WEBVTT - Brad Setser on the US's Unusual Japanese Yen Intervention 0:00:02.720 --> 0:00:15.840 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.000 --> 0:00:20.800 Hello man, welcome to another episode of the podcast. 0:00:20.920 --> 0:00:23.440 I'm Tracy Alloway and I'm Joe. 0:00:23.800 --> 0:00:23.960 Joe. 0:00:24.040 --> 0:00:26.000 I think I know the answer to this question, But 0:00:27.040 --> 0:00:28.520 do you ever write to do list? 0:00:29.240 --> 0:00:29.440 No? 0:00:29.680 --> 0:00:35.400 Yeah, I figure, well, I make a half hearted attempt 0:00:35.560 --> 0:00:39.800 every day where it's like podcast recording one, podcast recording two, 0:00:39.920 --> 0:00:44.440 do the newsletter, reply to the following emails. But as 0:00:44.479 --> 0:00:47.640 of last week, I have seen the most epic to 0:00:47.760 --> 0:00:48.320 do list. 0:00:48.720 --> 0:00:53.720 Oh yes, yes, presumably, yeah, yeah, yeah, I saw the 0:00:54.040 --> 0:00:55.160 Scott Bessett to do list. 0:00:55.200 --> 0:00:57.040 It was basically like by the end, right. 0:00:57.080 --> 0:01:02.480 Right, so US Treasury Secretary Scott bessen there was a 0:01:02.480 --> 0:01:05.560 photo taken of him. Presumably he did this on purpose, 0:01:05.800 --> 0:01:08.040 one would hope. But he had a to do list 0:01:08.600 --> 0:01:11.960 and it basically just said buy Japanese yen and he 0:01:12.080 --> 0:01:16.720 put in the jp wy yeah, five to ten billion. 0:01:17.800 --> 0:01:18.080 Yeah. 0:01:18.120 --> 0:01:20.319 So it's pretty clear that he was not referring to 0:01:20.520 --> 0:01:23.200 personal purchases in some vacation. 0:01:23.319 --> 0:01:25.840 If that's the only thing on the Treasury secretaries to 0:01:25.880 --> 0:01:28.440 do list, he's not that busy, right. 0:01:29.240 --> 0:01:32.399 He's not, but he presumably is fairly busy. We know 0:01:32.480 --> 0:01:35.200 that the en had been weakening dramatically. We know that 0:01:35.200 --> 0:01:38.000 there has been a recent sharp strengthening. There's always talk 0:01:38.080 --> 0:01:39.680 of a en intervention here and there. 0:01:39.880 --> 0:01:40.440 I don't really. 0:01:40.440 --> 0:01:43.640 Understand fully why the end is so weak, why the 0:01:43.800 --> 0:01:47.000 US feels compelled that it's important to get involved in 0:01:47.040 --> 0:01:49.480 that market, et cetera. I have many questions. 0:01:49.600 --> 0:01:52.920 Yeah, so the US did intervene together with Japan in 0:01:53.000 --> 0:01:56.800 the yen to stop it from weakening. And what's really 0:01:56.840 --> 0:01:59.760 interesting about all of this. I mean, we love Big 0:01:59.800 --> 0:02:02.880 four and currency stories anyway, but what's interesting is this 0:02:03.000 --> 0:02:06.480 was kind of a new type of intervention. So the 0:02:06.600 --> 0:02:09.760 US actually sold euros, which was very interesting, and they 0:02:09.800 --> 0:02:13.639 also used a fed repo facility that I had completely 0:02:13.720 --> 0:02:16.440 forgotten about as well. So there are all these interesting 0:02:16.520 --> 0:02:21.639 questions about this particular incident, let's say, including the big one, 0:02:21.680 --> 0:02:24.640 which is will this be enough to stop the end weakening? 0:02:25.000 --> 0:02:27.120 And it's still very surreal to me. Whenever I look 0:02:27.120 --> 0:02:30.720 at a chart of the dollar exchange rate, the yen 0:02:30.840 --> 0:02:34.200 will always be one hundred and ten to the dollar 0:02:34.280 --> 0:02:36.720 for me. Yeah, yeah, because that was my allowance when 0:02:36.760 --> 0:02:39.360 I was there. I got one thousand yen every week 0:02:39.440 --> 0:02:42.080 and it was like roughly ten dollars, and so I 0:02:42.120 --> 0:02:43.880 have that stuck in my head, and whenever I look 0:02:43.880 --> 0:02:45.720 at the chart it's now at like one hundred and 0:02:45.760 --> 0:02:46.320 fifty five. 0:02:46.360 --> 0:02:47.040 It's kind of crazy. 0:02:47.120 --> 0:02:50.080 Yeah, no, it's pretty wild. I mean, for so long, 0:02:50.200 --> 0:02:52.240 for like the first half of our careers, the story 0:02:52.320 --> 0:02:56.079 was like strengthening and strengthening yen, lower and lower rates. 0:02:56.120 --> 0:02:58.920 At the long end of the Japanese yield curve. People 0:02:59.040 --> 0:03:01.119 used to talk about the widow maker trade because many 0:03:01.160 --> 0:03:04.840 people had gone to short various forms of Japanese paper 0:03:05.160 --> 0:03:07.840 on the expe expectation that it will blow up in 0:03:07.880 --> 0:03:09.679 some way. But it has a really blown up. But 0:03:09.720 --> 0:03:12.240 it's been quite a reversal on both the rates in 0:03:12.320 --> 0:03:14.280 the end. And again, the question I have, in addition 0:03:14.320 --> 0:03:16.880 to the tools is why is this an important thing 0:03:16.960 --> 0:03:20.320 now for the US to get involved and why do 0:03:20.400 --> 0:03:22.760 we feel so I have many questions. 0:03:22.560 --> 0:03:25.680 All right, So whenever we have big questions about capital 0:03:25.720 --> 0:03:30.240 flows or FX moves, we shine our Brad setzir bat 0:03:30.320 --> 0:03:33.919 signal into the sky and he magically appears on the podcast. 0:03:34.000 --> 0:03:36.080 So we do, in fact have the perfect guest. We 0:03:36.120 --> 0:03:39.000 are speaking once again with Brad Setzer, senior fellow at 0:03:39.040 --> 0:03:41.800 the Council on Foreign Relations. So Brad, thank you so 0:03:41.880 --> 0:03:43.200 much for coming back on odd blots. 0:03:43.760 --> 0:03:44.760 It's always fun. 0:03:45.080 --> 0:03:47.840 Maybe just to begin with, let me ask the obvious question. 0:03:48.800 --> 0:03:52.240 If your currency is weakening to the degree that you 0:03:52.280 --> 0:03:56.760 think in intervention is necessary, why doesn't the boj the 0:03:56.840 --> 0:03:58.720 central bank just raise rates. 0:04:01.840 --> 0:04:06.440 That is a very obvious question. For whatever reason, the 0:04:06.480 --> 0:04:10.280 Bank of Japan has been very slow to raise rates. 0:04:10.320 --> 0:04:14.880 So the short term policy rates about one percent. Inflation 0:04:15.000 --> 0:04:17.560 is clearly above that. They're different measures. Inflation has been 0:04:17.560 --> 0:04:22.359 above that for a long time. The stated reasons for 0:04:22.440 --> 0:04:24.960 the hesitation, as you know, the Bank of Japan has 0:04:25.480 --> 0:04:28.600 worked for so long to get inflation back to two. 0:04:28.680 --> 0:04:32.440 They don't want to prematurely cut off this shift in 0:04:33.520 --> 0:04:37.520 behavior to kind of they don't want to fall back 0:04:37.600 --> 0:04:42.240 into the zero rate, zero inflation economy. I think there's 0:04:42.279 --> 0:04:46.400 also probably a few technical reasons that I'm sure that 0:04:46.480 --> 0:04:50.000 you Hada wanted the yield curve to steepen, and it 0:04:50.040 --> 0:04:54.560 has a lot before short term rates went up, and 0:04:54.720 --> 0:04:56.800 you know, short term rates affect the cost of all 0:04:56.839 --> 0:05:00.000 the yend deposits, so it's they impact the liability side 0:05:00.120 --> 0:05:02.640 of the banking system. The banks have a lot of 0:05:02.680 --> 0:05:05.520 low yielding assets on their balance sheet. So does the 0:05:05.560 --> 0:05:09.080 Bank of Japan, so there may be some concern about 0:05:09.600 --> 0:05:12.039 pushing up the cost of funding on the banking side 0:05:12.120 --> 0:05:16.640 too fast. The theory of some in the market, not me, 0:05:17.200 --> 0:05:19.400 is that this is out of concern about how it 0:05:19.480 --> 0:05:24.000 impacts the government's overall funding cost and that if you 0:05:24.040 --> 0:05:27.120 pushed up short term rates that would push up the 0:05:27.520 --> 0:05:30.240 fiscal deficit interest costs too much. I think it's a 0:05:30.279 --> 0:05:33.839 little overstated, but that is certainly one of the considerations. 0:05:34.960 --> 0:05:37.159 I want to ask about why the yen has been 0:05:37.200 --> 0:05:39.600 so weak in the first place. But I actually before that, 0:05:39.680 --> 0:05:42.920 maybe we zoom out bigger, because like weakness in East 0:05:42.960 --> 0:05:46.359 Asian currencies in general has been a story of twenty 0:05:46.440 --> 0:05:50.400 twenty six. And you know, it's not obvious to me 0:05:50.600 --> 0:05:54.400 why East Asian currencies at all would be particularly weak 0:05:54.440 --> 0:05:58.240 these days, because all I ever read about in headlines 0:05:58.600 --> 0:06:02.680 is extraordinary. You know, current account surpluses, not in Japan 0:06:02.760 --> 0:06:06.239 per se specifically, would be the big one. 0:06:06.360 --> 0:06:07.920 It's not intuitive to be at. 0:06:07.839 --> 0:06:10.159 All that at a time when like the big chip 0:06:10.160 --> 0:06:13.160 makers are making money hand over fist, that they would 0:06:13.160 --> 0:06:15.880 be particularly weak currencies. Why do you give us this 0:06:15.960 --> 0:06:19.920 sort of view from the Asia Pacific view generally and 0:06:19.960 --> 0:06:23.279 then the Japan specific view on this year's currency moves. 0:06:25.120 --> 0:06:28.360 Well, look, you're right, the global trade surplus is now 0:06:28.400 --> 0:06:32.920 all in East Asia. The chip electron you know, basically 0:06:33.400 --> 0:06:35.560 San Francisco decided to spend a lot of money on 0:06:35.680 --> 0:06:41.440 kit that basically comes from you know, in the first instance, Japan, Korea, 0:06:41.560 --> 0:06:44.840 and Taiwan, but feeds into a lot of parts from Japan. 0:06:45.040 --> 0:06:47.680 It's pushing you know, it's help in China too. So 0:06:47.760 --> 0:06:52.279 you know, we have like really record trade surpluses throughout 0:06:52.480 --> 0:06:56.000 Asia East Asia except for Japan. We'll get to Japan later. 0:06:56.480 --> 0:06:59.599 And like, you know, Korea's current account surplus is going 0:06:59.640 --> 0:07:02.000 to go from one hundred billion and changed to somewhere 0:07:02.040 --> 0:07:05.880 between three and four hundred billion. Massive. You know, Taiwan's 0:07:05.920 --> 0:07:07.880 is probably gonna double, and you know it was big 0:07:07.880 --> 0:07:09.920 to begin with. So we're doubling means going from like 0:07:09.960 --> 0:07:13.160 fifteen to twenty five to thirty percent of GDP. These 0:07:13.160 --> 0:07:19.520 are insane numbers. With Taiwan, it's a bit different. The 0:07:19.520 --> 0:07:25.720 central bank doesn't want its currency to strengthen. It has 0:07:25.840 --> 0:07:30.160 engineered a weakening of the Taiwan dollar compared to last 0:07:30.240 --> 0:07:35.600 year by reversing crudential regulations basically letting the lifers unhedged 0:07:35.640 --> 0:07:39.280 their foreign assets. And then with Taiwan in particular, it's 0:07:39.320 --> 0:07:42.720 almost one company TSMC, and you can kind of lean 0:07:42.760 --> 0:07:44.800 on that company to tell it when it converts and 0:07:44.800 --> 0:07:46.960 when it doesn't. Bloomberg actually did one of the best 0:07:46.960 --> 0:07:50.360 stories I've ever seen about the Central Bank of China 0:07:50.400 --> 0:07:55.040 Taipei and how it is managing Taiwan's dollar without actually 0:07:55.160 --> 0:07:59.240 using this balance sheet. Korea is different. Korea has been strange. 0:07:59.320 --> 0:08:02.880 It's been this story where the better the news is 0:08:02.920 --> 0:08:05.880 for Korea, the more the Korean stock market goes up, 0:08:06.360 --> 0:08:10.040 the more foreign holders of Korean stocks have to sell 0:08:10.120 --> 0:08:14.200 because they're hitting concentration limits. And that has created a 0:08:14.240 --> 0:08:18.320 weird situation where good news for the equities for Korea's equity, 0:08:18.400 --> 0:08:21.920 so you know, Heinez and Samsung was leading to an 0:08:21.960 --> 0:08:25.680 outward flow and producing record weakness in the Korean wand 0:08:26.840 --> 0:08:30.080 that is layered on to outflows from the pension system. 0:08:30.400 --> 0:08:33.280 That is layered on to this whole story about you know, 0:08:33.360 --> 0:08:37.160 Korean day traders who used to do buy levered US 0:08:37.200 --> 0:08:39.920 ETF single stock ETFs and then Korea let them by 0:08:40.000 --> 0:08:43.440 levered single stock Korean ETFs, and that didn't turn out 0:08:43.480 --> 0:08:45.120 to be a great idea, but you know, it's sort 0:08:45.160 --> 0:08:47.320 of we end up with a world where you have 0:08:47.400 --> 0:08:51.320 this enormous positive terms of trade shock enormous that is 0:08:51.320 --> 0:08:55.320 producing record weakness, and that's in the it's in that 0:08:55.440 --> 0:08:58.280 context where we can think about the end as being 0:08:58.320 --> 0:09:02.280 another of these countries currencies that is, you know, kind 0:09:02.280 --> 0:09:06.320 of fundamentally okay. Japan has a current account surplus of 0:09:06.640 --> 0:09:09.439 five percent of GDP its investment income. It's not a 0:09:09.559 --> 0:09:13.280 trade its trade accounts would be improving butt for oil 0:09:13.840 --> 0:09:17.040 thanks to the AI stuff. It's got one of the 0:09:17.040 --> 0:09:20.840 biggest foreign asset portfolios in the world. The government of 0:09:20.880 --> 0:09:24.480 Japan has you know, still probably close to one point 0:09:24.520 --> 0:09:27.520 two trillion in reserves, that's a big number. It has 0:09:27.640 --> 0:09:31.840 nine hundred billion plus in the government pension fund foreign assets. 0:09:31.920 --> 0:09:34.760 That's a big number. GDP is now down to four trillion, 0:09:34.840 --> 0:09:36.959 so you know, the government is sitting on a foreign 0:09:36.960 --> 0:09:39.240 asset position of close to fifty percent of its GDP. 0:09:40.920 --> 0:09:46.480 The weakness was it has been throughout Asia a bit counterintuitive, 0:09:46.559 --> 0:09:50.000 but for slightly different reasons. And with Japan, you obviously 0:09:50.080 --> 0:09:53.559 have the very low ring story as a central part. 0:10:10.040 --> 0:10:13.960 So when I hear the words currency intervention, I often 0:10:14.000 --> 0:10:18.920 associate that with currency speculation, right, and here central banks 0:10:18.960 --> 0:10:22.520 will come out and say, like, oh stern words to 0:10:22.640 --> 0:10:25.559 the speculators, you better watch out, and that sort of thing. 0:10:25.960 --> 0:10:29.520 With Japan, do we have indication of how much of 0:10:29.559 --> 0:10:33.080 this is actually speculation versus to your point earlier, like 0:10:33.600 --> 0:10:35.640 actual outward investment. 0:10:39.640 --> 0:10:43.320 There's a bit of speculation around the end. You know, 0:10:43.400 --> 0:10:47.080 there's not a clean measure of the speculative flow. But 0:10:47.200 --> 0:10:50.640 like you know, look, the end was one of the 0:10:50.640 --> 0:10:54.319 lowest yielding currencies, so it was a typical funding currency. 0:10:54.800 --> 0:10:57.640 I don't think the carry trade was on an enormous scale, 0:10:58.240 --> 0:11:03.439 but there were certainly hedge funds others who more or 0:11:03.520 --> 0:11:08.400 less thought that the Ministry of Finance was going to 0:11:08.600 --> 0:11:13.079 allow the yen to weaken beyond what it had weakened before. 0:11:13.520 --> 0:11:16.120 And since you know, the end shortening the en is 0:11:16.160 --> 0:11:19.920 positive carry. There's a higher yield on dollars than on yen. 0:11:20.640 --> 0:11:22.960 As long as it's stable, you make a little bit 0:11:23.000 --> 0:11:24.640 of money, and if the end appreciates, you make a 0:11:24.640 --> 0:11:27.200 lot more money. So there was a bit of speculative 0:11:27.200 --> 0:11:29.680 betting on it, not a ton, I would say. And 0:11:29.720 --> 0:11:34.040 then you have weird hedging dynamics. So there's a little 0:11:34.040 --> 0:11:37.360 bit of a head dynamic where when the NICK goes up, 0:11:37.440 --> 0:11:39.480 foreigners holding the NICK need a hedge a bit more 0:11:39.520 --> 0:11:43.800 because some do partially hedge. When the Nasdaq goes up, 0:11:43.880 --> 0:11:47.240 the GPIF doesn't hedge, so it doesn't generate an offsetting 0:11:47.280 --> 0:11:51.240 hedging flow. And then, despite all the hedge America stories 0:11:51.240 --> 0:11:56.280 from last year, in Japan, the key fixed income hedged 0:11:56.320 --> 0:11:59.120 investors seem to have gone a little bit less hedge. 0:11:59.160 --> 0:12:02.079 The lifer hedge issue has come down, so you don't 0:12:02.280 --> 0:12:04.280 so a lot of it is not quite your classic 0:12:04.400 --> 0:12:07.160 speculative flows, although there's a bit of that. A lot 0:12:07.200 --> 0:12:10.600 of this is hedging flows amongst real money investors, so 0:12:10.679 --> 0:12:13.280 that does add a little bit of a different dynamic. 0:12:14.200 --> 0:12:18.359 But I don't discount the fact that a bunch of investors, 0:12:18.400 --> 0:12:20.600 including a bunch of hedge funds, were basically making a 0:12:20.640 --> 0:12:23.080 bet that the end would go to one seventy because 0:12:23.160 --> 0:12:24.280 Yueita was behind the curve. 0:12:25.200 --> 0:12:28.160 So let's talk about it from the US perspective. What 0:12:28.360 --> 0:12:32.280 is the reason that the weakening of the end is 0:12:32.320 --> 0:12:36.720 something that would or should concern the Treasury Department. 0:12:39.960 --> 0:12:43.960 Well, I think the classic concern, which hasn't been the 0:12:44.040 --> 0:12:49.319 concern that Secretary Vestin has articulated, is that extreme weakness 0:12:49.320 --> 0:12:53.560 in East Asian currencies gives East Asia a trade edge 0:12:53.600 --> 0:12:57.200 over American producers. I mean, classically, a week end is 0:12:57.240 --> 0:13:00.280 bad for Detroit, A weak Korean land is bad for Detroit. Right, 0:13:00.840 --> 0:13:07.160 it's really you know, the traded goods pressure, most classically 0:13:07.600 --> 0:13:11.480 through the automotive sector, that has been the traditional driver 0:13:11.640 --> 0:13:14.560 of this. And to be clear, we are like fifty, 0:13:14.640 --> 0:13:16.400 you know, the ones come back a bit, but fifteen 0:13:16.480 --> 0:13:18.640 hundreds a crisis level of the wand and Korea is 0:13:18.640 --> 0:13:23.000 not in a crisis. One sixty is an insanely weekend 0:13:23.080 --> 0:13:26.600 on any big MAC index. It pushes the end below 0:13:26.679 --> 0:13:30.120 and inflation adjusted terms where it was in the nineteen seventies. 0:13:30.160 --> 0:13:34.880 We're back to the nineteen sixties. These are extreme undervaluations 0:13:35.120 --> 0:13:38.360 in my view. And so in that sense, the classic 0:13:38.400 --> 0:13:41.160 concern would be that this gives all these guys a 0:13:41.280 --> 0:13:46.720 huge edge over American manufacturers. That hasn't been what Bestin 0:13:46.760 --> 0:13:50.560 has emphasized. He's emphasized well, the weekend is putting pressure 0:13:50.600 --> 0:13:55.920 on the wand is adding to the generalized malaise bizarreness 0:13:56.440 --> 0:13:58.160 where good news is bad news for a lot of 0:13:58.200 --> 0:14:02.960 Asian currencies. And then and there's a sense that this 0:14:03.000 --> 0:14:06.280 could create pressure on the treasury market. Now, to be clear, 0:14:07.200 --> 0:14:10.480 if the yen just falls, that makes the value of 0:14:11.000 --> 0:14:15.480 Japanese investments in treasuries higher. So the impact on the 0:14:15.520 --> 0:14:19.760 treasury market would come if the Japanese resisted that use 0:14:19.880 --> 0:14:23.200 their reserves, and the excessive use of their reserves or 0:14:23.200 --> 0:14:26.520 the use of their reserves started to put pressure on 0:14:26.520 --> 0:14:28.800 the treasury market because they have to fund they would 0:14:28.840 --> 0:14:32.040 fund it by selling treasuries. So I think part of 0:14:32.160 --> 0:14:35.680 Besson's theory of the case is that by joining with 0:14:35.720 --> 0:14:39.480 the Japanese, first of all, you know, we're supporting the 0:14:39.720 --> 0:14:43.120 end from an incredibly weak level. It's arguably overshot. It 0:14:43.200 --> 0:14:47.160 has decoupled from five year ten year rate differentials for 0:14:47.200 --> 0:14:52.400 the past several months, past year even And by helping 0:14:52.440 --> 0:14:56.280 the Japanese, we're helping a friend, that's what the President says, 0:14:56.880 --> 0:14:59.960 and we can jointly intervene in a way that we're 0:15:00.000 --> 0:15:03.560 reduces the possible pressure on the treasury market. That would 0:15:03.600 --> 0:15:06.320 be I think the explanation I would give, but I 0:15:06.480 --> 0:15:08.680 you know Besson has n't been He's more I mean 0:15:08.720 --> 0:15:12.280 the President said it was to help a friend. Bessant 0:15:12.400 --> 0:15:17.120 has said is to avoid destabilization throughout the Asia currency complex. 0:15:17.800 --> 0:15:20.200 Why did they do it in euros or why did 0:15:20.240 --> 0:15:22.520 the US do it in euros? They sold euros? 0:15:23.480 --> 0:15:25.240 I mean, you know, some of it is just Secretary 0:15:25.280 --> 0:15:28.320 Besson being a former currency trader wanting to have presumably 0:15:28.360 --> 0:15:32.680 a bit of fun. You know, we have euros, we 0:15:32.720 --> 0:15:35.440 can't use euros. We have a few more dollars, but 0:15:35.520 --> 0:15:37.960 only a few more dollars. I mean, you can debate. 0:15:38.040 --> 0:15:40.480 I mean, this was clearly an intervention, but you know, 0:15:40.520 --> 0:15:43.880 when you shift your the composition of your reserves around, 0:15:44.160 --> 0:15:46.520 sometimes that's not even viewed as intervention because you're not 0:15:46.880 --> 0:15:50.360 selling your currency to buy another guy's currency. I think 0:15:50.360 --> 0:15:52.360 he presumably did it because he wanted to be a 0:15:52.360 --> 0:15:55.840 bit cute and say, well, this isn't an This is 0:15:55.840 --> 0:15:58.960 not a view about the dollar that we still want 0:15:58.960 --> 0:16:01.480 a strong dollar. This is just a view about the yen. 0:16:01.560 --> 0:16:04.280 And we're just expressing this in a way that makes 0:16:04.320 --> 0:16:06.960 it clear that this is a view about the en. 0:16:07.480 --> 0:16:10.480 It also let him do like kind of surprising things, 0:16:10.520 --> 0:16:13.080 like there was the rate check in euro yen, which 0:16:13.120 --> 0:16:16.800 caused a lot of confusion in the market. But at 0:16:16.800 --> 0:16:18.800 the end of the day, the you know, we don't 0:16:18.840 --> 0:16:20.640 know the volume, we don't know if he actually did 0:16:20.680 --> 0:16:23.200 the five to ten. Maybe we'll see in a week 0:16:23.320 --> 0:16:26.520 or so. But the vast bulk of the intervention was 0:16:26.520 --> 0:16:29.120 from the Japan's Ministry of Finance, and it was in 0:16:29.200 --> 0:16:32.680 dollar yen, So fundamentally this was a dollar yen intervention, 0:16:32.800 --> 0:16:34.000 not a euro yen intervention. 0:16:34.400 --> 0:16:37.040 Brad, you mentioned that if you were to go buy 0:16:37.080 --> 0:16:40.560 something like the Big Mac Index, the dollar yen or 0:16:40.600 --> 0:16:43.080 the en is at historically weak levels. And of course 0:16:43.080 --> 0:16:46.680 there's all kinds of attempts to measure like what like 0:16:46.880 --> 0:16:49.040 fair value of a currency is, right, so you mentioned 0:16:49.080 --> 0:16:52.280 the Big Mac Index, and then there's like, I don't know, 0:16:52.400 --> 0:16:58.560 beer models and rear models and exchange rate differential models 0:16:58.640 --> 0:17:03.560 and GDP differential models. Do any of them work anymore? 0:17:03.640 --> 0:17:10.320 Are any of them consistently either predictive or useful? Or like, 0:17:10.640 --> 0:17:12.840 what is the state of all of these sort of 0:17:13.000 --> 0:17:17.800 classical approaches to determining fairvlie of any given currency. 0:17:18.920 --> 0:17:21.760 The Big MAC index is a version of purchasing parity 0:17:21.840 --> 0:17:25.040 that sort of prices, broadly speaking, should be the same 0:17:25.080 --> 0:17:30.919 if you're comparable levels of development. Recently, particularly visa the Asia, 0:17:32.520 --> 0:17:37.320 the market pressure, the financial pressures have pulled currencies further 0:17:37.400 --> 0:17:42.800 away from their purchasing power parity levels. So that hasn't 0:17:42.960 --> 0:17:46.920 as a predictive variable. That hasn't worked as an analytical tool. 0:17:47.000 --> 0:17:51.600 I feel think it's valuable. A behavioral equilibrium exchange rate 0:17:51.720 --> 0:17:56.680 model fundamentally looks at policy settings today and says, we 0:17:56.760 --> 0:17:58.760 know what's the impact of the policy settings, and then 0:17:58.760 --> 0:18:01.840 it says, we don't know the equilibrium value of the 0:18:01.880 --> 0:18:03.600 currency is, but we know what it is where it 0:18:03.600 --> 0:18:06.560 has been in the past. So given the policies and 0:18:06.600 --> 0:18:10.120 given the past, is the currency strong or weak? All 0:18:10.119 --> 0:18:13.160 the Asian currencies kind of score is weak on this 0:18:14.080 --> 0:18:17.960 because they are fundamentally incredibly weak. I mean, we haven't 0:18:17.960 --> 0:18:20.320 talked about China, but China has a big and growing 0:18:20.320 --> 0:18:23.320 trades are Plus, use a current account based model, you'll 0:18:23.359 --> 0:18:26.680 find that China's currency is undervalued. Certainly Korea's currency is 0:18:26.720 --> 0:18:29.560 undervalued on a current account based model. All these show 0:18:29.640 --> 0:18:34.320 is undervalued on behaviorable exchange rate based models. So basically, 0:18:34.440 --> 0:18:36.920 like what we know is that financial flows have pulled 0:18:37.480 --> 0:18:41.800 currencies quite far away from any of the more fundamental 0:18:41.920 --> 0:18:43.680 or purchasing power based measures. 0:18:45.160 --> 0:18:48.600 So I want to go back to the idea of 0:18:48.680 --> 0:18:52.879 avoiding additional pressure on the US treasury market. And a 0:18:52.880 --> 0:18:55.919 big component of this seems to be use of this 0:18:56.000 --> 0:18:58.760 FED facility that I mentioned earlier. It's called the Foreign 0:18:58.840 --> 0:19:03.919 and International Monetary Authorities REPO Facility very catchy or FEMA, 0:19:04.400 --> 0:19:08.440 and it basically allows foreign central banks to use their 0:19:08.440 --> 0:19:13.240 treasuries as collateral to get dollars. But from what I understand, 0:19:13.400 --> 0:19:17.520 and I should say, this facility I think came about 0:19:17.600 --> 0:19:20.600 during twenty twenty during the pandemic with the big treasury 0:19:20.600 --> 0:19:24.880 market route. From what I understand, it charges above market 0:19:25.119 --> 0:19:29.200 rates for central banks. And so one of the criticisms 0:19:29.240 --> 0:19:33.760 I've seen lately, or maybe concerns, is that the FEMA 0:19:33.840 --> 0:19:37.680 REPO facility is ultimately going to be uneconomical for central banks, 0:19:37.720 --> 0:19:39.159 like why would they want to use it if they 0:19:39.160 --> 0:19:43.240 could just repo treasuries at cheaper market rates. And then secondly, 0:19:43.520 --> 0:19:47.240 the facility is also capped at something like sixty billions, 0:19:47.280 --> 0:19:50.840 So if you need to intervene again, someone's going to 0:19:50.920 --> 0:19:54.320 have to raise that limit. What are the sort of 0:19:54.400 --> 0:19:58.840 pros and cons of using this particular facility in this way. 0:19:59.040 --> 0:20:01.520 You're a fan, right, I'm a fan. 0:20:01.680 --> 0:20:04.639 I publicly, I privately pushed for it back when I 0:20:04.680 --> 0:20:07.119 was at the Treasury. I publicly pushed for it in 0:20:07.160 --> 0:20:11.560 twenty twenty. I think it is a useful tool. The 0:20:11.640 --> 0:20:14.480 basic idea is that central banks have a lot of 0:20:14.480 --> 0:20:18.600 really good collateral and if they need cash, they don't 0:20:18.640 --> 0:20:22.240 actually have to go and sell the treasuries into the 0:20:22.400 --> 0:20:25.480 cash bond market. They can just repo them at the FED, 0:20:25.600 --> 0:20:29.200 get dollars and then intervene that way, and it's zero 0:20:29.320 --> 0:20:32.400 risk to the FED, and the FED can always offset 0:20:32.440 --> 0:20:36.199 any monetary impact with its domestic operations, so there's no 0:20:36.920 --> 0:20:41.320 necessary monetary impact. It's just a way to allow in 0:20:41.440 --> 0:20:44.640 times of stress or times of pressure, a central bank 0:20:44.680 --> 0:20:48.119 to avoid having to immediately sell treasuries. And remember the 0:20:48.160 --> 0:20:51.040 in twenty twenty we kind of got into a downward 0:20:51.359 --> 0:20:54.560 spiral in the treasury market where central bank sales were 0:20:54.840 --> 0:21:00.959 sort of begetting begatting private sales, and the long bonds 0:21:01.080 --> 0:21:03.280 was really selling off and the FED had to come 0:21:03.280 --> 0:21:06.280 in and do a lot of direct bond purchases. So 0:21:06.359 --> 0:21:08.280 you know, it sort of makes sense to have this 0:21:08.359 --> 0:21:12.800 additional tool in the tool kit. You know, why do 0:21:12.880 --> 0:21:15.000 it with the FED rather than with a Well, first 0:21:15.000 --> 0:21:16.320 of all, I guess you know the FED, you know, 0:21:16.400 --> 0:21:19.959 not in this case is a little quieter as a counterparty. 0:21:20.040 --> 0:21:22.240 I mean, it is disclosed, but with a weak lag 0:21:23.359 --> 0:21:25.760 it is in theory. You know, if you get rid 0:21:25.800 --> 0:21:29.920 of the cap, it's unlimited in the quantities, and then 0:21:29.960 --> 0:21:35.280 the premium is there. It's not huge, but you know, 0:21:35.320 --> 0:21:37.439 you can debate where it is not. It was not 0:21:37.480 --> 0:21:40.439 meant to be used as a as a substitute for 0:21:40.720 --> 0:21:45.159 REPO in ordinary conditions, so it does have a premium. 0:21:45.520 --> 0:21:47.880 I think you can argue that right now, if you're 0:21:48.040 --> 0:21:51.280 the Ministry of Finance and you got a legacy five 0:21:51.400 --> 0:21:54.560 year bond with a pretty high coupond, you're better off 0:21:54.680 --> 0:21:57.200 using FEMA REPO than dumping it in the market. You're 0:21:57.240 --> 0:22:00.920 gonna be able to cover the cost of FEMA out 0:22:00.960 --> 0:22:03.040 of the cuban on the bond. And if obviously, if 0:22:03.040 --> 0:22:04.920 you sell the bond, you're never gonna get that bond 0:22:04.960 --> 0:22:08.239 and that heel back. It gives the you know, the 0:22:08.240 --> 0:22:11.359 Ministry of Finance a bit of flexibility at a minimum. 0:22:11.680 --> 0:22:15.760 It means it can intervene and then sell treasuries with 0:22:15.800 --> 0:22:20.000 a lag. It doesn't have to sort of immediately sell. Now, 0:22:21.080 --> 0:22:24.280 Japan does have a cash buffer. When they've intervened in 0:22:24.320 --> 0:22:27.639 the past, for whatever reason, they haven't used their cash buffer. 0:22:27.680 --> 0:22:30.480 They've pretty directly sold treasuries. So I think, you know, 0:22:30.520 --> 0:22:35.879 it just gives another tool to the Ministry of Finance 0:22:35.920 --> 0:22:39.520 and gives the Ministry of Finance more options about how 0:22:39.680 --> 0:22:42.520 it generates the dollars that it's self. 0:22:59.119 --> 0:23:02.639 Is there anything stuff upping Secretary Bessent from saying, you 0:23:02.680 --> 0:23:03.119 know what. 0:23:03.240 --> 0:23:05.560 One hundred and fifty dollars, one hundred and fifty end. 0:23:05.520 --> 0:23:07.840 Of the dollar. That is our line in the sand. 0:23:08.280 --> 0:23:10.800 We're not gonna let it weaken beyond that. And then 0:23:10.880 --> 0:23:13.240 you might not even have to spend a penny because 0:23:13.560 --> 0:23:15.760 you know, no one's gonna people might not want to 0:23:15.800 --> 0:23:19.280 test it, and you just say, we have unlimited, unlimited 0:23:19.280 --> 0:23:21.440 firepower because we're spending our own currency. 0:23:21.560 --> 0:23:22.640 We're just gonna cap it there. 0:23:24.440 --> 0:23:27.000 Yeah, there's something that limits Secretary Bestent from doing that, 0:23:27.040 --> 0:23:29.600 which is that he doesn't control the fed's balance sheet. Okay, 0:23:30.160 --> 0:23:33.720 Secretary Bessent just has the ESF. Right now, the ESF 0:23:33.760 --> 0:23:37.840 has ballpark twenty billion in FX ballpark twenty billion in 0:23:37.920 --> 0:23:41.600 like liquid dollar cash, and then the special drawing rights, 0:23:41.680 --> 0:23:43.359