Carry Trade Whiplash >> Stock Pullback 2026

For decades now, the “carry trade” has been one of the most reliable ways to bank a quick buck in high finance.

It’s simple. You borrow money for next to nothing from Japanese banks (where interest rates have long lingered near 0%), then you invest the same money in interest-bearing T-bills and earn a few percent. Quick profits, practically zero risk.

But that carry trade is now starting to stall out…

And that could be bad news for stock investors in the first half of 2026.

Click below to start today’s episode of Moneyball Economics and get the full story:

Video transcript:

Welcome to Moneyball Economics.

I’m Andrew Zatlin, and I think the market’s poised for a little bit of a pullback.

I think it’s going to be a “buy the dip” opportunity.

And the reason I expect this pullback … Well, actually there are two reasons…

One of them is economics and the other isn’t. It has to do with Japan and what’s called the carry trade. Let’s start with the carry trade.

For the longest time, we’re talking decades. You could go to Japan and borrow money at almost 0% interest rates. So you take that money and then you buy T-bills, which are paying 4%, 5%. Fantastic arbitrage opportunity. I pay someone almost nothing. I get that money. I just lock in four or 5%. Easiest game in the world. Or I take that cheap money, easy money, and I just buy stocks and sit back.

That was the game until starting last year when all of a sudden, yield in Japan moved up to 1%.

Now, still a great game. Not as good as 0%, but when you’re borrowing at 1% and you can still get T-Bills, four and a half percent yield, still a great game to be in. Except it didn’t stop. All of a sudden, over the course of a little over a year, we’ve gone from 0% interest rates in Japan to 2% and 2.3%.

That is eating into the carry trade. It’s no longer as profitable to borrow in Japan and use that cheap money to flood our markets in the West. It isn’t stopping it, but when we have yields over here at 4.2% and now Japan’s at 2.2%, 2.3%, well, that’s going to slow down a lot of the momentum of borrowing that pumps up the stock market and the bond markets.

So there’s some interesting things going on there. As it slows down, let’s face it, so does buying.

That means things come down. That means if there’s less money out there buying US T-bills, well, now the T-bill yields have to start going up again. That’s not good for the Fed. So there’s some interesting things with this carry trade that are not positive. But let’s talk about the economic reason.

Right now, any good economic news is bad news for the bonded stock markets because quite frankly, the bond markets want more interest rate cuts. We keep talking about this and guess what? In two weeks time, the Fed meets again, in fact, in less than two weeks.

So all of a sudden we’re back to that point, will they or won’t they? The bond market’s trying to figure this out. I’ve talked to some hedge funds and they’re trying to figure it out. But I believe 2026 is going to be bullish. I’ve told you this.

I think the economy’s going to be growing and I think we’re going to start seeing signs of life this quarter. If I’m right, that is very different from the consensus. That’s very different from what the market thinks. If the economy starts to come to life, that’s not priced in right now. A slowdown and interest rate cuts is not priced in right now.

As the market digests this, expect volatility, expect stocks to come down, expect bond yields to go up.

Now, why do I think the market’s going to face this? Why do I think I’m right? I’m looking at the data. Everything I see says companies are coming back. There’s going to be a lot more business activity. And I can go through all the various data points, mine and others that point to the fact that the bleeding’s way over. And now that we’re in a new year, this is when companies kick off.

They don’t do it last quarter, the last quarter of the year. You know why? Because the CEO bonus is predicated on what happened in the prior year. So they’ve been pulling back all year on their spending and hiring. No reason to take their foot off that, keep it going through the year into December.

But now that it’s January, new budgets are being released. There’s going to be hiring because there’s more business activity. A lot of this activity, whether it’s seen in capital spending, whether it’s seen in manufacturing, perking up, payrolls, you name it, it’s going to be positive. We’re not going to see a lot of it until we get to March, because again, it’s always backwards looking.

But FedNow came out and now expects the GDP for the fourth quarter to be a whopping 5.3%. Let me tell you what FedNow is, why it matters to the markets, and what that 5.3% GDP means, because that’s a real, real interesting number.

Fed now is the Atlanta Federal Reserve. And they’ve got this model that predicts GDP based on all these aggregated economic data points. They are saying 5.3% fourth quarter growth versus third quarter. And remember, fourth quarter had the October into November government shutdown. So that’s pretty impressive growth. That’s not the story though. The story is when we look at the third quarter. Third quarter was pretty perky, 4.3%. But that’s quarter over quarter. It’s like comparing the second quarter, which was pretty much weak with this quarter, blah, blah, blah.

At the end of the day, we want to know year-over-year because that’s what stimulates spending. It’s not what just happened last month, but what happened relative to where I was last year. Well, guess what? If we look at the third quarter that came out, year-over-year was 5.4% growth, meaning in the third quarter, as we had the run up into elections last year, compared to that, five and a half percent growth year over year is phenomenal.

You know what’s even more phenomenal? What’s happening in the fourth quarter? That 5.3% quarter over quarter translates into 10% year over year. We’re going from 5% in the third quarter year over year to 10%. This is huge growth. So all of a sudden, a lot of folks out there are starting to wonder whether Zatlin’s right, whether this growth that I’ve been talking about for a couple months is starting to materialize.

We’re heading into earning season. This will be a different snapshot, a different look back at what happened in the fourth quarter. I bet it’s going to confirm a lot of this growth, and it’s going to talk about what’s coming down the pipeline, what these companies are looking at for the next year.

I think a lot of the growth I’ve been talking about is a second half. It’s kind of backloaded, but I do think we’re going to see enough growth this quarter.

It’s going to take a lot of folks by surprise and they’re going to have to recalibrate. We get one more rate cut and then it’s not one and done, but certainly for a while there’s not going to be another rate cut.

And this is going to change the way markets behave in the sense that they’ve got to now recalibrate and it’s not good news for them. It’s bad news. This is volatility. This means pullbacks.

This means watching whatever options you have out there, but also getting ready, getting ready to buy, buy, buy, because any dip, any major dip is a buying opportunity. Eventually they’ll price in whatever they need to price in and they’re going to refocus on the fact that not just the US, but the rest of the globe is starting to go positive with economic activity and the implications can only be positive.

I don’t expect a lot of inflation either. So this is all good news. Right now, good news is bad news because everyone’s forecasted kind of situation. And I’ve been forecasting a thumbs up.

Let’s see what happens.

We’re in it to win it.

Zatlin out.