Yen Carry Trade, AI Spending Fuel Market Panic
Key Points
- The unwinding of the massive “Yen carry trade” – sparked by an unexpected rise in Japanese interest rates that also strengthens the yen – is forcing investors to liquidate roughly $4 trillion of U.S. equities that were funded with cheap yen borrowing.
- Companies are pouring record capital expenditures into AI, but the payoff horizon is measured in years rather than the 12‑18‑month window investors expect, creating a misalignment between cash outlays and near‑term earnings.
- An election year compounded by heightened geopolitical tensions adds a layer of political and macro‑risk uncertainty that traditionally amplifies market volatility.
- Together, the yen‑rate shock, AI‑capex lag, and political/geopolitical instability are driving the current panic in the U.S. stock market and raising concerns about the near‑term outlook for technology stocks.
Full Transcript
# Yen Carry Trade, AI Spending Fuel Market Panic **Source:** [https://www.youtube.com/watch?v=m0n-TldUGro](https://www.youtube.com/watch?v=m0n-TldUGro) **Duration:** 00:07:09 ## Summary - The unwinding of the massive “Yen carry trade” – sparked by an unexpected rise in Japanese interest rates that also strengthens the yen – is forcing investors to liquidate roughly $4 trillion of U.S. equities that were funded with cheap yen borrowing. - Companies are pouring record capital expenditures into AI, but the payoff horizon is measured in years rather than the 12‑18‑month window investors expect, creating a misalignment between cash outlays and near‑term earnings. - An election year compounded by heightened geopolitical tensions adds a layer of political and macro‑risk uncertainty that traditionally amplifies market volatility. - Together, the yen‑rate shock, AI‑capex lag, and political/geopolitical instability are driving the current panic in the U.S. stock market and raising concerns about the near‑term outlook for technology stocks. ## Sections - [00:00:00](https://www.youtube.com/watch?v=m0n-TldUGro&t=0s) **Yen Carry-Trade Unwind Sparks Panic** - The speaker explains that an unexpected hike in Japanese interest rates is forcing a $4 trillion Yen‑carry‑trade unwind, driving panic in the U.S. stock market and raising concerns for tech equities. ## Full Transcript
it's Monday August 5th and I want to
explain to you why everyone is throwing
up their hands and panicking about the
stock market in the US there's three key
drivers here and it's all coming
together and I want to explain what's
going on and then also explain the
implications for Tech so here's the
drivers number one is what we call the
Yen carry trade I actually lived through
the first instance when this became un
stock in 1998 in Asia it's a very vivid
memory for me it's a really big deal
when this gets unstuck so brief history
since 1990 about the Japanese government
has maintained broadly speaking about a
0% interest rate on the Yen and the
reason for that is because they want to
reinl the economy and so Japanese
interest rates have been so low for so
long that institutional investors have
taken to borrowing in Yen because it's
essentially risk-free money at their
scale and investing in US equities and
arbitraging the difference so there's a
lot of buying pressure coming from that
trade for a very long time is really
consistent and when it comes unstuck is
basically when the Japanese government
decides to raise interest rates which it
has once or twice it did in 1998 and it
did this week in fact it was an
unexpectedly sharp rise which is part of
what's driving people up the wall right
now about $4 trillion dollar in US
equities are attached to this Japanese
Yen carry trade thing it starting to get
Unwound as Traders have to go back and
make sure they can cover their losses
because at the end of the day there's a
there's a double Dynamic here when the
interest rates rise it's not only not
risk-free anymore it is also increasing
the value of the Yen it's appreciating
the currency so if you're handling
multicurrency swaps it means that you're
potentially unable to sell your us
equities position and cover all of your
Yen debt because the Yen's worth more
now relative to the
dollar that probably sounded really
complicated it is one of the pieces
here's the other two
briefly uh the AI capex problem which I
have talked about on this channel Affair
bit fundamentally we're spending a ton
of money on Capital expenses for AI but
the return on investment window is way
longer than the street wants it is not
12 to 18 months it's going to be years
out and that's not me saying that that's
big corporations saying that in their
earnings reports and that is scaring the
market that was really hoping that AI
would produce an earlier boost to
earnings and instead they're sing it
produce an earlier boost to Capital
expenditures on the wrong side of the
balance
sheet all right and then the third
Factor no surprise election year things
tend to be really dramatic the
geopolitical situation uh right now is
very unstable as well and so that just
adds to a sense of uncertainty when you
put all three of these things together
and then you sort of light the Tinder
with uh this unexpected interest rate
rise from the bank of Japan things get
exciting really quickly and that is
exactly what happened over the weekend
and that is why uh most people are
expecting that this week in the equities
markets is going to be really red so
what does that mean for the IPO window
for the exit window for Tech in general
so I I'd like to divide this up into a
couple of of maybe three different
takeaways one for Broad tech which is
like Tech outside of the really big tech
companies like if you work in Tech at
Walmart one is uh around how we
understand the tech startup market and
exits and the last one is for big Tech
in particular all right so broadtech
first in general the thing if you work
in broadtech like if you're an IT
support at a bank if you're a product
manager who is working with a large
retail company that isn't a tech
company these things matter less than
the larger signals in the economy around
whether or not the economy has headed
into recession and right now those
lights are flashing yellow
we don't really know what's going to
happen we typically learn about whether
we're in a recession after we're already
in it which is part of what makes people
nervous so if you're looking at what is
going to drive your Equity package look
at the broader economic signals because
that is what's going to be most
influential for the earnings and revenue
for your particular
company now if you're in startups this
whole uncertainty window all of the red
in the markets this week probably is
going to make it even harder to plan for
a exit now that won't matter if you're
seed stage if you're series a you don't
really care you're way too far out from
an exit for it to matter but if you are
series C or later and you were thinking
about a particular three or four four
month window three to six-month window
for exiting this is probably going to
shift that timeline out which means the
value of your Equity is going to shift
out as well that is something I have
seen over and over and over again since
the shift in the markets in
2022 and I think one of the things I am
looking for to see if tech is getting
back to healthy is if late stage
companies can reasonably plan for exits
because right now that has just not been
the case for a couple of years and it's
sticking up the markets
overall finally for big Tech if you have
equity in big
Tech it's a tough time so long story
short basically big Tech is getting
pummeled from two directions at once uh
the invest in equities that the Yen
carry trade unlocked and sort of a lot
of the institutional buying in the
market May turn into some degree of
selling over the next week it's just not
going to be a good time for a week or
two here and when you have broader
concerns around recession that are also
starting to pop their heads up and
concerns around Capital expenditures at
the very companies where you own
Equity it adds up to a really
challenging combination I'm not here to
tell you what to do but I would say say
this is one of those times where you
have to have a long-term view of the
value of your career and the value that
you're unlocking and sort of where your
equities can go long term because in the
short term I don't think that things are
going to look very pretty at some of
these big tech companies none of them
are necessarily strangers to draw down
so if you look back at the history of
say Amazon or Netflix or other big
companies they will have these big draw
Downs it's happened before this it may
happen again we'll see uh but keep in
mind that overall what you're doing when
you work at a company is you're making a
bet on that company's long-term future
and just remember the longterm right now
remember the long-term future you're
looking to
unlock because things will probably get
rough this week and that hopefully you
understand why now hopefully you
understand the implications for attack
I'm really looking for a little bit more
predictability in the markets in 2025 to
unlock that late stage IPO window and I
think that's going to help things out it
will also help if in 2025 we can get
some of these big companies saying
they're starting to see Revenue coming
in from AI those two factors would be
huge all right best of luck this week