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The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy--and the meteoric rise of carry.
The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy--until now.
A groundbreaking book sure to leave its mark in the canon of investing literature, The Rise of Carry explains how carry trading has virtually shaped the global economic picture--one of decaying economic growth, recurring crises, wealth disparity, and, in too many places, social and political upheaval. The authors explain how carry trades work--particularly in the currency and stock markets--and provide a compelling case for how carry trades have come to dominate the entire global business cycle. They provide thorough analyses of critical but often overlooked topics and issues, including:
-The active role stock prices play in causing recessions--as opposed to the common belief that recessions cause price crashes
-The real driving force behind financial asset prices
-The ways that carry, volatility selling, leverage, liquidity, and profitability affect the business cycle
-How positive returns to carry over time are related to market volatility--and how central bank policies have supercharged these returns
Simply put, carry trading is now the primary determinant of the global business cycle--a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises.
The Rise of Carry provides foundational knowledge and expert insights you need to protect yourself from what have come to be common market upheavals--as well as the next major crisis.
The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy--until now.
A groundbreaking book sure to leave its mark in the canon of investing literature, The Rise of Carry explains how carry trading has virtually shaped the global economic picture--one of decaying economic growth, recurring crises, wealth disparity, and, in too many places, social and political upheaval. The authors explain how carry trades work--particularly in the currency and stock markets--and provide a compelling case for how carry trades have come to dominate the entire global business cycle. They provide thorough analyses of critical but often overlooked topics and issues, including:
-The active role stock prices play in causing recessions--as opposed to the common belief that recessions cause price crashes
-The real driving force behind financial asset prices
-The ways that carry, volatility selling, leverage, liquidity, and profitability affect the business cycle
-How positive returns to carry over time are related to market volatility--and how central bank policies have supercharged these returns
Simply put, carry trading is now the primary determinant of the global business cycle--a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises.
The Rise of Carry provides foundational knowledge and expert insights you need to protect yourself from what have come to be common market upheavals--as well as the next major crisis.
240 pages, Hardcover
Published December 17, 2019
176 people are currently reading
939 people want to read
About the author
Tim Lee
75 books2 followersTim Lee lost his legs in Vietnam on March 8,1971 while leading a mine sweep in Quang-Nam Province. That event completely transformed his life, eventually leading to his call to the ministry.
A pastor for 5 years, Dr. Lee entered the field of full-time evangelism in 1979.
Note; not all the "Tim Lee" books listed were written by this author.
A pastor for 5 years, Dr. Lee entered the field of full-time evangelism in 1979.
Note; not all the "Tim Lee" books listed were written by this author.
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Displaying 1 - 30 of 37 reviews
April 14, 2020
Speculative more than definitive.
Implications of the book are interesting, but the writing is unconscionably bad. Yes, it’s a book about carry, you should have one cohesive definition and explanation of what it is, you don’t need to repeat at the beginning of every chapter what carry is.
The actual contents of this book is much more suited to a 10 page paper.
Tl;dr: carry is is any trades that is short vol, from borrowing currency that have lower interest rates and redeploying those funds in a currency that provides higher return, to private equity that performs leveraged buyouts, in that it hopes that the buyout provides a higher roi than the cost of debt.
The implication that the authors raise in the book is the fact that the fed keeps providing liquidity whenever markets turn sour; which truncates loses, and further encourages risk-on behavior, exacerbating the problem.
Implications of the book are interesting, but the writing is unconscionably bad. Yes, it’s a book about carry, you should have one cohesive definition and explanation of what it is, you don’t need to repeat at the beginning of every chapter what carry is.
The actual contents of this book is much more suited to a 10 page paper.
Tl;dr: carry is is any trades that is short vol, from borrowing currency that have lower interest rates and redeploying those funds in a currency that provides higher return, to private equity that performs leveraged buyouts, in that it hopes that the buyout provides a higher roi than the cost of debt.
The implication that the authors raise in the book is the fact that the fed keeps providing liquidity whenever markets turn sour; which truncates loses, and further encourages risk-on behavior, exacerbating the problem.
January 21, 2023
It’s a good book. And the theory is super interesting. The first half about the history of the carry trade was fantastic. It’s clipped, 1990s to today, but no notes. Best explanation I’ve seen. It’s doubly amazing because I spent the last year or so working around defi in the Blockchain space. And when you remove the nonsense, like 90% of it is just carry trades. Someone invests money in your protocol, you take that money and invest in a slightly higher interest rate. That guy does the same with a slightly higher risk asset. All the way down until you reach the absolute degenerate level of yield farming where you’ve got to be coked to the gills to even think it’s reasonable. Sadly, That’s why everything blew up when Terra blew up. Everyone was ultimately playing hot potato with tethers yield as the final boss. All the subsequent explosions, 3AC, FTX, can be seen as downhill from that event.
So for that, wonderful. The book doesn’t once mention crypto if you’re freaked out by my analogy. It sticks to a much more respectable level of securitized mortgages and insurance arbitrage. Although, I wish there’s been a little more historical examination. I think there were some missing threads here around Bretton Woods that really could’ve been explored better.
But the major shortfall here is how the authors fall into the trap of trying to extrapolate their pet theory into everything. And it seems to mostly fall flat at that point. It’s like asking your history professor to engage in creative writing. I think the skills that make someone really good at analysis often times can be detrimental for creativity. Sapiens falls into the same trap. And that’s fine. You’re essentially renting these authors‘s ideas through this book and using their model to try to fit that onto the world. It’s not like, they have some crystal ball about what’s going on. But it’s still annoying to read. And with three separate authors, you’d hope that at least someone can get a little wacky.
Read it for the important analysis of what seems to be a growing strategy. Not for examples of what you can do with that strategy. For that, you need to think critically on your own, good luck.
So for that, wonderful. The book doesn’t once mention crypto if you’re freaked out by my analogy. It sticks to a much more respectable level of securitized mortgages and insurance arbitrage. Although, I wish there’s been a little more historical examination. I think there were some missing threads here around Bretton Woods that really could’ve been explored better.
But the major shortfall here is how the authors fall into the trap of trying to extrapolate their pet theory into everything. And it seems to mostly fall flat at that point. It’s like asking your history professor to engage in creative writing. I think the skills that make someone really good at analysis often times can be detrimental for creativity. Sapiens falls into the same trap. And that’s fine. You’re essentially renting these authors‘s ideas through this book and using their model to try to fit that onto the world. It’s not like, they have some crystal ball about what’s going on. But it’s still annoying to read. And with three separate authors, you’d hope that at least someone can get a little wacky.
Read it for the important analysis of what seems to be a growing strategy. Not for examples of what you can do with that strategy. For that, you need to think critically on your own, good luck.
June 19, 2024
This is a difficult book to categorise. Is it a conspiracy theory? Is it a Marxist tract disguised as a finance textbook to fool naïve publishers? Is it a work of dystopian fiction appealing only to hedge fund professionals? Or is it a useful contribution to the understanding of modern financial markets, bringing together many useful insights. Let's see:
Arguments for conspiracy/Marxist tract/dystopian fiction theory: Mentions "fiat currency" a lot; condemns financial bubble formation and exploitative, rigged financial system leading to rent-seeking and growing inequality; anticipates the collapse of the existing financial regime, hyperinflation, the death of money and all the other nightmares of our financial masters.
Arguments against conspiracy/Marxist tract/dystopian fiction theory: Written by 'Lecturer in Financial Engineering' at UC Berkley; condemns 'crony capitalism', inequality and mal-investment - otherwise seems to quite like capitalism; explanations are consistent with observed behaviors of financial markets in recent decades; provides a coherent mechanism for the appearance of repeated asset price bubbles around the world, backed up with reference to relevant statistics.
In my opinion, for what it's worth, this book is on to something - but as other reviewers have mentioned, it might have taken a pet theory too far. Other factors - greed, stupidity, vested interests, group-think - are often excellent explanations of human behaviour that don't need the support of a complicated analysis of the financial system.
So what is this 'carry' whose rise we should all be so worried about? It might help to look at the simplest example of a carry trade - the currency carry trade - while daydreaming about a brand new job at an investment bank.
First day on the desk
It's January and you have a fresh start in life as a trader on the currency desk of Boldman Zachs. Your trading accounts are all set to zero. You have entered a brave new world where the only things you have going for you are access to millions of dollars of computer and communications equipment, billions of dollars of liquid cash and your brilliant trading brain. Your boss tells you to "go make money" before skipping off for a Starbucks in the basement.
What do you do? You draw on your trading skills honed by years of top class education and months of online poker. You watch the markets like a hawk, and observe that US dollar ('USD') interest rates are 1% to borrow, while Brazilian real ('BRL') interest rates pay out at 9%.
Put on the carry trade now!
In a flash you call your internal treasury department and borrow USD250 million for one year, then you call the currency desk to change your USD into BRL. A minute later you call the bond desk and buy a Brazilian bond that redeems in a year's time. Your hard work has locked in a profit calculated as the difference between the 1% interest you pay on the USD borrowing and the 9% you earn on the BRL denominated bond. This 8% difference is called your 'carry' and it will earn USD20million this year, being 8% of USD250 million.
You push back your chair, put your feet up on the desk and plan to take it easy for the next twelve months, safe in the knowledge that at least a few of those USD20 million should be deposited in your personal bank account this coming bonus season.
Foreign exchange risk
Hold on a minute! I hear some of the more astute among you say. Don't you have an unhedged foreign exchange exposure?
If the BRL crashed against the USD by the end of the year (or if it didn't crash, but just weakened enough so you wouldn't be able to swap it back for USD252.5m, being USD250m plus USD2.5m interest at 1%) then you'd have lost money overall, and depending on the USD/BRL rate potentially a large amount at that.
Shouldn't you hedge your USD/BRL foreign exchange risk by pre-agreeing the exchange rate you use to change your BRL back into USD in December so you are sure that you'll have enough USD to pay back the money you borrowed? (Shouldn't you - to use the jargon - buy a FX forward contract as a hedge, allowing you to sell the BRL you're sure to receive to USD252.5m at the end of December?)
You think about this for a moment and take a look at the Bloomberg terminal.
Unfortunately the price of an FX forward hedge incorporates the implied interest rate differential (your 8% carry) into the USD/BRL exchange rates used in the contract. If you hedged like this you'd end up safe from FX risk, but wipe out all the carry profit you were hoping to make. You decide not to bother, and start browsing the Ferrari website instead.
Casino capitalism? Or worse
The even more astute among you are now thinking that our hypothetical trader is really just a gambler playing with someone else's money.
He has no idea how FX rates will move during the year, but just wants to place a handy bet. If BRL strengthens against the USD he makes out like a bandit with foreign exchange profits to add on to his carry gains and boost his bonus even more. If the BRL weakens he will lose the money and his job, but so what? It's not his money after all, it's the shareholders'. He'll just move on to a job somewhere else next year and place the same bet which might still work. He'll still be paid his generous base salary, which will probably go up now that he's got an extra year's trading experience.
Well, if only this last scenario were true and casino capitalism was this simple. Unfortunately, according to the authors at least, the reality is far worse.
If everyone's doing it, it must be OK
The reason our trader can so confidently choose the colour of his new Ferrari is that all over offices in Lower Manhattan, the City of London or downtown Singapore other traders are making exactly the same bet that he is.
The BRL isn't going to collapse against the USD because those other traders are busy selling their USD to buy BRL denominated bonds as well, helping maintain the strength of the BRL by boosting BRL demand.
Meanwhile in Sao Paulo, Rio de Janeiro and Belo Horizonte the Brazilian companies selling all these bonds are busy spending the money they raise on skyscrapers, hotels, stadiums and (just occasionally) something useful to the Brazilian economy, like a factory for example. All that borrowing, spending and building is pushing up the price of Brazilian real estate, which is encouraging even more borrowing, spending and building, which is pushing up the price of Brazilian real estate and the BRL even more as everyone wants a piece of the boom.
The sad reality
The even yet more astute among you might think along the following lines: this is ridiculous and can only end in tears. It's like a massive Ponzi scheme.
Brazil doesn't need all these skyscrapers and hotels (although it might need a few of the factories). Eventually the penny will drop, the balloon go up and the house of cards collapses. The BRL will nose dive, the traders that borrowed all those USD will never be able to pay them back and because everyone's been doing it (which was the only reason the trade worked in the first place) the financial losses could bring down banks, hedge funds, insurance companies and ultimately the whole financial system.
Well, these even yet more astute readers are absolutely right - this is exactly what could happen, and in fact has happened more than once.
What colour is your Ferrari?
But our trader still isn't too worried about this. And the reason for his complacency is that in this worst case scenario of looming utter financial collapse there is a decent chance that the Banco Central do Brasil ('BCdB') will intervene to halt or at least slow BRL decline through market intervention, giving our hero a chance to unload his loss making position to some unsuspecting client of the bank (and ultimately your pension fund), although as everyone else alert to the risks will be trying to do the same.
Even if BCdB direct intervention in the currency markets didn't work and the BRL continued to drop so Brazilian companies were in trouble repaying their USD debts then the BCdB could borrow USD from the Federal Reserve under 'USD swap lines' that were set up during and after the financial crisis for just this eventuality. The BCdB would borrow from the Fed and lend Brazilian companies USD which they would use to repay their USD bonds, so buying time for the BCdB to sort out the problems between them and the Brazilian companies at, more or less, their leisure and importantly without the involvement of all those pesky gringos.
This would help prevent collapse, at least for this latest round of financial crisis, which would allow the whole process to begin again.
So where does that leave us
The above is an example of a currency carry trade in its most basic form, intended to illustrate some of the problems it creates that are discussed in more detail in the book.
We have poor allocation of capital as investment decisions all chase 'carry' for profit rather than being based on a proper understanding of the economic potential of a country and its borrowers. This leads to excessive investment and the expansion of speculative financial bubbles, with the added bonus of rising inequality due to only a small section of the lender's economy benefiting from the resultant profits. All of this is underwritten by the world's central banks.
Turkey: the collapse of the Carry Regime
The book includes a discussion of Turkey as an example of the growth and collapse of what the authors term the 'Carry Regime'. I understand this term to refer to the embedding of 'carry' into the financial system to the point it seems a completely and natural part of it, as natural to the participants as water is to a fish. Unfortunately this Regime includes all the problems we see of speculative capital blowing up bubbles, rewarding the few backed by central banks.
Turkish interest rates were very high for many years, which attracted huge inflows of 'carry' capital into the country encouraging a domestic credit boom and an associated real estate boom, which drew yet more capital into Turkey. The Turkish Lira became very overvalued despite a balance of payments deficit that reached close to 10 percent of GDP in 2011. This trade has since collapsed, the bubble deflated and the currency collapsed.
Institutional incentives
The work includes a very instructive example of how the growth of market participants such as hedge funds or sovereign wealth funds has facilitated carry transactions that would otherwise not have occurred, promoting their ills still more. It is worth summarizing in more detail:
Suppose our trader turns his attention away from Brazil and towards Turkey, wanting to invest in high yielding bonds issued by a Turkish company so he can pick up yet more 'carry' (and more bonus). As before he borrows USD which he sells to buy the Turkish Lira (below 'TRY') which he then uses to buy the Turkish debt.
The selling of USD for TRY would normally cause the TRY to rise, so to prevent this the Central Bank of the Republic of Turkey (below the 'CBRT') may intervene to sell a corresponding amount of TRY for USD. The CBRT now has the problem of what to do with its USD, and the easiest option is simply to buy some US treasuries which it can add to its foreign exchange reserves. The US government is more than happy to sell these treasuries, as it needs to borrow billions each year due to its ongoing fiscal deficit.
The end result of the above sequence of transactions is the USD moving in a large arc from the US bank via the hedge fund, the Turkish corporate sector and the CBRT back to the US and the US government.
You could have achieved the same overall result if the US bank had lent money directly to the US government and the CBRT had lent money to the Turkish company. In practice these two transactions would never have occurred by themselves. Only the existence of the carry trade and the intervention of the hedge fund seeking to profit from the carry spread enabled them to occur.
The above transactions would not necessarily be a bad thing if the hedge fund had some brilliant insight into the Turkish economy and the profitable Turkish investment opportunities it offered. In reality the hedge fund has no such, or very little, specialist knowledge and its Turkish transactions are only profitable because, firstly, 'everyone is doing it' (that is bidding up TRY and creating a bubble) and because, secondly, market participants expect central banks, either the CBRT or the Federal Reserve or both, to buy them enough time to exit or bail them out if things start going south.
More about the book
The above is a summary of the thesis of the book. Its narrative is backed up with plenty of charts drawn from reliable sources together with more detailed explanations of the implication of carry and the Carry Regime for markets.
To give an example of a more technical area the book touches on, the authors explain how the carry trade is really being 'short volatility' (that is, if volatility increases, you lose money) and how in many ways - if I read them correctly - the existing financial system seems to reward this position regardless of whether the fundamentals of the economy would back this up.
Other topics include how central bank support of the 'carry trade' helps reduce the volatility of financial assets and so enhances the "moneyness" of assets that would not typically be thought of as money because naturally they would be too volatile (corporate bonds for example). This, in turn, may contribute to the formation of bubbles relying on easy credit, until, due to an unexpected crisis (a war or pandemic perhaps), volatility suddenly reappears and the carry bubble bursts.
Marxist tract?
I used to work in banking. While I came across a few true believers in the merits of the market system and the social value of investment banking, a surprisingly large number of my colleagues were suspicious that that the game was rigged and that a good part of the financial services industry was rent-seeking and exploitative. This book will provide those colleagues a lot of comfort as the authors take the trouble to confirm what these insiders suspected.
Another problem with the carry trade is that it incrementally rewards with ever more profits the institutions that already have access to capital and liquidity and who are strong enough to survive the periodic crises that the trade inevitably produces (or at least survive it with a bit of help from the government and taxpayer, until the trade is up and running again). These institutions (hedge funds, banks and so on and their employees) get ever richer and stronger at the expense of the rest of us outside their happy club.
This process of gradual booms and sudden busts underwritten by the carry trade does indeed seem to be what is happening and this is the first book I have seen that, for all its flaws, explains in some detail a generally coherent mechanism behind it. As such it seems well worth further study.
Arguments for conspiracy/Marxist tract/dystopian fiction theory: Mentions "fiat currency" a lot; condemns financial bubble formation and exploitative, rigged financial system leading to rent-seeking and growing inequality; anticipates the collapse of the existing financial regime, hyperinflation, the death of money and all the other nightmares of our financial masters.
Arguments against conspiracy/Marxist tract/dystopian fiction theory: Written by 'Lecturer in Financial Engineering' at UC Berkley; condemns 'crony capitalism', inequality and mal-investment - otherwise seems to quite like capitalism; explanations are consistent with observed behaviors of financial markets in recent decades; provides a coherent mechanism for the appearance of repeated asset price bubbles around the world, backed up with reference to relevant statistics.
In my opinion, for what it's worth, this book is on to something - but as other reviewers have mentioned, it might have taken a pet theory too far. Other factors - greed, stupidity, vested interests, group-think - are often excellent explanations of human behaviour that don't need the support of a complicated analysis of the financial system.
So what is this 'carry' whose rise we should all be so worried about? It might help to look at the simplest example of a carry trade - the currency carry trade - while daydreaming about a brand new job at an investment bank.
First day on the desk
It's January and you have a fresh start in life as a trader on the currency desk of Boldman Zachs. Your trading accounts are all set to zero. You have entered a brave new world where the only things you have going for you are access to millions of dollars of computer and communications equipment, billions of dollars of liquid cash and your brilliant trading brain. Your boss tells you to "go make money" before skipping off for a Starbucks in the basement.
What do you do? You draw on your trading skills honed by years of top class education and months of online poker. You watch the markets like a hawk, and observe that US dollar ('USD') interest rates are 1% to borrow, while Brazilian real ('BRL') interest rates pay out at 9%.
Put on the carry trade now!
In a flash you call your internal treasury department and borrow USD250 million for one year, then you call the currency desk to change your USD into BRL. A minute later you call the bond desk and buy a Brazilian bond that redeems in a year's time. Your hard work has locked in a profit calculated as the difference between the 1% interest you pay on the USD borrowing and the 9% you earn on the BRL denominated bond. This 8% difference is called your 'carry' and it will earn USD20million this year, being 8% of USD250 million.
You push back your chair, put your feet up on the desk and plan to take it easy for the next twelve months, safe in the knowledge that at least a few of those USD20 million should be deposited in your personal bank account this coming bonus season.
Foreign exchange risk
Hold on a minute! I hear some of the more astute among you say. Don't you have an unhedged foreign exchange exposure?
If the BRL crashed against the USD by the end of the year (or if it didn't crash, but just weakened enough so you wouldn't be able to swap it back for USD252.5m, being USD250m plus USD2.5m interest at 1%) then you'd have lost money overall, and depending on the USD/BRL rate potentially a large amount at that.
Shouldn't you hedge your USD/BRL foreign exchange risk by pre-agreeing the exchange rate you use to change your BRL back into USD in December so you are sure that you'll have enough USD to pay back the money you borrowed? (Shouldn't you - to use the jargon - buy a FX forward contract as a hedge, allowing you to sell the BRL you're sure to receive to USD252.5m at the end of December?)
You think about this for a moment and take a look at the Bloomberg terminal.
Unfortunately the price of an FX forward hedge incorporates the implied interest rate differential (your 8% carry) into the USD/BRL exchange rates used in the contract. If you hedged like this you'd end up safe from FX risk, but wipe out all the carry profit you were hoping to make. You decide not to bother, and start browsing the Ferrari website instead.
Casino capitalism? Or worse
The even more astute among you are now thinking that our hypothetical trader is really just a gambler playing with someone else's money.
He has no idea how FX rates will move during the year, but just wants to place a handy bet. If BRL strengthens against the USD he makes out like a bandit with foreign exchange profits to add on to his carry gains and boost his bonus even more. If the BRL weakens he will lose the money and his job, but so what? It's not his money after all, it's the shareholders'. He'll just move on to a job somewhere else next year and place the same bet which might still work. He'll still be paid his generous base salary, which will probably go up now that he's got an extra year's trading experience.
Well, if only this last scenario were true and casino capitalism was this simple. Unfortunately, according to the authors at least, the reality is far worse.
If everyone's doing it, it must be OK
The reason our trader can so confidently choose the colour of his new Ferrari is that all over offices in Lower Manhattan, the City of London or downtown Singapore other traders are making exactly the same bet that he is.
The BRL isn't going to collapse against the USD because those other traders are busy selling their USD to buy BRL denominated bonds as well, helping maintain the strength of the BRL by boosting BRL demand.
Meanwhile in Sao Paulo, Rio de Janeiro and Belo Horizonte the Brazilian companies selling all these bonds are busy spending the money they raise on skyscrapers, hotels, stadiums and (just occasionally) something useful to the Brazilian economy, like a factory for example. All that borrowing, spending and building is pushing up the price of Brazilian real estate, which is encouraging even more borrowing, spending and building, which is pushing up the price of Brazilian real estate and the BRL even more as everyone wants a piece of the boom.
The sad reality
The even yet more astute among you might think along the following lines: this is ridiculous and can only end in tears. It's like a massive Ponzi scheme.
Brazil doesn't need all these skyscrapers and hotels (although it might need a few of the factories). Eventually the penny will drop, the balloon go up and the house of cards collapses. The BRL will nose dive, the traders that borrowed all those USD will never be able to pay them back and because everyone's been doing it (which was the only reason the trade worked in the first place) the financial losses could bring down banks, hedge funds, insurance companies and ultimately the whole financial system.
Well, these even yet more astute readers are absolutely right - this is exactly what could happen, and in fact has happened more than once.
What colour is your Ferrari?
But our trader still isn't too worried about this. And the reason for his complacency is that in this worst case scenario of looming utter financial collapse there is a decent chance that the Banco Central do Brasil ('BCdB') will intervene to halt or at least slow BRL decline through market intervention, giving our hero a chance to unload his loss making position to some unsuspecting client of the bank (and ultimately your pension fund), although as everyone else alert to the risks will be trying to do the same.
Even if BCdB direct intervention in the currency markets didn't work and the BRL continued to drop so Brazilian companies were in trouble repaying their USD debts then the BCdB could borrow USD from the Federal Reserve under 'USD swap lines' that were set up during and after the financial crisis for just this eventuality. The BCdB would borrow from the Fed and lend Brazilian companies USD which they would use to repay their USD bonds, so buying time for the BCdB to sort out the problems between them and the Brazilian companies at, more or less, their leisure and importantly without the involvement of all those pesky gringos.
This would help prevent collapse, at least for this latest round of financial crisis, which would allow the whole process to begin again.
So where does that leave us
The above is an example of a currency carry trade in its most basic form, intended to illustrate some of the problems it creates that are discussed in more detail in the book.
We have poor allocation of capital as investment decisions all chase 'carry' for profit rather than being based on a proper understanding of the economic potential of a country and its borrowers. This leads to excessive investment and the expansion of speculative financial bubbles, with the added bonus of rising inequality due to only a small section of the lender's economy benefiting from the resultant profits. All of this is underwritten by the world's central banks.
Turkey: the collapse of the Carry Regime
The book includes a discussion of Turkey as an example of the growth and collapse of what the authors term the 'Carry Regime'. I understand this term to refer to the embedding of 'carry' into the financial system to the point it seems a completely and natural part of it, as natural to the participants as water is to a fish. Unfortunately this Regime includes all the problems we see of speculative capital blowing up bubbles, rewarding the few backed by central banks.
Turkish interest rates were very high for many years, which attracted huge inflows of 'carry' capital into the country encouraging a domestic credit boom and an associated real estate boom, which drew yet more capital into Turkey. The Turkish Lira became very overvalued despite a balance of payments deficit that reached close to 10 percent of GDP in 2011. This trade has since collapsed, the bubble deflated and the currency collapsed.
Institutional incentives
The work includes a very instructive example of how the growth of market participants such as hedge funds or sovereign wealth funds has facilitated carry transactions that would otherwise not have occurred, promoting their ills still more. It is worth summarizing in more detail:
Suppose our trader turns his attention away from Brazil and towards Turkey, wanting to invest in high yielding bonds issued by a Turkish company so he can pick up yet more 'carry' (and more bonus). As before he borrows USD which he sells to buy the Turkish Lira (below 'TRY') which he then uses to buy the Turkish debt.
The selling of USD for TRY would normally cause the TRY to rise, so to prevent this the Central Bank of the Republic of Turkey (below the 'CBRT') may intervene to sell a corresponding amount of TRY for USD. The CBRT now has the problem of what to do with its USD, and the easiest option is simply to buy some US treasuries which it can add to its foreign exchange reserves. The US government is more than happy to sell these treasuries, as it needs to borrow billions each year due to its ongoing fiscal deficit.
The end result of the above sequence of transactions is the USD moving in a large arc from the US bank via the hedge fund, the Turkish corporate sector and the CBRT back to the US and the US government.
You could have achieved the same overall result if the US bank had lent money directly to the US government and the CBRT had lent money to the Turkish company. In practice these two transactions would never have occurred by themselves. Only the existence of the carry trade and the intervention of the hedge fund seeking to profit from the carry spread enabled them to occur.
The above transactions would not necessarily be a bad thing if the hedge fund had some brilliant insight into the Turkish economy and the profitable Turkish investment opportunities it offered. In reality the hedge fund has no such, or very little, specialist knowledge and its Turkish transactions are only profitable because, firstly, 'everyone is doing it' (that is bidding up TRY and creating a bubble) and because, secondly, market participants expect central banks, either the CBRT or the Federal Reserve or both, to buy them enough time to exit or bail them out if things start going south.
More about the book
The above is a summary of the thesis of the book. Its narrative is backed up with plenty of charts drawn from reliable sources together with more detailed explanations of the implication of carry and the Carry Regime for markets.
To give an example of a more technical area the book touches on, the authors explain how the carry trade is really being 'short volatility' (that is, if volatility increases, you lose money) and how in many ways - if I read them correctly - the existing financial system seems to reward this position regardless of whether the fundamentals of the economy would back this up.
Other topics include how central bank support of the 'carry trade' helps reduce the volatility of financial assets and so enhances the "moneyness" of assets that would not typically be thought of as money because naturally they would be too volatile (corporate bonds for example). This, in turn, may contribute to the formation of bubbles relying on easy credit, until, due to an unexpected crisis (a war or pandemic perhaps), volatility suddenly reappears and the carry bubble bursts.
Marxist tract?
I used to work in banking. While I came across a few true believers in the merits of the market system and the social value of investment banking, a surprisingly large number of my colleagues were suspicious that that the game was rigged and that a good part of the financial services industry was rent-seeking and exploitative. This book will provide those colleagues a lot of comfort as the authors take the trouble to confirm what these insiders suspected.
Another problem with the carry trade is that it incrementally rewards with ever more profits the institutions that already have access to capital and liquidity and who are strong enough to survive the periodic crises that the trade inevitably produces (or at least survive it with a bit of help from the government and taxpayer, until the trade is up and running again). These institutions (hedge funds, banks and so on and their employees) get ever richer and stronger at the expense of the rest of us outside their happy club.
This process of gradual booms and sudden busts underwritten by the carry trade does indeed seem to be what is happening and this is the first book I have seen that, for all its flaws, explains in some detail a generally coherent mechanism behind it. As such it seems well worth further study.
December 15, 2020
Possibly overblown! Possibly very very very important! I need to read it again to determine the exact ratio.
(ed. note: NOT a prequel to anything by Stephen King)
(ed. note: NOT a prequel to anything by Stephen King)
January 8, 2025
Touched on an interesting topic and was very informative—got progressively more unhinged and the authors just began raving the last few chapters
March 25, 2023
To me the title should be revised to - The Rise of Carry, Financialization and a Bezzle Economy
April 5, 2020
Very thought provoking. Adds lots of flesh to the bones for those who want to understand the underlying and underneath financial system of the world with all of its consequences. I believe 'money makes the world go around' and 'follow the money', explain much of how we live and what happens, whether one is aware, not aware or wants to be aware. I'd guess for many non-financial (and many financial types too, who in my experience often have a superficial knowledge of the world they work or invest in) this is complicated stuff though the authors do a great job of breaking things down into easily understandable concepts. The book often repeats and circles back to the main ideas put forward in a necessary way. They stress test their ideas, aren't saying they are 100% right, yet make a very compelling case that carry trades, carry regimes, carry crashes and central banks (The Fed being the main one, along with the ECB, while not much mention of the Bank of Japan, who seems to be the canary in the coal mine) are the main reason for wealth inequality and a general feeling among many that the whole financial edifice plays along a knife's edge (their term). Reading this in March 2020, in the midst of the coronavirus catalyst leading to an economic brick wall through much of the world makes it seem like reading a thriller in real time. Highly recommended!
November 9, 2020
I found the concepts fascinating but the writing style challenging to read.
I was most interested by the idea that Carry is in fact a flow from the weak to the strong.
Need determines yield. The wealthiest pay the lowest mortgage rates and the companies closest to bankruptcy pay the highest bond yields. There are two ways to think about it. One is that the less creditworthy are higher risk and hence have to pay a risk premium. The second is that the neediest can be exploited.
I was most interested by the idea that Carry is in fact a flow from the weak to the strong.
Need determines yield. The wealthiest pay the lowest mortgage rates and the companies closest to bankruptcy pay the highest bond yields. There are two ways to think about it. One is that the less creditworthy are higher risk and hence have to pay a risk premium. The second is that the neediest can be exploited.
April 29, 2025
8.4/10
don't thread on my vol suppression 🐍
quite interesting thesis. conclusions are very speculative, as the authors admit, but most of us weren't here for bretton woods so who knows
"The carry regime results in a suppression of interest rate spreads that rests on an assumption that central banks - and other governmental or multilateral institutions such as the IMF - will not allow excessive exchange rate volatility or asset price volatility in general and will effectively stand behind debt. This means that credit risk is mispriced from a free market perspective. It implies that there is an understanding that debt is at least partly socialized; the costs of default or failure will be at least partly shared accross the economy. This mispricing of credit risk in turn will mean that unprofitable investments may have a longer life than genuinely justified." "There are reasons to suspect that non-viable firms may be increasingly kept alive by the legacy of the financial crisis, with bank forebearance, prolonged monetary stimulus and the persistence of crisis-induced small- and medium-sized enterprise-support policy initiatives emerging as possible culprits"
"Following the carry crash and financial crisis of 2007-09, the carry bubble that emerged from 2009 was founded in the much more explicit support for financial markets provided by central banks and governments, both during the crisis and subsequently. This was mispricing of risk in the sense of socialization of risk: the famous "Heads I win; tails the taxpayer loses," from the perspective of the financial speculator.
The experimental monetary policies of central banks, their willingness to expand their balance sheets to support financial markets, from the Fed's quantitative easing policies to the ECB's "whatever it takes" approach, sent a strong signal to speculators that central banks were standing behind them. The central bank's quantitative easing is itself a giant carry trade; the central bank buys higher-yielding debt instruments and finances these purchases by issuing its own low- or zero-yielding liabilities - the high-powered money, of which it is the monopoly supplier. If the central bank itself is implementing a giant carry trade, how can a speculator go wrong by following in the central bank's footsteps?"
don't thread on my vol suppression 🐍
quite interesting thesis. conclusions are very speculative, as the authors admit, but most of us weren't here for bretton woods so who knows
"The carry regime results in a suppression of interest rate spreads that rests on an assumption that central banks - and other governmental or multilateral institutions such as the IMF - will not allow excessive exchange rate volatility or asset price volatility in general and will effectively stand behind debt. This means that credit risk is mispriced from a free market perspective. It implies that there is an understanding that debt is at least partly socialized; the costs of default or failure will be at least partly shared accross the economy. This mispricing of credit risk in turn will mean that unprofitable investments may have a longer life than genuinely justified." "There are reasons to suspect that non-viable firms may be increasingly kept alive by the legacy of the financial crisis, with bank forebearance, prolonged monetary stimulus and the persistence of crisis-induced small- and medium-sized enterprise-support policy initiatives emerging as possible culprits"
"Following the carry crash and financial crisis of 2007-09, the carry bubble that emerged from 2009 was founded in the much more explicit support for financial markets provided by central banks and governments, both during the crisis and subsequently. This was mispricing of risk in the sense of socialization of risk: the famous "Heads I win; tails the taxpayer loses," from the perspective of the financial speculator.
The experimental monetary policies of central banks, their willingness to expand their balance sheets to support financial markets, from the Fed's quantitative easing policies to the ECB's "whatever it takes" approach, sent a strong signal to speculators that central banks were standing behind them. The central bank's quantitative easing is itself a giant carry trade; the central bank buys higher-yielding debt instruments and finances these purchases by issuing its own low- or zero-yielding liabilities - the high-powered money, of which it is the monopoly supplier. If the central bank itself is implementing a giant carry trade, how can a speculator go wrong by following in the central bank's footsteps?"
April 23, 2023
Great book and a critical explanation of the global world of finance. The best parts of the book were the relation of the carry trade to what an economy does with the proceeds, and how an economy is structured around carry - effectively, bezzle across different areas. Looking at carry from outside a simple trade and as part (arguably THE part) of what keeps the current system going. Personally less convinced by the descriptions of volatility trades themselves as being so critical to the story, but that could be my incompetence speaking.
May 5, 2023
Now I see why the central banks are so eager to get real inflation under control. If they lose control of real inflation the entire status quo monetary system will collapse; Destroying all the wealth the elites have siphoned off from the population since the fiat system was established.
Also, carry crashes = elite recirculation events.
Also, carry crashes = elite recirculation events.
May 25, 2020
The beginning and end are interesting. It starts with use cases and ends with philosophical ramifications. The end in particular allows for some "seeing farther". Not for the light of economic background (i.e. if you don't know what a carry trade going into this book is, you're a but out of your depth). Kind of boring in the middle, or may be a bit preachy, but this can be viewed differently as really hammering home the point: carry trades can be ascribed to many aspects of our current economic system and that's pretty likely to be pretty bad.
August 1, 2021
Where do I begin… it’s a mixed bag.
The book’s central theme is compelling and basically indisputable -
1) that carry dictates essentially most financial market behaviors to the point of systemic rent-seeking and regulatory capture (eg the Fed put to the stock market) and
2) that this is all counterproductive stuff to the real economy due to moral hazards / inefficient allocation of capital / zombie companies not allowed to die and be cleaned up and
3) that serial reflations of ever increasing sizes lead to systemic overleverage and debt overhang which is ultimately deflationary (eg Japan and now much of developed world)
4) that such a system necessarily leads to more inequality.
However these issues are all fairly well documented and have been mainstream consciousness for quite a long time. So the book hardly broke any new ground here. But at least they are coherently articulated with no obvious logical fallacies.
Where the book sort of became a problem is when it overextends and tries to offer alternatives eg conjuring up an “anti carry” regime which is so called the mirror opposite of the current carry regime. It is bold and creative but also laden with logical inconsistencies disguised in ambiguous / imprecise writing.
To sum up the “anti carry” regime, it is essentially a world where inflation is alive and even potentially hyperinflationary. The authors seem to believe this as a solution can help clear up the debt burden in real terms and restore growth in the economy. The actual issue is far more complex and the only way to grow out of a debt overhang is real productive growth in the economy not by monetary inflation.
All in all, a decent read and even recommended read to financial newbies with some interesting arguments but take with a giant sea of salt on many of the assertions made in relation to proposed/imagined alternatives of the current system and how term structures are supposed to behave.
The book’s central theme is compelling and basically indisputable -
1) that carry dictates essentially most financial market behaviors to the point of systemic rent-seeking and regulatory capture (eg the Fed put to the stock market) and
2) that this is all counterproductive stuff to the real economy due to moral hazards / inefficient allocation of capital / zombie companies not allowed to die and be cleaned up and
3) that serial reflations of ever increasing sizes lead to systemic overleverage and debt overhang which is ultimately deflationary (eg Japan and now much of developed world)
4) that such a system necessarily leads to more inequality.
However these issues are all fairly well documented and have been mainstream consciousness for quite a long time. So the book hardly broke any new ground here. But at least they are coherently articulated with no obvious logical fallacies.
Where the book sort of became a problem is when it overextends and tries to offer alternatives eg conjuring up an “anti carry” regime which is so called the mirror opposite of the current carry regime. It is bold and creative but also laden with logical inconsistencies disguised in ambiguous / imprecise writing.
To sum up the “anti carry” regime, it is essentially a world where inflation is alive and even potentially hyperinflationary. The authors seem to believe this as a solution can help clear up the debt burden in real terms and restore growth in the economy. The actual issue is far more complex and the only way to grow out of a debt overhang is real productive growth in the economy not by monetary inflation.
All in all, a decent read and even recommended read to financial newbies with some interesting arguments but take with a giant sea of salt on many of the assertions made in relation to proposed/imagined alternatives of the current system and how term structures are supposed to behave.
February 14, 2025
The Rise of Carry offers an insightful exploration of a significant and complex topic—carry trading in financial markets. The authors demonstrate a strong command of their subject, providing valuable data and well-supported arguments in certain sections. I particularly appreciated the depth of analysis in these areas.
However, the book suffers from a lack of structure that made it a challenging read. A considerable portion of the text is filled with questions that the authors promise to address in later chapters—many of which feel unnecessary and disrupt the narrative flow. The language is often overly academic, further hindering readability, and the overall progression of ideas lacks coherence.
I would have preferred a more straightforward, structured approach. For instance, a clear definition of carry across various asset classes, accompanied by well-constructed, backtested performance charts, would have greatly enhanced the book’s practical value. Additionally, more consistency in chapter structure and fewer forward references to future content would improve the reading experience. As it stands, the book could easily be condensed to a quarter of its length without losing substance. If the authors had included more data and actionable insights, the existing 200+ pages might have been justified.
In summary, while The Rise of Carry tackles an important subject with moments of strong analysis, its structural issues and dense style detract from its overall effectiveness.
However, the book suffers from a lack of structure that made it a challenging read. A considerable portion of the text is filled with questions that the authors promise to address in later chapters—many of which feel unnecessary and disrupt the narrative flow. The language is often overly academic, further hindering readability, and the overall progression of ideas lacks coherence.
I would have preferred a more straightforward, structured approach. For instance, a clear definition of carry across various asset classes, accompanied by well-constructed, backtested performance charts, would have greatly enhanced the book’s practical value. Additionally, more consistency in chapter structure and fewer forward references to future content would improve the reading experience. As it stands, the book could easily be condensed to a quarter of its length without losing substance. If the authors had included more data and actionable insights, the existing 200+ pages might have been justified.
In summary, while The Rise of Carry tackles an important subject with moments of strong analysis, its structural issues and dense style detract from its overall effectiveness.
August 20, 2024
This is a very ambitious book…
The authors define a carry trade as any trade that satisfies all of: a) uses leverage, b) creates liquidity, c) is short volatility and d) has a sawtooth return pattern. They then go on to apply the metaphor in a broad range of places: The classic currency carry trade, to the S&P500 all the way to the Kardashians. From my amateur perspective the metaphor felt overextended, especially when it extended beyond finance. That might say more about my ignorance than it does about the book — I don’t know.
The authors also make a lot of logical statements and then assume the consequent. As an amateur it was difficult for me to accept the logical leap, despite the fact that it did seem to follow most of the time.
With all of that said this was a really fresh and interesting lens through which you can inspect much of the world. The authors take a look at several past crashes through this lens. It was written pre-COVID and 2022 so as an exercise you can observe those crashes through this lens as well. The authors explore what an anti-carry regime might look like, and discuss several causes and effects of the entire regime.
If nothing else it offers a very interesting perspective on what is happening in the world economically and otherwise. Worth the read.
The authors define a carry trade as any trade that satisfies all of: a) uses leverage, b) creates liquidity, c) is short volatility and d) has a sawtooth return pattern. They then go on to apply the metaphor in a broad range of places: The classic currency carry trade, to the S&P500 all the way to the Kardashians. From my amateur perspective the metaphor felt overextended, especially when it extended beyond finance. That might say more about my ignorance than it does about the book — I don’t know.
The authors also make a lot of logical statements and then assume the consequent. As an amateur it was difficult for me to accept the logical leap, despite the fact that it did seem to follow most of the time.
With all of that said this was a really fresh and interesting lens through which you can inspect much of the world. The authors take a look at several past crashes through this lens. It was written pre-COVID and 2022 so as an exercise you can observe those crashes through this lens as well. The authors explore what an anti-carry regime might look like, and discuss several causes and effects of the entire regime.
If nothing else it offers a very interesting perspective on what is happening in the world economically and otherwise. Worth the read.
December 31, 2020
This is an extremely informative book but I have to say that the writing itself was a little shaky. I'm rating this purely on the information relayed and the concepts covered.
For me, the conclusion of the book is - the rich get richer because they never actually have to face consequences of their investment strategies. This is based on the fact that there is extreme volatility suppression aided by central banks.
Volatility suppression happens in both the currency markets as well as other equities (in today's age they are very highly correlated) and allows for the use of extreme 'carry' as an investing strategy.
It is important to acknowledge that carry can be argued as having a net positive impact on the market by providing much needed liquidity. However, operators of carry inherit risk to make gains, but, with the back stop of the IMF + CB's operators don't actually hold all that risk. Instead, the people who aren't involved in the trade inherit the risk through the CB's policy.
I thought the chapters on VIX strategies were amazing and for someone w/o a ton of knowledge of the currency markets - those chapters were written in a way that I could understand.
For me, the conclusion of the book is - the rich get richer because they never actually have to face consequences of their investment strategies. This is based on the fact that there is extreme volatility suppression aided by central banks.
Volatility suppression happens in both the currency markets as well as other equities (in today's age they are very highly correlated) and allows for the use of extreme 'carry' as an investing strategy.
It is important to acknowledge that carry can be argued as having a net positive impact on the market by providing much needed liquidity. However, operators of carry inherit risk to make gains, but, with the back stop of the IMF + CB's operators don't actually hold all that risk. Instead, the people who aren't involved in the trade inherit the risk through the CB's policy.
I thought the chapters on VIX strategies were amazing and for someone w/o a ton of knowledge of the currency markets - those chapters were written in a way that I could understand.
April 5, 2021
The Rise of Carry looks at the risks and development that become inherent in the American financial system following the major bailouts of the S&L’s and the major crashes in the 2000’s. These disruptions to the natural flows of the markets have created a new normal in which the moral hazard of the banking institutions grows leaving the system at greater risk and the policy makers in precarious positions. Looking at currencies, stocks and housing markets as well as the role carry plays in income inequality distribution the authors do a great job of showing how these play out. This is not for the average lay person it does do a good job of covering things even if you only have a passing knowledge of economics and finance (and no fears of graphs). This book does a heavy focus on the potential for bubble and the way that carry demand can grow while looking at a variety of forms of carry. Overall, very interesting and well thought out book.
July 8, 2021
This is an extremely interesting book that I first listened to as an audio book and then bought the paper copy so that I could look into some of the nuances. It provides alternate explanations for currency valuation changes compared to "textbook narrative" and backs them up with data. If you want to find out why the dollar's valuation increased during the 2008 crash when the US was the nidus of the calamity, check out this book. If you are interested in knowing about the kindling that will allow the next economic inferno to rage, read this book. This book provides alternative-thought-provoking ideas to explain the world we inhabit.
December 29, 2021
This is a must read for those interested in financial markets. Especially if you'd like an alternative view of what is going on since at least 2008, possibly longer. This presents a different model, very probably a more useful one than value/growth stocks, or interest/inflation rates driving things.
Why only 3 stars then? Well even at 210-ish pages it's still a touch long. And the riff on how the carry trade is similar in nature to accumulation of competitive advantage is interesting but explaining with analogies to fame and celebrity didn't really help, it felt like over reaching the argument.
Why only 3 stars then? Well even at 210-ish pages it's still a touch long. And the riff on how the carry trade is similar in nature to accumulation of competitive advantage is interesting but explaining with analogies to fame and celebrity didn't really help, it felt like over reaching the argument.
October 16, 2021
I'm not an economist, so take this from whence it comes. Overall the explanation of current recurring carry-bubbles and carry-crashes is interesting, but in "about this book" (whoever wrote that) it claims that the information will save me from the next major crisis. It doesn't. It offers a couple of vary vague possible scenarios, but no answer on how to act now. Or then. The insights from this book (and I suspect they are very valuable and pertinent insights) could have been reduced to the length of a journal paper (around 4-5 pages) without losing any value.
April 1, 2025
“The true answer is that households are not perceiving equities in mutual funds to be particularly risky. They increasingly have perceived financial assets other than money, including equities, to be the responsibility of the central bank or government, in a similar way to money. If the stock market goes down by a large amount, the federal reserve will do whatever is necessary to rescue it and after all, it print money. This is what they believe”
July 15, 2021
The work clearly outlines what the problem is and the solution - we are in the midst of a financial pandemic that will lead to another financial collapse, where the workers of the world will be asked to bail out the elites; yet again. The regulator requirements to reach and maintain stability will be countered by claims they impinge on the freedom of the individual to reek havoc on the group.
August 16, 2022
An excellent analysis (and explanation) on how the central banks interventions with such a long QE programs, increase the inequality gap, and how asset prices keep going up. They offer a theory of when this will "blow up", which is at the time of inflation. Since this happened just 2 years after the book was written, it will be interesting to see its "predictive powers".
July 4, 2021
An attempt at connecting the dots - carry, liquidity, volatility supression, moral hazard, regulatory capture, inequality and power among other things in today's globalised world. Some thought experiments on how this could end.
May 23, 2022
A prescient and enormously important book.
This book provides a compelling framework and articulation of a phenomenon underpinning financial markets globally for many decades, the incentive structures and moral hazards that drive and perpetuate it, and the risks to our future prosperity.
This book provides a compelling framework and articulation of a phenomenon underpinning financial markets globally for many decades, the incentive structures and moral hazards that drive and perpetuate it, and the risks to our future prosperity.
October 11, 2022
a guy i'm on a first date with wrote this book with his dad. he keeps wiggling his eyebrow at everything i say.
p.s. jamie lees signature is just his name written out. he’s hot so it makes up for his penman ship. he also loves his parents dearly.
p.s. jamie lees signature is just his name written out. he’s hot so it makes up for his penman ship. he also loves his parents dearly.
September 13, 2020
Must read! And once you see it, you can’t unsee it.
December 28, 2020
This book requires a good understanding of economics. It is thought provoking, but unnecessarily lengthy and makes use of many assumptions to drive home a doom-and-gloom story.
May 29, 2021
All I can say is if you are new to trading or "investing", then you better read this book.
November 11, 2021
The author fails to back up most of his positions with supporting facts.
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