What’s being said around the tables: Fear continues in the market after the collapse and gurus recalibrate investments

One of the world’s leading traders in this business pointed out in a conference call that, while the desks at JP Morgan and Goldman were frantically discussing the importance of how much time was left before the global carry trade was undone following the BoJ’s decision, they were overlooking the fact that The carry trade that the Japanese government had been involved in over the past decades was a time bomb that was difficult to defuse and when it exploded it was “game over”. This expert, a veteran of several crises, explained that at the end of last year, when the last cycle of the yen carry trade was still in its infancy (the dollar-yen exchange rate was around 140 yen, on its way to reaching a mind-blowing and inflation-inducing level of 162 yen, not to mention two interventions by the BoJ), it was clear that the Japanese economy was practically dead and the only thing missing was to declare the time of its death. The reason: the 20 trillion dollar carry trade that the Japanese government has been feeding for 40 years. As early as December of last year, the main currency strategists of the global market had already sized up the total size of the operation whose explosion would require a coordinated rescue by the central bank.

The truth is that the carry trade has already exploded and the purge has taken place, boosted by some economic data, news of strong stock sales (case Warren Buffet with Apple) and panic ensued globally. That was the beginning of a crash, and that’s how Goldman traded it. But in the JP Morgan-Goldman debate, it was JPM’s head of global FX strategy, Arindam Sandilya, who first came out to say (on Bloomberg TV) that the unwinding of the carry trade is by no means over, at least within the speculative investor community — it’s somewhere between 50% and 60% complete. That was refuted by Goldman trader Jerry Shen, who analyzed the bank’s yen positioning and tactical funds flow indicator and concluded that investors are actually net-long yen as of this week, implying that the carry trade has largely unraveled.

For now, the feud between these Wall Street giants seems to have lowered its decibels and the market recognizes that there was fear but not panic, and that VIX index readings were exaggerated.

In this regard, in another conference call, a strategist who even spent time with Robert Whaley, creator of the VIX, at Vanderbilt University – he said that the original name was going to be REW (Whaley’s initials) but another exchange had that ticker so they opted for VIX – explained an arid and very technically complex issue, why he considered that the level reached last Monday by the VIX does not denote panic. Here it is enough to mention that the calculation obeys a chain of options in the CBOE, including some very illiquid ones. As can be seen, the issue of global carry, and in particular the Japanese one, monopolized the conversations worldwide.

While analysts are already referring to the heated days as a childish tantrum by investors, BNYM warns that its model and iFlow data still indicate that they can see more risks until the end of August. Strategists at the iconic US bank explain that the role of rate differentials between Japan and the US and other countries is clearly important for currency markets, but the correlation with real rates eroded in June and July, when politics began to matter more than monetary policy, starting with the EU elections, going through the French and British elections, and also the debate between Trump and Biden.

These experts warn that the development of this battle for the centrality of the factors will set the tone for the returns in the third quarter, as investors will see how the patterns break down and correlations turn around. With a very volatile August, they consider that the yen, the Swiss franc and the Swedish crown will be the main sources of safe haven flows.

And how are we doing at home?

After the storm the waters calm down and At the local tables, attention is once again focused on the internal gossips, which in itself there is plenty and for all tastes. Obviously the global shock forced rethink positions and strategiesrecalculate benchmarks and reschedule meetings and gatherings that are biased towards current global markets.

One of the most interesting was the one held by economist Martín Polo with Ana Cohen, who deepened the analysis of the US economic data, improving the reading and interpretation of what happened, which for him was more of a financial wake-up call than a macroeconomic one, in reference to Monday’s collapse. For Polo, it is premature to venture a recession in the US, but rather a slow soft landing. When talking about investments, the idea that it was time for fixed income prevailed.

In most of the Zoom meetings and meetings between people from the local market, with clients and advisors, there was a lot of talk about politics as well. Every day there is more talk about a new “black monk”, the unemployed advisor, Santiago Caputo, and how his tentacles, with the permission of “Sor” Karina, reached sensitive government areas such as those linked to intelligence services, Justice, the UIF and large state companies. A prestigious political scientist commented at a lunch in the Retiro neighborhood that this issue, especially the appointments to the bicameral intelligence services commission, had the leader of the PRO, Mauricio Macri, in a very bad mood, who aspired to put his own people but “Sor K” had neutralized him.

There is much speculation about how the relationship between the PRO and LLA will continue, where the libertarian leader does not seem at all interested in sealing any alliance or pact, or inter-block or anything, but rather, seduced by the polls that reach the Rosada that show the cannibalism of the PRO votes at the hands of LLA, he prefers to do a take-over rather than a merger.

In another northern area stronghold, a barbecue brought together several financial industry leaders with ties to offshore private banking and there they made fun of the “Toto” REPO, alluding to the remembered General Alais, because they never come, they say they are coming, they come, they announce themselves, but they don’t come. A handful of optimists came to the rescue of Caputo and Bausili, pointing out that if the Spanish bank deal went through, it could drag down others as happened in the previous administration with Cambiemos when more than 6 thousand pesos were collected. The most skeptical wait to see to believe. But both groups know that The BCRA’s reserve position does not provide any room for manoeuvre and the second half of the year is coming.

Meanwhile, an economist, a frequent visitor to Balcarce 50, brought the latest gossip from the palm tree patio to colleagues gathered in an exclusive club in downtown Buenos Aires: no matter how much they want to hide it or distract, there is a management problem in the Government, having taken almost a month and a half to regulate two chapters of the Bases law shows that these are not the times that the market and the people have; the excuse is that the problem lies in the fact that the people voted for the change but the legislators did not.

Every time a survey of image, approval rating or voting intention comes out in which the Vice President surpasses the President, tempers explode against the head of the Senate who keeps her attention on winning territorial and age-based support throughout the country; the issue of the appointments of the judges of the Court was complicated, but it seems that the one of Lijo that was on track got stuck, the other one (García Mansilla) is not even mentioned. Sister Karina is focused on the organization of the party at a national level, which is generating tensions between allies and provincial tensions.

The result of the money laundering and the moratorium is divisive. The government is betting on $50 billion, but the more cautious are talking about $30 billion. However, in the city, according to the thermometer of customer consultations, it would be around $25 billion at the most.

One of the colleagues present toasted the silver medal in the country risk ranking, second only to Bolivia, which took the gold. Regrettable. And just then came the note from the S&P Global rating agency confirming Argentina’s global scale ratings of “CCC/C” and national scale ratings of “raB+”, with a stable outlook.

There is also a lot of talk about the cannibalization of the exchange rate buffer, there is nothing left for the experts and on top of that the Brazilian real has also started to tighten. Another one mentioned the fact that during the bad days of the exchange market, it seems that the flag carrier was forced to sell foreign currency in the MEP.

Anything goes when the Indians comethe interlocutor justified. Another financial-tax expert at the diner, half fed up with the seminars and meetings related to money laundering, considered that the most interesting thing about the official proposal was the potential for the local capital market due to how the Special Commitment Accounts work and the flexibility to buy and sell papers avoiding having to pay the fine. He gave an example: if 5,000 million were to enter said special accounts, estimating a money laundering amount of 25,000 million, it would be almost a third of the current stock of Argentine dollars that could then be attracted to multiple investments. We will see.