Well that was interesting...
Wednesday the market rallied a bit after Fed Chairman Powell’s comments that signaled a rate cut was a real possibility in September, but Thursday the market began to wobble, followed by Friday when the selloff picked up steam as unemployment rose from 4.1% to 4.3%.
As a side note, when I studied economics in college, 4% unemployment was considered full employment!
But the catalyst that accelerated the selloff on Monday appears to have been an unwind of the classic Japanese carry trade. Julian Brigden rang the alarm bells on RealVision on July 25th, check out his video here.
Below are a couple screen shots that illustrate that the Japanese carry trade was beginning to unravel as the BOJ began to intervene in the currency and the yield differential between the 10 year Treasury bond and the 10 year Japanese Government Bonds began narrowing, a lethal combination making the carry trade less attractive.
Now throw in a seasonal chart below illustrating what we all already know, that the VIX index historically bottoms in July and tops out in October, and the market was primed for increased volatility.
And that is exactly what we got yesterday when the VIX Index shot up to 65, the fourth highest level in the past 40 years after Black Monday in October 1987, the GFC when Lehman went under in 2008, and of course when COVID hit in 2020.
That was ugly. Expect some volatility as these carry unwinds usually last a couple weeks, the market has to clear out the weak hands. Similar to pruning the weeds from your garden so that the flowers can bloom.
Pretty impressive to see 10 year treasury yields drop 100 basis points in 3 months, the last 50 basis points in the span of a week! That’s a big move and if you are running a well diversified portfolio this will be your release valve that enables you to approach the market like a true value investor, selling those expensive bonds to buy some cheap stocks. Hopefully you have your shopping list ready!
CONFERENCES / TRAVEL:
Money 20/20 in Las Vegas: October 27 - 30 - This conference is focused on what’s next across the world of Payments, FinTech and Financial Services. Please reach out if you would like to connect to discuss angel investing or private credit. Tickets are available here.
FinTech Specialty Finance Forum in Dana Point: December 4-6 - This is a great conference to catch up with peers and get a broad update on the lending markets for consumer, small business and specialty credit markets. Tickets are available here.
I hope that you enjoy the letter as much as I enjoyed writing it and please feel free to share the links with friends and associates. If you are interested in startups and are an accredited investor you can join over 750 other backers that follow my AngelList syndicate here.