Some Carry on while others get Carried away

There is a delicate line between "carry on" and "carrion".

The Carry Trade is when financial institutions borrow money from the FED at like .25% and then use that money (not to make loans) but rather buy something else that has a higher yield like US Treasury Bonds. It is a way to make tons of money without risk.

Now you probably think that only the big institutions can do that but you are wrong. The common person can too! But there is a lot more risk involved. In fact, what I am going to tell you I don't recommend. So take this as an exercise in mathmatics not an a discussion about investing.

So here goes and I will use round numbers for convenience.

1. There are 600 or so stocks traded on the New York Stock Exchange that have a dividend yield of 5% or greater.
2. If you can gather up enough resources to open a brokerage account with, let's say round numbers of $100,000; A brokerage will allow you to borrow up to $500,000 or more on margin @ 1.25%.
3. So let's say you buy $500,000 in stock and after a year you will have $25,000 in dividends @ 5%.
4. Now you have to pay the broker back interest, so you owe them $6,235 leaving you with $18,750 in profit pre tax.
5. Now current tax rate on dividends is 15% so you owe Obama $2,812.50 tax on your dividends. You do get a tax credit for your margin interest (assume 25% tax bracket) of roughly $703; so your net tax is $2,110.
6. Subtract the $2,110 from your $18,750 pre-tax profit (step 4) and you get a cool $16,640 in your pocket to spend.
7. Now the tricky part. The brokerage also wants their $500,000 back. If those stocks you bought with the original $500,000 tanked then you are in big financial trouble and this normally results in people jumping out of windows al a 1930.
8. And that is why you never want to do this.
9. Unless of course, you knew the government or the Federal Reserve were going to do their level best to ensure the stock market doesn't crash again.

The banks get away with this because they are not worried about the implications of step 7. The US government will use tax payer money to cover any losses in step 7 that they cannot absorb. That is why many free thinking people firmly believe that Washington is concerned about Wall Street and not Main Street.

This not a US phenomenom. This is being done by central banks all over the world.

Financial institutions all around the world have been taking advantage of the "carry trade" made possible by their country's central bank.

Which means they have all been buying assets to capitalize on the yield differential.

Which means all this buying has been inflating asset prices.

Which means someone at sometime will start selling.

Then they will all start selling.

What will you be doing?

What will your pension plan be doing?