(From a friend that knows...)

 

Dear Ernie,

 
I enjoyed the article. I agreed with most of it.
 
The carry trade has been an enormous gift to insiders. Not a totally riskless gift, but a huge one none the less.
 
The idea is simple, imagine the Japaneses govenment lets you borrow yen at .01 % interest. You take those borrowed yen, sell them and invest them in for the last decade or so in something like USG bonds and get over 4%. Your risk is that the currency you owe(yen) goes up more than 4% a year against the currency you invest in. The edge that makes it work is that .01 % is a ridiculous government driven interest rate.  Of course, only an insider can really borrow a massive amount of yen at that price.
 
Other places, you may have invested the borrowed money, might have been commodity currencies like the AUD, CAD or NZD, or even the US stock market as he implies.
 
There undoubtedly was a smaller carry trade as he implies, in borrowing gold from central banks at lease rates of less than 1%, selling it and investing the proceeds. This trade has not done well as gold has risen more than 4 or 5% a year and buying the gold back will cost them dearly.
 
The key is to borrow something at a ridiculous rate not likely to go up.
 
So, his next point is that the USD is now the premier candidate for a carry trade. Artificially low interest rates and with all the money printing, very unlikely to go up over any period of time. He then concludes, that as these dollars are borrowed and sold, this will add greatly to the pressure driving the dollar down and gold up. Knowing that Bernanke is virtually certain not to raise rates, is waving a red flag in front of a bull and virtually guaranteeing the sucess of the dollar carry trade.
 
To a certain extant even normal schmucks can participate in the carry trade at somewhat less of an edge. For instance, just buying futures in gold or the AUD, the price of the futures reflect the low interest on the USD and the high interest on the AUD, thus you can buy future AUD at a discount!
 
We used to be long JPY, expecting the carry trade in it to unwind someday. We took our profits, were neutral for a while and have now gotten short yen. As usual, it appears early.
 
Japan is even more in debt than the US and their demographics are way worse than the US, totally hopeless in fact. THe younger generation now responsible for their oldsters debts is small in size as the oldsters didn\'t even bother having children!
 
Exports have fallen massively and Japan cannot afford a strong yen. We have taken the view, that the yen is so high from the unwinding of the carry trade. People had to buy yen to pay back those they borrowed. But, it much be close to finnished or finished and eventually the yens fundamentals will tell.
 
Hope this helps.