The End of the Carry Regime: Why the Next Monetary Shift Favors Resource Equities

From Goehring & Rozencwajg

In our fourth-quarter 2024 letter (click here to view past commentaries), we introduced a framework that has since shaped much of our thinking about commodity cycles—the “Carry Bubble.” Drawing heavily on The Rise of Carry by Lee, Lee, and Coldiron, we argued that the four major commodity cycles of the last 125 years fit neatly within a broader and more predictable carry cycle. It is worth returning to that idea now, and examining how such a regime ultimately ends and what may greet investors once it does.

The authors describe with careful precision the mechanisms that produce and extend a carry regime. The standard example involves borrowing in a chronically low-yielding currency, such as the yen, and investing in a higher-yielding asset, often in Australia. Provided exchange rates remain calm, the trader simply earns the spread between borrowing costs and asset returns.