The Great Carry Unwind

Fear and panic is everywhere now and we will likely see capitulation selling of everything on Friday or Monday and thereby exhaust this down leg for the time being.

Yen Rises to Highest Since 2006 as Investors Exit Carry Trades: "The yen rallied to its highest since 2006 against the dollar as investors fled carry trades after global stocks fell and companies in Australia and Canada sought emergency funds because they were unable to refinance debt."

I'm going to call this the Great Carry Unwind. The entire system is now rapidly deleveraging and the devastation this will wreak on every single asset class over the next year will be mind boggling. I'm talking from equities to commodities to houses. Everything.

Chicago Mercantile to Raise Margin Requirements Today (Update1): "CME raised margin requirements on some currency, interest rate and stock-index futures, according to a notice sent by the exchange to members."

Of course. This is how deleveraging works. First you're offside on the position, which already requires that you come up with more margin. Then the margin requirement is raised. Double whammy. It becomes self fulfilling prophesy. Let the forced liquidations accelerate...

Oil Drops as Investors Sell to Cover Equity Losses; Storm Moves: "The main reason is because of the crisis in international financial markets,'' said Wolfgang Kraus, chief energy and commodities trader at BayernLB in Munich. "Liquidity between banks is a rare commodity right now, and many speculative investors have been forced to close out positions.''

That is just one other example of deleveraging and a liquidity crisis. Everything has got to go. The baby too. Not just the batch water...

Treasuries Advance as Drop in Stocks Feeds Demand for U.S. Debt: "Two-year notes rose for a fourth day following the biggest gain in three-month bills since 1989, pushing the gap between two- and 10-year yields to the widest since May 2005."

The yield curve is steepening with incredible speed as everybody rushes for safety. This is blowing flattener trades out of the water and short dollar trades. As of quite recently, both of which were large bets put on by many a hedge fund.

Run on Treasury Bills Spurred by Subprime Contagion (Update1): "Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt."

Countrywide Taps $11.5 Billion Credit Line to Boost Liquidity: Good thing the financial ninjas over at Merril downgraded this sucker yesterday... haha...

U.S. Housing Starts Dropped 6.1% to 1.381 Million Pace in July: "Builders in the U.S. started work on the fewest homes in a decade in July as the industry showed no sign of recovering from the 18-month recession.

The greater-than-forecast 6.1 percent decrease to an annual rate of 1.381 million, followed a 1.47 million pace in June, the Commerce Department said today in Washington. Building permits also fell to a 10-year low. "

Poole Says Only `Calamity' Would Justify Rate Cut Now (Update1): "William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a "calamity'' would justify an interest-rate cut now."

Taunting the trading Gods like that is always a brilliant idea. Right now Mr. Market is thinking, "Ah calamity eh? I could totally do that..." Mr. Poole, get out the ketchup, cuz you're gonna have to eat those words for sure.