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After 40 years in financial journalism and finance, I’ve learned two things to be true. First, when everything is being sold — and just about everything is being sold on Monday — someone is in big trouble. Second, when someone is in big trouble, coordinated rate cuts will follow. Most pundits are focusing on the weaker-than-expected July jobs report and fears that the Federal Reserve is behind the curve in cutting rates to stave off a potential recession, but it appears there’s more to this sell-off than meets the eye. The yen ‘carry trade’ and the ensuing sell-off Michael Gayed of The Lead-Lag Report has been warning on social media site X of an impending unwind of a so-called “carry trade” denominated in Japanese yen. The carry trade involves speculators borrowing in a currency with low interest rates — the yen, in this case — and using the proceeds to purchase higher-yielding assets in other parts of the world. As the yen has recently surged against the dollar, those trades have gone south. That has forced the speculators to sell assets — first in Japan, and now just about everywhere. Japan’s Nikkei 225 index tumbled 12.4% on Monday for its worst session since 1987’s “Black Monday.” The spillover effect, exacerbated by a Federal Reserve reluctant to cut interest rates even as inflation cools, has put all assets on sale. Even so-called hedges, including gold and cryptocurrencies, are falling. Bitcoin at one point slid below $50,000 for the first time since February. Oil prices are also dropping , even as tensions between Israel and Iran continue to rise. This suggests that fears of a financial market problem are greater than those of a widening Middle East war. It is a profound market statement about which risk is greater now. UBS director of floor operations Art Cashin has said about moments like this, “When you can’t sell what you own, sell what you can.” A crisis reminiscent of the late 1990s If I were a betting man, I would place money on the Fed making a statement that it’s ready to provide liquidity to the market should this rout deepen. Should the situation become more tumultuous, the Fed could be forced into cutting interest rates between meetings. In many ways, this moment resembles the Asian currency crisis in the summer of 1997. It’s also similar to the Russian debt crisis in the late 1990s and the eventual collapse of the hedge fund Long-Term Capital Management. Legendary hedge fund investor Stanley Druckenmiller taught me back then that bailouts are bullish. Indeed, when the Fed responded to the 1998 event by cutting interest rates , stocks went on a tear before topping out in 2000. This talk may sound premature, but experience is a tough task master. We’re about to learn yet another lesson in how highly levered trades, based on cheap money — this time in Japan — leads to trouble from one market to the next. Strap yourselves in. It’s going to be a bumpy ride. — CNBC contributor Ron Insana is CEO of iFi.AI, an artificial intelligence fintech firm.
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