Sub-prime meltdown occurring

Sub-prime mortgage companies are getting hit hard this week after announcing growing defaults among borrowers, especially those who chose no verification of personal financial information. Stay away from this sector. The ripple effect is causing the blue-chip financials major pain. Bargains are showing up among the large banks, such as Bank of America (BAC), as well as Wall-Street firms such as Lehman Brothers (LEH) and Bear Stearns (BSC) whose exposure to subprime lending is minimal compared to other financial firms.

Yen Carry Trade Unwinding

The global financial markets have had a good-sized sell-off over the last week that started following the Bank of Japan raising short-term interest rates from 0.25% up to 0.5%. The sell-off was due to the yen carry trade unwinding. What is the Yen Carry Trade? The Yen Carry Trade involves people taking a loan denominated in Yen and charging less than 0.5% yearly interest, and then using the money to purchase US treasury bonds or riskier assets with the money to get a higher yield. Over the last year, Japan has raised short-term interest rates from 0% to 0.5% and the Yen has remained cheap relative to other currencies. However, over the past week, the Yen has appreciated 10% relative to other currencies, reducing the ability to people to borrow cheap Yen and invest them abroad at a profit.

The last global selloff in June 2006 was triggered by the first increase in Japanese interest rates from 0 to 0.25%

Japan's economy is coming out of a 15 year funk that should result in the Japanese Central Bank continuing to raise interest rates slowly and increasing the value of the Yen, reducing the ability for foreigners to borrow against the Yen to fund purchases abroad. This should have the effect of reducing asset inflation over the short-term. The Yen carry trade can be blamed for rampant increases in global real estate prices, commodities prices, and stock prices in emerging markets.