What clues can carry trading give us about the past two decades of international economic downturns?

Kevin Coldiron is a Lecturer at UC Berkeley's Haas Business School. He’s also the is the co-owner of Algert Coldiron Investors. After 25 years in quantitative finance, Coldiron has a new book called The Rise Of Carry: The Dangerous Consequences Of Volatility Suppression And The New Financial Order Of Decaying Growth And Recurring Crisis.

In this episode, we’ll hear more about the four characteristics of carry trades and how the market has changed since the 2008 crash. We’ll also learn more about feedback loops as they relate to carry trades and the centrality of the S&P 500.

Episode Quotes:

On the socialization of risk:

“I just think competitively, it's very difficult to say we're not going to go down this path because we're worried about a crash that happens every decade. You might be proven right, but it's not likely you'll be in business or be employed by the time you were proven right.”

On carry trades and mortgages:

“A basic level of trade, like taking out a mortgage, fits the definition of a carry trade. And it's not as destabilizing as a lot of carry trades because as long as there's a reasonable deposit, you can still cover the mortgage payments[…] So, it's really the forced selling in a downturn that creates these fire-sale effects and leads to the big carry unwinds.”

On when the federal government should step in:

“It's a bit like Russian roulette, right? The feds can say, we're drawing a line here and markets are a bit like teenagers. You set them a boundary and it's going to be tested repeatedly.”

Show Links:

Understanding Carry Trades feat. Kevin Coldiron

unSILOed with Greg LaBlanc