Ladies, liquor and leverage

According to the late value investor Charlie Munger, “There are only three ways a smart person can go broke: ladies, liquor, and leverage.” This principle applies to investors engaged in the yen carry trade as well. Recent days have shown that the substantial amounts borrowed in yen and invested in risky assets denominated in other currencies have been significant enough that the forced unwinding of these bets sent shockwaves through global markets. The primary threats to this trade are an appreciating yen and rising interest rates in Japan.   To stabilize financial markets, Bank of Japan Deputy Governor Uchida sent a dovish signal today, stating, “I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, given the extreme volatility in financial and capital markets both domestically and internationally.” Following this announcement, the yen weakened by 2% against the USD, the Nikkei rose another 2.9% today, and European equity futures are also up this morning.