During yesterday's rout when panicked traders were scrambling to figure out the cause behind the historic rout in Japan which this morning spilled over into the US, we expanded upon our criticism of the BOJ's recent ridiculous rate hike decision, and said that the amid the doom and gloom, it is only a matter of time before the carry trade (which we profiled in "The $20 Trillion Carry Trade Has Finally Blown Up ") is reversed as the BOJ has no choice and is merely prolonging the inevitable, because as we put it, "at a gross balance sheet value of around 500% GDP or $20 trillion, the Japanese government's balance sheet is, simply put, one giant carry trade." In other words, to pretend that Japan can keep hiking rates into a deflationary abyss (one which the record crash in the stock market would only accelerate) would assure that not only Japanese stocks but also Japanese bonds, and eventually the yen too, would crater.
Today, we were delighted to see none other than Goldman trader Paolo Schiavone echo our sentiment (and even our words) when in a must-read note, he wrote that "we are not going down because of recession but because of an unwind of circa 20trilion carry trades. “Only BOJ can stop this."
We agree wholeheartedly - after all we said it first - and we also agree with Schiavone's conclusion (see below) especially since the market is following what we expected would happen, namely a huge dead cat bounce driven perhaps by Japan's Ministry of Finance selling some of those trillions in yen it bought down at 162, and which has sent both the USDJPY and the Nikkei and Topix soaring.
