Massive Speculative Carry Trade

"The mother of all evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

John Hussman describes the current financial system condition very well: "At present, the entire global financial system has been turned into a massive speculative carry trade."

Carry trades involve borrowing funds at low cost and investing them in projects deemed to return higher than the 'cost of carry.' Carry trades involve leveraged debt used for speculative purposes.

Zero interest rate policies (ZIRP) and quantitative easing (QE) attract carry traders with their low cost funds and asset buying promises. Layer on top of that propensity for central banks to bail out risk gone awry and you have the perfect environment for huge, risk-laden carry trades.

Carry trades persist until either a) cost of carry goes up, or b) return on assets bought on margin with those borrowed funds forecast to decline. If either occurs then carry traders rush to close out their projects before margin calls begin.

With carry trades currently put on in such size, it is only a matter of time before the process reverses.