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

After recent events concerning the yen and JPY/USD carry trade, I was curious to learn more and read this book. It was helpful. Of course the authors discuss currency carry trades, but they also highlight other cases as well. They go over the agents of such trades and the incentive structures that drive various entities (e.g. hedge funds, sovereign wealth funds, corps) into either being carry traders or not being carry traders.Something I've noticed but never really thought deeply about was how the S&P generally increases slowly but then drops abruptly (sawtooth), as opposed to behaving in the more sinusoidal pattern implied by the terminology "business cycle". For most of us, these drops aren't themselves surprising, but it's hard to get the timing. The book explains the underlying dynamics (basically credit is readily available until it isn't), which I think is useful for investors and traders alike.I'm a pretty basic investor, so some of the detailed discussions around derivatives (futures, options, more sophisticated hedging strategies, the Greeks, etc.) were just quick scans for me, but if you're at least familiar with those concepts then you should still get something out of those parts of the book.The book is slightly out of date right now -- I'm writing in 2024, where the USD is a recipient currency instead of a funding currency as it was when interest rates in the US were lower. But it turns out that this gives us a way to evaluate some of the predictions that the book makes. For example, in Ch 13 the authors explain how the Fed balance sheet is a big carry trade, and so when the trade unwinds then you would expect to see capital loss at the Fed, which in fact occurred after the book was published. They go on to discuss one possible Fed response, which would be to maintain easy policy to keep the trade going. But they point out that inflation would make that response unlikely and so they would likely prioritize suppressing inflation over maintaining their own solvency. The authors got all those predictions right.I especially appreciate at the end some of the more speculative material about the evolution of and end game for carry trading (especially the global carry trade centered on the S&P 500). The authors explore the monetary, economic, socio-political and technological dimensions. They briefly discuss the possibility of cryptocurrencies coming to prominence, in terms of both direct exchange of assets (e.g., tokenizing equities on a blockchain) and serving directly as a monetary base where the cryptocurrency is difficult/expensive to produce (think bitcoin/proof of work). Up until the very end the book didn't discuss cryptocurrencies at all, so I found that discussion interesting indeed.

Anyone confused about today’s economic and financial world should read this book. As Modern Monetary Theory (MMT) gains traction, the authors offer a solid alternative perspective. The book delves deeply into why and how the phenomenon of “carry” emerged and, more importantly, how it has influenced the mechanisms of financial markets. Readers will gain a clearer understanding of how central bank policies and the SPX index play a role in our economy.At its core, I found this book grounded in the authors’ profound yet straightforward philosophy: The world naturally runs in cycles, despite human intervention.The book was completed in 2019. In my view, the events following the pandemic have both reflected and reinforced the authors’ arguments. The rapid "carry crash" in early 2020 led central banks and governments to flood the market with paper money in an effort to stave off a deep crisis. However, the outcomes have been less than satisfactory: For the first time in human history, a widespread pandemic did not diminish or narrow wealth inequality but instead widened and continues to expand the gap.In the book's conclusion, the authors present several scenarios for how the carry regime might end and what the consequences could be. I believe the true value of this book will become increasingly apparent as time passes, and it certainly deserves a prominent place on our bookshelves!

Fascinating perspective on why our financial markets have become more volatile as leverage and government intervention has increased. Its actually a bit scary given how hard/impossible it will be to unwind. It informed my decision to allocate toward long-tail insurance for our fund.

‘The Rise of Carry’ is the best book on the topic of ‘Carry’ I came across so far. It is excellently written, well-structured, well-researched, and thought provoking. Being a practitioner in the asset management industry who have witnessed the recent rise and crash of carry first-hand, lots of the concepts and insights in this book feel close to my heart. I sincerely recommend this book to fellow readers.This book is a great read for both professional investors and anyone who are interested to know (1) why carry has become so pervasive in today’s financial markets (e.g. currency and interest rate carry, credit carry, commodity carry, liquidity provision (e.g. dip buying, option and volatility selling), leverage buyout, debt-financed shares buyback, dollar-financed foreign investments, and HFT are all forms of carry, some in disguise) (2) why carry demands a positive premium (3) why the carry bubble grow, crash and rise again (4) why the structure of financial markets has evolved to both encourage and accommodate this trend (5) and why we see the world we see today and what shall we do so our wealth can be preserved, and our society can be benefited from.This book fundamentally changed my understanding on carry. The contributions of this book are multi-fold. First, it gave excellent non-technical explanations about the origin, nature, agents and mechanism of carry. Second, the author generalized the concept of carry and explain why carry is a natural phenomenon, why it is pervasive and why it is expected to continue to gain popularity. Third, the book introduces the concept of carry and anti-carry regimes and their monetary ramifications. Forth, the book further generalizes carry and insightfully shows that carry is power, luck compounded cumulative advantage, and the reason behind the 'winner-take-all' phenomena we see today. Finally, the book tries to answer the ultimate question on whether and how carry regime can end.This book is well-timed. We are in the middle of the longest run of carry regime, which renewed from a carry crash in GFC, and the carry bubble has since then grown larger. At macro-level, interest rate is as low as it can, inflation and long-term growth expectation are low. Valuations of risky assets are high. Leverage is elevated, volatility is suppressed, and risk of ruin is mitigated by the supporting hand of global central banks, whose power have arguably shrunk. At micro-level, corporations are massively issuing and refinancing cheap debt to buyback shares, which boosts reported earnings and fuel up the equity market higher. In addition, we live in a strange time. Wealth gap is at its widest in history. Nationalism and populism are gaining steam, and globalization is at risk. If you are wondering why we should not be surprised to see these seemingly strange things, this book will give you the answer.This book is written just before the March 2020 crisis, which is arguably the sharpest crisis since GFC. During that periods, we see volatility spikes, liquidity evaporates, asset prices collapse, deleveraging happening at different asset classes (most notably among illiquid asset classes such as non-agency mortgage, credit) and carry-like strategies involving leverage and liquidity mismatch such as risk arbitrage and convertible arbitrage strategies. Levered investors face margin call and funds investing in carry-like strategies with weak financing are stopped out. Although the subsequent recovery since April is stronger than expected, with the help of massive liquidity injection and ‘whatever-it-takes’ mentality coordinated among global central banks, this crisis episode shows us the fragility in our economy, and it has permanently changed how new generation of investors perceive risk, and carry.

Well-documented book on the development of bubbles financed by the artificial lowering of interest rates by the main central banks.It is not an easy read, but it is essential for anyone who wants to get closer to the causes, signs, consequences and foreseeable development of monetary intervention.

Excellent book! (I rarely give 5 stars) and I usually don't comment on books. I have read many on investing and this one gives a clear view on the current macro landscape with an interesting perspective. It is useful for stock pickers as well and market participants.I do not recomment this book for beginner (and I would recommend some knowledge on carry trading and option swap before reading it).

This fascinating book expounds a new model of the global economy, and its interaction with financial markets, that helps to explain many of the unprecedented developments of the last two decades. The central thesis - that Central Banks have underwritten a distorted regime that undermines economic growth - should be of concern to policymakers everywhere in a world where the limits of viable stimulus are being tested to destruction. Well written, and packed with insights into fields such as currency trends, stockmarket bubbles, and derivatives, I found it an easy read. Warning: the prognosis is convincing and also very concerning

Maybe not for those without a technical economic or financial market interest.

先月末に届いた本。risky financeというサイトで紹介されていた本。コロナウイルスの進行にもかかわらず、上がる一方の米国株式相場が気になり、違和感を感じて2月の半ばに注文して読んでみたのだが、読み始めがちょうど今回の株式市場の暴落の動きと重なったという因縁の作品だ。ただ中身はとても素人に勧められる作品ではない。著者の基本的なメッセージのアウトラインとその背後にある懸念や憂慮はなんとか理解できるのだが、鍵となる概念の未整理と議論の飛躍、そして大風呂敷に特徴づけられる作品であり、正直なところ読み進めば進むほどわからなくなってしまった作品だ。いや3000円も払ったのに。だれか優秀な人のレビューを読みたいというのが本音だ。とはいえ最後まで読み通したわけで、僕の現時点での混乱した感想を記すことにより、逆説的な意味で、皆さんの参考になればと思い、恥をさらす次第。そもそも、この「Carry」という用語自体が、曖昧模糊とした概念なのだ。よく使われるが、あまりものその一般性のため、なかなかその役割りが特定できないのだ。ある意味では、金融はすべて「carry」なのだ。本書では、「an activity that provides a steady premium income but exposes the seller to occasional large losses.」と定義されている。さてわかったようなわからないような。また別の箇所では、「Carry trades make money when “nothing changes”」とも言及されている。もし、「Carry」を為替の領域に限定すると、そのリスクと普遍性やメカニズムまではまーなんとか理解できる。つまり低金利（米ドルや円）の通貨で資金調達し、高金利（トルコ・リラや豪ドル）の通貨での運用だ。現在の金融の世界では、これに巨大なleverageがかかるため、究極的にはいつも為替の変動（高金利通貨の減価）により、クラッシュが起き、参加者の多数が退場ということになる。ただここにはいつも最終的には中央銀行（究極的にはFed)の介入が最終的には担保されており、大きなリスク吸収力を持つプレーヤーは、巨額の損失にもかかわらず生き残るというわけだ。生き残ったプレーヤーはまたこのcarryを始めることになる。このサイクルこそが金融市場の本質であり、それへの対処として埋め込まれたリスク管理の思想と様々なメカニズム（追証、ロスカット）は、逆説的な意味で、このクラッシュのインパクトを増幅する。このサイクルが繰り返されることにより、そこに投入されるリスク量は大きくなり、より大きなクラッシュが一定の頻度で起きるわけだ。経済のしもべであるはずの金融が逆に経済を決定づけるというわけだ。経済のファンダメンタルな変化が経済危機を生み出すのではなく、金融市場でのcarryとその不可避的な結果としてのcrashがそのスケールの大きさのため、経済の不況を引き起こすというわけだ。中央銀行はこのcarryの囚人に堕しており、結果として、強者はさらに強くなり、富と権力の不平等が進行するというわけだ。ここは、ピケッティの「Capital in the 21st Century」の議論と共通する。というか中央銀行や政府が巨大なcarryの当事者。たとえば、日本政府は巨額の政府短期証券をBOJに引き受けさせ、米国のUS Treasuryを購入している。年金の海外有価証券投資や生保の外債投資も同じ。ここまではなんとかついていける。ただ著者の議論は、通貨でのcarryにとどまらずに、「a trade with ‘short exposure to volatility’」と議論をさらに抽象化させ、そこではsp500のindexのvolatility sellingまで「Carry」にまで包含されていくのだ。著者は、SP500こそが究極のcarryとまで言い切っているのだ。ここがおそらく著者の議論の一番目新しい点なのだろうけど、残念ながらここから先は著者の議論を追いかけることが出来なくなってしまった。後半は、carryと絡めた現在の金融市場の持続不可能性、中央銀行の手詰まり、と新しい展望にまで議論が広げられるのだが、前半のテクニカルな議論と後半の大きな議論がどうもうまくつながれていない。本書の結語は、以下の通りだ。Ultimately, the verdict of history will likely be that the post-Breton Woods experiment with fiat money failed. But techonologies that have emerged could potentially provide the basis for future, workable monetary systems. Whatever it is that eventually rises from the ashes of the present monetary systems, we hope it will be more effective in restraining the rise of carry.