The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (BUSINESS BOOKS)

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The book defines carry trade as risk bets where investors win if nothing happens. Examples of such bets are currency carry trades, as well as the sale of naked put options. After defining the core concept, the book details the history of financial markets since the 1990s, when the volatility suppression regime emerged. Also, in the end, you will find a cursory prediction of what such a regime can lead to. What is a Franken-Bull? It’s a term I came up for a market that has bearish fundamentals, but experiencing a bull run. The ways that carry, volatility selling, leverage, liquidity, and profitability affect the business cycle

Holding a short position in volatility, by contrast, produces steady profits at the expense of occasional large losses. In the event of higher volatility, those who provide insurance against such an increase have a high risk of going bankrupt—a risk that is amplified if, as seems most often to be the case, they are leveraged. Thus a rise in volatility has the potential to set off a vicious cycle: when volatility rises, the cost of insuring against both gamma and vega risks will likewise rise; as a result of this increased cost, the market will become less liquid, and the decline in liquidity is itself likely to enhance volatility. The central thesis of the book is as follows. The financial authorities of developed countries artificially suppress volatility in financial markets. In the past few decades, selling volatility has been too profitable. The buyers of put option made significant profits in those rare periods when the bubbles collapsed. However, even despite it, buying volatility has been too unprofitable. This is a very ambitious book, and in places its ambition causes it to overreach. Carry is a fundamental part of the markets, and to some degree in the economy as a whole. But linking it to human evolution as the authors do in the final chapters, seems rather tenuous to me. Nevertheless, this is an important book. Carry is important, and is not going away. It will always be an attractive strategy. 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.We are now in the midst of a perpetually moral hazard cycle in that carry traders, having their loses truncated, and walked out of the risk-of-ruin scenario relatively unscathed, they have incentive in ever increasing their prior behavior before, knowing the central banks will rescue them once again when the time comes. 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. Jamie Lee works for investment guru and philanthropist Jeremy Grantham, focusing on environmental research and volatility trading. He previously worked as economist and analyst for asset management companies in Boston and London. Jamie holds a B.A. in Mathematics and English from Dartmouth College. 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. Fighting the crisis means increasing the chances of higher inflation. Since crisis risk in more salient and more immediate, it will always get priority. The logical conclusion is that inflation will not return to 2% for a sustained period.

However the world has changed. Currently the US dollar has an interest rate more than 2% higher than that of the Euro. A carry trade where US dollar deposits are funded by Euro loans would not necessarily do badly in a global market crash. Of course, “solvent but illiquid” is exactly the situation SVB was said to be in. Expect to hear this messaging a lot more in the coming years. The line between market support and QE will become increasingly blurry and, as it does, the risk of much higher inflation will increase.To explain why this runs counter to expectations, also recall that another critical feature of carry trades is that by definition they involve leverage. Let’s see how liquidity plays out during a volatility spike or downturn: Robin Wigglesworth, “Jane Street: The Top Wall Street Firm ‘No One’s Heard Of,’” Financial Times, January 28, 2021. He is a co-author of The Rise of Carry (2020). He is also the author of the highly regarded Economics for Professional Investors (2nd edition 1998) along with many articles in newspapers and journals. His commentaries and analyses have been widely quoted.

Over at least the past 30 years financial markets have become increasingly dominated by carry trades; markets can be said to be in a ‘carry regime’. Carry trades have in common four features: 1) Leverage; 2) They provide liquidity to markets; 3) Short volatility exposure; and 4) a ‘saw tooth’ return pattern. Particularly because of the liquidity provision feature, carry trades have always had a role in the financial system. But certain non-market developments, particularly the increasingly dominant role of the Federal Reserve and other central banks, have led to the evolution of the carry regime.But, as the authors point out, carry trading is not limited to rogue traders. Collecting steady premia is what an insurance company does. Banks, who borrow and lend to earn an interest rate spread, are also carry trading. But insurers and banks diversify across many customers, transforming a portfolio of risky bets into a benign balance sheet. In contrast, most carry trades in the financial markets are correlated in market crashes, so true diversification is hard to find.

Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy—and the meteoric rise of carry. In 2002, he moved to California to co-found Algert Coldiron Investors, a quantitative equity specialist managing both hedge funds and long-only strategies. ACI was consistently ranked by alternative investment consultants as among the best equity market neutral managers globally.Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy--and the meteoric rise of carry. When the music stops, in terms of liquidity things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. In this world, with the dominance of the Fed and the dollar, and the liquidity of the S&P 500 derivatives markets, the S&P 500 has evolved to become itself a carry trade at the centre of the global carry regime. A sudden crash in the S&P 500 crashes the global economy. The Fed then reacts by becoming a giant carry trader itself, replacing the private sector carry trade and ultimately reinforcing the carry regime.