Inflation Surge + Yen Carry Collapse: Economist’s Dire Warning For Market Bubble Pop | Steve Hanke
Summary
Monetary Easing: Expectation of looser policy via Fed rate cuts, QT ending, SLR removal in April, and deficit-funded T-bills driving money supply growth.
Rising Inflation: Inflation remains above the 2% target, with accelerating M2 suggesting upside risk and a potential 5% scenario if M2 reaches 10% growth.
Yen Carry Trade: Detailed discussion of borrowing in low-rate yen to invest in higher-yield USD assets and the risk of a sharp unwind if the yen appreciates.
US Treasuries: US 10-year yields rose amid fears of looser policy and higher inflation, with bond vigilantes increasingly concerned about sustained price pressures.
US Equities: The market is characterized as a bubble, with a potential carry-trade reversal flagged as a possible catalyst for a correction; rebalancing is advised.
Macro Framework: The analysis emphasizes MV=PY, money supply as the key driver, and shorter lags to inflation given current stickiness.
Policy Outlook: Prediction markets imply more cuts ahead and a looser stance under potential leadership changes at the Fed, reinforcing liquidity expansion.
Companies/Tickers: No specific public companies or tickers were pitched; the focus was on macro drivers, currencies, bonds, and systemic risks.
Transcript
The bank produced money by the commercial banking system is at 6.8% not 4.5. It's over the golden growth rate. I think it'll probably go up to like 10% or something like that. >> 10% M2 money supply year-over-year growth. What does that imply for inflation? >> It would probably be something like >> why is the yen even depreciating against? It should be appreciating against the dollar because the Bank of Japan's raising rates. the reversal of the carry and the reversal would occur if for some reason the yen starts appreciating against the US dollar. >> So if the yen were to appreciate presumably against the USD, right, we're going to see the bar chart go down here. Let's assume this relationship holds. We're looking at the S&P falling off. >> You're making a good point. You're you're making a good point. >> Steve Hanky returns to the show. He is a professor of applied economics at Johns Hopkins University, expert on global currencies and monetary policy. We'll be talking about uh the Japanese carry trade. What is it? How has it been impacting bond markets and potentially equity markets and what a reversal of the Japanese yen carry trade could mean for global equities and US equities in particular. We'll find out whether Professor Hanky will also be going over today's uh PCE report that came out on the morning of December 5th. So, we'll go over inflation and what the Fed's going to do next. This episode is brought to you by Koshi, one of the largest prediction markets in the US. It is a fully regulated platform that lets you trade on real world events from economic data and and news to political outcomes. So, go to Kowi link down below kowshi.com/r/lin or scan the QR code here. Use my promo code Lynn L I N and uh new users using my promo code will get $10 when they deposit $100. Professor Hanky will also be going over a few predictions on Koshi today and uh it'll be very interesting episode. Welcome back to the show, Professor Hanky. Good to see you as always. >> Absolutely, David. Great to be back with you. >> Yeah, the uh 10-year bond yield in uh Japan rose to the highest level since 2007. And here in the US, uh, bonds have been selling off, uh, aggressively over the last week as well. People have been linking these two issues. Well, we'll find out. We'll get your take on that in just a minute because it's top of mind for a lot of people in the investment community and people are very concerned about this and it's trending all over the news right now. Let's start by talking about today's PCE report in the US, though. So, uh, headline PCE rose 0.3% month overmonth in September. It's, uh, now the annual rate's now at 2.8. 8% core PCE excluding food and energy dipped slightly to 2.8% annually. So uh more or less this is in line with expectations. However, it came down a little bit from the previous month. The core PC and we know that the core PC is watched by the Fed. So I want to get you know in this in this segment of the conversation I want to get your outlook on two things. Inflation itself and what the Fed's going to do. >> The first thing is that the the new September report is kind of a nothing burger. No, nothing really changed. And and remember uh with those numbers that you just reeled off, we've got inflation uh considerably higher than the Fed's inflation target of 2%. And I don't think uh that the Fed is going to be able to get the inflation genie back in the bottle this coming year. I think that's the that's my my my main takeaway from what's going on. You ask about the next week's December 10th Federal Open Market Committee meeting and it looks like a 25 basis cut uh in the Fed funds rates baked in the cake. The probability uh at the Chicago Merkante Exchange is running, you know, close to 90%. So, it's pretty much a done deal. Now, that that that's loosening. Lowering the Fed funds rate, that's loosening. Another factor that's that's loosening in in the picture as I see it is that in April the supplementary liquidity ratio will be dropped on commercial banks and remember commercial banks actually produce most of the money in the United States money measured by M2 about 80% of that is actually produced by commercial banks not by the Fed. So, so that will that removing that reserve requirement, that liquidity reserve requirement on the commercial banks will give them quite a bit more firepower. In fact, a lot more maybe maybe $2.5 trillion dollar worth of extra capacity. Meaning that loans, the rate of loan growth, we can anticipate credit expansion. And as that credit expands, of course, that means that the money supply expands and and accelerates. So that's the second loosening factor. The the the third loosening factor has come into play this month and that is the Fed has dropped quantitative tightening. And the Fed has actually been involved in tightening quantitative tightening reducing the size of its balance sheet and and actually making a negative recently it's been making a negative contribution to the money supply growth the Fed. So al although the commercial banks are contributing at a fairly rapid rate actually the Fed has actually been a non-contributor. They're they're subtracting from the money supply growth. And then the fourth factor is we have the fiscal deficit in the United States running you know 6% a little over 6% and and that's being funded very heavily now with the issuance of uh treasury bills with less than one year in duration and those have been vacuumed up by money mark mainly by money market funds and and that vacuuming increases the money supply. So you've got four loosening factors in the picture. One, Fed funds rates going down. Two, I just mentioned quantitative tightening has been dropped in December. Three, a big one will be in April when this supplemental liquidity uh ratio is dropped. And and then four, we we've got the fiscal deficit coming into the picture and and it's being financed with the issuance of Treasury bills, short-term Treasury bills, and those have been vacuumed up by money market funds, and that increases the money supply. So, so the the deficit is being monetized. Part of the deficit's being monetized. So that that's a force factor all leading to an increase in the rate of growth in the money supply and that will eventually mean more inflation in the picture. So so that's the that's the inflation picture. Right now we're we're stuck at with with an inflation. The CPI by the way is at 3%. These core numbers you gave the year-over-year are what what did you give David? 2 2.8. So So those all the numbers are stuck above the target rate of 2% right now. And and it looks to me like we we are probably going to be in a loosening stage, a credit expansion stage in the United States. And that will eventually give us even more inflation. Now, this this becomes a political issue because this affordability issue has has really gotten some teeth. And people people know that if when they go to the store, they're paying more than they were a year or so ago or certainly more more than they were in 2020 before the whole thing started taking off. and and we've got what what's called money illusion going on. They they pay attention not to re the real inflation adjusted values. They look at the sticker the nominal prices on things and they say, "God, I'm paying a lot more now. It is I it is unaffordable and and the shoe seems to be dropping on Trump." They're they're blaming Trump for this. So, so, so this all of this inflation story factors into the political story. And remember that I my contention is that the Fed is flying blind. It's not it it watches data. It's data dependent, but the only thing that's important to be watching is the money supply and the Fed doesn't seem to watch it. They watch everything under the sun. the PCE numbers that we just talked about, the CPI, the unemployment uh numbers and and and and all all kinds of things, manufacturing uh activity, all of those things they watch, but they don't watch the money supply, which is the only thing that counts. >> So, professor, I'll before we continue, let me just pull up I have a lot of follow-up questions on that. Let me just pull up the money supply. So, you and your colleague, Mr. Greenwood have been spot on in calling for inflation to go all the way up to 9.1% at its peak a couple years ago and then all the way back down. You called the bottom um and you basically called the range. So, it was a perfect spot-on prediction over the last couple years. However, you've been on my show a lot talking about inflation and you've been consistently saying that inflation will not be a problem until the money M2 money supply growth rate reaches your golden growth rate of 6%. This is the first time I've heard you in a long time sounding the inflation alarm bell, which is a 180 degree turn from your stance from just earlier in the year, professor. And the importantly, the M2 money growth rate is not yet at 6%. So why the change? >> Well, you you heard it first on the David Lynch show. That's the one thing you you you pick up on things pretty fast and and and this is a first time announcement of my concerns. And my concern, okay, right now the year-over-year rate of growth in the money supply is 4.5%. That's that's lower than the 6% rate that's consistent with hitting a 2% inflation target. But if you look at the thing, it's accelerating number one. And and if you look actually at the uh bank produced money, the bank produced money by the commercial banking system is at 6.8% 8% not 4.5. It's at actually it's already increased and it's it's over the golden growth rate. And I said with that supplemental liquidity ratio coming off in April, that means that we're going to that's going to go up. I think it'll probably go up to like 10% or something like that. So, so that we're we're we're at a turning point and and and and I'm anticipating I'm I'm kind of getting out ahead of the thing a little bit, but as I look at the tea leaves, David, the tea leaves are telling me that everything is pointing towards a loosening of the monetary policy and that will lead to an acceleration in that M2 growth rate that you just had up there at 4.5%. So that that's what's worrying me now. If you if you ask me what's keeping me up at night, well, not much does actually. I sleep like a baby. But uh to to use that proverbial phrase, what's keeping me up at night or making me worry in the daytime is what I think is going to be a loosening of the money supply that will be excessive and it will give us more inflation and certainly it won't lead to a reduction in the PCE numbers that we just went over getting those down to 2%. I don't think that I don't think that inflation genie is going to be put back in the bottle at 2%. That that's that's the that's the bottom line. The big the big message is two points. One, the inflation genie has not been put back in the bottle at 2%. We've already gone over that. And two, looking ahead, it looks like they're going to be loosening even more. And that will give us more inflation, not less. >> Professor, uh, let's take a look at who's going to be the next Fred chair and potentially that may impact monetary policy or change or support what you just said. So prediction markets, I know you like to look at prediction markets. This one's from Koshi. It's one of the largest ones, the US. Uh, Kevin Kevin Hasset is uh is predicted by traders as the front runner to be nominated as fed share. So let let's assume the market's right on this. Kevin Hasset's going to be Fed chair. Uh what do you think is is is he going to is he going to support the loosening monetary policy that we just discussed? >> Yes. >> Okay. >> He's he's he's a Trumpist. He's a Trump man. And Trump Trump wants the Fed funds to way down much lower than they are right now. And and Hasset will lean into that direction. Now, by the way, the prediction market was very interesting because uh if you look at that thing on Monday, it looked like Hasset was a shoe in. He he was over 80%. >> And and it's and the and the bond market sell off >> part of that it forget Japan. It was spooked because the bond market see saw hassid as being a loose money guy and a loose money guy means more inflation. More inflation means higher yields and lower bond prices. >> Okay, that makes sense. Well, let's just see how the prediction markets are predicting uh rate cuts here. uh rate decision in December. Uh it's looking at 94% chance of a 25 basis point cut in the in the next uh uh rate uh rate cut decision. We'll have you back on um after the next FOMC meeting to uh evaluate this, but it looks like that's basically um a done deal. 25 basis point cut. The the question is what's going to happen in 2026? Uh Fed cuts in 20 I wonder if they have this here. uh number of rate cuts in 2026. There we go. Uh the bond the prediction markets are kind of split on this. Exactly two cuts 25% exactly three cuts 24%. So there isn't an overwhelming majority on any one particular outcome yet. I don't know what's your view >> but but well there there there is one overwhelming uh outcome and and that is that we're going to get cuts in 2026. >> You're right. Yes. >> And and the question is well how many are we going to get? But well, let's worry about that later. >> Well, do you think do you think we'll get more cuts with Kevin Hasset than with Jerome Powell? >> Yes. >> Okay. Well, I guess that sums up uh our our thesis for loose monetary policy and the QT like you mentioned has ended. Um so >> and and don't and don't forget that taking April April is key because April is when that reserve that liquidity reserve uh supplemental liquidity reserve ratio come comes off and and the banks will have much more capacity to loan and and and right now right now the the the contribution the rate of growth growth and the contribution of commercial banks to the money supply measured by M2 is 6.8%. That's already over Hanky's golden growth rate of 6%. So the the commercial banks are already extending a lot of credit and and after April they certainly will have more capacity to even lend more and and I think that number probably will go up. My guess is this is just a guesstimate. It could go up to 10%. Yeah, that's what you said earlier. So, let me ask you about that because that was my next question. Perfect segue. 10% M2 money supply year-over-year growth. What does that imply for inflation? Have you done a back of the envelope calculation on that? >> Yeah, let's do it. Let's do it right now just off the top of my head. >> So, the six the 6% >> figure has uh 2% is accounted for by the increased demand for money and and let's say 2% real economic growth. So you've got 4% that we have to subtract from the 10% number that you gave to get inflation. So I'd say, you know, it could it could go up to, you know, 5%. I'm not predicting that. That that isn't a sharp pencil kind of thing. You you ask me what what off the top of my head >> and I'm I'm just saying off the top of my head under that scenario if M2 was growing at 10%. >> Yeah. If if that occurred, then the implied inflation rate associated with it would probably be something like five. >> Well, we can also >> and you get that the arithmetic of that is pretty easy. You have M2 growing at 10%. And and you have to subtract out a real growth of at least 2%. And and also subtract out a 2% rate of growth in the in the money supply soaking up that part of that 10%. So that you subtract 4% from the 10 and you get six. And I adjust it down a little bit and just say keep it keep it conservative at five. I mean that's that's in line with back testing this. So if we back test this and let's say uh in in February 2021 when inflation was peaking at 9.1% the M2 was growing at a peak of 26.7%. So it's 26 26% M2 growth year-over-year implies or implied past tense 9% roughly. Let's say round up to 10% inflation for the sake of argument and then if you divide that by roughly two that's roughly five. So that's another way to look at it. I I guess. Okay. Well, let's let's see if that happens. >> If if you're if you're looking at the quantity the using the quantity theory of money, which you should be MV equals PY. If you're using that equation of exchange to do your arithmetic and figure out things, you you can roughly do some of these back of the envelope calculations that we've just done. So the people who are watching us, if at home, they can get a piece of paper and a pencil and figure the thing out and and get, you know, more more or less a feel for what's going on. Let's put it that way. Now, unfortunately, the Fed isn't doing this, David. That's the whole point. They are not looking at the equation of exchange. MV= PY. They do not look at that and they're not looking at M, the money supply. Okay. Well, I think that concludes our conversation about inflation and uh the Federal Reserve. So, if you have any questions for Professor Hanky, please uh do submit them to us. Email down below, link down below. Uh click on the description or below the description. I'll put the email from Professor Hanky and myself. So, please uh email us. We we have been getting a few pretty good questions I think um directed to you privately. >> We we get we we have very very astute viewers who give us good. >> So, the the one thing are very smart. Let me summarize the the inflation story that we're talking about is that, you know, as you said, I was kind of on a green light and and now the the light has turned to kind of a flashing yellow. It's not red yet, but it's it's definitely yellow. >> What would turn it red for you? I >> if if these things that I anticipate happening with monetary policy actually do happen, >> well, what's the lag there? So let's say once these things in monetary policy actually do happen, then at how many months afterward can we expect inflation to start picking up? >> Since since it's so sticky right now, it probably a shorter lag than normal. The normal lag is about 12 to 24 months. >> Okay, >> that's a nor it could be less than 12. >> Okay, >> remember remember the the the famous Milton Friedman line. you you have long and variable lags between changes significant changes in the money supply and changes in inflation. So the the lags are long and and they're variable. So it's very hard to put your finger on exactly what's going to happen, but my my guess is given the current environment that the lags will be shorter than than the 12 month. Well, one thing to note is that the M2 growth has been rising concurrently with CPI growth over the course of this year 2025. So, uh maybe that's a qu that's been a coincident indicator throughout this year. Let's move on to the bond market now. So, the bond market like you said uh threw a hissy fit not because of the Japanese yen carry trade but because of hid. But, um we can look at the yen carry trade um regardless. So, this this just came in from a couple of days from Bloomberg. the yen to strengthen 10% in coming months on US rate cuts, says Morgan Stanley. Uh the yet the yen looks set to appreciate by nearly 10% against the dollar in the coming months. Yet the Federal Reserve delivers backto-back rate cuts. We just talked about that. The dollar yen is detached from fair value now and that relationship returns. The cross is seen declining in the first quarter of 2026. Uh Japanese fiscal policy is setting uh settings meanwhile are not especially expansionary, they said. So that's one narrative. The other thing to consider is of course that the US 10-year bond yield has been rising. It's now actually in today it's up 60 basis points which is a big move in one day. And um people are assigning all sorts of reasons. But tell us what's happening with the Japanese uh yen um the carry trade. What is the carry trade? Explain to the audience please and why it is we should be concerned about this. Uh part of the reason we're talking about this in the first place is that like I mentioned in the very beginning, the Japanese bond yield uh 10-year bond yields is at the highest level in more than 15 years. F >> first let let's back up and and and define what what the so-called Japanese there are very there are all kinds of carry trades, but the one in Japan is is the most significant one because the money supply has been growing at a very slow rate for like 30 years in Japan. So interest rates at nominal interest rates are very low in Japan and that means that you can borrow at low interest rates in Japan and when you borrow in low at low interest rates you're you're short the yen. Okay, you borrow in yen at a low interest rate and you invest someplace else at a high interest rate. And typically what's happened o over the past several years the the one one of the most fa the favorite uh carry trades was the Japanese yen Turkish lera and then it moved from the the lera to the Mexican peso that was popular for a while and now the US dollar of all things is a is a is the biggest Japanese yen carry trade. So, you borrow in yen and and now the the J the 10-year bond is is about 2% in Japan and actually an 18-year high and the 10-year US is about what 4.2 now. So, you're borrowing at 2% in yen and investing at a little over 4% in the United States. Now, so, so that's the carry. Now, the the risk of of the carry is the thing that you just went over that the Bank of Japan will increase its interest rate and and that will strengthen the yen. And if you strengthen the yen and you're and you've borrowed against it, you're short the yen, you're going to lose. So, so that's that's the risk. the risk that is that is that the the yen is at about 155 uh now it's it's been depreciating. So that's that's allowed the carry trade to work. You not only have made money on the spread between borrowing low in Japanese yen and investing higher in the US dollar, but you've also been making money because the yen has been depreciating against the dollar. So, uh, if you have an unhedged carry, you've been making money in the spread and you've been making money in in in in the exchange rate. Now, the worry, the panic everybody is in is that the governor of the Bank of Japan has pretty much indicated that he's going to raise the interest rate to strengthen the yen and and fight their little blip up in inflation that they have in Japan. by strengthening the yen. And and if if that yen would appreciate, as you just reported, if it would appreciate by 10%, of course, you you'd lose your shirt in the carry trade, the spread the spread you're making would would not cover the loss that you're going to be making on the appreciating end. So that that's what's going on with the yen. Now, it happened coincidentally, by the way, when when the 10-year JGB went up and hit an all-time high earlier this week. At the same time, you had a selloff in the 10-year US uh bond and uh and and and they were correlated, but correlation, of course, doesn't imply causation. I don't think I don't think there was any causality going on here. I think that I think the main thing on the US tenure was that was a concern over what I just told you and we talked about in the inflation story. the the bond vigilantes are getting nervous basically and they're getting nervous because it looks like Hasset will go in as chairman of the Fed and he he'll probably be a loose money guy rel relative to Powell and and it looks like by the way that the Fed in general the members of the open market commit committee have have had their arms twisted so much by the White House and Trump that they're they're coming ran to this loose, you know, lowering Fed funds, lowering Fed funds. So, that's that's the nub of it. I I might add, David, that if anyone really is the the carry trade's very important because what happens in Japan is that the public sector they they have a debt to GDP ratio over 200%. So they have they have a huge dissavings in the public sector but the private sector has a huge o over savings in the sense that savings exceeds investment in the private sector by a huge amount. If you add them both together, they have a surplus of savings relative to investment in Japan. And that's the source of the carry. That's the fuel. And and so they export capital. The the carry trade is nothing more than the Japanese exporting all this excess savings they have and exporting capital to the rest of the world. When when you engage in a carry trade to the the US, where where does the Japanese capital go? It goes into the US. If you do it with Mexico, it goes to Mexico. If you do it with Turkey, it in the LRA, it goes into Turkey. Now, the definitive book on this, by the way, is written by a good friend of mine, Tim Lee. Here it is. >> Yeah. for for your audience any anyone seriously wants to get into this topic which happens to be very important in international looking at international capital flows and what's going on read Tim Lee the rise of the carry uh he wrote that by the way with one of the his co-authors is his son Jamie three authors but that that's the book if people are really serious about drilling down into the thing. Um, McGraill publisher, you can get it on Amazon. >> The the the concern, and I'll pull up some stats later. The concern is that uh as capital leaves Japan, and I'm I'm about to find exactly how much capital has left Japan. Um, sorry. So, it goes back into Japan. I'm not leaving Japan. Goes back into Japan because rates are going up in Japan. That will lead to a sell-off at equities markets in the United States. I don't know how much capital is parked in the US that Japanese investors institutions have had that are probably going to be unwound and put back into Japan is as uh yields are more favorable in Japan. Now, I'll let you comment on that. >> Okay. So, here's the here's the the the the way this thing it gets in kind of a doom loop and the unwind the unwind. How would that happen? The unwind the I said the major risk is the appreciation of the end. So let's let's assume that the increased interest rates that the governor of the Bank of Japan promises actually strengthens the yen and the yen gets strong relative to the dollar. Well, that means every everyone involved in the carry is is probably going to lose a lot of money and they'll they'll start unwinding the carry and and they'll unwind the hedges that they have on on the end. And as they unwind these things, it just makes the yen even get stronger relative to the US dollar. And and of course, the the ultimate thing is the the the outflow of capital that's come in, these short-term capital movements that have come in with a carry, they will go out. The tide will go out. And you know, as as Warren Buffett's famously said, you know, when the tide goes out, you you're going to see what what people are wearing. So >> isn't it interesting though that given even given the interest rate differential, the Fed lowering rates, the Bank of Japan about to hike rates more. Uh the the dollar has been strengthening against the yen >> in the last in the last couple What how does that make sense? and and what they're worried about is the 160 level is the key. If if the yen would depreciate and and go over 160 to the dollar, that that that's a very key resistance point. >> But how does this hold on? How does this even make sense? Why is the yen even depreciating against it should be appreciating against the dollar? Because the Bank of Japan's raising rates, interest rates are going up in Japan. the the carry trade has something to do with this because the market is shorting the yen. They're borrowing in yen to to enter the carry trade and invest in the US dollar. So, so the carry the carry if you have a carry on that's unhedged, you're going to be short the end. >> I see. So the the the carry the the the key thing that we're talking about and the the reason you brought this up to put words in your mouth is is the concern that people have about the reversal of the carry, the reversal of the carry. And the reversal would occur if for some reason the yen starts appreciating against the US dollar. So there the the the carry trade is is it's like picking up, as they say, it's like picking up pennies in front of a steamroller. >> Well, you see what I mean? If the steamroller hits you, you you're reversed. You look at this, right? You look at this chart. I've got here the S&P 500 in the blue line and then the USD to yen in the uh bar chart here. So as you can again you to quote your to quote yourself later earlier from earlier correlation is not causation. We know that there is a very stark correlation between the yen uh the dollar yen and the S&P 500. So if the yen were to appreciate presumably against the USD, right? We're going to see the bar chart go down here. Let's assume this relationship holds. We're looking at the S&P falling off. So that's that's just an extrapolation. I'm not saying that's going to happen. I'm just looking at this chart. So, >> you're making a good point. You're you're making a good point with this. And the point, let me elaborate slightly. The the the market, the equity market in the United States is is in a bubble. Every bubble detector, including Hanky's Dr. X's bubble detector, concludes we're in a bubble. and and and what you you never know is when and how the bubble is going to deflate. Is it going to pop? Is it going to just slowly dissipate? And you and you're you're going through the an important thing people have to be watching. And that's the Japanese yen against the dollar because if that yen starts appreciating, they'll unwind. You'll have a huge carry trade reversal. And if you have a huge carry trade reversal, you you get a lot of money coming out of the market and and maybe maybe that would be the thing that would pop the bubble. You see what I mean, David? >> Yes. >> Yeah. That that that that's why it's important to put up those charts like that. We know correlation doesn't imply causation, but you you put up that thing and and my my takeaway from that uh which I quite frankly I'll admit I hadn't thought about it is that it's it's a bubble popper. If if you reverse the carry, you you've got a potential bubble popper. >> Let's keep that. I mean, can you explain this correlation that we've observed? Why why why why why why was the straightening of the USD versus Japan um correlated with the S&P? Maybe maybe it had nothing to do with uh Japan itself. Maybe it's just capital flowing into the US. But can we explain the the carry the Japanese carry it number one the Japanese carry to the US is the biggest Japanese carry right now. >> Sure. And that mean that means there's a lot of capital that's come in from Japan into the United States. And and what what does that mean? Well, it means at the margin it's got to be fuel for the the bubble. It's in it's inflating the bubble. And if you reverse it, may maybe it pops a bubble. >> Okay. Well, besides that, what other risk are you looking at for uh US equity markets? >> It it's kind of a long list. Give us your top one, two or something. I don't >> make it easier for us. >> Yeah. Well, let let's just let's let's leave it at at at at as as follows. One one one risk, by the way, is is the carry that's we just talked about. But let's look at the other side of the thing. What did we talk about earlier? A loosening of US monetary policy. So that so that that would be pumping air into the bubble and and the carry coming off would be taking it away. So we we we have a perfect illustration of the kind of uncertainties that are facing us right now. We've just done two big ones. >> Yeah. Okay. Well, uh >> and they're going in opposite directions. So So that that that is that's the kind of thing that actually does keep people up at night. So So what do you do? What do you do? What the only the only thing I the only thing I can say is is that I I I we I wouldn't I wouldn't say get out of the market, get into the market, whatever. I'd say rebalance your portfolio. look back at where you were at some starting point may maybe before COVID. Let's let's assume you're 55 years of age and you've got a standard portfolio of 6040. Well, that that portfolio with this bubble increase in the equity market certainly isn't going to be 6040 anymore. It's going to be more like 8515 or something. So my my advice would be in these kind of uncertain times, it's always probably wise to take a look at your portfolio and rebalance it a little bit. >> All right, good. Thank you very much, professor. We'll end it here for today. Where can we find you? >> You can follow me on X atte_hanky or you can just write me if you want be on my weekly distribution uh list and that it would be just my email hankyjhu.ed. edu. >> Okay, good. Thank you very much, Professor Hanky. Don't forget to follow Steve in the links down below and uh make sure to write to us in the emails that are also in the links down below or just put in the comments down below what you would like us to talk about next time. Professor Hanky will be on again in a couple weeks. So, uh stay tuned for the next episode and do contribute your ideas. And again, do use my promo code lynn l i n when you sign up to kowshi. That's cowshi.comr/lin link down below or scan the QR code here. You'll get $10 in your first $100 deposit.
Inflation Surge + Yen Carry Collapse: Economist’s Dire Warning For Market Bubble Pop | Steve Hanke
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Transcript
The bank produced money by the commercial banking system is at 6.8% not 4.5. It's over the golden growth rate. I think it'll probably go up to like 10% or something like that. >> 10% M2 money supply year-over-year growth. What does that imply for inflation? >> It would probably be something like >> why is the yen even depreciating against? It should be appreciating against the dollar because the Bank of Japan's raising rates. the reversal of the carry and the reversal would occur if for some reason the yen starts appreciating against the US dollar. >> So if the yen were to appreciate presumably against the USD, right, we're going to see the bar chart go down here. Let's assume this relationship holds. We're looking at the S&P falling off. >> You're making a good point. You're you're making a good point. >> Steve Hanky returns to the show. He is a professor of applied economics at Johns Hopkins University, expert on global currencies and monetary policy. We'll be talking about uh the Japanese carry trade. What is it? How has it been impacting bond markets and potentially equity markets and what a reversal of the Japanese yen carry trade could mean for global equities and US equities in particular. We'll find out whether Professor Hanky will also be going over today's uh PCE report that came out on the morning of December 5th. So, we'll go over inflation and what the Fed's going to do next. This episode is brought to you by Koshi, one of the largest prediction markets in the US. It is a fully regulated platform that lets you trade on real world events from economic data and and news to political outcomes. So, go to Kowi link down below kowshi.com/r/lin or scan the QR code here. Use my promo code Lynn L I N and uh new users using my promo code will get $10 when they deposit $100. Professor Hanky will also be going over a few predictions on Koshi today and uh it'll be very interesting episode. Welcome back to the show, Professor Hanky. Good to see you as always. >> Absolutely, David. Great to be back with you. >> Yeah, the uh 10-year bond yield in uh Japan rose to the highest level since 2007. And here in the US, uh, bonds have been selling off, uh, aggressively over the last week as well. People have been linking these two issues. Well, we'll find out. We'll get your take on that in just a minute because it's top of mind for a lot of people in the investment community and people are very concerned about this and it's trending all over the news right now. Let's start by talking about today's PCE report in the US, though. So, uh, headline PCE rose 0.3% month overmonth in September. It's, uh, now the annual rate's now at 2.8. 8% core PCE excluding food and energy dipped slightly to 2.8% annually. So uh more or less this is in line with expectations. However, it came down a little bit from the previous month. The core PC and we know that the core PC is watched by the Fed. So I want to get you know in this in this segment of the conversation I want to get your outlook on two things. Inflation itself and what the Fed's going to do. >> The first thing is that the the new September report is kind of a nothing burger. No, nothing really changed. And and remember uh with those numbers that you just reeled off, we've got inflation uh considerably higher than the Fed's inflation target of 2%. And I don't think uh that the Fed is going to be able to get the inflation genie back in the bottle this coming year. I think that's the that's my my my main takeaway from what's going on. You ask about the next week's December 10th Federal Open Market Committee meeting and it looks like a 25 basis cut uh in the Fed funds rates baked in the cake. The probability uh at the Chicago Merkante Exchange is running, you know, close to 90%. So, it's pretty much a done deal. Now, that that that's loosening. Lowering the Fed funds rate, that's loosening. Another factor that's that's loosening in in the picture as I see it is that in April the supplementary liquidity ratio will be dropped on commercial banks and remember commercial banks actually produce most of the money in the United States money measured by M2 about 80% of that is actually produced by commercial banks not by the Fed. So, so that will that removing that reserve requirement, that liquidity reserve requirement on the commercial banks will give them quite a bit more firepower. In fact, a lot more maybe maybe $2.5 trillion dollar worth of extra capacity. Meaning that loans, the rate of loan growth, we can anticipate credit expansion. And as that credit expands, of course, that means that the money supply expands and and accelerates. So that's the second loosening factor. The the the third loosening factor has come into play this month and that is the Fed has dropped quantitative tightening. And the Fed has actually been involved in tightening quantitative tightening reducing the size of its balance sheet and and actually making a negative recently it's been making a negative contribution to the money supply growth the Fed. So al although the commercial banks are contributing at a fairly rapid rate actually the Fed has actually been a non-contributor. They're they're subtracting from the money supply growth. And then the fourth factor is we have the fiscal deficit in the United States running you know 6% a little over 6% and and that's being funded very heavily now with the issuance of uh treasury bills with less than one year in duration and those have been vacuumed up by money mark mainly by money market funds and and that vacuuming increases the money supply. So you've got four loosening factors in the picture. One, Fed funds rates going down. Two, I just mentioned quantitative tightening has been dropped in December. Three, a big one will be in April when this supplemental liquidity uh ratio is dropped. And and then four, we we've got the fiscal deficit coming into the picture and and it's being financed with the issuance of Treasury bills, short-term Treasury bills, and those have been vacuumed up by money market funds, and that increases the money supply. So, so the the deficit is being monetized. Part of the deficit's being monetized. So that that's a force factor all leading to an increase in the rate of growth in the money supply and that will eventually mean more inflation in the picture. So so that's the that's the inflation picture. Right now we're we're stuck at with with an inflation. The CPI by the way is at 3%. These core numbers you gave the year-over-year are what what did you give David? 2 2.8. So So those all the numbers are stuck above the target rate of 2% right now. And and it looks to me like we we are probably going to be in a loosening stage, a credit expansion stage in the United States. And that will eventually give us even more inflation. Now, this this becomes a political issue because this affordability issue has has really gotten some teeth. And people people know that if when they go to the store, they're paying more than they were a year or so ago or certainly more more than they were in 2020 before the whole thing started taking off. and and we've got what what's called money illusion going on. They they pay attention not to re the real inflation adjusted values. They look at the sticker the nominal prices on things and they say, "God, I'm paying a lot more now. It is I it is unaffordable and and the shoe seems to be dropping on Trump." They're they're blaming Trump for this. So, so, so this all of this inflation story factors into the political story. And remember that I my contention is that the Fed is flying blind. It's not it it watches data. It's data dependent, but the only thing that's important to be watching is the money supply and the Fed doesn't seem to watch it. They watch everything under the sun. the PCE numbers that we just talked about, the CPI, the unemployment uh numbers and and and and all all kinds of things, manufacturing uh activity, all of those things they watch, but they don't watch the money supply, which is the only thing that counts. >> So, professor, I'll before we continue, let me just pull up I have a lot of follow-up questions on that. Let me just pull up the money supply. So, you and your colleague, Mr. Greenwood have been spot on in calling for inflation to go all the way up to 9.1% at its peak a couple years ago and then all the way back down. You called the bottom um and you basically called the range. So, it was a perfect spot-on prediction over the last couple years. However, you've been on my show a lot talking about inflation and you've been consistently saying that inflation will not be a problem until the money M2 money supply growth rate reaches your golden growth rate of 6%. This is the first time I've heard you in a long time sounding the inflation alarm bell, which is a 180 degree turn from your stance from just earlier in the year, professor. And the importantly, the M2 money growth rate is not yet at 6%. So why the change? >> Well, you you heard it first on the David Lynch show. That's the one thing you you you pick up on things pretty fast and and and this is a first time announcement of my concerns. And my concern, okay, right now the year-over-year rate of growth in the money supply is 4.5%. That's that's lower than the 6% rate that's consistent with hitting a 2% inflation target. But if you look at the thing, it's accelerating number one. And and if you look actually at the uh bank produced money, the bank produced money by the commercial banking system is at 6.8% 8% not 4.5. It's at actually it's already increased and it's it's over the golden growth rate. And I said with that supplemental liquidity ratio coming off in April, that means that we're going to that's going to go up. I think it'll probably go up to like 10% or something like that. So, so that we're we're we're at a turning point and and and and I'm anticipating I'm I'm kind of getting out ahead of the thing a little bit, but as I look at the tea leaves, David, the tea leaves are telling me that everything is pointing towards a loosening of the monetary policy and that will lead to an acceleration in that M2 growth rate that you just had up there at 4.5%. So that that's what's worrying me now. If you if you ask me what's keeping me up at night, well, not much does actually. I sleep like a baby. But uh to to use that proverbial phrase, what's keeping me up at night or making me worry in the daytime is what I think is going to be a loosening of the money supply that will be excessive and it will give us more inflation and certainly it won't lead to a reduction in the PCE numbers that we just went over getting those down to 2%. I don't think that I don't think that inflation genie is going to be put back in the bottle at 2%. That that's that's the that's the bottom line. The big the big message is two points. One, the inflation genie has not been put back in the bottle at 2%. We've already gone over that. And two, looking ahead, it looks like they're going to be loosening even more. And that will give us more inflation, not less. >> Professor, uh, let's take a look at who's going to be the next Fred chair and potentially that may impact monetary policy or change or support what you just said. So prediction markets, I know you like to look at prediction markets. This one's from Koshi. It's one of the largest ones, the US. Uh, Kevin Kevin Hasset is uh is predicted by traders as the front runner to be nominated as fed share. So let let's assume the market's right on this. Kevin Hasset's going to be Fed chair. Uh what do you think is is is he going to is he going to support the loosening monetary policy that we just discussed? >> Yes. >> Okay. >> He's he's he's a Trumpist. He's a Trump man. And Trump Trump wants the Fed funds to way down much lower than they are right now. And and Hasset will lean into that direction. Now, by the way, the prediction market was very interesting because uh if you look at that thing on Monday, it looked like Hasset was a shoe in. He he was over 80%. >> And and it's and the and the bond market sell off >> part of that it forget Japan. It was spooked because the bond market see saw hassid as being a loose money guy and a loose money guy means more inflation. More inflation means higher yields and lower bond prices. >> Okay, that makes sense. Well, let's just see how the prediction markets are predicting uh rate cuts here. uh rate decision in December. Uh it's looking at 94% chance of a 25 basis point cut in the in the next uh uh rate uh rate cut decision. We'll have you back on um after the next FOMC meeting to uh evaluate this, but it looks like that's basically um a done deal. 25 basis point cut. The the question is what's going to happen in 2026? Uh Fed cuts in 20 I wonder if they have this here. uh number of rate cuts in 2026. There we go. Uh the bond the prediction markets are kind of split on this. Exactly two cuts 25% exactly three cuts 24%. So there isn't an overwhelming majority on any one particular outcome yet. I don't know what's your view >> but but well there there there is one overwhelming uh outcome and and that is that we're going to get cuts in 2026. >> You're right. Yes. >> And and the question is well how many are we going to get? But well, let's worry about that later. >> Well, do you think do you think we'll get more cuts with Kevin Hasset than with Jerome Powell? >> Yes. >> Okay. Well, I guess that sums up uh our our thesis for loose monetary policy and the QT like you mentioned has ended. Um so >> and and don't and don't forget that taking April April is key because April is when that reserve that liquidity reserve uh supplemental liquidity reserve ratio come comes off and and the banks will have much more capacity to loan and and and right now right now the the the contribution the rate of growth growth and the contribution of commercial banks to the money supply measured by M2 is 6.8%. That's already over Hanky's golden growth rate of 6%. So the the commercial banks are already extending a lot of credit and and after April they certainly will have more capacity to even lend more and and I think that number probably will go up. My guess is this is just a guesstimate. It could go up to 10%. Yeah, that's what you said earlier. So, let me ask you about that because that was my next question. Perfect segue. 10% M2 money supply year-over-year growth. What does that imply for inflation? Have you done a back of the envelope calculation on that? >> Yeah, let's do it. Let's do it right now just off the top of my head. >> So, the six the 6% >> figure has uh 2% is accounted for by the increased demand for money and and let's say 2% real economic growth. So you've got 4% that we have to subtract from the 10% number that you gave to get inflation. So I'd say, you know, it could it could go up to, you know, 5%. I'm not predicting that. That that isn't a sharp pencil kind of thing. You you ask me what what off the top of my head >> and I'm I'm just saying off the top of my head under that scenario if M2 was growing at 10%. >> Yeah. If if that occurred, then the implied inflation rate associated with it would probably be something like five. >> Well, we can also >> and you get that the arithmetic of that is pretty easy. You have M2 growing at 10%. And and you have to subtract out a real growth of at least 2%. And and also subtract out a 2% rate of growth in the in the money supply soaking up that part of that 10%. So that you subtract 4% from the 10 and you get six. And I adjust it down a little bit and just say keep it keep it conservative at five. I mean that's that's in line with back testing this. So if we back test this and let's say uh in in February 2021 when inflation was peaking at 9.1% the M2 was growing at a peak of 26.7%. So it's 26 26% M2 growth year-over-year implies or implied past tense 9% roughly. Let's say round up to 10% inflation for the sake of argument and then if you divide that by roughly two that's roughly five. So that's another way to look at it. I I guess. Okay. Well, let's let's see if that happens. >> If if you're if you're looking at the quantity the using the quantity theory of money, which you should be MV equals PY. If you're using that equation of exchange to do your arithmetic and figure out things, you you can roughly do some of these back of the envelope calculations that we've just done. So the people who are watching us, if at home, they can get a piece of paper and a pencil and figure the thing out and and get, you know, more more or less a feel for what's going on. Let's put it that way. Now, unfortunately, the Fed isn't doing this, David. That's the whole point. They are not looking at the equation of exchange. MV= PY. They do not look at that and they're not looking at M, the money supply. Okay. Well, I think that concludes our conversation about inflation and uh the Federal Reserve. So, if you have any questions for Professor Hanky, please uh do submit them to us. Email down below, link down below. Uh click on the description or below the description. I'll put the email from Professor Hanky and myself. So, please uh email us. We we have been getting a few pretty good questions I think um directed to you privately. >> We we get we we have very very astute viewers who give us good. >> So, the the one thing are very smart. Let me summarize the the inflation story that we're talking about is that, you know, as you said, I was kind of on a green light and and now the the light has turned to kind of a flashing yellow. It's not red yet, but it's it's definitely yellow. >> What would turn it red for you? I >> if if these things that I anticipate happening with monetary policy actually do happen, >> well, what's the lag there? So let's say once these things in monetary policy actually do happen, then at how many months afterward can we expect inflation to start picking up? >> Since since it's so sticky right now, it probably a shorter lag than normal. The normal lag is about 12 to 24 months. >> Okay, >> that's a nor it could be less than 12. >> Okay, >> remember remember the the the famous Milton Friedman line. you you have long and variable lags between changes significant changes in the money supply and changes in inflation. So the the lags are long and and they're variable. So it's very hard to put your finger on exactly what's going to happen, but my my guess is given the current environment that the lags will be shorter than than the 12 month. Well, one thing to note is that the M2 growth has been rising concurrently with CPI growth over the course of this year 2025. So, uh maybe that's a qu that's been a coincident indicator throughout this year. Let's move on to the bond market now. So, the bond market like you said uh threw a hissy fit not because of the Japanese yen carry trade but because of hid. But, um we can look at the yen carry trade um regardless. So, this this just came in from a couple of days from Bloomberg. the yen to strengthen 10% in coming months on US rate cuts, says Morgan Stanley. Uh the yet the yen looks set to appreciate by nearly 10% against the dollar in the coming months. Yet the Federal Reserve delivers backto-back rate cuts. We just talked about that. The dollar yen is detached from fair value now and that relationship returns. The cross is seen declining in the first quarter of 2026. Uh Japanese fiscal policy is setting uh settings meanwhile are not especially expansionary, they said. So that's one narrative. The other thing to consider is of course that the US 10-year bond yield has been rising. It's now actually in today it's up 60 basis points which is a big move in one day. And um people are assigning all sorts of reasons. But tell us what's happening with the Japanese uh yen um the carry trade. What is the carry trade? Explain to the audience please and why it is we should be concerned about this. Uh part of the reason we're talking about this in the first place is that like I mentioned in the very beginning, the Japanese bond yield uh 10-year bond yields is at the highest level in more than 15 years. F >> first let let's back up and and and define what what the so-called Japanese there are very there are all kinds of carry trades, but the one in Japan is is the most significant one because the money supply has been growing at a very slow rate for like 30 years in Japan. So interest rates at nominal interest rates are very low in Japan and that means that you can borrow at low interest rates in Japan and when you borrow in low at low interest rates you're you're short the yen. Okay, you borrow in yen at a low interest rate and you invest someplace else at a high interest rate. And typically what's happened o over the past several years the the one one of the most fa the favorite uh carry trades was the Japanese yen Turkish lera and then it moved from the the lera to the Mexican peso that was popular for a while and now the US dollar of all things is a is a is the biggest Japanese yen carry trade. So, you borrow in yen and and now the the J the 10-year bond is is about 2% in Japan and actually an 18-year high and the 10-year US is about what 4.2 now. So, you're borrowing at 2% in yen and investing at a little over 4% in the United States. Now, so, so that's the carry. Now, the the risk of of the carry is the thing that you just went over that the Bank of Japan will increase its interest rate and and that will strengthen the yen. And if you strengthen the yen and you're and you've borrowed against it, you're short the yen, you're going to lose. So, so that's that's the risk. the risk that is that is that the the yen is at about 155 uh now it's it's been depreciating. So that's that's allowed the carry trade to work. You not only have made money on the spread between borrowing low in Japanese yen and investing higher in the US dollar, but you've also been making money because the yen has been depreciating against the dollar. So, uh, if you have an unhedged carry, you've been making money in the spread and you've been making money in in in in the exchange rate. Now, the worry, the panic everybody is in is that the governor of the Bank of Japan has pretty much indicated that he's going to raise the interest rate to strengthen the yen and and fight their little blip up in inflation that they have in Japan. by strengthening the yen. And and if if that yen would appreciate, as you just reported, if it would appreciate by 10%, of course, you you'd lose your shirt in the carry trade, the spread the spread you're making would would not cover the loss that you're going to be making on the appreciating end. So that that's what's going on with the yen. Now, it happened coincidentally, by the way, when when the 10-year JGB went up and hit an all-time high earlier this week. At the same time, you had a selloff in the 10-year US uh bond and uh and and and they were correlated, but correlation, of course, doesn't imply causation. I don't think I don't think there was any causality going on here. I think that I think the main thing on the US tenure was that was a concern over what I just told you and we talked about in the inflation story. the the bond vigilantes are getting nervous basically and they're getting nervous because it looks like Hasset will go in as chairman of the Fed and he he'll probably be a loose money guy rel relative to Powell and and it looks like by the way that the Fed in general the members of the open market commit committee have have had their arms twisted so much by the White House and Trump that they're they're coming ran to this loose, you know, lowering Fed funds, lowering Fed funds. So, that's that's the nub of it. I I might add, David, that if anyone really is the the carry trade's very important because what happens in Japan is that the public sector they they have a debt to GDP ratio over 200%. So they have they have a huge dissavings in the public sector but the private sector has a huge o over savings in the sense that savings exceeds investment in the private sector by a huge amount. If you add them both together, they have a surplus of savings relative to investment in Japan. And that's the source of the carry. That's the fuel. And and so they export capital. The the carry trade is nothing more than the Japanese exporting all this excess savings they have and exporting capital to the rest of the world. When when you engage in a carry trade to the the US, where where does the Japanese capital go? It goes into the US. If you do it with Mexico, it goes to Mexico. If you do it with Turkey, it in the LRA, it goes into Turkey. Now, the definitive book on this, by the way, is written by a good friend of mine, Tim Lee. Here it is. >> Yeah. for for your audience any anyone seriously wants to get into this topic which happens to be very important in international looking at international capital flows and what's going on read Tim Lee the rise of the carry uh he wrote that by the way with one of the his co-authors is his son Jamie three authors but that that's the book if people are really serious about drilling down into the thing. Um, McGraill publisher, you can get it on Amazon. >> The the the concern, and I'll pull up some stats later. The concern is that uh as capital leaves Japan, and I'm I'm about to find exactly how much capital has left Japan. Um, sorry. So, it goes back into Japan. I'm not leaving Japan. Goes back into Japan because rates are going up in Japan. That will lead to a sell-off at equities markets in the United States. I don't know how much capital is parked in the US that Japanese investors institutions have had that are probably going to be unwound and put back into Japan is as uh yields are more favorable in Japan. Now, I'll let you comment on that. >> Okay. So, here's the here's the the the the way this thing it gets in kind of a doom loop and the unwind the unwind. How would that happen? The unwind the I said the major risk is the appreciation of the end. So let's let's assume that the increased interest rates that the governor of the Bank of Japan promises actually strengthens the yen and the yen gets strong relative to the dollar. Well, that means every everyone involved in the carry is is probably going to lose a lot of money and they'll they'll start unwinding the carry and and they'll unwind the hedges that they have on on the end. And as they unwind these things, it just makes the yen even get stronger relative to the US dollar. And and of course, the the ultimate thing is the the the outflow of capital that's come in, these short-term capital movements that have come in with a carry, they will go out. The tide will go out. And you know, as as Warren Buffett's famously said, you know, when the tide goes out, you you're going to see what what people are wearing. So >> isn't it interesting though that given even given the interest rate differential, the Fed lowering rates, the Bank of Japan about to hike rates more. Uh the the dollar has been strengthening against the yen >> in the last in the last couple What how does that make sense? and and what they're worried about is the 160 level is the key. If if the yen would depreciate and and go over 160 to the dollar, that that that's a very key resistance point. >> But how does this hold on? How does this even make sense? Why is the yen even depreciating against it should be appreciating against the dollar? Because the Bank of Japan's raising rates, interest rates are going up in Japan. the the carry trade has something to do with this because the market is shorting the yen. They're borrowing in yen to to enter the carry trade and invest in the US dollar. So, so the carry the carry if you have a carry on that's unhedged, you're going to be short the end. >> I see. So the the the carry the the the key thing that we're talking about and the the reason you brought this up to put words in your mouth is is the concern that people have about the reversal of the carry, the reversal of the carry. And the reversal would occur if for some reason the yen starts appreciating against the US dollar. So there the the the carry trade is is it's like picking up, as they say, it's like picking up pennies in front of a steamroller. >> Well, you see what I mean? If the steamroller hits you, you you're reversed. You look at this, right? You look at this chart. I've got here the S&P 500 in the blue line and then the USD to yen in the uh bar chart here. So as you can again you to quote your to quote yourself later earlier from earlier correlation is not causation. We know that there is a very stark correlation between the yen uh the dollar yen and the S&P 500. So if the yen were to appreciate presumably against the USD, right? We're going to see the bar chart go down here. Let's assume this relationship holds. We're looking at the S&P falling off. So that's that's just an extrapolation. I'm not saying that's going to happen. I'm just looking at this chart. So, >> you're making a good point. You're you're making a good point with this. And the point, let me elaborate slightly. The the the market, the equity market in the United States is is in a bubble. Every bubble detector, including Hanky's Dr. X's bubble detector, concludes we're in a bubble. and and and what you you never know is when and how the bubble is going to deflate. Is it going to pop? Is it going to just slowly dissipate? And you and you're you're going through the an important thing people have to be watching. And that's the Japanese yen against the dollar because if that yen starts appreciating, they'll unwind. You'll have a huge carry trade reversal. And if you have a huge carry trade reversal, you you get a lot of money coming out of the market and and maybe maybe that would be the thing that would pop the bubble. You see what I mean, David? >> Yes. >> Yeah. That that that that's why it's important to put up those charts like that. We know correlation doesn't imply causation, but you you put up that thing and and my my takeaway from that uh which I quite frankly I'll admit I hadn't thought about it is that it's it's a bubble popper. If if you reverse the carry, you you've got a potential bubble popper. >> Let's keep that. I mean, can you explain this correlation that we've observed? Why why why why why why was the straightening of the USD versus Japan um correlated with the S&P? Maybe maybe it had nothing to do with uh Japan itself. Maybe it's just capital flowing into the US. But can we explain the the carry the Japanese carry it number one the Japanese carry to the US is the biggest Japanese carry right now. >> Sure. And that mean that means there's a lot of capital that's come in from Japan into the United States. And and what what does that mean? Well, it means at the margin it's got to be fuel for the the bubble. It's in it's inflating the bubble. And if you reverse it, may maybe it pops a bubble. >> Okay. Well, besides that, what other risk are you looking at for uh US equity markets? >> It it's kind of a long list. Give us your top one, two or something. I don't >> make it easier for us. >> Yeah. Well, let let's just let's let's leave it at at at at as as follows. One one one risk, by the way, is is the carry that's we just talked about. But let's look at the other side of the thing. What did we talk about earlier? A loosening of US monetary policy. So that so that that would be pumping air into the bubble and and the carry coming off would be taking it away. So we we we have a perfect illustration of the kind of uncertainties that are facing us right now. We've just done two big ones. >> Yeah. Okay. Well, uh >> and they're going in opposite directions. So So that that that is that's the kind of thing that actually does keep people up at night. So So what do you do? What do you do? What the only the only thing I the only thing I can say is is that I I I we I wouldn't I wouldn't say get out of the market, get into the market, whatever. I'd say rebalance your portfolio. look back at where you were at some starting point may maybe before COVID. Let's let's assume you're 55 years of age and you've got a standard portfolio of 6040. Well, that that portfolio with this bubble increase in the equity market certainly isn't going to be 6040 anymore. It's going to be more like 8515 or something. So my my advice would be in these kind of uncertain times, it's always probably wise to take a look at your portfolio and rebalance it a little bit. >> All right, good. Thank you very much, professor. We'll end it here for today. Where can we find you? >> You can follow me on X atte_hanky or you can just write me if you want be on my weekly distribution uh list and that it would be just my email hankyjhu.ed. edu. >> Okay, good. Thank you very much, Professor Hanky. Don't forget to follow Steve in the links down below and uh make sure to write to us in the emails that are also in the links down below or just put in the comments down below what you would like us to talk about next time. Professor Hanky will be on again in a couple weeks. So, uh stay tuned for the next episode and do contribute your ideas. And again, do use my promo code lynn l i n when you sign up to kowshi. That's cowshi.comr/lin link down below or scan the QR code here. You'll get $10 in your first $100 deposit.