Carrying Cost

"Somedays, you just can't get rid of a bomb."
--Batman (Batman)

John Mauldin makes the case that the Fed's cheap credit policy is facilitating a monster dollar carry trade. Folks are borrowing dollars for virtually nothing and investing them in risky assets of all sizes.

Essentially, those involved in this trade are short dollars. Should something spook this trade, a large dollar rally should ensue (as folks buy back dollars to cover their short position). And, of course, they'll have to sell all of those risky assets (stocks, bonds, commodities) that the original dollar proceeds purchased.

Carry trades work well in high risk appetite environments. When folks collectively become risk averse, then the carry trade works in reverse, causing correlated price declines across asset classes.

John thinks there's a potential market accident waiting to happen should the dollar carry unwind.

Me too.

position in USD