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As someone who has never taken an economics course, I’m fascinated by the domino effect of what is now going on in the financial world. First there was the sub-prime issue, and then it spilled into asset-backed commercial papers and now I read about something called a yen carry trade?

For those not familiar with what this is, this is a strategy where investors borrow the Japanese yen at near zero interest rates to invest in other global assets which have higher yields. Sounds great, sign me up! But as with all borrow to invest strategies, things can go awry when events occur to disrupt the standard ebb and flow. Events such as… oh, the global credit crunch.

In times of uncertainty, traders exited the yen currency trade which lowered liquidity in the global market. In doing so, repurchasing the yen to cover the loans resulted in the currency’s appreciation. The higher currency and the threat of a slowdown in the US economy sent big time Japanese exporters into a tailspin. The Nikkei index dropped a whopping -5.42% Friday, despite a third injection of liquidity by the Bank of Japan within a week.

Okay, so what are the implications of this?  Japan is the second largest economy and with a dry up of liquidity, the global buyouts we are so used to seeing will happen less frequently. Oh, and those high growth emerging markets? Don’t be surprised if they have taken out yen denominated loans and the leverage play is now less profitable. The ramifications are endless.

What does this have to to with a small-time beginner investor like me?  Probably nothing; just as the sub-prime and the ABCP have little effect on the buy and hold investor.   I have faith in the ability of humans to rebound as countless historical stock market charts will tell you. In fact, I’m looking at entry points to companies and ETFs. However, I will not invest more money in market uncertainty. The Fed’s cut on discount rate this past Friday has helped soothe liquidity concerns but I’m looking for further assurance to what the Bank of Japan does on August 23.  Until the dust settles, I’m going to wait on the sidelines.

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