Carry is the lubricant of investing. Carry, as we define it here, is the difference between what one can earn on an asset and what one pays to finance the asset purchase. When carry is negative, it costs more to finance an investment than the expected cashflow on that investment. Rationally no one should take on a negative carry investment for too long unless they are confident of a payoff later, because the negative carry will literally burn a hole through their wallet while they wait.
In a paper I coauthored a few years ago, we demonstrated that across a range of markets, the best strategy combines trading in the direction of the trend, and doing so when the carry is positive. The worst strategy is to fight the market; i.e. go against the trend, and pay carry to do so. This should not be very surprising, since anyone who has survived in the markets knows that it is always best to (1) not fight the market’s direction, (2) not pay too much to invest, and negative carry, fees and bid-offer spreads are all costs.
Today, we are in a world of negative carry (almost) everywhere, and by most metrics, financial assets are in a negative trend. This is not an environment where one should be trying to fight the markets and catch the bottom, since the carry cost of doing so is quite high. Let us take inventory of the carry situation as of this writing (October 2023). Readers can check out the trend or momentum situation themselves by looking at price charts and see if the prices are trending up or trending down – most, especially bonds are trending down.
The full note on this important topic can be downloaded at this link: LTA Thinking – Negative Carry Everywhere