If you follow the stock market, or like me, you believe that international diversification is rational, you and I both have been in for a rude shock in the past four months. Every market in the world, from Singapore to Stockholm has been moving in sync hour by hour and day by day. There is no haven from the volatility.
I have no idea what is causing the volatility, (+/- 7% to 12% a week), nor why all the global markets are moving in sync
There
is a phenomenon that is of interest. The Yen relative to the Dollar is
moving in the same pattern as the market on a weekly basis. The Yen connection to
the global market is understandable because of the carry trade. The 'carry trade' is
the practice of very large players (governments, pensions,
international funds) of borrowing money in Japan at interest rates below 2%
and investing at higher rates in other country's bonds. Since the
money is borrowed, the net yield can be very large. However, the
currency risk is also very large.
With the carry trade, a global fund can borrow $200 billion in Japan at 1.5% invest in Spanish bonds at 6% and only have to use 10% of the global fund's money as security for the loan. That gives a yield of 45% in a year. However, if the Yen falls relative to the Euro, money will be moved back to Japan to reduce the size of the loan. Big money is moving because of the carry trade.
Big money is flowing around the globe minute by minute, probably a lot is borrowed. What is this money paying attention to?