The Devaluation Of The Yen and Global Carry Trade

[00:00:21][music] [music] >> Oh.

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[00:01:22]>> [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] >> What?

[00:03:13]>> [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] >> Welcome back to the Capital Flows live stream.

[00:05:02]We are uh excited to be here today because we have uh a topic that I've had a lot of people ask me to cover. And today is the day that we're going to cover it because I've laid out some views on the global carry trade over the last I would say 6 months.

[00:05:24]And there is always this looming question about how the carry trade works, how cross-border flows work.

[00:05:32]>> [clears throat] >> And really, if you look at all of the major people who talk about the credit cycle, liquidity, or things like that, or have said that uh said that the macro liquidity factors are beginning to contract. They're, you know, mapping a lot of factors except the global carry trade. And specifically Japan's role in that. And so, today's session, we're going to break down all of that. If you are brand new and you're just trying to understand all the different factors or how the carry trade even works, what is a carry trade?

[00:06:07]How does another country impact what is happening in the United States or AI flows or AI cap ex? What in the world does that even mean?

[00:06:15]We are going to cover all of that in today's session. So, if you're here, welcome to the Capital Flows live stream. The entire goal of these live streams is to provide a comprehensive breakdown of the macro regime and to take asymmetric bets within that. And the the focus that we always have as traders is how can we pull together all these moving parts, synthesize them clearly, and then take bets within that. And so, we'll be covering how that works with the global carry trade, with the yen, with Japan, and then James will take that and we'll go into how do you begin to structure all these different ideas in depth and breadth.

[00:07:02]And that's what we're going to cover in the stream today. So, uh as a reminder, these streams are happening every single day the market is open. So, uh we won't have a stream tomorrow morning cuz we have a holiday, markets closed, things like that.

[00:07:17]But, now next one will be on Monday, but every single market day we will have a stream breaking everything down. And so, the goal is that you can come onto the stream, have a very clear view of the macro picture, and if you don't have time to be on the entire stream, you can always go and read the proprietary report that's put out afterwards. So, as a reminder, go to the Capital Flows Substack, go to the website, it's linked in below, above, wherever it is. You guys know how to find links. And you know, you can find the live stream, it'll all be right here, and then you can find the recent reports that break everything down. So, for example, if you want to understand what happened yesterday at FOMC and why is it exactly that the curve is flattening, bonds are bidding the day after FOMC, but then the short end is kind of anchored a little bit? This This breakdown provides everything for you.

[00:08:06]And then you can go down to the proprietary report right here and download that and get all of the takeaways, all of the models that I'm running on how interest rates are functioning. So, those are all on the website at capitalflowsresearch.com.

[00:08:22]And in the first section of today, yeah, as a reminder for everyone, these live streams have two sections. So, everything is built for risk takers who are putting real capital to work, especially if you're trying to manage inflation shocks, recession risk, and these bigger macro moves. Macro flows account for 80% of the changes that we see in markets. Period. End of story.

[00:08:49]Fundamentals come in and will push around different names or sectors, but on a macro basis, macro flows, capital flows, account for 80% of all the moves that take place in markets. And so, if you want to re- clear read on rates, FX, equities, so that you can know when you should be really aggressive and then when you should be a lot less aggressive, these live streams and the reports that come out right after them are tailored exactly for you in that process. So, you bridge that gap. So, the first part of the live stream, which we will be covering on Japan, goes over the macro principles, what actually is driving markets, how the structural regime is developing, how to filter the different narratives that are out there that you should or shouldn't be listening to, and then synthesizing all of it so you have a very clear read on the bigger picture macro backdrop.

[00:09:40]If you understand those things, then that sets the stage for all of the quantification of those factors in the private members section of the live stream. So if you're not a private member yet, be a great time to join. And the entire private member section has one simple goal, to have clarity on the macro regime and conviction in asymmetric bets. If you have that, then everything will be a lot clearer. The way that you have clarity in the macro regime and conviction in asymmetric bets is by understanding global capital flows, which breaks down to macro liquidity, the credit cycle, cross-border flows. We're covering cross-border flows today.

[00:10:19]That is what we're going to be covering.

[00:10:21]The macro regime of growth, inflation, liquidity, which we covered a lot of inflation and rates yesterday. We covered rates and FX yesterday. Equities, we've been covering those all week. And then positioning systematic flows, which we're going to be covering on Monday on how exactly some of these leverage flows, systematic flows are functioning in the market. So you're going to want to be there for Monday for the private member section of the live stream. And then there's always live Q&A. So if you have questions, just go to the paid subscriber section of the chat on Substack. So on Substack is the paid version of the stream. Basically halfway through, we'll go from just streaming to Twitter and YouTube to just streaming on Substack. And that'll be exclusively reserved for paid subscribers. And if you don't have a ton of time or there's one or two days you're not able to get the entire live stream, there's always every single day after the live stream a proprietary report where I pull together all these factors. You can read all of it in under 20 minutes. You'll also have the recording of the live stream you can watch later and a synthesized transcript of the live stream you can feed into AI and ask it questions. So the goal is that every single thing is given to you so that you're able to take agency and accountability in an informed way for everything. So, if you want to join that, go below in the link section, you can get the link for the Substack live stream. Join that, and then when the live stream the free section of the live stream ends on Twitter and YouTube, you can go right over, join it on Substack, and continue going through in the private members section. And then get the report as well for that. So, the place that we are going to start is that by the end of this section right here, you will be able to trace the entire chain from Japanese demographic to global volatility spikes, and explain exactly how the yen carry trade wires Japanese monetary policy into the global markets. By the end of this section, you will understand that.

[00:12:21]That's the key thing. That's the main idea for this section. And the place that we want to start is on Japanese demographics, how that flows into things like deflation, the zero interest rate policy that the BOJ Oh, I was not on the slide.

[00:12:42]Let's see.

[00:12:45]Let's see. Slide decks are tough.

[00:12:47]>> Slide decks are tough.

[00:12:48]>> Thursday slide decks are tough. We were just joking, guys, that, you know, after all this time and all this new technology, here we are just making better decks for everybody, right?

[00:12:59]>> Everything is laid out uh as a reminder, everything's for risk takers. Here are the slides. Um everything will be laid out on the Substack. You guys know how it works.

[00:13:08]All right.

[00:13:10]By the end of the session, Japanese demographics, global volatility spike, and explain exactly where we are with the yen carry trade.

[00:13:16]Um let's start here with the demographics idea. You know, a lot of people in the macro space or or it, you know, whatever kind of area they're at.

[00:13:29]Um hang on one second.

[00:13:33]You know, people talk about demographics, but the problem is they don't quantify those demographics with the changes in the underlying economy or with the kind of the structure of everything. And so, right now, we have demographics which have created lower inflation for Japan. Now, that's relative to the rest of the world. We're actually having higher inflation in Japan right now, but it's significantly lower than the US or Eurozone or some of these other countries. So, over the last 40 years, you have had the decline in demographics in Japan, which has created deflation, and it has created a zero interest rate policy and yield curve control policy for the BOJ.

[00:14:19]As a result, this has created a glut of savings. So, simply put, the Japanese people have a lot more savings than other people in the world, which results in them exporting a lot more capital.

[00:14:34]And as a result, you have a cheaper yen, you create global carry trades, and that can result in violent unwinds.

[00:14:41]I'll explain what all that means, but the main takeaway you want to have is that there is a causal chain between all these factors, and nothing operates in a silo. So, if you want to understand why the S&P 500 can correlate with the yen sometimes, or how the carry trade works, everyone starts right here on well, what's the VIX doing and what's the Nikkei doing, but what you really need to do is start back here with demographics, deflation, how that connects to the BOJ, how that connects to the savings glut, and the Ministry of Finance spending, how it connects to capital exports. You have to start back all the way over here. If you start at the right place, you'll be able to arrive with the correct foundation at the positioning and changes in markets.

[00:15:24]And so, the couple papers that I would really encourage people to start with, there's three papers behind the some of the research that we're going to go over today. But, you'll have all the links for these. So, if you want to go through the these papers specifically, this entire slide deck will be available at Capital Flows Research afterward, and you can go through the slide deck. So, for example, we we went through the wash credit changes, and you can go through how to position the macro deck. You can go download the macro deck from the slide the other day, and you can go through this entire deck on your own, and be able to have a clearer view of all the slides that took place the other day. And you can understand how nominal rates work, and how, you know, the different changes in inflation versus nominal rates are functioning in this period of time.

[00:16:17]Again, that's all on the website. So, if you're a free subscriber on the website, you'll be able to get all of that.

[00:16:23]So, coming back to where we're at with this.

[00:16:28]First paper that I want to kind of cover is Japanese government borrows cheaply at short duration while investing in long duration riskier assets and pockets the spread.

[00:16:38]The consolidated state treasury and central bank, and then you also have all the pension funds in Japan have created a environment where their entire country almost functions like a bank. The second order effect of that is their near zero interest rates are hidden transfer. They expand fiscal space and fund [snorts] an aging population, but tax long younger and less financially sophisticated households.

[00:17:03]And then, you also have the same reach for a spread pushes Japanese capital abroad. The public sector carry trade is the blueprint for the private yen carry trade that follows. So, simply put when you have capital transfers in an economy then that will always result in larger capital transfers via carry trades. And you can go through these paper and kind of begin to understand what that even means. But currency carry returns are negatively skewed subject to crash risk when funding liability and risk appetite appetite declines. So, simply put when you borrow in a low yield to buy high yield assets that is creating an asset liability relationship. So, let me just give you a very extreme example. Imagine you have a credit card and you say, you know what?

[00:18:01]I have an investment that is going to pay me 50% a year. It's kind of risky, but it's going to pay me 50% a year. And you say, but I don't have any money right now. So, what I'm going to do is go max out and take $10,000 off my credit card and go put it in that riskier investment and get 50% a year.

[00:18:21]So, if you take that $10,000, you go put it in you take it out of your credit card and pay 20% a year on the credit card to use that money and go put it into a 50% a year um asset and get 50% a year you collect a spread by using someone else's money.

[00:18:42]And a lot of the US banking system, global banking system is structured around that idea of a spread. Now, here's the thing.

[00:18:50]You always have different changes in interest rates across every single country. And that's where carry trades begin to develop. And so, these papers are all about carry trades because people always want to borrow in the yen and convert it back to dollars so that they can go buy things because the yen is very cheap in its financing and I'll cover that and how it functions.

[00:19:19]When you think about it, think about the yen as a credit card where instead of paying 10% you can pay 5% or I'm sorry it's instead of paying 20% like let's say a regular credit card has a 20% APR on it that you have to pay year and you want to go put this money into a 50% asset. Again, these are crazy numbers but this is what people do all the time because you have um people you know you have stock returns that might be 50% 60% a year and that could be Japanese investors who have borrowed money at a couple percent taken that converted it put it into that and now you have a new asset liability relationship created.

[00:20:01]And so the entire idea is that if you understand how capital moves in the system you can understand when people are borrowing and why currencies crash at the same time as some of these other things as well. And again, you can go to the National Bureau of Economic Research. They have a lot of great papers that will begin to to frame that.

[00:20:19]And that this paper specifically that documents that carry traders are subject to crash risk i.e. when exchange rate movements between high interest rate and low interest rate currency are negatively skewed we argue that this negative skewedness is due to sudden unwinding of carry trades which tend to occur in periods which risk appetite and funding liquidity decrease. So just think about it. Right now we're in a period of time where there's a lot of liquidity in the market and risk appetite is increasing. So the opposite is happening right now. We are having a period where risk appetite is increasing and funding liquidity is increasing. But when those reverse I guarantee you you're going to have a lot of unwinding and positioning because of how one-sided the carry trade is right now. So funding liquidity measures and uh uh liquidity measures uh predict exchange rate movements controlling for liquidity helps explain uncovered interest rate puzzle, carry trade losses reduce future crash risk, but increase the price of cash risk. If you don't know what that means, it's okay. What I would do is just take this paper, feed it into AI, and we'll give you the bottom line takeaways in this section. So, the Yen carry trade specifically is a large leverage and largely off-balance sheet, so it barely shows up in conventional debt statistics.

[00:21:39]Go right here.

[00:21:41]Give me one second.

[00:21:43]Uh, so triangulating official data pulls 14.2 trillion of Yen on one side of FX derivatives and roughly 40 trillion, or 250 billion, of speculative carry going on into the August 2024 unwind. That was one of the carry trade unwinds that happened recently. Uh, if you have a carry trade unwind right now, you know, I would say the variance for that is could be a 10% drawdown in the S&P 500 or other global equity indices if that happens.

[00:22:12]And then you have to know, is it is this a carry trade in a position unwind, or is this a larger macro factor that could create structural change?

[00:22:19]So, Japan's debt is half as scary as the headline, but in in simple terms, people will say, "Oh, Japan, they have a ton of debt, and it's very risky because the entire country could collapse or anything like that."

[00:22:35]Again, those people probably don't trade in markets because yes, they have a lot of debt on a headline basis compared to GDP, but if you look at what their assets are, they hold a lot of US Treasuries.

[00:22:48]And so, it helps them balance the other side of their balance sheet.

[00:22:53]So, for example, if you have a ton of debt just in your own life, I wouldn't ask, "Oh, if you say like, oh I have a you know uh, 10 million dollars of debt right now.

[00:23:07]You would begin to say okay well is that a lot or is that a little or how much assets you have and you can if you said oh well I have 30 million of assets and I say like oh well then you're fine right now. You're probably not over leveraged. Maybe you have some liquidity risk if you're not getting payments on time and you can't pay off your debt at the right moment but you'll always be able to borrow against your assets to fund any liquidity risk as long as markets are functioning so you need to hedge your risk or maybe buy some premiums or pay some premiums to hedge your risk but you know broadly speaking you're at a great spot.

[00:23:36]So the idea is that the Yen carry trade itself is very hidden from the overall system and what people understand.

[00:23:45]And as that is taking place the larger context for it is how much the population has changed which has created so much extra savings and a global savings glut in the Japanese economy and so the chart here is the population which you can see the population age that is above 65 has been just increasing really significantly and workers that are you know below 65 has been collapsing. So simply put a lot older people are in the Japanese economy which begins to change how the economy functions cuz just think about an example where your grandparents who can't work anymore they're living off their own savings but they need have a lot of money that they need to invest and so that's where a lot of the Japanese economy is almost like in a retirement community where they're always trying to find yield to fund their own living because they've already exited the workforce.

[00:24:51]That's the context for how Japan is functioning right now and why a carry trade even exists in the first place.

[00:25:00]>> All right. So, I have a question for you. And when I listen to all this, it makes me think that the ratio between like let's just use the Japanese tenure and the US tenure either moving in lockstep or expanding or contracting from each other not only is important, but makes me think that within those there's their own regimes. Cuz I guess if like if uh if what like let's just say the US tenure is staying stagnant, but the Japanese tenure is moving up aggressively, that's going to decrease the credit quality of that trade. Is that correct?

[00:25:43]>> Yes. So, actually super interesting because let me see if I can find this video really fast.

[00:25:53]That is I think the That's the exact question you want to ask.

[00:25:56]The ironic thing is that um the drivers for the carry trade have actually changed, which is why so many people actually misunderstand them to a pretty significant significant degree.

[00:26:12]So, if you go to Capital Flows Research, the YouTube channel, uh you just go to Capital Flows, I don't know, search Capital Flows, it's right here.

[00:26:22]And again, all the live things you can go through and you can go through all the past streams that we've done every single day.

[00:26:30]In the video section, there are two videos that really were critical on understanding the yen that I did earlier this year. One was the imminent devaluation of the yen and its impact on your portfolio, published 5 months ago in January, and then the biggest misconception in yen positioning.

[00:26:48]These two videos, and you know, I'll come back to uh there was I'll I'll take these two videos. I actually posted them on Twitter as well.

[00:26:59]And I'll give everyone um I'll put this in the chat right now so that everyone can have it.

[00:27:09]See.

[00:27:10]So go to I'll and I'll just retweet it as well.

[00:27:16]So that everyone can have these.

[00:27:23]In these two videos, the main idea that I laid out earlier this year was that the yen was about to be devalued on an imminent basis.

[00:27:36]And you know, when I released these videos in um January, I believe it was of this year. Let's go right here.

[00:27:43]Yep. Basically released these videos in this entire range right here.

[00:27:49]And the idea was that there are changes in the carry trade to James's point.

[00:27:56]Not only with interest rate differentials that have confused people, but also with why the yen is moving in the way that it is. And the thesis that I laid out in both those videos was that the yen is very likely to move down in a massive way. Now, what's happened? We're making a new low in the yen on the day.

[00:28:12]And we're continuing to move in lockstep with the thesis that I laid out in those videos. Now, the critical change that has taken place is that the view that I laid out here and that got us to the point where we're at now is not the same view that's going to lead us to the next leg down. There are some factors that have definitely changed and we're going to go through those in the uh live member section after the the first section here and we're going to break down those drivers and how to think about them. But if you go through that first video that I did, and again, those are all laid out, you can go through the links here, wherever it might be.

[00:28:46]Uh if you understand why these moves take place and the mechanics behind them, which we're going over right now. Like, what are the mechanics for the carry trade?

[00:28:55]Then, if you understand the market views and mechanics for the drivers right now, everything will become a lot clearer about what's going to take place next.

[00:29:03]So, those are two of the videos that I think are just really critical. I would encourage everyone to go back and watch them.

[00:29:09]But, yes, I think James, your point, we actually have a lot of you know, one of the biggest carry trade unwinds we had and I'm going to skip a couple slides here. We'll come back. Is what happened in August of uh, 2024.

[00:29:28]And August 2024, we had one of the fastest and and really significant drawdowns in the S&P 500.

[00:29:36]And it was all driven by the carry trade. So, if you know, this goes back to if you don't understand that the carry trade starts to tick up and you see changes in the flows around the carry trade, which again, that's what we're laying out every single day in the proprietary section, all the proprietary reports and how those flows function.

[00:29:53]So, if you want to understand those, we're going to cover that in the paid section today.

[00:29:57]When you see these moves happen, you need to understand why they're happening and if they begin to take place, you are going to have massive, massive drawdowns in the S&P 500. This is, in my view, the largest risk to the S&P right now is if the carry trade begins to unwind and pulls down all the capital that's moved out the risk curve, it is going to be really significant. And we've already been laying this out over and over on the on the Substack. If you go to capitalflowsresearch.com and go to the global carry trade on the edge of a cliff, published on June 3rd, I laid out how we are seeing an overlapping in the carry trade and AI flows. So, if you're long different semi stocks, AI stocks, some calls and some of these names that are squeezing, but you don't understand the global carry trade, then I would say basically you are misunderstanding the largest tail risk that exists in the entire AI flow space right now.

[00:30:52]Not only between the US, but also Eurozone, China, and every every other major country.

[00:30:57]So, all of these factors and you know, are really converging at the same time, which is why understanding the mechanics is so critical right now, because we're going to lay out the entire mechanics, and that's the entire point of this section is the free playbook is meant to lay out what are the mechanics behind the carry trade, what is actually driving markets in this regime, how is the structural regime developing, and then how do we filter and understand the data in this context?

[00:31:24]That sets the stage for then saying, "Okay, what is the clarity that we need and conviction for getting long the yen when the time is right?"

[00:31:33]And then also, how do we think about liquidity and everything that Japan is doing in that context as well? So, the entire structure of this livestream is meant to lay out all the educational material for you, and then break down all the research and drivers for actually taking risk.

[00:31:49]And so, coming back to the next section, the biggest debt pile in the world in terms of the central bank's involvement is in Japan. So, here's a chart of who owns Japanese debt. The rising cost has been connected to higher interest rates in Japan, but just notice, the Bank of Japan is the largest holder of debt in Japan.

[00:32:16]This is you know, when when people talk about this entire idea of central bank's debt monetization, all this all this stuff about money printing, and everything like that. What you really want to do is connect it to the interest rate complex, and that's what we we're going to do.

[00:32:35]But, the largest holder of debt that is issued by the gap Japanese government, the Ministry of Finance, is the Bank of Japan.

[00:32:45]And then, next is Japanese insurers and pensions, banks and depositories, households own a very small portion of outstanding debt, and foreigners own a little bit as well. But, overall, the Bank of Japan has really been center stage for everything that's happened, and the Bank of Japan just hiked interest rates again. Now, the question is, if the Bank of Japan has been hiking interest rates this entire time, then, why in the world is the market not collapsing right now? Why is it?

[00:33:18]And let me walk you through the progression for that, because on the day today, the Nikkei the yen has made a new low, and the Nikkei just made a new high. Let me share this right here. And I I've been laying this out. If you've been on the Substack, you know that I've been bullish to the the Nikkei with a lot of aggressiveness, because it it's just such it's just such a a massive part of the market that no one watches, because they're so focused on Mag 7. But, the Nikkei is up 3.2% on the day.

[00:33:49]I mean, it's outperforming the Nasdaq even.

[00:33:52]And it's making an all-time high as well.

[00:33:54]And it's doing that at the same time that you have the yen making a new low. And just think about that. That's taking place as you just had the BOJ, the Bank of uh Bank of Japan hike interest rates to 1%.

[00:34:11]So, let me walk you through the progression of what's taking place.

[00:34:15]In 2016, we had a shift where the Bank of Japan was easing really aggressively. They took interest rates and turned them negative, so they suppressed interest rates so they were negative, and they conducted yield curve control.

[00:34:30]And so, that was the normalization. That was a period of time that they had, or excuse me, that was a period of easing that they had that they suppressed interest rates and they put a lot of money into the system. But, because it didn't transmit into the underlying economy, it didn't create inflation.

[00:34:49]What began to take place in March of 2024 is they stopped this entire regime.

[00:34:55]And they began to hike interest rates because inflation started to tick up.

[00:35:01]So, after years and years of zero interest rate policy, negative real interest rates, yield curve control, the Bank of Japan flipped their entire stance and they have been hiking interest rates. So, this is having a massive impact on markets that I would say is still misunderstood because everyone thinks, oh, if someone if a central bank is hiking rates, it has to be bearish for risk assets.

[00:35:28]Except the Nikkei is just melting up right now. So, again, it goes over, you need to understand the underlying drivers. Here is inflation expectation, or excuse me, inflation data for the CPI in Japan. And what you'll notice is that in 2022, we had a really significant rise and then you also had wages for years running at over 5%.

[00:35:52]So, the deflation in Japan, again, look at this. We are, you know, below we had deflation. We are below 1% in CPI.

[00:36:00]That shifted and turned into inflation.

[00:36:03]Now, we are in this period of higher inflation. Even though we have come down a little bit, inflation is still elevated in Japan, which is why the Bank of Japan just hiked.

[00:36:13]And so the shift that we have seen in inflation frames the entire action of the BOJ, which in turn, again, this goes back to understanding the causal chain of everything, that change if we have go from deflation to inflation, that changes the zero rates dynamic, which changes the global savings glut, which changes capital exports, which changes the cheap yen. We are just not seeing that impact global carry trade yet because there's actually some factors that shifted in January, which is why I did those videos that I did. So, I would encourage you to go watch those on how the Ministry of Finance is funding a lot of things now.

[00:36:52]But, the the period of time that we're in now is inflation is a bit higher, but the Japanese saving glut is still on, you know, basically on par and it's not decreasing. So, simply put, Japan still has so much money in the system and they are exporting liquidity to the rest of the world right now.

[00:37:15]And in those videos that I shared previously, the idea was that Japan and the Ministry of Finance has begun to change their bill issuance and their spending so that they have basically the largest spending that we have seen in like a over a decade in Japan right now. So, the even though that the Central Bank is shifting their stance, the government side is beginning to increase its spending really significantly. And the world's largest net foreign assets, you can see Japan here, used to be number one. It's shifted down a little bit. You have it, uh, you know, Germany right here and then also China. But, yeah, you know, think think about how small Japan is compared to China and how much money they have to be moving in almost lockstep. So, they have a lot of net foreign investment, which just means that all of the investors, all the people in China, they own a lot of US assets.

[00:38:11]And so, the structural yen move, here's the dollar against the yen. So, the dollar is moving up against the yen, which means the yen is moving down against the dollar.

[00:38:22]These moves right here, we have seen currency intervention by the BOJ multiple times trying to set tops in the yen against the dollar. And so, simply put, we have seen the BOJ now intervene in currency markets in a lot of different ways, and it's causing people to really wonder, is the Bank of Japan going to lose control over the yen, or how are they going to really manage this new situation with the global carry trade?

[00:38:54]So, when we think about the global carry trade and what that means, when you're borrowing, when you're, you know, creating a carry trade, you know, the Japan is basically borrowing short-dated floating rate near zero cost.

[00:39:09]They're basically borrowing at zero almost.

[00:39:12]And they're taking that, and they're harvesting a spread.

[00:39:17]And they're buying long-dated risky domestic foreign assets via, you know, the BOJ, public funds, everyone.

[00:39:25]And so, net debt is 78% of GDP, but the headline is 270%. This is why when people talk about, like, oh, there's so much of debt in the system, everything is going to collapse.

[00:39:36]Um, again, they're they're not really thinking about how the asset liability balance sheet works. They're thinking about the headline number. So, even though there's 270% of GDP in debt, yes, but how much do we have in assets?

[00:39:51]Right? Like, how much do we have in these other kind of changes against the balance sheet? And so, the idea here is that people will borrow in the yen at 1%, right? So, rates in the yen right now, or in Japan right now, are 1%. We just had the BOJ take rates to 1%. What they'll do is this is how carry trade works.

[00:40:14]They'll go borrow in the yen, they'll take it, sell the yen and buy dollars, and you know, you can do this as a US investor, you can do this as a Japanese investor, anyone can do this.

[00:40:26]Uh you know, all of the largest funds in the world are conducting these operations every single day.

[00:40:32]And then step three, you can hold the dollar or USD at four and a half four and a half percent, or you know, whatever the money market is at right now. And so you get a carry of 3.5% a year only if the dollar-yen currency remains flat. So this is the idea of a carry trade. You borrow in one currency, you take that money and put it into you could just say a money market fund or there's more sophisticated ways to do it, but just for the sake of explanation here, you borrow at at 1%, put it into a money market fund, hold it at four four and a half percent, three and a half percent, and then you get a three and a half percent a year carry.

[00:41:12]So, you'll get paid three and a half percent a year if the dollar-yen doesn't move. And you say like that doesn't sound like a really big deal. Why would I care about three and a half percent a year?

[00:41:23]Well, you can leverage that up and start making a lot more money or buy some risk assets instead of putting in money market funds. And then on top of that you get paid three and a half percent a year. Think about if, you know, you didn't have to pay as much for financing, uh you know, margin or if you didn't have to pay a funding rate and it was actually positive. You had a positive carry. That's the entire idea of a carry trade. And so this creates a recycling machine where more capital chases the trade, or let's start with one here. People borrow in yen, they sell the yen for other FX flows.

[00:42:02]They take that and they buy assets in that country, and then they earn the yield, and the weaker yen adds to the gain. So So the yen goes down, you actually just made money.

[00:42:13]You can actually make a ton of money if you borrowed in yen and then you go buy another currency and you can make money on the currency side and the asset side. And then as a result, more people pile in. So just think about it like this is if we come back to the example right here with the yen.

[00:42:32]If you would have borrowed in the yen Let me put this right here. If you would have borrowed in the yen right here let's just say right right here. Let's just be optimistic.

[00:42:44]If you borrowed in the yen right here and then took that money, converted it to dollars, and then just bought Mag 7 you would not have just made Mag 7 returns, but you would have also made money on this entire move in the yen, which was what? 3% down.

[00:43:03]So you would have just made 3% on the carry to the uh the FX side of your trade, not even including Mag 7 rallying another, let's say, 5 or 7%.

[00:43:18]So all of those things line up to stack a ton of money and increase your returns. And then on on top of that you can just say like, "Oh, now I want to really leverage up even more and I want to use that to fund you know, taking out more leverage or whatever it might be." So that's something that's really not understood by a lot of people in markets because most people don't really understand FX and it it reverberates across the entire system.

[00:43:47]>> Bro, I have so many questions.

[00:43:51]Who is the main player in this trade? Is it Japan itself or is it globally a mix of people or is it the US? Like who has the most incentive to keep this going?

[00:44:06]>> You mean the the weaker yen?

[00:44:08]>> Yeah, like who in the carry trade, who is the one that has the most incentive to keep the carry trade going? Is it Is it Japan itself?

[00:44:17]>> Yeah, I would say that it's everyone that wants the carry trade to keep going.

[00:44:23]Uh well, here's the thing. When you are long a carry trade, you're functionally short ball. You're short the Vix.

[00:44:31]Um which works out most of the time, you know, right? But um Jap- Japan, they they do want the yen lower right now.

[00:44:40]Um the question is when they might lose control of it because even though they are like a massive player in the market, they're going to lose control of their currency one day.

[00:44:50]Um and it's going to either cause a small unwind that will get managed or a larger unwind that will really blow up something that none of us even know is existing under the surface right now.

[00:45:00]But basically any trader in Japan or in the US who has borrowed a cheap yen to basically take out a lot of leverage, they are incentivized to keep the carry trade going. They don't want it to unwind. And the downside is that this is like a regular currency where Japan, if they have the currency weaken too much, it could bring inflate more inflation into the country.

[00:45:26]It could weaken their ability to import and export different things where they need to, you know, keep that because think about like this.

[00:45:35]The the hedge fund trader who borrowed in a cheap yen and converted it to dollars and bought Mag 7, he's printing money right now.

[00:45:44]But on the the flip side, the um you know, the the exporter who's trying to, you know, import and export goods, he might be losing money.

[00:45:58]And so you have these two different people in the economy, one that might be making money, one that might be losing money.

[00:46:03]And the question is, when do those two agents or forces become unsustainable?

[00:46:08]When do they begin to interact, and then someone says like, "Hey, I don't have any more money to give you this month because I just haven't been able to make any money in real terms." Again, this goes back to like real yields, real purchasing power, how do things change in nominal and real terms cuz most people only think in nominal terms, which is one of the main things we're going to cover in the paid section. Breaking down like, how do you understand real purchasing power as it relates to this?

[00:46:35]>> Okay, so second thing is like, when I think about the Japanese 10-year right now, and I think about what you've been saying over this whole time about like the US 10-year, and how the long end is what prices the mistake of the central bank.

[00:46:50]So, is it basically the same scenario here where the Japanese real yields are they're they're still way too accommodative than people might think, even though the 10-year is running up. They're just They're trying to catch up to that, but in a sense in a sense, at the same time, don't even want to catch up to that cuz it could trigger what they don't want to trigger.

[00:47:16]>> Yeah, so the interesting thing here is I will share this one chart because we have a lot of stuff to cover on that and how it connects to a trade in the the the >> Yeah, anything you don't want to answer for that, that's fine. Just let me know.

[00:47:31]Yeah, I just >> Totally. Here Here's the one thing I would say before we before we keep going cuz I want to answer these questions um in in the paid subscriber section, but this is the chart that everyone doesn't understand right now. The dollar has rallied against the yen.

[00:47:46]And previously, this moved in lockstep with interest rate differentials. So, the 10-year would move up higher than the JGB uh yield, JGB 10-year.

[00:47:58]And as a result, it would strengthen the dollar against the yen.

[00:48:01]What has taken place recently is this entire relationship diverged.

[00:48:05]And what you would want to ask is why did this divergence take place, and what's the new driver?

[00:48:10]And that is all connected to this carry trade recycling machine, which we're going to cover in the member section, but the idea here is if you can quantify uh and understand that chart about what has changed, and then begin to connect it to when is the idea of pennies in front of a steamroller beginning to build in the system where, you know, you're having risk build in the system for macro liquidity, and sure, everything is going fine until it doesn't, but it's these periods of time over here on the left tail that once those occur, they can have a massive change. And here's kind of another chart about exa- exact same thing where, you know, US rates have fallen, but the uh you know, this is the Fed minus the BOJ policy.

[00:49:01]You can see the Fed rates have been falling against that, but the dollar keeps rallying.

[00:49:06]That's the entire question people have had over the last, you know, kind of couple of years is what is causing the yen to move in the way that it is.

[00:49:16]And you know, I'll have these slides decks so you guys can keep going over them after we're we we kind of go through these sections, but the biggest risk that I see is that in August of 2024, the carry trade unwound, and it didn't even unwi- unwind in a big way. S&P dipped. I think we went down almost 7% in a couple of days, um in like a week period of time as the yen really rallied. And if the carry trade actually unwinds in a major way, yeah, okay. First, all the doom stuff about the carry trade out there about like it's going to blow up the entire world economy. Totally false. Again, none of those people are trading.

[00:49:55]They're not really looking at how nominal rates, real rates, inflation swaps all quantify into that and change things. That's number one. But, number two is that there is risk under the surface for carry trade unwinds that happen within and they can push the S&P down uh you know, 10 12%. Those are the kind of things that you want to watch because if that happens, you got to sidestep that, right? I mean, you know, we'll still be in a cyclical regime where a macro regime where liquidity is still expanding and we're still seeing things to the upside on a cyclical basis.

[00:50:35]But, the biggest risk in the system what I would say is if the carry trade unwinds and in the United States we see structural factors begin to deteriorate as well.

[00:50:44]That's when a larger factor could be could begin to take place. But, these kind of these like dooming about Japan and that they have so much debt and that's going to spill over. We're actually seeing the opposite right now where Japan is exporting inflation, which is why the Nikkei has been leading the entire rally to the upside. So, uh you know, those are those are the mechanics for the carry trade. So, you can you can begin to begin to understand all of these factors where, okay, I understand how Try to go to this slide right here.

[00:51:18]I understand how the carry trade works where people can borrow in the yen and then sell the yen to buy dollars and then hold dollars or other other currencies and get a carry for leverage. And if the dollar yen stays flat and my mag seven stocks rally, I'm making a ton of money and I don't have to pay as much to, you know, borrow.

[00:51:42]So, if you understand, you know, we've we've covered that of like how that mechanism works. Now we say, "Okay, how does that connect to where we are in markets right now and the drivers behind that?" And I actually think this dovetails really well, right, you know, before we go into the member section to to cover that.

[00:52:00]This dovetails really well into how should you dig into these factors not only in depth but breadth?

[00:52:08]And why understanding some of these small things in the yen carry trade can be very helpful, kind of what we talked about earlier of if you're trading AI stocks, understanding things in Japan can actually be really valuable because guarantee you that all the guys who are modeling the next um, you know, fundamental analysis for AirPods and Apple earnings, they're not thinking about the carry trade.

[00:52:33]Right, they're not thinking about these macro factors. So, all these things and understanding these factors are going to pay dividends if you pull together the mechanics and then the market view is correctly. So, James, why don't you break down a little bit more some of some of those ideas for depth and breadth when you when, you know, people kind of see these ideas we've covered that are a little complex but you know, that we're going to synthesize in the paid members section but explain a little bit more about you know, that side of things if you want to go through your section.

[00:53:04]>> Sure. So, I was thinking yesterday about how I was I was talking with somebody about how there's just so much opportunity out there and there's so many quote-unquote experts um, but in reality it's very rare to meet somebody that is an expert across all domains, right?

[00:53:25]There's usually somebody who might be an oil person or a bond person and then there's other people who are able to kind of go cross asset, cross ecosystem and uh, do their thing. So, I thought that'd be interesting to kind of talk about especially since we are currently jumping from uh, country to country where you know, one day we're talking about computers the new oil and then the next day we're talking about the Yen carry trade and Japan exporting inflation, right? So, we're kind of bouncing around even though everything is linked and intertwined probably a lot more than people might think. So, I thought it might be valuable to just talk about in a way it compares to what we were talking about 2 days ago in the first and third thing, right? That the the last thing you want to be is caught in the middle. I think it's I think it's kind of the same thing here where I think you kind of want to go deep into one thing and become a quote-unquote expert and develop a moat or you want to build more of the ability to if you've read the book Range, just be kind of broadly good or capable at a swath of different things. So, I'm going to take you through that a little bit and you know, pick picking your direction I've heard this because it's the most dangerous place to be is in the middle of these things and a lot of people are standing there without actually even knowing that.

[00:54:48]So, let's dive into this real quick.

[00:54:50]I'll take about you know, 5 minutes and then we'll get ready to head over and talk about the Yen a little bit more.

[00:54:57]So, in a sense you got to pick a lane here.

[00:55:01]Do we want to be the somebody who specializes or do we want to be more horizontal? Now, I myself uh given that I've been trading a long time and a lot of different assets. I was in futures, I've done stocks, I've done options, I've done crypto, I I like perps a lot. Like I am more of a person who is trying to understand things quickly, pick them up fast and be able to kind of bounce around to where volatility expresses itself. Some people hate that, right? And they would want to stick and focus into something and want to know everything about one thing before they could actually and informed decisions.

[00:55:37]Neither Neither of those is is correct.

[00:55:40]It's just you want to probably find the one that matches yourself. And if you're kind of stuck in the middle, you're probably going to have a lot of problems and we'll touch on that a little bit later, too. So, depth, right?

[00:55:51]You're going to be talking specific edge, right? Uh I like to use oil as an example and we'll touch on that next, but like there's some people out there that that spend their life in the energy sector, um generally tend to be oil bulls, but they know everything about, you know, refineries and all this stuff. They have an ecosystem expertise that not many people in the world have. They optimize for focusing on that and they go from bottom up and kind of understand it more than anybody else will.

[00:56:18]Now, where I tend to live, and by the way, I think this is where Flows, you know, he has the ability to jump around in different things, but I think when it comes to interest rates, that's kind of where you focus, right?

[00:56:28]You want to go so deep into those and then understand how to kind of branch out into those other things, but you're building this really thick core base of a tree trunk within the interest rate systems.

[00:56:42]For me, uh a little bit more breadth, right? I want a portable process. I almost treat it like a scaffolding. Like I I have this scaffolding that I could just bring, almost like a 3D printer, to whatever asset class I want to be able to help me understand what's going on there quickly so that I can act with conviction and you know, kind of alternate what what size I want or why.

[00:57:02]Um broad knowledge, understanding the the ranges and the movement and the players of all sorts of different arenas. And then I'm optimizing for that as as quickly as I can.

[00:57:14]So, you know, when it comes to the surface, like going vertical, right? You're going to be picking one sector, one asset, one instrument to drill down into until you understand it better than almost anybody in the world. Uh you're going to understand the vol- volatility regime that it cycles through, the right vehicle for you to actually express that trade, who the players are, and how to be positioned into these trades before the crowds even see it. Right? That depth is your moat. And that can be a really powerful moat if you're able to express that cleanly. And that compounds over time in the seat and more reps. And it's honestly, it's really hard to replicate.

[00:57:53]So, here's what I was talking about with an oil specialist, all right? They're going to know entirety about the futures complex oil contango and it's in backwardation, the roll mechanics.

[00:58:03]They're going to know the differences between WTI, Brent, sour, what moves those, where the where are all the um oil depositories and refineries in the world and in what can affect that, right? Middle East is a great example.

[00:58:15]Who are the players, the producers, the commercial players, the funds, the retail. They're going to know everything about the crack spreads and how how everything is refined, the supply and demand moving throughout all of the world, and the bull and bear cases and how they could adjust accordingly over time. So, this you want to be an oil specialist, you're going to need to know everything about it and it's a very difficult thing to do. I think most assets are are difficult, but oil especially.

[00:58:44]All right. So, for me something is like the scaffolding that I could carry around. I'm not really going as deep anywhere. That's why I'm a little out of my element when it comes to like hearing about the yen-carry trade. Right? It's not something I really understand. I had to ask more questions about. But I built a framework that I can bring over into the yen and drop it in there if need be.

[00:59:04]If you know a month or two from now, this ends up becoming something we want to express a view in, right? Which I I'm assuming we're going to talk more about in the paid sections as these uh signals present themselves.

[00:59:18]Um I'll be able to develop my own risk-reward, my own asymmetry, use my bankroll, my ability to limit my downside, rotate from other assets into this, understand the correlations between the things, and then shift it time shifting my uh horizons around as I see fit.

[00:59:37]So, you know, for somebody like me, I'm going where the volatility goes. I could be in blue chips one day, I'm in the mag seven, or oh now I'm shorting oil every time Trump says uh you know, the war is back on. Or maybe I want to shift into DRAM memory because AI the capex build out is continuing. Or maybe I want to be in hyperliquidator per or Bitcoin if it ever actually did anything. And it doesn't even limit itself to you know, markets online by the way.

[01:00:05]This could be real estate deals, this could be VC locked up opportunities, it could be uh investing in your bro because he's going to play blackjack tonight. You know, who knows? Maybe he'll win you some money.

[01:00:18]So, every edge, you know, is going to have a trade-off. So, let's just focus on this right here. If you do go deep, right? One of the things that could happen is regime risk in which which I've seen this like there have been years where the assets that I really like to trade just died. The volatility died, the interest died, the ranges died, the volume died. It just was uninteresting.

[01:00:42]Uh that's definitely something that's going to be really tough because there's going to be shiny objects in all sorts of different areas for you to pay attention to.

[01:00:49]And if you're not careful, uh hint me in Bitcoin, you can get very married to a thesis, it could become your entire identity, you can experience like sunk cost fallacy where you feel like time and money has been so sunk into this that leaving and rotating out would be so antithetical to who you are as a person that you'd be like failing yourself. Um I think there's a lot of people that deal with that.

[01:01:12]And you know, it's it it's it's slow to build this depth, right? You're going to have to take years and years to become a quote-unquote expert at something.

[01:01:20]As for the people with breadth, you know, you're probably going to be capped in your knowledge if you're bouncing around too much. You're never really going to become a resident expert in something. Um, also, you might underestimate what what arena you're in and think that you could just drop your scaffolding anywhere and have it work.

[01:01:36]Well, if you don't understand it at least quite a little bit, that could bite you and make you kind of unaware of hidden risks, right? And then, like, um, if if you aren't disciplined and if you don't stick to your process, it could really hurt you because you could be bouncing all around chasing things. And if you're not kind of within yourself, within your process, this could blow up very quickly in your face and you won't even know how it happened.

[01:02:01]All right. So, just imagine this as being kind of like the worst thing, right? If you're Let's take the specialist who thinks he's thinks he's, uh, really good, right? And he reaches to be breath. He wants to be the guy who can express his views everywhere, but that's not him. He's really good at one thing, but he tries to be really great at other things. And then he goes into those arenas and just gets massacred.

[01:02:25]I'm sure we've experienced that ourselves and we see people do that quite a lot as well. Then you also have the one that's more of like a breath trader, somebody like me, who tries to go and have that deep conviction of an expert somewhere. I get over my skis. I end up blowing up a lot more of my account than I think because I'm, you know, I don't actually have that deep of a read even though I might think I do. In that essence, I end up usually becoming the fish at the table to use a poker analogy.

[01:02:54]So, think about who you are. How are you wired? Do you get energy from going deep into something? Does one arena really fascinate you and you never could get tired of it? And, you know, you could lose one you you're okay with the results of one thing rather than 10 different things.

[01:03:12]If it's somebody who's more horizontal, you're going to maybe get a more energy from novelty and rotating into the next thing, the next meta, the next uh AI technology shift or whatever it may be.

[01:03:26]Um sitting in one area for years and going so deep actually sounds like a nightmare to you. That's that's what That's from for sure me. I I would never want to sit somewhere for 5 years. And you just trust your process really over any thesis. And honestly, that's how I feel about my own abilities. So, you know, choose your destiny, do it with purpose, be intentional, and I think you'll be much better off moving forward if you could kind of bucket yourself into one of those rather than getting stuck in the middle.

[01:03:58]So, Flows, how how how do you kind of treat that? What do you feel like um is is your calling?

[01:04:06]>> Yeah, I I'll kind of share one thought and then I'd love to ask you a question about it, but >> You're on mute, by the way.

[01:04:15]>> Am I coming in now?

[01:04:21]Check.

[01:04:22]Check.

[01:04:24]>> We don't hear you.

[01:04:27]>> Um it should be coming >> out for a little bit, folks. We'll try to get him back. But yeah, for if you guys are in the chat right now, let me know which one of these uh do you feel more accustomed to? Do you feel like somebody who's just really a specialty at something?

[01:04:42]Or do you feel as if you're somebody who can bounce around?

[01:04:45]>> Am I uh Am I in, James?

[01:04:48]>> Flows back up here.

[01:04:56]And if you don't mind, guys, uh if you could repost this on X, just been trying to get this out, this awesome stuff out.

[01:05:08]Do you guys hear Flows?

[01:05:12]>> Am I there? Am I coming in?

[01:05:15]So, I'm going to try putting in your link again. See if it works.

[01:05:28]Check. We're there?

[01:05:31]No.

[01:05:35]Oh, you guys could hear. Okay.

[01:05:38]Ah, maybe I'm the one messed up. All right, I'll shut up for a minute and try to figure it out.

[01:05:42]>> All right. Cool.

[01:05:47]Okay, sounds good, guys. Uh well, my to to build off of what James just said, I think that I I think there's proclivities on either side, right? Where you're someone who can easily, you know, go really deep into something and you're the type of person who can just say like, "Oh, yeah, I could trade one asset and only look at one asset for 5, 10, 20 years. And as long as I just stay in my lane and just stick to that, then I don't need anything else."

[01:06:22]And then I think on the the flip side, you have, you know, someone who is just always going to different things. And I think either way, you can have trade-offs. And >> [snorts] >> I I guess I would say that I've kind of gone a little bit all over the place, but the only reason I've gone all over the place um I I always have a core of like understanding interest rates, and that's where I start.

[01:06:47]But, when I I think about there's trade-offs on either side that I'm always trying to manage. Because if I'm just in >> [snorts] >> a couple of large trades, then things can get pretty boring sometimes. And I'm like, "Oh, I need to go research something else and go do something else, or whatever it might be." But then I also don't want to get distracted from my core things.

[01:07:10]And you have a trade-off on that side.

[01:07:12]Whereas, you know, someone who is just, you know, a specialist in oil, they might really size up and make, you know, their kind of like career-making trade when supply-side things really pop off, and a generalist might not be that person.

[01:07:29]So, I think there's trade-offs on either side. Um James, how would you how would you kind of encourage people to kind of figure out what lane they're in, and then how would there the trade-offs of being a generalist, but it's easy to get distracted, and then being a specialist, and it's easy to get blindsided? Um or you can get really bored, you know, sometimes. Like, how would you think about the trade-offs on either, especially as we move through different macro environments?

[01:07:59]>> Yeah, I just think you got to think think about it like if you're if you're uh I think the generalists right now are going to have a field day for the next few years. I really do. Like, although if you happen to be it's going to be kind of like anomalies. Like, if let's just say the yen carry trade becomes something super relevant. Maybe it unwinds, maybe it keeps going, whatever. If that's something that you live and breathe in, I feel like if it were to reverse, and if you were to get the signal, or if you are levering up and taking trades while it's still working, like you could probably absolutely make your career that way.

[01:08:37]But, if you're somebody who's like an ag specialist right now, like, you know, the grains, soybeans, corn, wheat, stuff like that, it has been relatively quiet and boring. And with all this stuff moving, with all this new technology out there, I feel like you could get sucked out and pulled away to the point where you're just going to be overwhelmed and inundated with all these opportunities. And uh I think that's a really dangerous cocktail. So, I think that's why generalists are set up really well because volatility is just beach balling everywhere and just going pew pew just like, you know, one day it's in memory. Today I was looking through I mean, if we were to look through uh see here.

[01:09:18]Just uh just generally speaking, we got the NASDAQ is up 2 and 1/2%. But, if you go down and look at different stocks, you got some, you know, SpaceX is down 4%. You got energy stocks uh Bitcoin miners ripping, but then you got all of crypto dumping. You got these violent rotations just all sorts of places. The VIX is crushed yesterday. It was up 10%.

[01:09:41]So, I think generalists are going to have um a good few years here. That's why I think that the managed money or active management or whatever that's been like um kind of trolled for a long time. I think it's going to start to pay off quite a bit. And I think that passive down the road might actually struggle. So, I don't know. That's That's how I think about it. It's like there's there's there's always tradeoffs in everything, which you've talked about recently a little bit is like there's risks and tradeoffs for just every single decision in life. But, I think this one is like a really, really big deal to think about moving forward here. And I just want to refine my process over and over and over so that I can keep bouncing to um whatever the spot is.

[01:10:28]>> Yeah, you know what's interesting? I I always think about how how is the one macro environment, but two, my personality and what I'm good at.

[01:10:41]How does that connect to the macro regime that we're in? Because you know, there are the I I think the hardest thing is just to moderate your actions to the environment that you're in without getting out of alignment with your circle of competence, right? Because I think that the understanding the macro side of things is incredibly valuable and it's going to be incredibly helpful.

[01:11:05]And then but the you know, the macro is always changing.

[01:11:08]And then on the flip side, you like always want to adapt with that.

[01:11:11]Sometimes you just want to Sometimes you you know, when something pops, you want to take a gain.

[01:11:16]And then sometimes it's when you want to add. And you kind of have to know which one that is in the environment. You know, I think you know, one of the things that I talked about in the credit cycle research that I was doing months ago now.

[01:11:28]And I said, "Hey, we're going to have some really significant rallies and people are going to get paid to do, you know, aggressive things, right?" When people just buy tons of calls and just hold them and hold them and hold them.

[01:11:40]You know, maybe you wouldn't do that during a normal regime or a slower market, but you know, it's it's kind of like, you know, more aggressive risk-taking gets rewarded for a reason because of the amount of money in the system.

[01:11:51]And sometimes you need to capitalize on those, but then you also have to say like, "Well, where's my circle of competence, right?" And that's I think what the market and the regime The regime always rewards certain actions and it's always trying to I think get you to kind of get out of your circle of competence and you always have this like tension between like, "How Am I out of my circle of competence or am I just getting stretched right now and learning a new domain?" And how do I manage risk around that, right? So, there's always the those two factors. That's why we cover both of them in the live stream is how how do we understand the macro flows, but then how do we say, "Okay, well, how how do I think about my own edge inside of that, right?"

[01:12:36]>> Yeah. Sorry, I was trying to figure figure out the chat and the audio. I wasn't listening to your last part.

[01:12:41]>> Oh, no worries. No worries. I I just think that's why I was going to say I think that's why um understanding the macro and unders- understanding and how that's changing, but then also understanding your strengths and weaknesses inside of that are both key. Right? Because you have both lines.

[01:13:00]>> Yeah, and what it what it's doing what this is doing for me specifically as a guy who's generally like got like a larger shallow is I'm just slowly like I it's almost like a pool, like a lap pool, like maybe at one of the places you've lived in your fancy buildings. But like one of these lap pools that is like let's just say it's 4 ft deep. I feel like I'm digging the bottom slowly.

[01:13:23]>> Yeah.

[01:13:24]>> Like I'm it's now 5 ft deep and in 5 more years it'll be like a deep 10-ft pool and I'll have even a broader understanding of everything. So, that's kind of see uh I'd rather do that than dig one deep really deep hole in the center of the pool or something like that. I'm kind of slowly doing it all at once.

[01:13:41]>> Totally. Yeah. And I think a lot of times you'll have your It goes back to the Oh, actually we should talk about this, but it goes back to that kind of like the Warren Buffett where he made like the majority of his money in like his when he was really old, like in his like 60s, 70s, and 80s or something like that. Like the majority of his net worth came from those years, right? And I think that's tough because a lot of >> Ain't nobody got time for that, bro.

[01:14:08]>> [laughter] >> That's the problem, right? Cuz like if you if you go if you build that base, sometimes you need to like the the the the moments you're going to monetize it is when you're in your 50s, 60s, and 70s, right? I don't know if that's what you want to be doing.

[01:14:22]>> But you know, I'm almost there. I'm almost there.

[01:14:25]>> With with that being said, I would like your thoughts before before we kind of shift. Um this is a little bit of a side tangent, but I think it's important.

[01:14:34]You know, for years and years and years Buffett has been like epitomized and glorified as the way to create wealth over the long term. If you just do this and this and this and this, you'll make money.

[01:14:50]And I think honestly there was like a step change since the SpaceX IPO where in one day Elon Musk, his net worth increased in more than Buffett made in his entire life.

[01:15:03]And I think people are like People always >> On paper.

[01:15:06]>> Okay. Okay.

[01:15:08]>> Good luck >> [laughter] >> with that, buddy.

[01:15:09]>> Yeah. Okay.

[01:15:10]>> Sure, man. Sure.

[01:15:11]Um but I think it's it's one of those moments where the entire new generation, do you think they're going to look at Warren Buffett and be like, "Yeah, you know, compounding."

[01:15:21]No, they're going to look at Elon Musk and be like, "Yeah, that guy is the goat. He made more in one day than than Buffett did in his entire career. And that's what I want to do. I want to swing for the fences. I want to take risk, create value, and think bigger."

[01:15:34]And I think that's going to totally change how the next generation thinks about wealth creation and how people in the market think about like people are people are only going to take more risk as we move to the future, right? Like I think everyone got so burned in 2008.

[01:15:52]And now like, you know, at like like the people who were like lived through like with a ton of real estate into all of that, they're just so scarred and they're just like, "You kids don't get it. It's all going to collapse one day."

[01:16:06]You know, but like on the flip side, it's like every other young person they're just like, "How can I take max risk?" And are they going to get burned?

[01:16:15]Maybe. Probably. Maybe one day. But burned at what level? After they've like 20x their net worth and they're like, "Oh, I lost a couple million dollars this year, but I'm still at, you know, 15 million dollars." Like what How do you think about that those types of like changes in the market and how they influence people?

[01:16:34]>> So I was typing this as you said it. I I think I'm just coming to this idea now or a realization or a way to bucket it is like the long-term narratives, like Warren Buffett or like value investing or passive passive 60/40.

[01:16:50]All that or buy the dip, everything's going to be okay, stock market always goes up is so deeply entrenched.

[01:16:59]Like so deeply entrenched. It's unbelievable.

[01:17:04]That I see it almost as we are early adopters to chasing vol.

[01:17:12]Like if if the old narrative is vol suppression, value investing, limit your risk, just wait, it'll work out. And the new era is money management, volatility, rotation, spikes, unwinds, huge growth or whatever. Um we are the early adopters.

[01:17:37]We are the contrarians running towards that.

[01:17:40]Because I think we understand that's where the world's moving and like the scoreboard is kind of showing that. I kind of I think I think it's just like a cool way for me to visualize it is that on the adoption curve of high vol living.

[01:17:55]>> Mhm.

[01:17:56]>> We're adopters to it. If that makes sense.

[01:18:00]>> Totally.

[01:18:01]I I think that's >> And exciting and I think like everybody here feels that. If you're in markets, you feel it. Like and you're you're getting driven that way. It's just like accepting it and being like, "Okay, like no more throw It's like the the meme. Throw out the intelligent investor book, right? Put it in the garbage.

[01:18:19]>> [laughter] >> Just like run towards it, you know?

[01:18:22]>> I think this is this is kind of one of the final things that I'll I'll kind of share, but I think that on the on this section, but I think that it it costs less and less every single month now to take risk and make massive amounts of wealth. Right? Like you can have a guy who just knows so much about AI and is like just building something with a, you know, a $200 subscription a month or even less or just nothing. Right?

[01:18:51]Like you're just coming up with stuff.

[01:18:54]Go from that to like printing 500k a mill a month or even being so good that they get signed at a company where they're making like I mean the highest paid people right now are the highest level software engineers at all these companies that are getting 100 millions of dollars a year.

[01:19:10]Right? And so I think that it costs so much less to to to to take risk today, but people have never been more distracted because they don't know how to lean into their own edge of like how do I stack my time?

[01:19:27]How do I stack markets? How do I stack skill development? How do I stack AI and social media? How do I stack these different forms of leverage so that I can know the environment that I'm in and taking bets in it and then my own circle of competence and specialty within that and how do I align both of those?

[01:19:49]It's never been easier to do that, but then there's never been more distractions where like the entire algorithm and the feed and everything knows how to psyop you. They know how to like pull you in and distort like how people even think about reality, which is why I think even in markets people have these views that are out of like left field. They're just like that can't even be possible right now or that's not even like a probability right now, but you're anchoring your entire time investment framework and capital to this like idea that doesn't even exist.

[01:20:21]Right? Like we you know, people get that all the time. They watch some video.

[01:20:24]They don't ask any really good questions and they end up kind of like walking away with saying like, oh yeah, the the you know, Japanese economy is going to blow up in the next 30 days.

[01:20:35]And it's like, "All right, man, you know? Like, let's see how that goes."

[01:20:41]>> Yeah, I agree.

[01:20:42]All right, so I'm going to uh close up this section and transition.

[01:20:46]>> Yeah, as a reminder for everyone, um you know, the entire point of these live streams, we just covered If you just watch this, go rewind, go through the entire stream cuz we just covered how does a carry trade work, what are the actual drivers of markets right now, how is the structural regime in Japan impacting where we're at right now, what are all the biases that are incorrect about it, and what are the data you need to understand in that. We just covered all that in the free section. So, go rewind, go through all of it. This recording will be available on YouTube afterward, on Twitter afterward. You can go through all that. And then right now, we're going to transition into the paid members live stream section, which is only going to be available on Substack. So, it'll end on Twitter and on YouTube, and it'll only be on Substack. So, go on Substack, become a paid subscriber, you can stream it, and then we're going to go into All right, we have this big picture idea. Now, how do we connect that to market views, risks, changes in the S&P 500, the Nikkei, banks, and things like that.

[01:21:41]That's what we're going to go over right now. You can ask any questions in there, and if you can't make the entire stream, there's a proprietary report that's sent out afterward that you can read and go over in under 20 minutes, get the entire view and big picture, and you'll be able to have all the resources behind that, and then we'll have other things as well. There won't be a live stream tomorrow cuz markets are closed, but we'll have another live stream Monday morning, but right now, we're going to transition into the paid member section. So, we'll take a quick break.

[01:22:10]Wherever you're watching this, it'll be linked below, and we'll have a quick break so people can go over, subscribe, and get into the paid section, and on Substack and stream it from there, and then we'll go over all of the specific views from there. So, with that, we will see you guys there.

[01:22:37]>> [music] [music] [music] [music] [music] [music] [music] [music] >> What?

[01:23:39]>> [music] [music] [music] [music] [music] >> Oh.

[01:24:20]>> [music] [music] [music] [music] [music] [music] [music] [music] [music] [music] >> Okay.

[01:26:13]Okay.

[01:26:21]>> Okay.