For me, the conclusion of the book is - the rich get richer because they never actually have to face consequences of their investment strategies. This is based on the fact that there is extreme volatility suppression aided by central banks. What is a Franken-Bull? It’s a term I came up for a market that has bearish fundamentals, but experiencing a bull run.

Because volatility risk cannot be hedged in aggregate and the total amount insured seems to have grown so much, there is broad agree­ment that a future increase in volatility will produce big winners and big losers. There is, however, no consensus on whether this will simply involve a large-scale exchange of wealth between otherwise equivalent players in the market—the Pauls receiving large sums from the Peters—or if it will have serious economic, political, or social consequences. However these issues are all fairly well documented and have been mainstream consciousness for quite a long time. So the book hardly broke any new ground here. But at least they are coherently articulated with no obvious logical fallacies. These characteristics are reflected in the options market on which the VIX is based. As both put and call options provide the same cover against market volatility, the prices of the two exhibit a phenomenon known as “put-call parity,” diverging little from each other.In 2002, he moved to California to co-found Algert Coldiron Investors, a quantitative equity specialist managing both hedge funds and long-only strategies. ACI was consistently ranked by alternative investment consultants as among the best equity market neutral managers globally.

Simply put, carry trading is now the primary determinant of the global business cycle - a pattern of long, steady but unspectacular expansions punctuated by catastrophic crises. Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy--and the meteoric rise of carry.

Create a new list

The central thesis of the book is as follows. The financial authorities of developed countries artificially suppress volatility in financial markets. In the past few decades, selling volatility has been too profitable. The buyers of put option made significant profits in those rare periods when the bubbles collapsed. However, even despite it, buying volatility has been too unprofitable. The main reason for the surge upwards in the indicator, to unprecedented levels, is the collapse of money supply, with my estimate being that for Q1 M2 will be -2.6% year-on-year, unprecedented in modern history. The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy--until now.

Financial instability has thus risen as the carry trade has grown. The Rise of Carry does not estimate the size of the market, for which reliable data do not seem to be available, but the authors argue convincingly that it is very large and has expanded greatly in recent years. They also point to the risk that volatility in different financial assets may be contagious: “There is also evidence of a growing correlation between currency and equity market carry, suggesting that a single global volatility risk factor may be a driver of all forms of carry in the future. If this is true, future carry crashes may impact on all asset classes at the same time.” 7 The financial shelves are filled with books that explain how popular carry trading has become in recent years. But none has revealed just how significant a role it plays in the global economy—until now.

My Book Notes

The ways that carry, volatility selling, leverage, liquidity, and profitability affect the business cycle For most of the twentieth century, the neoclassical synthesis in economics was generally believed to provide a solid basis for public policy. There were, nonetheless, significant dissenters. Hyman Minsky, for instance, wrote that “modern orthodox economics is not and cannot be a basis for a serious approach to economic policy.” 1 In the wake of the financial crisis and the great recession of 2008, such questioning became even more vociferous, and criticisms like Min­sky’s are now increasingly accepted. For those of you perma-bulls questioning the basis of “bearish fundamentals:” If headlines such as: Traders do not especially care their strategies affect the operation of the market more generally, but the authors do explore this interesting facet of the carry story. I particular enjoyed their description of selling vol at short durations, then buying it at long durations. This nicely fits certain stylised facts of market behaviour: mean reversion at shorter horizons, and momentum at longer horizons. money-printing presses went into overdrive. A myriad of emergency funding windows were opened to enable cash to be injected into the financial system, and from virtually any and all directions. Sovereign borrowing and credit guarantees were issued left, right, and center. Direct public funding was placed into all the major American banks and many of the smaller ones” This, “unprecedented deployment of liquidity and direct involvement in markets played a critical role in reconnecting the wires of the market system and restoring trust (p. 48, El-Erian)