Yen Carry What?

Remember Y2K? Or rather, remember the Y2K hysteria? Planes would fall out of the sky, ATMs stubbornly refuse to cough up cash, computers melt, and all of modern life's little conveniences suddenly implode in one, awesome, anarchy-inducing ball of over-digitized apocalyptic flames.

None of that happened, of course. Yet, as the cleanup from millennium parties commenced, we received no mea culpa from the media. They admonished us to stock up on canned goods, water filters, and gold bullion, but not a word was mentioned about the utter lack of crisis.

Come to think of it, have you ever received an apology after a popular concern is debunked or proven misconstrued? When you read or hear breathless warnings about something certain to induce plummeting stock prices, is your first thought, "I better find a hole to hide in," or is it, "I wonder if any of this is true?" We encourage you to train yourself to ask the latter. Let's take a look at some recent popular concerns, and why you'd have been best served by a healthy dose of cynicism.

Remember the yen carry trade? The furor wasn't so long ago—making headlines just last February and into March. The popular concern was countless investors had borrowed in yen and purchased risky assets in other currencies. As the yen appreciated rapidly over a short period, the media warned the market would melt as investors rushed to "unravel" their carry trades, sustaining huge losses and whacking the global stock market.

This concern seems silly now—global markets corrected and moved unconcerned to new highs. But it could have seemed just as silly then had investors asked, "Is this true? Should I fear unraveling yen carry trades?" Rational analysis would have told you every single yen carry trade would not be unwound all at once, the borrowed funds were not being plowed into Mongolian tugrik-denominated cheetah futures, and the fundamentals driving the yen carry trades (super low Japanese short interest rates) were never imperiled. One concern down.

What about the sub-prime crisis? A year ago, most Americans probably couldn't define sub-prime. Yet, as this year began, we lived in constant fear of impending homelessness and bankruptcy—regardless of whether we even had a sub-prime mortgage ourselves. It didn't matter—the crisis would take down the entire financial sector and bleed into the rest of the market. Having entirely missed calling the tech bubble, no one wanted to make that mistake again—this bubble was going to burst and burst now.

Yet, as of now, there's been no financial meltdown and the broad equity market seems oblivious to sub-prime market woes. Even imperiled niche sub-prime lenders are weathering the storm by finding investors better able to diversify the risk. And many with those insidious adjustable rate mortgages have discovered, with fixed rates historically low, they can refinance and remain in their homes.

Seems quite rational now, but you didn't need the benefit of retrospection to know this concern wasn't worth fretting—you could have asked, "Does this seem right? Is it likely such a relatively small universe of homeowners will organize to default all at once? And even if they do, what's the overall impact?" If you asked the question, as we frequently did in this space, you wouldn't have wasted any energy on this concern.

It's easy to get caught up in these popular concerns because the media knows how to prey on our emotions. That's their job—to keep you coming back so advertisers pay them big fees. They don't have to be right; they just have to be compelling—which is why emotions are your enemy in investing, as the following article rightly points out.

The Numbers Guy
By Anne Kates Smith, Kiplinger

When you read or hear a frightening news item, remember Y2K. Remember the yen carry trade and sub-prime. Remember the scariest news items are frequently the ones that turn out dead wrong, or at least, ultimately toothless. Shine a little light on the scare mongers by asking, "Is this right? Will this have the outcome they insist?" With the fear blinders off, you're less likely to make costly investing mistakes. Even better, you can begin seeing what others can't see—and isn't that the only way to beat the market?