there is no specific maturity date. Bonds are typically put importance on how it is safe and never be in a risky of bankruptcy rather than the fundamental of growth.

Bonds can be divided into two categories depending on the way interest is paid.
Coupon bond: A bond that pays interest every specific period. Depending on the bond, interest may be paid every three months, annually, or monthly.

Discount Bond: Unlike coupon bonds, discount bonds do not have interest(yield). Another word for discount bond is zero-coupon bond. Discount bonds are literally 'discounted' when issued and promise to buy them back at a higher price later. If issuer buys back later as promised, bond-holders will be able to profit from discount bond.

For example, if the purchaser promises to buy a discount bond issued at 9 million USD for 10 million USD after 3 years, the 3-year yield total will be 11.11% and the 1-year yield will be around 3.7%. From the issuer's point of view, they tend to issue discount bonds because they are burdensome to pay interest on a regular basis.
Discount bonds are a bit burdensome for purchasers who buy bonds. They will have to wait until the expiration. These days, it is said to issue coupon bonds to attract investors.

Bonds can be divided into 4 categories depending on where they are issued. There are treasuries (bill, note, bond, TIPS - government bonds) issued by the government, municipal bonds issued by local governments, bank bonds issued by financial institutions such as banks, and corporate bonds issued by companies such as corporations.

Moreover, there are two types of grades of the bonds.
Investment-grade: These bonds have a higher credit rating, implying less credit risk, than high-yield corporate bonds. (Over BBB- ratings)
Speculative-grade (High-yield): These bonds have a lower credit rating, implying higher credit risk, than investment-grade bonds and, therefore, offer higher interest rates in return for the increased risk. (Under BBB- ratings)

Mostly, companies with low credit ratings issue bonds, interest rates are high. There's a risk of failing to pay back as much as the credit rating is low, so it raises interest rates even more.

Source: Investor.gov
https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds#:~:text=Corporate%20bonds%20are%20debt%20securities,than%20high%2Dyield%20corporate%20bonds.

Why is South China Sea a very big issue?

Background of South China Sea conflict
In the past 20 years right before the WW2, Japan was reigning South China Sea. However, after being defeated in the war, they stepped back from the territory. About 6 countries started claiming for sovereignty over the Sea. The countries, which are involved in the territorial dispute, are Vietnam, Philippines, Taiwan, Malaysia, Brunei, and most importantly China.

Why is South China Sea important?
1. The South China Sea is a region of tremendous economic and geo-strategic importance. One-third of the world's maritime shipping passes through it, carrying over USD 3 trillion in trade each year including imported crude oil. About 80 percent of China's energy imports and 39.5 percent of China's total trade passes through the Sea.

2. Huge oil(estimated about 11 billion barrels) and natural gas reserves are believed to lie beneath its seabed. The disputes include the islands, reefs, banks, and other features of the South China Sea, including the Spratly Islands, Paracel Islands, Scarborough Shoal, and various boundaries in the Gulf of Tonkin.

Why is U.S. involved in this conflict?
There are four islands in the South China Sea. Spratly Islands and the Paracel Islands are the main issue among those four. Vietnam and Philippines challenged against China for the territory during 1974-1999, but failed to conquer. In 2013, China built military bases by building artificial islands which later created complaints from neighboring countries about 'Navigation Freedom'.

Experts now see the South China Sea as a conflict between U.S. and China, and forecast that there is high possibility to escalate into a military conflict. Chinese artificial islands have latest missile in that Sea; however, more than half of the U.S. forces in the Indo-Pacific region are near there. If the conflict rises between U.S. and China, then the countries nearby will take the risk of damage.

Source: Wikipedia about South China Sea
https://en.wikipedia.org/wiki/Territorial_disputes_in_the_South_China_Sea

Chinese companies be delisted if they fail to comply with U.S. audit requirements

Trump Administration announced that Chinese companies listed on the U.S. stock exchange could be delisted if they fail to comply with U.S. audit requirements according to plans recommended by the Trump administration. There were several problems that Chinese companies did not disclose financial statements sincerely. Companies that have already been listed have been given a deadline for compliance by 2022. Also companies that have plan to list in the U.S. stock market in the future must comply with audit requirements prior to listing.

The regulation against Chinese companies can imply two meanings.
1. To eliminate financial fraud regarding to the precedent issue such as Luckin Coffee listed in Nasdaq last year.
2. To use China as a tool for the next election. Threatening Chinese companies can switch the issue from inferior COVID-19 countermeasures.

WHO and China are the easiest target to change COVID-19 issue right before the election which will held November this year. So investors should think carefully.

[News from WSJ]
https://www.wsj.com/articles/trump-administration-seeks-crackdown-on-chinese-companies-with-shares-traded-in-u-s-11596748284?fbclid=IwAR2z7QR9dqwLMF1LbW3Rz0t0_cmVQWooxp6APzwGI9IBaGgEzfXwBLwUrq4

China wants to revitalize its domestic market again

China has announced that it will revitalize its domestic market again. In the past, there was attempt to stimulate their Chinese domestic market right after financial crisis of 2007-2009. It is famous that Chinese corporate have massive debts due to excessive investment to increase the employment rate and GDP.

To solve this issue, China has attempted to internationalize its currency RMB by pushing forward OBOR(One Belt One Road) which later changed its name to BRI(Belt and Road Initiative). The ambitious plan is for economic development and commercial project that focuses on improving connectivity and cooperation among multiple countries across the continent of Asia, Africa, and Europe.

Stimulating its domestic economy by its huge population (over 1.4 billion) can be very convincing, however, the weakness in its risky currency has made their plan failed temporarily.  Increase in FFR(Federal Fund Rate) announced by Federal Reserve has caused Chinese currency outflow.

Also, there is risk in two factors why Chinese have difficulty in revitalizing its domestic market at this moment.

1. China has a lot of corporate debt, so the companies may not be able to hire low-income groups, so overall income may not go up.
2. Unlike the United States, China has insufficient energy resource, so relying on imports would be unavoidable. (China needs U.S Dollars to import the commodities. In order to stabilized the Dollars, they have to export and earn the capital)

In addition, RMB is a risky asset, so there is a risk of outflow of local currency which might cause serious stagflation(most of emerging market faces this problem).

However, finding alternative energy would be the number 1 priority in order for China to grow stubborn. Movements to foster electric vehicle batteries in recent years is to activate the domestic economy, which will help achieving their ultimate goal, Smart City Project and Made in China 2025.

[News from WSJ]
https://www.wsj.com/articles/chinas-xi-pledges-stronger-domestic-market-global-ties-as-strife-with-west-brews-11595409718?fbclid=IwAR3ffVUWdzks9P5h_iIOwKVR6vtKO55IsMlX1JShN-o6Ewi-Ov0oLNlwhW4

Twitter's new subscription-based business can harm it's value

Twitter is starting a new subscription-based business to make short-term profits. This news has boosted Twitter's stock price by 14 percent for a week. (as of Week 2 of July)

Twitter is very financially stable company with 37% of net profit, but it seems to be under pressure from shareholders because of its lack of growth. It's questionable whether this pressure creates real value for the company itself or just to show their growth figures to shareholders in the short term.

Although shareholder-friendly environment in U.S. can certainly be welcome to the investors, we must think this will create harm to the value of Twitter itself.

https://theprint.in/opinion/twitters-planned-subscription-service-could-work-with-these-ideas-experts-suggest/477983/