While I have talked about currencies, it has primarily been about the fall of the dollar relative to the Euro. A more significant risk in the short term is a strengthening Yen.

Much of the current investment mania has been driven by the Yen carry trade.

Basically, Japan has the lowest interest rates in the industrialized world, so if one borrows money in Yen, and invests them in another country.

The Japanese interest rates are currently arounc 0.5% (no, I did not misplace a decimal point), so you could invest in the US at around 4-5%, and pocket the difference.

The rates are low because of the long Japanese recession, and deflation, starting in the early 1990s.

The carry trade is not risk free. If the Yen strengthens versus the Dollar, then you have to pay back more dollars, and you can end up losing money.

Japan appears to be finally over its 15 year downturn, it’s economy “grew at a 3.3 percent annual rate in the first quarter”, so it’s likely that the central bank will raise rates, which will bolster the Yen generally.

In any case a rate of 0.5% is simply not sustainable, so it has to go up, and the currency can be expected to go up then too.

So, in addition to the private equity binge, sub prime mortgage securities, exotic mortgages generally, and an IPO boom, we have another potential for a collapse with the Yen strengthening.