Homeloan carry trade, profit from your mortgage?

‘Carry trade’ is where you borrow and pay interest in order to buy something else that pays higher interest, the difference (when it is working as planned) is called ‘positive carry’. Usually this is done in bonds or currency, for instance, if you were to borrow money on short term rates to finance longer term bonds. The interest being paid on the long term bonds minus the interest on the short term borrowing would be the ‘carry return’. In currency the Yen was a very popular carry trade currency as their interest rate was 0%. So you could borrow in Yen, buy something else (unfortunately this money often ended up in CDO’s) such as US Tnotes and keep the difference, the main risk being that one that the Yen would strengthen significantly meaning you couldn’t pay back the original loan.

How does this affect mortgages though?

NOTE: THIS IS NOT A SUGGESTION THAT YOU DO WHAT IS DESCRIBED HERE! THIS IS MERELY MAKING A POINT!

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Currency markets Q4 of 2008

In the last few weeks we have seen some of the most volatile currency markets in history. Iceland (Króna) as a nation basically went bankrupt, there are serious currency risks in Hungary (the Forint), the Ukraine (the Hryvnia) and several other countries.

The downside is that this may be the prelude to a currency crisis not unlike that which we saw in Asia in the late 90’s. The move has been playing out in the markets at a time when most of us are concentrating on the Credit Crunch/Liquidity Crisis. The dollar was as low as $1.60 to the Euro and $2.10 to Sterling, then it snapped back to $1.25 and $1.60 respectively.

The Australian and Kiwi Dollars both got hammered, Iceland was next in line then the South African Rand and Polish Zloty took a beating. The South Korean Won and then the Hungarian Forint suffered, the Czech Republic Koruna is facing issues and the Mexican Peso is …

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The ‘Carry Trade’ or ‘Stoozing crack-smoker style’

‘Crack-addict stoozing’ or ‘stoozing on steriods’ is one way to describe the Carry Trade. It’s important at this point to realise that the carry trade knows no boundaries, and it seeps through literally millions of investments, from food to mortgages. What is the ‘Carry Trade’? Simply put it’s kind of like institutional stoozing (see previous post on stoozing). When you stooz you get a credit line of 0% or close to it (normally in the form of a credit card) you borrow all you can on it and put the money on deposit, when the 0% credit runs out you repay the loan and keep the deposit interest you earned. The same thing is being done with Japan, only in the billions, even trillions.

Institutions borrow money from the Bank of Japan at extremely low interest rates (at one point it was 0%!), typically below 1% and then they often leverage this money (borrow using it as collateral) up and invest in anything that might grow, in fact this practice had a lot to do with the worldwide credit crisis …

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The 'Carry Trade' or 'Stoozing crack-smoker style'

‘Crack-addict stoozing’ or ‘stoozing on steriods’ is one way to describe the Carry Trade. It’s important at this point to realise that the carry trade knows no boundaries, and it seeps through literally millions of investments, from food to mortgages. What is the ‘Carry Trade’? Simply put it’s kind of like institutional stoozing (see previous post on stoozing). When you stooz you get a credit line of 0% or close to it (normally in the form of a credit card) you borrow all you can on it and put the money on deposit, when the 0% credit runs out you repay the loan and keep the deposit interest you earned. The same thing is being done with Japan, only in the billions, even trillions.

Institutions borrow money from the Bank of Japan at extremely low interest rates (at one point it was 0%!), typically below 1% and then they often leverage this money (borrow using it as collateral) up and invest in anything that might grow, in fact this practice had a lot to do with the worldwide credit crisis …

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Stoozing? … It’s Money for nothing and the bips for free.

I kind of paraphrased a line from the Dire Straits song ‘money for nothing’ and replaced ‘chicks’ with ‘bips’. Bips are ‘Basis Points’ and it normally refers to hundredths of a percent when you are talking about rates, so 33 bips is 1/3 of 1% or 0.33. Anyways, this post is about Stoozing or getting money for nothing. Its something that has become more and more popular as of late and it’s also a loophole in the financial system that is being widely abused it even has its own website.

Stoozing is where you get a credit card on 0% and max out the money you can take on it at 0%. Normally cash withdrawals have a separate interest rate but if you know a person who owns a shop you can run it once for your total credit limit and have them give you the money (illegal – I’m just saying how it seems to work in practice). You then place this money in the highest paying deposit account …

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Stoozing? … It's Money for nothing and the bips for free.

I kind of paraphrased a line from the Dire Straits song ‘money for nothing’ and replaced ‘chicks’ with ‘bips’. Bips are ‘Basis Points’ and it normally refers to hundredths of a percent when you are talking about rates, so 33 bips is 1/3 of 1% or 0.33. Anyways, this post is about Stoozing or getting money for nothing. Its something that has become more and more popular as of late and it’s also a loophole in the financial system that is being widely abused it even has its own website.

Stoozing is where you get a credit card on 0% and max out the money you can take on it at 0%. Normally cash withdrawals have a separate interest rate but if you know a person who owns a shop you can run it once for your total credit limit and have them give you the money (illegal – I’m just saying how it seems to work in practice). You then place this money in the highest paying deposit account …

Read More →