Quote Originally Posted by vinoveri
I know this is a little off the topic, but I'm trying to understand the potential impact of the "carry trade" on the current run-up in assets, and why it just can't go on indefinitely ... Can someone please address whether this type of action goes on and explain what I'm missiing in the following scenario pertaining to yen carry trade. Thanks!

1. Someone (some organization in a privileged position) borrows $2billion worth of yen from the BOJ each month at 0.5% pa.

2. Then they invest $1b in short term US treas at 4.5-5% and systematically but slowly, buy the S&P 500 (futures, SPY etc or any other market) helping to support and drive the index higher.

3. If the bears begin to get traction or the market comes under pressure,they use the $1b in treas to step in and buy the S&P futures thereby keeping a floor and inspiring confidence in the market.

4. multiply this by ?? # of organizations

I realize that this is somewhat simplistic and there are other risks with the above, but with all this talk about a liquidity and credit crunch coming, where will it come from - when "speculators" can get yen at 0.5% or thereabout?

Probably outght to start another thread for this or do a search. I know a little but only enough to be dangerous