Here’s a really, really good video on how the carry trade works and what implications it has on global asset prices and the global financial stability.
I think the carry trade will have to reverse at some point in the near future. Trees do not grow to the skies and financial excesses do not last forever. When the average man on the street with no financial education starts talking or investing in a particular sector, it usually marks the end of that run. (In 2000 I overheard my hair-dresser talking about internet stocks – I should’ve sold then. In early 2005, I overheard some guys at the movie theater talking about getting into the local real estate market – I sold then and I’m glad I did!)
With Japanese housewives partaking in the carry-trade now, I think its safe to say that we’re pretty close to the end of the cycle of cheap, easy money. I sold some USD and bought Yen and I’ve also invested some money in Japanese investments (a REIT and a stock ETF).