The Rise of Carry: the New Financial Order of Decaying Growth & Recurring Crisis

In Episode 153 of Hidden Forces, Demetri Kofinas speaks with authors Kevin Coldiron, Jamie Lee, and Tim Lee, as they explain how the behavior of financial markets today is not, as is commonly believed, some function of the economy, interest rates, or political developments, but rather a manifestation of what they call "the rise of carry" or the suppression of volatility.

In finance, a carry trade is typically thought of as an interest rate arbitrage expressed as a trade between two currencies, where the more historically stable currency is used to fund the purchase of an historically less-stable but higher-yielding alternative in exchange for taking on currency risk.

The authors extend this principle across every facet of the economy in an effort to show that the logic of carry has increasingly become the dominant force driving market behavior and by extension, asset prices.

If we are to agree that financial markets play a vital function in a capitalist economy and that their value ultimately derives from the underlying businesses and cash flows that their prices should reflect, then the rise of carry in a highly levered, fiat economy represents an existential threat to all aspects of human affairs.

The authors argue that we appear to be closer to this eventuality than ever before, but what will the collapse of carry or its ignition create? What will it look and feel like? What could allow it to continue? How might we stop it? Or is it already too late? We tackle all these questions and more during the course of this nearly two-hour-long conversation.

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Producer & Host: Demetri Kofinas

Editor & Engineer: Stylianos Nicolaou

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Episode Recorded on 09/01/2020