Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Igniting the Retail Carry Trade in 2026
Transcript
- Lucas: So the S&P 500 closed today at 7,530, up another 0.6 percent on the week. The Nasdaq is at 26,102, up a full 1 percent. But here's the number that's sticking with me: the Russell 2000, the small-cap index, is basically flat on the week — down 0.1 percent. The rally is getting narrower, not broader. Luna: Yeah, and that's the kind of divergence that usually makes me nervous. But I've been looking at something else this week that might explain why mega-cap tech keeps grinding higher despite the narrowness. Lucas: What's that? Luna: The retail carry trade. I'm seeing more and more individual traders borrowing in low-rate currencies — yen, Swiss franc — and piling into U.S. tech stocks. It's like the 2000s yen carry trade but for everyone with a smartphone. Lucas: That's a fascinating angle. And it makes sense given the rate environment. The Fed's holding at 3.63 percent, but the Bank of Japan is still near zero, and the Swiss National Bank is even negative. So you can borrow yen at effectively zero cost, convert to dollars, and buy something like Cloudflare, which was up 12.7 percent just this week alone. Luna: Exactly. And it's not just forex pros anymore. Platforms like Interactive Brokers have made multi-currency margin accounts accessible. Even Revolut lets you hold yen and dollars in the same app. So a retail trader can execute a carry trade with a few taps. Lucas: Right. The classic carry trade — borrow in a low-yielding currency, lend in a high-yielding one — has been a hedge fund staple for decades. But what's different now is the asset they're buying. They're not buying Japanese government bonds or even U.S. Treasuries. They're buying Nasdaq stocks. Growth stocks. High-beta names. Luna: And that changes the risk profile dramatically. A traditional carry trade has currency risk and interest rate risk. But adding equity volatility on top? That's a triple-decker risk sandwich. Lucas: Look at Cloudflare specifically. It's up 12.7 percent in five days. That kind of move attracts momentum. And if some of that buying is funded with borrowed yen, then a sudden yen strengthening — say, the Bank of Japan surprises with a hike — could force a rapid unwind. You'd have to sell the stock to repay the loan, amplifying the downside. Luna: We've seen that movie before. The 2008 unwind of the yen carry trade caused massive selloffs in risk assets globally. But back then, it was institutions. Now it's retail, which might be even more prone to panic selling. Lucas: There's a reason Michael Burry is betting on sportsbooks like DraftKings and Flutter. He sees a speculative froth that eventually gets regulated or unwound. Sportsbook stocks are a pure play on retail risk appetite. And if the carry trade unwinds, those names get hit hard. Luna: So let's talk about the mechanics. How exactly does a retail trader set up a yen carry trade to buy U.S. stocks today? Lucas: Simplest version: Open a margin account at Interactive Brokers or a similar broker that allows multi-currency borrowing. Deposit maybe ten thousand dollars as collateral. Borrow yen at near-zero rates — say, the equivalent of fifty thousand dollars in yen. Convert that to dollars. Then use that fifty thousand to buy something like Cloudflare or an ETF like the Vanguard Growth ETF, VUG, which is up 1.3 percent this week. Luna: And the interest cost on the yen loan is negligible — maybe 0.1 percent annually. So as long as the stock goes up and the yen doesn't strengthen, the trade prints money. Lucas: Exactly. But the leverage magnifies both gains and losses. If Cloudflare drops 10 percent, that's a 50 percent loss on the original ten thousand dollar equity. And if the yen rallies 5 percent against the dollar, you get hit on both sides. Luna: I'm curious about the data. Do we have any sense of how much retail carry trade flow is actually happening? Lucas: It's opaque. But we can infer from margin debt figures. Total margin debt on the NYSE is near all-time highs. And the yen has been weakening steadily — it's at a multi-decade low against the dollar. That emboldens carry traders. There's a reason the Fed minutes released this week showed some officials worried about financial stability risks. Luna: So the Fed is watching. But they're not acting. They're split on the direction of rates, as the minutes showed. So the carry trade environment persists. Lucas: And that's the tension. The bull market is being partly fueled by leverage that's sensitive to currency moves. The S&P at 7,530 doesn't look obviously cheap — the price to earnings ratio on the index is elevated. But with cheap yen funding, the hurdle for returns is lower. Luna: Right. And this ties into something we've talked about before — the narrowing breadth. The Russell 2000 is flat because small caps are more domestic, less exposed to global carry flows. Mega-cap tech is the primary beneficiary of this retail yen trade. Lucas: Exactly. Cloudflare, CrowdStrike, Datadog — these are the kinds of names that attract momentum and are easily financed with borrowed money. And we should mention that the interest on reserves is still 3.65 percent. So there's a spread: borrow at near zero in yen, earn 3.65 percent on cash if you wanted to be safe. But nobody's doing that — they're chasing 12 percent weekly gains. Luna: Which brings us to the psychology. This is a bull market that's creating its own fuel. The gains attract more capital, which pushes prices higher, which attracts more capital. It's reflexive. Lucas: And it can work for a long time. But the unwind can be violent. I think the key risk is a coordinated central bank move — if the Bank of Japan hints at normalization and the Fed cuts simultaneously, that could reverse the carry trade incentive. Luna: Or if we get a shock — a geopolitical event, a earnings miss from a key name — that triggers a risk-off move. The yen tends to strengthen during risk-off, which compounds the pain. Lucas: You know, speaking of things that compound, I want to take a quick second to talk about how this show stays on the air. We don't run ads. We don't have sponsors. And that's only possible because a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. Luna: Yeah, and it's genuinely what funds our ability to dig into topics like the retail carry trade without worrying about pleasing advertisers. If our conversations have helped you think about a market dynamic differently, that's the reason we do this. Lucas: So, back to the carry trade. One thing I find interesting is how decentralized finance is also playing a role. Some retail traders are using crypto lending platforms to borrow stablecoins and buy volatile assets. It's the same concept — borrow cheap, buy risky. Luna: And that adds another layer of opacity. The traditional carry trade at least shows up in bank balance sheets and FX settlement data. Crypto lending is largely off-chain or on private blockchains. Regulators can't see it easily. Lucas: Which is why Michael Burry's bet on sportsbooks is so telling. He's betting that the gambling-adjacent nature of this speculation will eventually draw regulatory scrutiny. Prediction markets, sportsbooks, crypto — they're all part of the same risk-seeking ecosystem. Luna: So where does that leave the retail trader listening to this? Should they avoid the carry trade entirely? Lucas: I wouldn't say avoid entirely, but understand the mechanics. If you're going to borrow in yen to buy U.S. stocks, at minimum hedge the currency risk with a forward contract or a currency ETF. Most retail traders don't do that. They just assume the yen stays weak. Luna: And that assumption has worked for years. But it's a bet on policy inertia. The moment the Bank of Japan signals a change, the trade unwinds fast. Lucas: Look at what happened to the ARK Innovation ETF, ARKK. It's up only 0.3 percent this week. That's a fund full of high-duration, high-beta names. If retail carry traders were piling in there, you'd expect more. But ARKK is lagging. The money is going to specific names — Cloudflare, CrowdStrike, Datadog. Luna: So it's stock-specific carry trade, not thematic. That suggests active stock picking rather than passive index buying. Which might mean it's more concentrated and more fragile. Lucas: Right. If a few key names get hit, the whole thesis cracks. And with margin debt at highs, the forced selling could cascade. Luna: Let's talk about the Fed minutes again. They were split on direction. But one thing they agreed on: financial conditions are loose. The carry trade is a big reason why. If the Fed wants to tighten conditions without raising rates, they could jawbone about leverage. But they haven't. Lucas: They're in a difficult spot. The economy is growing — real GDP growth annualized at 2.1 percent — but inflation is sticky enough that they can't cut. So they're stuck at 3.63 percent, and the carry trade thrives in that static environment. Luna: So we might be in this regime for a while. Low volatility, narrow leadership, cheap yen funding. Until it breaks. Lucas: And when it breaks, it'll break fast. That's the nature of levered trades. The question is whether you want to be in the trade when it happens, or on the sidelines ready to buy the dip. Luna: I think I'd rather be on the sidelines with a list of names I want to buy at a discount. Cloudflare at 273 — I'd love to buy it at 220. But that requires patience. Lucas: Patience and a plan. Because the bull market can continue for a long time. But the carry trade adds an extra layer of fragility that investors should be aware of, even if they don't participate in it. Luna: Alright, Lucas. I think that's a good place to leave it. Next week, let's dig into the muni bond market. I've been seeing some interesting yield trends there. Lucas: Sounds good. Until then, keep your eyes on the yen.