© Michael M. Santiago/Getty ImagesThe New York Stock Exchange
The American economy is too financialized to withstand any sustained drop in asset prices.
It's carnage out there in the markets, and things have been moving with the force of a tsunami.
Japan's Nikkei 225 plunged more than 12% on Monday in what was the biggest single-day drop since 'Black Monday' in 1987. As of this writing,
the Dow has dropped some 1,000 points, while the
Nasdaq has cratered nearly 4% in what has turned out to be a global market rout.The triggers for the selloff are clear enough and have been well covered in the financial media. Friday's disappointing US jobs report ignited fears of a US recession. The once-hot but overly leveraged and overhyped AI trade has gone sour, which has led to a bloodbath for tech stocks.
Largely responsible for the latter development is the breaking of the massive dollar-yen carry trade - where investors were borrowing cheaply in yen and investing in higher-yielding US assets. This can be thought of roughly as
a big interest-rate arbitrage: Borrow at low rates and lend (invest) at higher rates. But when the Bank of Japan raised rates on July 31 and, perhaps even more importantly, signaled more hikes to come, a massive capitulation in these carry-trade positions ensued. This has reverberated through markets and
led to a lot of margin calls. And since investors often have to sell other assets to meet margin calls,
it creates even more selling pressure.
Comment: FirstPost reports on Israel's answer: