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  • Reverse Carry Trade Borrowing Proves Deadly
    To bearfund:

    "The problem is that borrowers are either out of capacity to borrow or unwilling to offer a fair rate. In both cases, that is a sign not of malfunctioning credit markets but of a marginal business..."

    Then why the dramatic spike in LIBOR rates? Why the huge increase in TED?

    "In a world that has enjoyed interest rates of much less than 5% for most of the past decade, most businesses are marginal."

    It might surprise you to learn that between 1930 and 1965, the prime rate was NEVER as high as 5%.

    "This is why cheap money is the worst possible curse than can be placed on an economy. It is far better to let the market set rates and use sound money that does not distort the market by losing some large but arbitrary and hard to guess part of its value every year."

    Psst. Hey buddy - the market does set rates. Bank lending rates are determined by a free, highly competitive market. And by the way - the cheap money that you bemoan? It wasn't inflationary.

    "As an example of this, I would be happy to lend gold to highly creditworthy companies at 12% for 10 years. But there are few such creditworthy companies and none willing to pay 12% on money that will not depreciate."

    First off, won't depreciate? Gold's down against the dollar 16% over the last five weeks. Second, why would a "highly creditworthy" company (whatever that means) borrow from you if your rate isn't competitive?

    "They can't; it would eliminate all profits. So the deleveraging continues..."

    You're missing a link here. At 12%, nobody borrows and nobody lends, and nobody makes any money. As risk tolerances normalize, rates come down, borrowing makes more economic sense, and a new equilibrium is reached. And if you continue to demand 12%, you will continue to hold an asset earning no interest.
    Nov 03 09:23 am |Rating: 0 0 |Link to Comment |View article

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