Degen

If a major carry trade is unwinding (see @jonwu thread on X: https://x.com/jonwu_/status/1820283967049965909), then this is related to a far more serious underlying issue than the weaker than expected macro data in the US.

The last time I heard a lot about a carry trade unwinding was while working in finance during the 2008 credit crunch.

Previous carry trade unwindings have contributed to financial downturns by causing rapid capital outflows and currency volatility. 

Below are a couple examples of carry trade unwindings that you can see on your graph, courtesy of GPT:

- 2008 Global Financial Crisis: The yen carry trade unwinding led to the rapid appreciation of the yen, exacerbating global market instability as investors repatriated funds.
- 1998 Asian Financial Crisis (LTCM on your chart): The unwinding of dollar-funded carry trades caused severe currency devaluations and capital flight in several Asian economies.

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I shared this in my @alfafrens channel just now and am going to make it a thread here, because I believe that knowledge is power, and I give away knowledge freely.

I keep harping on about the carry trade, a term that might seem obscure to many, because it represents a super-cycle event driven by major institutional investors who can arbitrage global market inefficiencies on a large scale. 

I've asked GPT to help fill in a few of the gaps in my thoughts below where my theoretical knowledge is lacking, because I am not an expert in finance or economics. I'm just a guy who learned what the carry trade was the hard way, while working in finance during the 2008 unwind, and now wants to help those around me understand the potential implications better, too.

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https://alfafrens.com/info

Essentially, carry trades involve borrowing in a low-interest-rate currency and investing in higher-yielding assets elsewhere. This strategy can create massive inflows of capital into certain markets, driving up asset prices and fostering economic growth. However, it also sets the stage for significant volatility when these trades unwind. The impact of such unwinding events can ripple across global markets, influencing deeper macroeconomic trends.

While many in the cryptocurrency space focus on macro data influencing Federal Reserve decisions, the carry trade's significance often goes unnoticed outside of major unwinding events like those in 1998 and 2008.

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The 1998 Asian financial crisis, for example, saw the rapid unwinding of carry trades, leading to severe currency devaluations and capital flight in several Asian economies. This crisis contributed to the collapse of Long-Term Capital Management (LTCM), a highly leveraged hedge fund, as their complex trades were caught in the turmoil. Similarly, during the 2008 financial crisis, the unwinding of yen carry trades led to a sharp appreciation of the yen, exacerbating global market instability as investors repatriated funds.

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Understanding the dynamics of carry trades is crucial because their unwinding can have far more profound and prolonged impacts on global markets than short-term indicators like US unemployment rates. When carry trades unwind, they often trigger lengthy downturns due to the rapid withdrawal of capital and subsequent market volatility. 

The "Taper Tantrum" of 2013 is another example, where the anticipation of the Federal Reserve tapering its bond-buying program caused the unwinding of dollar carry trades, leading to significant sell-offs in emerging markets. Recognizing the broader implications of these events can provide valuable insights into the complex interplay of global finance and macroeconomic stability.

I hope you find this insightful.

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