[00:02] with Japan and Korea all just coordinated to bail out the Japanese yen. And this is leaving a lot of people wondering, Kevin, is this going to create another Japanese carry trade crisis where the NASDAQ sells off 10% in
[00:18] a matter of days and the volatility index skyrockets. Take a look at this right here. This is a chart of the VIX, the CBOE market volatility index. And you can see the liberation day volatility over here was the second
[00:34] highest level of volatility we've seen where markets rapidly sold off. What beat it? The volatility we saw during the Japanese carry trade crisis and surprise Bank of Japan rate hike of July 31st, 2024 and the subsequent August
[00:52] 31st, 2024 and the subsequent August market selloff that came after July was already selling down quite a bit. So naturally when people hear carry trade and naturally when people hear uh wait a
[01:04] sec intervention the JPY is doing weird things this is bad for markets right people send me messages and say Kevin please talk about it and in this video going on. So now that we have a little bit of a baseline as to why people care
[01:19] about this we need to know what just happened. The US government has set up a $60 billion per day that's rolling. You don't get to use that every single day. It's sort of like you borrow at night and then pay it off the next morning and
[01:31] then borrow again. But anyway, the US government set up a $60 billion per day facility so that Japan could basically borrow against US treasuries that they own without having to dump those treasuries. And that actually gives you
[01:46] treasuries. And that actually gives you a little bit of insight into, oh, why is the United States getting involved in this? Well, because if Japan goes, crap, we need to stabilize our currency. Let's go dump a bunch of US treasuries that we
[01:59] have sitting at the Federal Reserve, in this case, the Bank of Japan. Uh, let's go dump those. Well, what happens then is you drive interest rates in the United States up, increasing borrowing costs for you, me, other companies, uh,
[02:13] costs for you, me, other companies, uh, and you end up creating more inflationary pressures, which is exactly the opposite of what both the Federal Reserve wants, the US government wants, and the Bank of Japan want. They do not
[02:26] want any more inflationary pressures. So the United States government actually also along with South Korea and sort of a more verbal point of view are kind of trying to help prod Japan along by making sure their currency stabilizes.
[02:41] government facility so Japan doesn't have to dump treasuries. Another way jawboning, which is basically you get Trump, Bessant, the Bank of Japan, and other officials yelling and screaming basically, we're going to support the
[02:57] Japanese yen. The Japanese yen is too cheap. It is undervalued. Really, what they're trying to do is get people to stop shorting the Japanese yen because if you short it, the value of the Japanese yen goes down because more
[03:10] people are selling it, right? Uh, and that's what they're trying to avoid. Now why are they trying to avoid that? Is the more the yen weakens the more Japan in ends up having to pay more money for imports that increases inflation in
[03:27] Japan. So basically just think when their currency loses value inflation goes up which actually increases the risk of more of a shock to the market.
[03:39] or some of what I've already said might get complicated or is already complicated. So, we're going to simplify this with exact strategies for, in my opinion, what you should watch for to see, hey, are we actually going to walk
[03:52] into another kind of carry trade selloff? Obviously, a lot of people will just pull up the chart. They'll look at, hey, how many yen can I buy with one US dollar? And the more this trends up, the more the dollar is strengthening
[04:06] relative to the yen, and the more the yen essentially weakens, right? It's the inverse chart. You can see over here though we had a strengthening in the yen. This was driven by intervention which was disclosed after the market
[04:20] close on Friday and there were a lot of headlines on this. I know a lot of people have been using the um Alphawire app which you could use totally for Kevin app in the Apple or Android app store and then you could see sort of
[04:33] comes through. For example, you know 2 or 3 minutes before CNBC talks about it. already instantaneously had the ISM manufacturing employment data uh as to manufacturing employment data uh as to it being a beat right here before CNBC
[04:48] this, you could literally use it for free. Just download the Meet Kevin app uh in the Apple or Android app store on your phone and after you sign up there. app.mmeke.com and use the desktop version as well, which is kind of cool.
[05:00] Uh but anyway, governments are really trying to stabilize the yen because if the yen can stabilize, inflation in Japan can stabilize and if inflation in Japan stabilizes, then maybe they don't have to hike rates as much and then we
[05:16] don't have more pressure on US treasuries. US Treasury market is already seeing enough pressure. We're up basically two rate increases already on the treasuries market. Well, we're seeing some soft short-term help because
[05:29] there's, you know, hope that uh Iran and Trump are talking again along with Qatar Trump are talking again along with Qatar and our Middle Eastern allies. they have been. So, let's try to understand everything that was just said
[05:43] understand everything that was just said and why it matters. Why it matters is the following on this beautiful simplified whiteboard. When the Japanese simplified whiteboard. When the Japanese yen loses value, Japanese inflation goes
[05:58] up because it costs them more to import stuff. stuff. Japan then might have to sell US treasuries to stabilize their currency. That increases rates in the United
[06:13] States, which is why the United States kind of wants to help coordinate over here. And Korea wants this as well. Korea is more of sort of like a an not actually throwing money at this problem yet, although they're selling
[06:27] some dollars. They care because if the Japanese yen goes down in value, then it Japanese yen goes down in value, then it makes the Korean Juan look like it's more expensive, which all of a sudden makes Toyota's cheaper than Hyundai's,
[06:41] makes Toyota's cheaper than Hyundai's, which all of a sudden makes Sony cheaper than Samsung. You see, that's why Korea cares. That's why the United States cares. That's why the United States cares. And why do financial markets
[06:53] care? Financial markets care because if the yen keeps falling, then there is a risk because the Bank of Japan has an inflation mandate that inflation keeps rising and then the Bank of Japan might have to come out with a shock or like a
[07:08] have to come out with a shock or like a sudden unexpected rate hike, which is sudden unexpected rate hike, which is exactly what we saw in 2024. So July 31st markets of 2024 markets were not expecting the Bank of Japan to hike
[07:21] rates and they did. That came as a shock. Markets don't like getting rugpulled. They like kind of being spoonfed information even if it's bad. we're seeing between Powell and Kevin Worsh. Kevin Worsh is like, "I don't
[07:36] need to talk to you guys." Jerome Powell's like, "No, no, no. Forward to you, okay? We're going to give you the medicine slowly so you don't choke. Okay, different strategies. Point is, we could see what a rugpole can do. A
[07:52] rugpole sends markets into a spiral and then companies collapse, which is ultimately bad, ironically, for capitalism because you think, oh well, capitalism should mean no intervention. But when the government sometimes
[08:07] doesn't intervene, companies fail really rapidly. A lot of people get laid off really suddenly and you kind of get global financial crisis level things which then lead people to demand socialism or you know worse that decays
[08:21] into communism uh and then capitalism dies anyway, right? So it's kind of like even though interventionism seems like you're messing with markets,
[08:33] the rationale for messing with markets is trying to prevent a crisis that ends up driving in socialism. So it's it's it's never all of one and none of the act. That's why you're getting this interventionism from a conservative
[08:49] president. Potentially you might see less of this. So what does all of that less of this. So what does all of that mean longer term? Well, first you kind of want to ask yourself like how useful has intervention been in the past? Not
[09:03] very useful. In fact, remember that chart that I showed you of the Japanese yen over time? It is weakened over the past years. I mean, you could see it right here, which you can also see in the Me Kevin app. Uh, it's as this line
[09:17] trending weaker and weaker and weaker because the dollar is strengthening. It's the like trend line 101. It's not working. In September to October of working. In September to October of 2022, Japan had about a 58.7 billion
[09:30] weeks. The short sellers came right back. In April to May of 2024, $62 billion bailout also rapidly faded. The short sellers came right back. July of
[09:42] 2024, $22 billion bailout also faded pretty dang quickly. Although we had the carry trade crisis there, July 31st. Then July of August, July to August, so Then July of August, July to August, so now of 2026, $87 billion bailout in 2
[09:56] days. There's really little reason to expect that this time will be different. different because we now have a standing facility for Japan, a bailout facility." Oh, we got to love the facilities. We have a stated goal by the United States,
[10:10] Trump, Bessant, Korea, and Japan to intervene and stop short selling the intervene and stop short selling the yen. And US and Korea are also involved, that we haven't seen really since like the 80s.
[10:25] Over time though, what we found is that [laughter] the yen ultimately ends up depreciating and losing value. And so that gives us the real outlook. And there are three ways to really look at the Japanese carry trade. And I think
[10:41] this is really the stuff to write down. This is what you want to take away. So We're going to write down three scenarios. We're going to write down the lowrisk scenario, the medium risk scenario, and then the highest risk
[10:54] scenario. Obviously, as a long-term investor or even short-term trader, you high-risisk scenario, and you want to be prepared for that. So, what is a lowrisk looks look like? Low risk, the when you type into Google USD to JPY, it bobs
[11:12] around 155 to 157. It doesn't break through 160. Pretty stable. The Bank of Japan does not raise rates and things are Gucci. People stop talking about the carry trade. No problem. So low risk is basically by the dip. This morning in
[11:27] our alpha report, this is written down. In fact, I said, "Hey, right at market open, there could be a little diply doodla because of the Japanese carry trade issues because, you know, people have to rebalance or whatever." But it's
[11:41] a buy the dip opportunity because I don't think it'll last. It's not that report this morning and in our course member live stream this morning. It's that that's actually what I'm also believing what I'm saying that right now
[11:56] deal. I'm just sharing that with you for free. I'm not trying to pitch you free. I'm not trying to pitch you anything. Okay. Low. Okay. BJ hold. BJ anything. Okay. Low. Okay. BJ hold. BJ hold. Uh and then we'll do JPY
[12:10] hold. Uh and then we'll do JPY stable. Okay. That's your lowest risk. Now, what is the medium risk? Let's get a different marker, too. I don't like a different marker, too. I don't like that one. Medium risk. The BOJ ends up
[12:24] that one. Medium risk. The BOJ ends up getting forced to hike. Okay, so BOJ hikes. Now, it's a medium risk because we kind of already expect that the Bank of Japan is going to hike with about a 48% chance of a 25 basis point hike. So,
[12:40] it's not going to be that big of a surprise that they hike. Medium risk also, and this is an interesting one, would include the Fed hikes as well. If the Fed and Bank of Japan both hike, then the difference between the two
[12:55] then the difference between the two currencies well stays the same, right? Because yield, the yield differential is what makes the Japanese carry trade desirable. Simple math. These aren't the actual numbers. If you could borrow in
[13:10] Japan at 2%, why borrow in the United States at 4%. You could go borrow here and invest here. It's mostly US hedge funds that do this, right? So, people forget that it's actually like mostly US institutions that are taking advantage
[13:23] of the spread. If both of these go up plus 25 plus 25, then the spread didn't narrow. It doesn't really mean anything. So the Fed can actually hike and the BOJ could hike or neither of them could hike and you're in a medium risk. So both
[13:40] hike or neither hike medium risk and the more it's forecast the better. Again the whole forecasting and forward guidance thing. Okay. Now here is your highest
[13:52] thing. Okay. Now here is your highest risk or you know the worst case scenario risk or you know the worst case scenario if you will. Okay. Worst case is Fed pause JPY goes over 160 again and BOJ signals
[14:10] uh this is getting messy but I'm just going to write more hikes or hikes. sloppy down there. So I want you to think about this. Low risk, Bank of Japan holds. JPY stays stable. We stop talking about it. No big deal. Buy the
[14:23] dip. Nobody cares. medium risk, both hike or both don't hike. Things are pretty much the same between the two. Things match expectations. Nobody cares. The worst case scenario is we get some kind of rug pulls from the Bank of Japan
[14:39] kind of rug pulls from the Bank of Japan where the Fed stays paused so that you know whatever we're rounding and using 4%. Uh so 4% stays 4%. But then the JPY
[14:51] rates go up. Now you've got a compression and if it comes as a "Hey, we're actually not just going to do one hike. We're going to do multiple hikes to where the Fed stays here and Japan is going dink d." And they're
[15:08] forecasting even more. And that comes as a shock and Japanese inflation is high while US inflation comes in lower than expectations. All about expectations. Then you could see another really bad Japanese carry trade selloff. You end up
[15:24] getting a shock, a spike in the VIX, Japanese stocks sell off, earnings suffer, tech gets liquidated, yield spike on US treasuries basically in spike on US treasuries basically in August of 2024 all over again. So I want
[15:38] to be really clear about that. You need a perfect storm for this to happen. US inflation lower, Japanese inflation higher. Japanese hiking more, US hiking less. Those differentials coming as a shock to the market or what
[15:54] created Japanese carry trade selloff. So really this bailout happening is to try to prevent this. I'm not the biggest fan of market intervention. I think the best thing to do is, you know, keep providing guidance of what's actually going on and
[16:09] what the intentions are. And as long as you spoon feed bad news slowly rather than all at once, people tend to get over it. They're able to swallow the pill, so to speak. All right, so let's try to bottom line some
[16:23] of this. Bottom line, like we said in the alpha report this morning, it's not a big deal. Right now, this is pretty much just to buy the dip. And I think the dip is already passed mostly from this morning. It was a very short dip,
[16:36] like 10 minutes worth of a dip. Although NASDAQ 100 stocks are still lower than weeks and we're still looking for that Q3 Q4 software bottom, which we did say on this channel that we thought that the
[16:49] NASDAQ 100 might come under pressure after the great suckening post SpaceX IPO because SpaceX is now in the NASDAQ 100 and software could hit its bottom in Q3 Q4. Microsoft kind of agrees with that and so do stocks like Service Now
[17:05] and Salesforce. More on that later. We'll see. I mean, Palanteer is earnings today, so maybe they'll ruin it, [laughter] but we'll see. That said, let's do a quick noob verse pro of this. So, the noob hears Japanese carry trade
[17:18] and immediately thinks of the August 2024 STOCK MARKET CRASH. 10% GONE within 2024 STOCK MARKET CRASH. 10% GONE within days. The pro says, "You don't need to worry about this. You need a perfect storm of shock to get another August of
[17:33] 2024." Bottom line, you need the Bank of Japan to hike when it wasn't expected. You need the Fed to pause when it wasn't expected. You need more inflation than Japan in Japan than expected and less inflation than expected in the United
[17:47] States. And then you need more unsignaled unsignaled Bank of Japan intervention, as in signaling multiple rate hikes. If all of that happens, yes, the market could sell
[18:00] off again. Is that likely? Probably not. But that's exactly what happened in August of 2024 thanks to the July 31st Bank of Japan surprise rate hike. This is why surprises aren't good for markets. So there you have it. Thank you
[18:13] luck. >> Why not advertise these things that you knows about this. >> We'll we'll try a little advertising and >> Congratulations, man. You have done so much. People love you. People look up to
[18:26] >> Kevin Praath there, financial analyst and YouTuber. Meet Kevin. Always great and YouTuber. Meet Kevin. Always great to get your [music] take.