ARK Innovation (ARKK): Borrowed Yen and a Fund Built for Swings

By Juri von Randow · 6 August 2024 · Tuesday Target 32/53 2024

How the yen carry trade unwind reaches ARK Innovation (ARKK), why thin tech liquidity reprices option premium, and what the BOJ decides next.

Tokyo Hikes, Then Calls a Meeting

The Bank of Japan raised rates at a moment almost nobody thought was clever, and Japanese stocks answered by falling through the floor. Soon enough the central bank, the Ministry of Finance and the Financial Services Agency were in an emergency huddle, and the market recovered about as fast as it had collapsed. That is the whole sequence: a hike, a crash, a meeting, a rebound. Nothing in it suggests a plan.

The uncharitable reading, which the letter passes along, is that the hike answered pressure from the ruling party rather than anything the data demanded. True or not, the BOJ is now stuck holding a yen it wants firmer and a stock market it does not want to see gutted, and it has to hold both at once. Central banks are famously bad at juggling.

The Loan Comes Due in Yen

Cheap yen has been the world's financing desk for years. Borrow where rates sit near nothing, park the money in something that pays more somewhere else, pocket the gap, repeat. It works right up until the funding currency lurches higher, at which point every such position is losing on the loan side and gets closed in the same direction on the same afternoon. That is the carry trade unwinding, and the letter lays roughly $6 trillion of vanished global equity value at its feet.

The banks cannot agree on where we are in the process. SocGen calls this the beginning of the end. JPMorgan's Arindam Sandilya sees plenty more to unwind. Goldman argues the worst is already behind us because the yen shorts have largely been covered. When the big houses look at the same flow and come back with contradictory verdicts, the honest summary is that nobody knows, and premium across the tape is priced for exactly that ignorance.

Where the Cathy Trade Lives

Why ARKK, of all things? Because the letter sets its trade right next to the wild ride in tech, and the assets funded with borrowed yen skewed toward whatever swings hardest. Hedge funds have just been snapping up single names at the fastest pace in months, and they did it into thin liquidity and a huge intraday spike in the VIX. Read together, that says the appetite for a rebound is genuine and the tape is thin enough that any appetite at all moves prices a long way.

For anyone pricing options rather than picking a direction, that combination is the point. Thin liquidity plus an intraday volatility spike means implied volatility got repriced in a hurry, and a fund that lives at the jumpy end of tech feels every bit of that repricing in its option chain. There is a trade on ARKK in this issue. How it is built and what it aims to do live in the Subscriber Chat, which is where they belong.

Auctions, VIX Spikes and the BOJ

Start with Tokyo. The BOJ has now shown it will hike and then flinch, and the question worth watching is which of those instincts wins the next meeting, because the yen, and every position financed in it, moves on the answer. The verdicts from SocGen, JPMorgan and Goldman are really competing guesses at the same thing: how much borrowed yen is still out there waiting to be repaid.

Then listen to the bond market's quieter vote. US Treasury yields fell and the three-year auction drew strong demand, which is the sound of money leaving risk for safety without making a fuss about it. If that bid persists while equities try to rebound, a market is wrong somewhere. And keep the VIX in view: a spike that reverses within the session is a different animal from a spike that decides to stay. The letter's own header on the options section, something like become rich overnight, yeah right, is the correct attitude to carry into all of it.

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Yen Carry Trade · Bank of Japan · Options Volatility