Currency/Carry Trade Unwinding in 2024: Mega Crash Coming?

If you have been borrowing Japanese Yen since some years ago at close to 0% to buy US equities to earn yield all the way to over 5% (end of 2023), what would you do when you hear Jerome Powell said that he may start cutting rates lasting few years?

If you decide to just do nothing and let Jerome Powell cut the rates all the way back to near hypothetical 2% inflation rate, then all the gains that you have made so far would probably come to naught.

This is because many money market funds may start to pull out their investments in the US and repatriate their borrowed currencies (in this case, Japanese Yen) back to the foreign countries to repay their borrowings and lock in their gains.

And when such situation happens, the US stock market may actually correct, or even crash, lasting in the duration that depends on how fast the Federal Reserve cuts its rates back to near inflation level, i.e. if the Fed ends up cutting the rate within 1 year, then the correction (or crash) will just last 1 year.

Otherwise, if Jerome Powell is a man of his words and cut rates for several years, then the correction (or crash) may last for just as long.

And this actually coincide with the general knowledge that historically the market always corrects (or crashes) when the Fed pivots, or when the yield curve inversion starts to revert back to normal.

And if this remain true in the coming 2024, then we may really see a market correction (or mega crash?) going to play out lasting some years.

And while this bearish prediction may tempt a lot of people to sell out their investment holdings, I would rather suggest people to just allocate some small percentage of their portfolio on some long-dated insurance (put options, 3x short positions, CDS; most importantly without margin to avoid margin call from sharp whipsaws) and let the remainder of the portfolio staying invested.

This is because no matter how we may try to time the market bottom, we are not in control of the money printing machine that is the Fed.

Over time, everything will reach a much higher price level than before.

And I also believe that after the next correction (or crash) is over and everything starts to recover, the Fed will actually inflate its money supply at a much larger magnitude than ever before.

Therefore, it is imperative that we preserve what we own (instead of selling out everything lest the WEF’s prediction that you will own nothing comes true) and even increase our ownership (with proceeds from insurance) by being prudent when necessary.