Why investors backed away from carry trades this week

In this week’s “Make Me Smart” newsletter, we explore why investors pulled back on risky carry trades. Plus, we try out “surplus food” apps that can save money for flexible eaters and do the numbers on how Olympic athletes are also getting paid for winning gold.

The news fix

It’s been a week of volatility on Wall Street. Stocks are yo-yo-ing with investors’ anxiety over the strength of the U.S. economy. That’s not new, but there’s a lot more going on than reading tea leaves this week.

What’s a basis point between central banks? Wall Street is normally hyper-focused on the Federal Reserve, but this week all eyes were on the Bank of Japan, which recently raised its key interest rate to 0.25%. That may not seem like a lot, but it’s only the second hike in 17 years. The value of the Japanese yen rose too, rattling investors who assumed they’d be able to use the weak currency to generate easy money. Instead, we got a mass sell-off.

Why Japan? While the rest of the world has struggled with too much inflation, Japan has struggled with too little. For years, central bankers set interest rates close to zero to encourage growth.

That’s also why Japan became a target for investors keen on the carry trade. It’s a risky strategy that involves borrowing money in a place where interest rates are low, and using that money to buy assets somewhere else. One could borrow Japanese yen essentially for free, use the money to buy American tech stocks or bonds, and pocket the returns. Investors had sunk at least $350 billion into yen carry trades by 2023, and that’s likely an undercount.

Right-sizing risk: When borrowing is cheap and market optimism is high, investors are more apt to downplay the dangers of trading with borrowed money. But if the value of the yen continues to rise and the value of the U.S. dollar falls — a common side effect of cutting interest rates, which the Fed said it plans to do later this year — yen carry trades won’t pay out like they once did.

Smart in a shot

Food is more expensive now, far more so for anyone who got hooked on food delivery during lockdown. Higher prices have got people rethinking what convenience is worth, and many are ditching services like Uber Eats and DoorDash to pick up their own food or just cook at home. This writer has never understood the appeal of delivery apps — why would you pay double for food that arrives lukewarm, at best. But it turns out that not all food apps will suck your bank account dry. New services like Flashfood and Too Good To Go claim to save users money by connecting them to restaurants and grocery stores who want to get rid of “surplus food” — aka food and produce that’s about to go bad.

In exchange for less convenience, users get discounts of 50% or more. Sure, you may have to compulsively check the apps to snag deals before other users do. Yes, you’ll have to pick up food when stores tell you to show up, rather than on your own schedule. It’s also possible you’ll get a “surprise” item that you can’t or won’t eat. But taking a chance on food you might not otherwise buy seems to be working out for the early adopters— they are even posting “unbagging” videos of their best hauls on social media.

The numbers

If snagging a spot on the podium at the Olympics wasn’t enough, many countries reward their top-performing athletes with extra incentives when they win, as Marketplace’s Dan Ackerman reported this week. The Games were once exclusively for amateurs, but now, competitors are cashing in. Let’s do the numbers.

Rule 26

The International Olympic Committee’s eligibility rules originally said “participated in sport as an avocation without material gain of any kind.” Professionals were effectively banned.

1960

That’s the first year that the Olympic Games were commercially televised. It was also the year when Puma and Adidas paid German athlete Armin Hary to don their shoes. As TV brought larger audiences, more athletes struck endorsement deals with sportswear brands, a sort of loophole around the IOC’s exclusion of athletes who got paid to play a sport. 

1986

The IOC amended its rules to let sports governing bodies decide whether or not to allow professional athletes to participate. By the start of the 21st century, pros were eligible for almost all Olympic sporting events.

$37,500

Athletes still aren’t paid directly by the Games, but many countries’ Olympic committees try to motivate their athletes with cold hard cash.Americans who win gold, silver or bronze in 2024, for example, get $15,000 to $37,500 per event, depending on their podium finish, doled out by the U.S. Olympic and Paralympic Committee. 

6

At least six countries are offering six-figure cash incentives to medalists. Hong Kong has some of the biggest rewards, at $768,000 for each gold medal. Non-cash incentives include cars, apartments and cows. Many countries also subsidize athletes’ training and living expenses.

$50,000

The World Athletics federation, which oversees all track and field sport events, announced this spring it would also pay each gold medalist $50,000 for 48 Olympic events at the 2024 Paris Games. It’s the first sports organization to do so, the latest move to bust the myth of Olympic amateurism.

6g

A gold medal from the Paris Games contains 523 grams of silver, coated in 6 grams of gold. Winning the top prize may be a priceless achievement, but the medal’s metal is valued at $1,027.

None of us is as smart as all of us

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