jonathan(love)wu Profile picture
Aug 5 18 tweets 4 min read Read on X
It seems unintuitive that a small 25 basis point interest rate hike in Japan would spike all risk assets, including tonight's -20% $ETH candle.

But you need to understand the way the carry trade works:

It's a leveraged unwinding.
The quick explanation of the carry trade is borrow at 0 rate and invest in something with higher than 0 expected returns:

1. borrow Yen for nothing
2. buy an asset outside Japan that yields more than nothing
3. ???
4. profit
The same behavior happened during the ZIRP era.

Take a margin loan out against your equities at a 2% variable rate and buy an AirBnB with it that yields 7%.

7% - 2% = 5% of free money, right?! ...right? Image
Well yes, so long as:
- your borrow rate remains low
- your collateral is worth something
- and the thing you bought with your loan makes money

All those things are becoming not-true for the carry traders.
First, rates.

The Bank of Japan is being forced into tighter monetary policy to protect Japanese people suffering under inflation:

The same killer the Fed was forced to confront when it raised interest rates at a historic pace from 2022-2023.
An already-weak Yen was making it hard for Japanese to buy foreign goods--a very tough spot to be in for a resource-poor country that imports most of its goods.
So in order to combat inflation, the BOJ raised rates.

Recall that interest rates are the price of borrowing money, so if you want less money in circulation, you raise the price of creating money.

To the carry traders borrowing Yen in order to buy foreign assets, this is death.

They own foreign-currency-denominated assets against Yen-denominated loans.

So for someone who OWES Yen and OWNS USD-denominated assets:

JPY:USD ↓ = 😁
USD:JPY ↑ = 😭
Higher interest rates exert upward pressure on the Yen's value:

First of all, they create direct demand for more Yen because now the yield on Yen has gone up, strengthening the currency because more people want to buy and hold it.

Second, it increases the cost of borrow.
Higher borrowing costs = less Yen borrowed = less supply = more upward pressure on the Yen.

As a result the Yen has SPIKED in value--and the inverse measure, USDJPY has fallen dramatically from a high of 162 to 145. Image
And because the Yen is so much stronger, anyone who was borrowing Yen now owes 10% more in USD terms just over the last few weeks!!

So it's a double-whammy for Yen borrowers:
- your loan outstanding is higher
- your interest rate is higher
The result caused some traders to sell their assets and repurchase Yen in order to pay back their loans.

But that buy pressure against the Yen sends it up further!

Which forces more buying--resulting in a liquidation cascade.
It's funny--in crypto we see these reflexive dynamics play out over and over again.

This is basically how Terra got unwound. We were born into reflexivity.

Everything goes great in one direction (Yen cheaper; I'm richer) and awful in the opposite.
Now we see how over the skis the carry traders were.

It seems folks were making a bet that interest rates would stay at 0 forever, that USDJPY would skyrocket, making the Yen worthless, and that BOJ was willing to enact ever more pain on the Japanese consumer...
And if that's the case we might not even be close to the end of forced selling.

That's the way these cascades go.

Only the folks with horrible risk management get liquidated first, but the building snowball eventually eats up anyone on the wrong side.
This is why risk assets are taking a tumble.

The hidden leverage in the system was the infinite money glitch that was Japan monetary policy.

The BOJ was the piggy bank for the world's assets.

But the piggy bank just closed. And now--pain.
There's a typo here:

JPY:USD ↓ = 😁
JPY:USD ↑ = 😭
Wow this went proper viral. Hi mom!

About me: I'm an early stage investor at @asylumventures

Drop your e-mail here if you want to keep in touch: jonathanlovewu.beehiiv.com/subscribe

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More from @jonwu_

Dec 3
Despite being used by Balaji, Vitalik, and Jesse, @anoncast_ is probably the most under-appreciated project in all of crypto right now.

Anon is lighting the path for @base szn, @farcaster_xyz supremacy, and on-chain privacy with @NoirLang--launched with @clankeronbase.

A guide to Anon, its lore, and how on-chain privacy is now reality:Image
There's @anoncast_ and there's $ANON:

$ANON is a coin itself launched anonymously with Clanker, serving as the canonical coin of @anoncast_, a private messaging project similar to @coinfessions.

Coinfessions is run (presumably manually) by a trusted editor, through a trusted interface (Google surveys).Image
Anoncast, on the other hand, is totally trustless.

Built by @Slokh in a weekend with @aztecnetwork's open-source ZK language @NoirLang--Anoncast is arguably the first mainstream on-chain private social application. Image
Read 12 tweets
May 9
Making an announcement soon? Don't hire a PR agency.

Definitely not through Series A, and maybe not ever.

You can execute PR internally with a junior resource without having to pay a $50K / month retainer.

Here are the basics in <5 minutes (bookmark this):
First, I take it when we're talking about public relations, we mean just the part that means "relationships with journalists" and not marketing or social media or "comms."

So to understand PR, you have to understand journalism and what makes something newsworthy.
Journalists are typically underpaid and overworked.

They enter the business for noble reasons (truth seeking, justice, accountability) but are constantly pushed to act against those ideals in order to drive ratings and views.
Read 19 tweets
Apr 9
Switching into crypto is one of the most asymmetric things you can do for your career.

Why? There's a low-status moat around it.

Cross the moat and you'll experience less competition, more career acceleration, and highly asymmetric opportunities:
I'll start with a story about low-status moats:

When I was in business school I attended an annual real estate conference.

Investors and developers would come and give advice on breaking into real estate development or real estate private equity.
Every year they'd answer the same two questions:

1) "Where do you think we are in the real estate cycle?"
2) "What advice would you give students trying to break into the industry?"
Read 19 tweets
Mar 22
Hearing from a few teams who are scrambling to get a marketing strategy in place before we go parabolic.

You're fine. If you're struggling with narrative and positioning here's what to do in the next 30 days.

Plus 1 thing you absolutely should NOT do:
1) Founders: start tweeting every single weekday.

Four single posts, one long post.

No excuses. Drop whatever it is you're doing, stare at the screen, get it done. Marketing leaders: literally sit next to your CEO and encourage them.

Pat them on the head. Give them treats.
An A++ personal feed should look varied, with some mix of:
- explainers
- insights / "takes"
- shilling your project
- media (video, pictures)
- retweets of your partners & ecosystem

If you are just doing 1 content vertical, challenge yourself to vary it up. Do one type a day.
Read 15 tweets
Mar 13
I've talked to 50+ crypto projects in the last 10 days looking to hire a CMO or Head of Marketing.

They're not going to have an easy time.

Here's why hiring an all-star marketing leader won't fix your problems:
Before we even get to what a CMO does, let's talk about how hard they are to find.

The head of talent for a leading crypto VC estimates the total # of "true" CMO candidates in crypto at 10-15.

Already, your odds are not good:

Hundreds of projects looking to hire 10-15 people.
And if you're lucky enough to find a "true" CMO, their comp can easily be in the 7-figure range.

- $250K++ cash
- 50-100bps of equity at Series A/B

Read 16 tweets
Feb 16
I saw a headline that went unnoticed yesterday:

"White House confirms US has intelligence on Russian anti-satellite capability"

Here's what would happen if an adversary took out America's global positioning system:

(+ why you should have 30 days of supplies)
People are sleeping on the threat of anti-satellite weapons.

Even the White House downplayed the threat.

Spokesman John Kirby said it was "troubling," but claimed no immediate threat and that anti-satellite weapons couldn't cause physical destruction on Earth's surface.
So why then are anti-satellite weapons so "troubling?"

Because destroying GPS--a constellation of 31 satellites owned and operated by the US government--would send us back to the stone ages.
Read 25 tweets

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