The carry trade can be viewed as a horde of hedge fund managers, crowded into a movie house. Here are the films playing in the double feature:
1. Raging Bull
2. Titanic
So you've got these hedge fund managers -- hundreds of them, sitting all over the place, on each other's laps, in the hallways, standing in the exit, hanging from the balconies, all so that they can get a view of the first movie. The movie house acts out of pure self interest and greed, and sells more tickets than it has seats. The more crowded the movie house becomes, the higher the price of admission.
During the intermission, someone yells 'fire!' from within the movie house. In fact, all they have to say is 'FFFF' -- just the sound of the first letter in the word fire, and all of the sudden, there is mass panic and everyone is heading for the door. Oh, I forgot to mention, there is only one exit out of the movie house, and it happens to be a hole the size of a warship porthole. And there is a Japanese banker standing at the exit, charging an exhorbitant fee just for the right to get out. He doesn't move aside when someone yells fire or any other word.
Every time someone yells fire, there is no way for everyone to get out. Pretty soon, the hedge fund managers realize that there really hasn't been any fire, just the false threat of one. So after a while, they stop panicking and they just get comfortable (as much as possible) so that they can enjoy the second feature.
They know the story of the Titanic. They know how it ends. But they stay anyway.
NOTE: Thanks to Commander Rob of the HMS Somerset for the 'FFFF'. And he's got a great blog.
