Sorry doomsayers, the unwinding of the “carry trade” can’t derail America’s manufacturing renaissance.

Recently, the U.S. stock market experienced a correction. The S&P 500 fell 6.6%, the Dow dropped 5%, and the Nasdaq decreased by 11.3% from their recent highs. The financial media is pointing the finger on a "margin call" triggered by the unwinding of trillions of dollars in "Carry Trade" bets.

The "Carry Trade" is driven by Japan's long-term 0% interest rate policy. 

Traders borrow money in Japanese Yen and reinvest it in higher-yielding currencies. For example, they might borrow Yen at 0%, convert it to dollars, and buy U.S. 1-Year T-Bills yielding 4.5%. It seems like free money.

However, on July 31, 2024, Japan's Central Bank raised interest rates from 0% to 0.25%.

Wait, what? That’s it? My portfolio took a hit because Japan increased interest rates by a lousy quarter point?

Japan’s interest rate increase may not seem like much. But for traders, it means the end of a highly leveraged situation.

After the rate hike, the Yen surged over 5% against the dollar. While this might not sound like a lot, for traders leveraged 10:1, it means a 50% loss on their equity in a short-Yen position.

As usual, this led to a wave of selling as positions were unwound.

Predictably, the media started claiming a recession was imminent.

Nonsense.

It's true that economic growth in Europe and China has been weak for various reasons both fundamental and demographic.

But in my view, this pullback is just a small bump in the road for America’s ongoing industrial growth.

After all, we’re only recently getting back to where we were before the Great Financial Crisis (GFC).

U.S. Industrial Capacity Manufacturing:

I’m not alone.

Billionaire Venture Capitalist and Early Facebook VP of User Growth Chamath Palihapitiya made a similar point on an X post:

I couldn’t have said it better.

So if you’ve been anxious the past week, don’t panic.

There are issues to be worked through, not the least of which are the prospect that interest rates will be higher-for-longer if for no other reason that demand for capital is high in a deindustrialization environment.

Until Next Time,

Sean O’Reilly

P.S. Be sure to check out this Saturday, August 10th’s Edition of Bottom Line Investing where I’ll reveal my latest “American Renaissance” stock pick whose stock has been pummeled in the pullback and thus represents a bargain buy.

This stock:

• Sports a P/E of less than 7.

• Has doubled revenues in the past 3 years to $3.5 billion.

• Is primed to benefit from America’s industrial buildout through the end of the decade.

To Gain Access to This Stock, And Every “American Industrial Renaissance” Investment Going Forward, Become a BLI Premium Subscriber.

Disclosure: This content is for educational purposes only and should not be construed as financial advice. Sean O'Reilly may have positions in some of the stocks discussed in this post. Please conduct your own research or consult a financial advisor before making any investment decisions.