1 00:00:11,320 --> 00:00:15,280 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,400 --> 00:00:19,640 Speaker 1: I'm Joe Wasn't and I'm Tracy Halloway. Tracy, I've been 3 00:00:19,680 --> 00:00:23,400 Speaker 1: really happy with some of these strings of episodes that 4 00:00:23,480 --> 00:00:29,520 Speaker 1: we've had lately, particularly sort of talking about the relationship 5 00:00:29,640 --> 00:00:35,400 Speaker 1: between a country's own domestic balance sheets, savings, profits, etcetera, 6 00:00:35,440 --> 00:00:37,920 Speaker 1: and then how those funds interact with the rest of 7 00:00:37,920 --> 00:00:40,800 Speaker 1: the world. That's good, Joe. I'm happy that you're happy. 8 00:00:42,000 --> 00:00:46,440 Speaker 1: I'm thank you, Tracy. I really, uh, I really appreciate that. 9 00:00:47,880 --> 00:00:51,120 Speaker 1: Did I just ruin your intro? You just ruined it? 10 00:00:51,240 --> 00:00:55,240 Speaker 1: It felt it's so condescending, So I'm sorry. I'm sorry. Yes, 11 00:00:55,360 --> 00:00:57,640 Speaker 1: I agree with you. I feel like I've been learning 12 00:00:57,640 --> 00:01:00,240 Speaker 1: a lot from our recent string of guests. Yeah, say, 13 00:01:00,520 --> 00:01:03,720 Speaker 1: I mean, I feel personally like we are tackling some 14 00:01:03,800 --> 00:01:09,120 Speaker 1: of the really big picture question and issues in financial markets. 15 00:01:09,120 --> 00:01:11,760 Speaker 1: We're talking about these huge flows of money that actually 16 00:01:11,800 --> 00:01:17,199 Speaker 1: dictate how the markets were exactly right. So today we're 17 00:01:17,240 --> 00:01:21,240 Speaker 1: going to talk about what is something that I feel 18 00:01:21,240 --> 00:01:26,640 Speaker 1: like probably or more of our listeners have never thought of. 19 00:01:27,160 --> 00:01:31,200 Speaker 1: I'm only saying that because I had never even really 20 00:01:31,400 --> 00:01:34,440 Speaker 1: heard of this issue up until a few weeks ago 21 00:01:34,600 --> 00:01:36,920 Speaker 1: when I heard about it from a friend of mine, 22 00:01:37,840 --> 00:01:41,880 Speaker 1: a friend on the playground with my daughter. But apparently 23 00:01:41,920 --> 00:01:45,440 Speaker 1: there's like this sort of interesting phenomenon in the world 24 00:01:45,520 --> 00:01:50,560 Speaker 1: of finance and it relates to uh Taiwanese life insure. So, 25 00:01:50,920 --> 00:01:53,440 Speaker 1: first of all, I love the idea that you're on 26 00:01:53,520 --> 00:01:57,080 Speaker 1: a playground in New York talking about Taiwanese life insurers. 27 00:01:57,720 --> 00:02:01,320 Speaker 1: But but secondly, I think you're right in framing this 28 00:02:01,400 --> 00:02:03,559 Speaker 1: is something that not a lot of people think about, 29 00:02:03,640 --> 00:02:06,200 Speaker 1: and that's kind of a shame because we do hear 30 00:02:06,280 --> 00:02:09,880 Speaker 1: people talking about the Asia savings glut all the time, 31 00:02:09,960 --> 00:02:13,720 Speaker 1: this idea that there's just this huge amount of money 32 00:02:13,760 --> 00:02:17,120 Speaker 1: coming from Asia and it has to go somewhere, and 33 00:02:17,200 --> 00:02:21,240 Speaker 1: most people think about China, or most people think about Japan, 34 00:02:21,520 --> 00:02:25,280 Speaker 1: but rarely do people think about Taiwan and that place 35 00:02:25,320 --> 00:02:29,960 Speaker 1: actually has this huge, huge financial industry, not just banks, 36 00:02:30,280 --> 00:02:34,680 Speaker 1: but life insurance. Right. So obviously we talked to Michael 37 00:02:34,680 --> 00:02:36,800 Speaker 1: Pettis a few weeks ago, and you talked about the 38 00:02:36,880 --> 00:02:41,840 Speaker 1: high savings rate in China and the result of you know, 39 00:02:41,880 --> 00:02:44,560 Speaker 1: that being the result of a few different factors such 40 00:02:44,600 --> 00:02:48,880 Speaker 1: as the poor social safety net and so on, and 41 00:02:48,919 --> 00:02:54,239 Speaker 1: there's also for similar reasons, I think a massive, incredibly 42 00:02:54,320 --> 00:02:58,240 Speaker 1: high savings rate in Taiwan and that is also showing 43 00:02:58,320 --> 00:03:01,919 Speaker 1: up in very strange and usual ways, and it's a 44 00:03:02,000 --> 00:03:05,160 Speaker 1: kind of through the life insurance sector that it's apparent 45 00:03:05,800 --> 00:03:09,480 Speaker 1: and that is going to be what we examined today. 46 00:03:09,680 --> 00:03:12,520 Speaker 1: I'm glad you said strange and unusual because I have 47 00:03:12,600 --> 00:03:16,640 Speaker 1: to say the piece of work that this podcast is 48 00:03:16,960 --> 00:03:21,280 Speaker 1: based on, or this particular episode is based on. Once 49 00:03:21,320 --> 00:03:24,200 Speaker 1: you're done listening to this episode, don't turn it off 50 00:03:24,240 --> 00:03:27,080 Speaker 1: just yet, but once you're done listening, go and read 51 00:03:27,120 --> 00:03:29,200 Speaker 1: the actual work that this is based on. Because it's 52 00:03:29,240 --> 00:03:33,000 Speaker 1: framed like a giant financial Who done it? It's like 53 00:03:33,040 --> 00:03:37,000 Speaker 1: a mystery novel about Taiwanese life insurers and it's great. 54 00:03:37,960 --> 00:03:41,600 Speaker 1: I completely agree. And Uh, without further ado, I want 55 00:03:41,640 --> 00:03:44,240 Speaker 1: to bring in the author, who is I think now 56 00:03:44,280 --> 00:03:47,680 Speaker 1: the record holder for the most frequent times appearing on 57 00:03:47,800 --> 00:03:51,280 Speaker 1: our on the odd Lots podcast. He's a brad said 58 00:03:51,320 --> 00:03:55,480 Speaker 1: Sir of the Council on Foreign Relations and Exante Data. 59 00:03:55,520 --> 00:03:58,640 Speaker 1: He was also a recent guest at the recent odd 60 00:03:58,640 --> 00:04:03,440 Speaker 1: LODs Live podcast talk about all things trade, and today 61 00:04:03,560 --> 00:04:07,040 Speaker 1: he's going to talk about his work on the Taiwan 62 00:04:07,080 --> 00:04:10,080 Speaker 1: His Life insurance sector, of which he has written co 63 00:04:10,200 --> 00:04:13,040 Speaker 1: written a six part series and up Brad, thank you 64 00:04:13,200 --> 00:04:17,480 Speaker 1: for joining us. As I mentioned, I was, I'm not 65 00:04:17,520 --> 00:04:21,200 Speaker 1: making this up. I was at the playground. My daughter's 66 00:04:21,200 --> 00:04:23,880 Speaker 1: friends dad was there and he's in the insurance industry. 67 00:04:24,040 --> 00:04:26,440 Speaker 1: Did she ask you about Taiwanese life insurance? My three? 68 00:04:26,440 --> 00:04:29,120 Speaker 1: And have your old daughter asked me about Taiwan His 69 00:04:29,200 --> 00:04:32,479 Speaker 1: Life insures? No, it's a friend. Uh, he's in the 70 00:04:32,520 --> 00:04:36,080 Speaker 1: insurance industry, and somehow I always asked him about insurance questions. 71 00:04:36,080 --> 00:04:39,000 Speaker 1: Somehow Taiwan came up. But it just so happened that 72 00:04:39,040 --> 00:04:42,000 Speaker 1: you wrote this huge series on it. So I guess 73 00:04:42,360 --> 00:04:45,600 Speaker 1: what I wanted to start with is this question, why 74 00:04:45,600 --> 00:04:47,880 Speaker 1: are we talking about this? Why are we having a 75 00:04:47,920 --> 00:04:51,360 Speaker 1: podcast on this? Why did you write a co author 76 00:04:51,480 --> 00:04:55,240 Speaker 1: a six part series on Taiwan His Life insurers? What 77 00:04:55,440 --> 00:04:58,719 Speaker 1: what's going on here? Why is this interesting? Well? It 78 00:04:58,800 --> 00:05:01,400 Speaker 1: was interesting to me for a bunch of different reasons. 79 00:05:01,720 --> 00:05:03,760 Speaker 1: The first one is the one you started with. There 80 00:05:03,839 --> 00:05:08,520 Speaker 1: is this Asian savings squad. Taiwan actually has a bigger 81 00:05:08,560 --> 00:05:12,400 Speaker 1: current account surplus or a bigger savings surplus relative to 82 00:05:12,440 --> 00:05:17,360 Speaker 1: the size of its economy than either China or Japan. 83 00:05:18,480 --> 00:05:21,160 Speaker 1: Current account surplus has been over ten percent of GDP 84 00:05:21,440 --> 00:05:26,240 Speaker 1: for a really long period of time. That raises the 85 00:05:26,320 --> 00:05:30,159 Speaker 1: question of where this money is going? Uh, and when 86 00:05:30,160 --> 00:05:33,080 Speaker 1: you started, When I started looking at this more closely, 87 00:05:33,600 --> 00:05:37,560 Speaker 1: it soon became clear that after the global financial crisis, 88 00:05:38,200 --> 00:05:41,560 Speaker 1: the way this money was reaching global financial markets changed. 89 00:05:42,000 --> 00:05:44,920 Speaker 1: It used to be that the Central Bank of China Taiwan, 90 00:05:45,120 --> 00:05:49,520 Speaker 1: the central bank bought foreign exchange reserves and invested those 91 00:05:49,560 --> 00:05:52,960 Speaker 1: foreign exchange reserves and let's say treasuries and agencies the 92 00:05:53,040 --> 00:05:58,960 Speaker 1: standard reserve assets. After the global financial crisis, the Central 93 00:05:58,960 --> 00:06:02,080 Speaker 1: Bank of China appear or to step back, and instead 94 00:06:02,120 --> 00:06:06,280 Speaker 1: the outflow was all coming from the life insurance sector, 95 00:06:06,680 --> 00:06:09,880 Speaker 1: and the life insurance sector was taking on new kinds 96 00:06:09,880 --> 00:06:14,360 Speaker 1: of risk, risk that a central bank typically wouldn't take. Okay, 97 00:06:14,400 --> 00:06:16,160 Speaker 1: I don't want you to give the whole thing away. 98 00:06:16,279 --> 00:06:18,840 Speaker 1: Before we get to that, talk to us about how 99 00:06:18,960 --> 00:06:23,600 Speaker 1: Taiwan actually ended up with this huge life insurance industry, 100 00:06:23,640 --> 00:06:26,039 Speaker 1: because I think again, to a lot of people, it's 101 00:06:26,080 --> 00:06:30,480 Speaker 1: not necessarily an intuitive development. You're talking about a relatively 102 00:06:30,480 --> 00:06:33,719 Speaker 1: small country, not a lot of natural resources, in a 103 00:06:33,800 --> 00:06:38,200 Speaker 1: really unique political situation, and for a long time it 104 00:06:38,279 --> 00:06:40,720 Speaker 1: was known as a sort of manufacturing hub, and then 105 00:06:40,760 --> 00:06:45,560 Speaker 1: at some point it just develops this giant insurance industry. 106 00:06:45,600 --> 00:06:49,719 Speaker 1: What happened, I'm not sure I understand entirely what happened. 107 00:06:50,320 --> 00:06:52,800 Speaker 1: I can see the end result. The end result is 108 00:06:52,839 --> 00:06:56,480 Speaker 1: that Taiwan's life insurers now have about nine billion dollars 109 00:06:56,520 --> 00:07:01,799 Speaker 1: in total assets. That's ballpark fifty percent of Taiwan's GDP. 110 00:07:02,600 --> 00:07:07,200 Speaker 1: I think what happened in the broadest possible sense is 111 00:07:07,240 --> 00:07:10,880 Speaker 1: that Taiwan was faced with a challenge as over the 112 00:07:10,880 --> 00:07:14,720 Speaker 1: past twenty years is China emerged as the region's dominant 113 00:07:14,720 --> 00:07:20,040 Speaker 1: manufacturing power, and one consequence of that was that a 114 00:07:20,160 --> 00:07:24,520 Speaker 1: manufacturing investment and investment in general in Taiwan fell, and 115 00:07:24,760 --> 00:07:29,160 Speaker 1: Taiwanese savings because of the low, relatively modest social safety 116 00:07:29,160 --> 00:07:34,200 Speaker 1: net and other structural factors, rapid aging Haiwan savings rate 117 00:07:34,280 --> 00:07:41,440 Speaker 1: state high. So this massive savings surplus developed, and the 118 00:07:41,480 --> 00:07:45,720 Speaker 1: Taiwanese government wasn't out borrowing large sums either, so the 119 00:07:45,840 --> 00:07:49,440 Speaker 1: savings had to go into some kind of financial instrument, 120 00:07:50,040 --> 00:07:54,760 Speaker 1: and the lifers started offering long run investment products that 121 00:07:54,840 --> 00:07:59,040 Speaker 1: offered a higher return than Taiwanese dollar bank deposits, and 122 00:07:59,080 --> 00:08:02,880 Speaker 1: that whole the savings surplus in a sense into the 123 00:08:02,960 --> 00:08:07,559 Speaker 1: life insurance industry. This is an important point, and maybe 124 00:08:07,560 --> 00:08:09,800 Speaker 1: it's one of those things that's really obvious to some people, 125 00:08:09,960 --> 00:08:12,640 Speaker 1: but it didn't, you know, when I first started paying 126 00:08:12,640 --> 00:08:14,960 Speaker 1: attention to finance. It took me a lot of grasp it. 127 00:08:15,560 --> 00:08:17,800 Speaker 1: But this sort of shades of gray between what we 128 00:08:17,840 --> 00:08:22,400 Speaker 1: consider an investment product and an insurance product, or in 129 00:08:22,440 --> 00:08:25,320 Speaker 1: a savings product, and I sort of like mentally put 130 00:08:25,400 --> 00:08:27,800 Speaker 1: insurance in one bucket of something that pays off in 131 00:08:27,840 --> 00:08:32,240 Speaker 1: a contingency. Investment is something that a little different, or 132 00:08:32,280 --> 00:08:35,800 Speaker 1: savings is different, but they're not that different. And fundamentally, 133 00:08:35,920 --> 00:08:40,720 Speaker 1: historically you can think of, say investing in a mutual fund, 134 00:08:41,280 --> 00:08:43,320 Speaker 1: or investing in a bank account, or investing in a 135 00:08:43,360 --> 00:08:47,160 Speaker 1: retirement fund. It's not that different from buying life insurance. 136 00:08:47,200 --> 00:08:49,960 Speaker 1: And effect a lot of life insurance here offers annuities, 137 00:08:50,000 --> 00:08:53,319 Speaker 1: so they're very they're very related. Good, right, and an 138 00:08:53,320 --> 00:08:57,360 Speaker 1: annuity is a life insurance classic life insurance policy combined 139 00:08:57,400 --> 00:09:02,240 Speaker 1: with an investment portfolio. Okay, So these Taiwanese life insurers 140 00:09:02,360 --> 00:09:06,600 Speaker 1: basically end up with a huge amount of money flowing 141 00:09:06,640 --> 00:09:11,160 Speaker 1: into them via insurance policies, annuities, whatever, and they need 142 00:09:11,200 --> 00:09:15,320 Speaker 1: to do something with that money. So what is it 143 00:09:15,480 --> 00:09:20,120 Speaker 1: that you've observed them doing well. The difficulty the insurer's 144 00:09:20,200 --> 00:09:24,600 Speaker 1: face was that the kind of classic products which an 145 00:09:24,640 --> 00:09:28,640 Speaker 1: insurance industry would invest in were rather small in Taiwan's case. 146 00:09:28,960 --> 00:09:32,160 Speaker 1: So you know, typically if you're pulling in a lot 147 00:09:32,200 --> 00:09:35,280 Speaker 1: of life insurance policies, you would invest in government bonds 148 00:09:35,440 --> 00:09:38,679 Speaker 1: or local corporate bonds. There just aren't that many though 149 00:09:38,760 --> 00:09:44,559 Speaker 1: Taiwanese dollar denominated government bonds or Taiwanese dollar denominated corporate bonds. 150 00:09:44,600 --> 00:09:47,560 Speaker 1: The corporate sector didn't need to borrow that much, and 151 00:09:47,600 --> 00:09:51,040 Speaker 1: it could borrow, you know, the economy was flush with 152 00:09:51,360 --> 00:09:55,360 Speaker 1: savings that could borrow from the banking sector. So over time, 153 00:09:55,559 --> 00:10:00,920 Speaker 1: the insurers started buying more and more foreign bonds. The 154 00:10:01,120 --> 00:10:04,559 Speaker 1: share that they put into foreign bonds was initially capped 155 00:10:04,600 --> 00:10:08,480 Speaker 1: at of their total assets, which is a high number. 156 00:10:08,480 --> 00:10:12,080 Speaker 1: Actually that's much higher than is typical across other Asian 157 00:10:12,080 --> 00:10:17,240 Speaker 1: life insurance sectors. But when they hit that number, rather 158 00:10:17,280 --> 00:10:24,040 Speaker 1: than stopping, a new instrument in a sense developed the 159 00:10:24,080 --> 00:10:28,000 Speaker 1: Taiwanese allowed the insurers to invest in what are called 160 00:10:28,040 --> 00:10:32,920 Speaker 1: for MOSTA bonds, which are dollar denominated bonds issued in 161 00:10:33,040 --> 00:10:37,400 Speaker 1: Taiwan US do US dollar, not Taiwanese dollar issued in 162 00:10:37,440 --> 00:10:41,800 Speaker 1: Taiwan listed on the Taiwanese a Stock Exchange, and those 163 00:10:41,840 --> 00:10:46,200 Speaker 1: were not counted against their cap on foreign assets. It 164 00:10:46,280 --> 00:10:50,959 Speaker 1: was a blatant loople and a lot of financial institutions 165 00:10:50,960 --> 00:10:55,160 Speaker 1: started issuing in this market, particularly calla ble bonds, so 166 00:10:56,000 --> 00:10:58,840 Speaker 1: bonds which have the option where the issuer can call 167 00:10:58,960 --> 00:11:02,480 Speaker 1: them if a test rates fall. The lifers like them 168 00:11:02,480 --> 00:11:05,360 Speaker 1: because they offered a little bit higher yield today. The 169 00:11:05,520 --> 00:11:08,960 Speaker 1: issuers like them because if interest rates fell, they had 170 00:11:09,000 --> 00:11:12,120 Speaker 1: the option of reducing their borrowing costs. And this became 171 00:11:12,160 --> 00:11:15,199 Speaker 1: a really big market, goes from like zero to fifty 172 00:11:15,200 --> 00:11:19,600 Speaker 1: billion in a couple of years. And then the insurers 173 00:11:19,679 --> 00:11:22,440 Speaker 1: and the regulators started asking, like, okay, this is getting 174 00:11:22,480 --> 00:11:26,679 Speaker 1: a little big. They put a cap on the insurers 175 00:11:26,760 --> 00:11:30,400 Speaker 1: holdings not just of foreign assets, but foreign assets plus 176 00:11:30,440 --> 00:11:34,800 Speaker 1: for most of bonds. That roughly s their total assets. Again, 177 00:11:34,880 --> 00:11:39,080 Speaker 1: that is a huge number. No other insurance sector in 178 00:11:39,120 --> 00:11:41,960 Speaker 1: the world, at least to my knowledge. Maybe some in 179 00:11:41,960 --> 00:11:46,120 Speaker 1: a tiny country has put two thirds of their assets 180 00:11:46,160 --> 00:11:49,720 Speaker 1: in a foreign currency, particularly when most of their policies 181 00:11:49,760 --> 00:11:52,199 Speaker 1: are still in Taiwee stall. We'll get back to that, 182 00:11:52,600 --> 00:11:55,920 Speaker 1: But then they've kind of blown through that SI cap 183 00:11:55,960 --> 00:11:58,760 Speaker 1: as well with a new product. So now the hot 184 00:11:58,800 --> 00:12:04,200 Speaker 1: new product is the UH Local Exchange traded funds, which 185 00:12:04,200 --> 00:12:08,679 Speaker 1: in Taiwan are invested entirely in foreign bonds sold entirely 186 00:12:08,679 --> 00:12:12,320 Speaker 1: to the life insurers, and are considered a Taiwanese dollar asset, 187 00:12:12,960 --> 00:12:19,079 Speaker 1: so obvious regulatory arbitrage. The net effect is that close 188 00:12:19,120 --> 00:12:22,840 Speaker 1: to it depends a little bit on which statistical source 189 00:12:22,920 --> 00:12:26,760 Speaker 1: you use, but close to se close to six billion 190 00:12:26,800 --> 00:12:31,440 Speaker 1: dollars of life ensure money has invested been invested in 191 00:12:31,480 --> 00:12:36,600 Speaker 1: foreign assets. That is to the first approximation of Taiwan's GDP, 192 00:12:37,240 --> 00:12:42,720 Speaker 1: So Taiwan's basically future retirement savings has been invested abroad 193 00:12:43,559 --> 00:12:47,319 Speaker 1: through the life insurers, and the flow has been so 194 00:12:47,400 --> 00:12:52,120 Speaker 1: big that it impacts particular parts of the global market. 195 00:12:53,800 --> 00:12:58,120 Speaker 1: Now before we go on, I mean, a that's fascinating 196 00:12:58,160 --> 00:13:02,720 Speaker 1: the degree of regulatory arbitrage and loopholes that they continue 197 00:13:02,800 --> 00:13:06,040 Speaker 1: to develop to blow through the caps. So I'm trying 198 00:13:06,080 --> 00:13:08,120 Speaker 1: to think of like some of the things that need 199 00:13:08,160 --> 00:13:11,480 Speaker 1: to be unpacked. Here. One of the reasons in your 200 00:13:11,800 --> 00:13:14,920 Speaker 1: research why this is this needed to be picked apart, 201 00:13:14,960 --> 00:13:18,800 Speaker 1: and maybe you can explain it. You mentioned statistical questions. 202 00:13:19,160 --> 00:13:23,199 Speaker 1: They don't report their statistical data on these things the 203 00:13:23,240 --> 00:13:25,800 Speaker 1: same way as everyone else does. UM. One of the 204 00:13:25,840 --> 00:13:28,959 Speaker 1: first things I learned when I started working at the U. S. 205 00:13:29,000 --> 00:13:32,800 Speaker 1: Treasury it was never too right that Taiwan is a country. 206 00:13:33,559 --> 00:13:37,000 Speaker 1: H Alright, Taiwan is always an economy. Taiwan is not 207 00:13:37,120 --> 00:13:40,880 Speaker 1: a member of the i m F. It has a complicated, 208 00:13:40,920 --> 00:13:47,880 Speaker 1: to put it mildly, UH position in the international community, 209 00:13:47,960 --> 00:13:52,880 Speaker 1: in the sense that for now the convention is that 210 00:13:53,360 --> 00:13:57,040 Speaker 1: both UH Taiwan, the Republic of China and the People's 211 00:13:57,040 --> 00:14:00,160 Speaker 1: Republic of China formally believe they are the right full 212 00:14:00,200 --> 00:14:03,920 Speaker 1: government to all of China. But for almost all global 213 00:14:04,000 --> 00:14:08,800 Speaker 1: institutional purposes, the People's Republic of China is the representative 214 00:14:09,000 --> 00:14:13,160 Speaker 1: of all of China. So the Republic of China Taiwan 215 00:14:13,679 --> 00:14:18,840 Speaker 1: doesn't participate in most global bodies, and so taiwan statistical 216 00:14:18,880 --> 00:14:24,240 Speaker 1: practices don't necessarily follow every global norm. How much does 217 00:14:24,840 --> 00:14:31,320 Speaker 1: Taiwan's again unique political situation also feed into its need 218 00:14:31,440 --> 00:14:35,520 Speaker 1: to find someplace to put its money abroad, and the 219 00:14:35,560 --> 00:14:41,160 Speaker 1: fact that it's generally put that money into US corporate 220 00:14:41,320 --> 00:14:43,880 Speaker 1: bonds because a lot of people know this is a 221 00:14:43,880 --> 00:14:46,000 Speaker 1: stupid question. I know what the answer is. Never mind, 222 00:14:46,000 --> 00:14:48,880 Speaker 1: I changed my mind. I might I might not know 223 00:14:48,920 --> 00:14:51,200 Speaker 1: the answer tracing well. No, I was going to say, like, 224 00:14:51,560 --> 00:14:55,280 Speaker 1: you know, there's a huge like market right next to 225 00:14:55,320 --> 00:14:57,600 Speaker 1: it that actually needs a lot of capital, and that 226 00:14:57,640 --> 00:15:00,240 Speaker 1: would be China. But what I was wondering, I'm I'm 227 00:15:00,400 --> 00:15:02,200 Speaker 1: glad you're going to ask this because I'm curious. Why 228 00:15:02,240 --> 00:15:05,120 Speaker 1: doesn't Taiwan invest in China. That's kind of an obvious one, 229 00:15:05,160 --> 00:15:07,680 Speaker 1: isn't it. No, Actually, I don't know is that? I mean, 230 00:15:07,680 --> 00:15:11,920 Speaker 1: it's a good question. I mean, the Chinese manufacturing sector 231 00:15:12,080 --> 00:15:16,920 Speaker 1: has invested enormously in China. Han Hai makes all of 232 00:15:17,520 --> 00:15:22,440 Speaker 1: Apple's smartphones in China. Hiwanese owned, I mean the Taiwanese 233 00:15:22,880 --> 00:15:28,000 Speaker 1: contract Taiwanese own contract manufacturers are an enormous source of 234 00:15:28,080 --> 00:15:31,920 Speaker 1: investment inside China. I think there's a couple of things here. One, 235 00:15:32,680 --> 00:15:37,440 Speaker 1: China's UH capital account has historically been closed, so it 236 00:15:37,520 --> 00:15:40,400 Speaker 1: hasn't been it's now getting more open. But Historically, it 237 00:15:40,440 --> 00:15:44,880 Speaker 1: hasn't been possible even if the Taiwanese wanted to to 238 00:15:44,960 --> 00:15:48,440 Speaker 1: put a large sum of money into the to the 239 00:15:48,520 --> 00:15:51,600 Speaker 1: Chinese market. And then second, I think there probably is 240 00:15:51,680 --> 00:15:55,360 Speaker 1: some concern about the political risk that would come with 241 00:15:55,520 --> 00:16:01,680 Speaker 1: putting a large amount of Taiwanese savings in Chinese financial instruments, 242 00:16:02,080 --> 00:16:05,160 Speaker 1: particularly in a context where you have to be a 243 00:16:05,200 --> 00:16:07,960 Speaker 1: little bit blunt and provocative. A lot of Chinese financial 244 00:16:08,000 --> 00:16:10,880 Speaker 1: instruments that offer yield a moral hazard plays on the 245 00:16:10,920 --> 00:16:14,240 Speaker 1: willingness of the Chinese government to bail out a given institution, 246 00:16:14,800 --> 00:16:17,760 Speaker 1: and of bailing out to give an institution and bailing 247 00:16:17,760 --> 00:16:20,720 Speaker 1: out to Taiwanese investor, you could see why that might 248 00:16:21,800 --> 00:16:25,200 Speaker 1: lead to some concerns. On the other hand, the Taiwanese 249 00:16:25,240 --> 00:16:29,360 Speaker 1: have been big buyers of Asian dollar bonds. The it's 250 00:16:29,400 --> 00:16:35,240 Speaker 1: not that a significant part of Taiwan's dollar portfolio is 251 00:16:35,280 --> 00:16:39,560 Speaker 1: not in bonds issued by American companies or American banks. 252 00:16:39,800 --> 00:16:45,320 Speaker 1: Taiwan actually disproportionately buys the dollar denominated bonds issued by 253 00:16:45,400 --> 00:16:48,880 Speaker 1: foreign companies and foreign banks. Just one of the many 254 00:16:49,120 --> 00:16:52,200 Speaker 1: peculiarities of Taiwan. So I would say, you know, like 255 00:16:52,320 --> 00:16:57,520 Speaker 1: European banks issuing dollar bond dollar callables to raise funds 256 00:16:58,440 --> 00:17:02,320 Speaker 1: Asian companies that issued dollar bonds all we're finding big 257 00:17:02,360 --> 00:17:06,199 Speaker 1: buyers amongst the Taiwanese life insurance community. So before we 258 00:17:06,359 --> 00:17:10,119 Speaker 1: go on, we need to establish that essentially, as you 259 00:17:10,200 --> 00:17:14,879 Speaker 1: describe it, the Taiwanese life insurers have a current a 260 00:17:14,920 --> 00:17:20,920 Speaker 1: potential currency mismatch situation. Their liabilities to Taiwanese savers or 261 00:17:20,960 --> 00:17:25,640 Speaker 1: two policy holders are denominated in Taiwanese dollars, but their 262 00:17:25,680 --> 00:17:28,240 Speaker 1: assets that they go out and buy are in US dollars, 263 00:17:28,280 --> 00:17:30,399 Speaker 1: which I guess it works fine as long as the 264 00:17:30,480 --> 00:17:34,439 Speaker 1: US dollar keeps strengthening and doesn't know, that doesn't pose 265 00:17:34,480 --> 00:17:37,520 Speaker 1: a problem. But how big is this sort of like 266 00:17:37,560 --> 00:17:40,199 Speaker 1: the crux of the issue that they face, that this 267 00:17:40,359 --> 00:17:44,560 Speaker 1: potential flip. If suddenly the Taiwanese dollar were to strengthen 268 00:17:44,640 --> 00:17:47,600 Speaker 1: and those UH priced and newest dollars or priced in 269 00:17:47,640 --> 00:17:51,639 Speaker 1: Taiwanese dollars, their assets fell by a lot. Unambiguously, the 270 00:17:51,680 --> 00:17:56,040 Speaker 1: biggest risk facing the Taiwanese life insurance sector comes from 271 00:17:56,119 --> 00:18:00,320 Speaker 1: their open foreign exchange position. The fact that they have 272 00:18:00,400 --> 00:18:03,800 Speaker 1: sold a lot of life insurance policies that promise a 273 00:18:03,840 --> 00:18:08,600 Speaker 1: Taiwan dollar return, and then they have invested those the 274 00:18:08,680 --> 00:18:12,880 Speaker 1: proceeds from those policies in US dollar denominated assets. There's 275 00:18:12,920 --> 00:18:16,360 Speaker 1: an intrinsic currency mismatch, and that's the number one risk 276 00:18:16,440 --> 00:18:20,520 Speaker 1: facing the lifers. They've also taken some more exotic credit risk, 277 00:18:21,080 --> 00:18:26,400 Speaker 1: and so they do face some potential risk just from 278 00:18:26,600 --> 00:18:31,320 Speaker 1: the the investment side of their portfolio from the particular 279 00:18:31,400 --> 00:18:34,520 Speaker 1: bonds that they have bought. So they have a currency 280 00:18:34,600 --> 00:18:39,560 Speaker 1: mismatch unless they actually go out and hedge their effects 281 00:18:39,560 --> 00:18:44,440 Speaker 1: exposure with another entity. And this is in large part 282 00:18:44,720 --> 00:18:49,200 Speaker 1: what your series is about uncovering. What did you find 283 00:18:49,240 --> 00:18:55,000 Speaker 1: out about the actual hedging processes of the Taiwanese life insurers. Well, 284 00:18:55,080 --> 00:18:58,879 Speaker 1: let's let's start with the fact that Taiwanese lifers have 285 00:18:58,920 --> 00:19:01,960 Speaker 1: about six hundred billion dollars or a hundred percent of 286 00:19:02,000 --> 00:19:07,280 Speaker 1: Taiwan's GDP and foreign assets. That it creates an enormous 287 00:19:07,440 --> 00:19:10,960 Speaker 1: hedging need. It's a much bigger relative to the size 288 00:19:11,400 --> 00:19:15,160 Speaker 1: of Taiwan's economy than the hedge need of the Japanese 289 00:19:15,240 --> 00:19:18,640 Speaker 1: life insurers is relative to the size of Japan's economy, 290 00:19:18,720 --> 00:19:22,560 Speaker 1: or the hedge need of Korea's life insurers is relative 291 00:19:22,600 --> 00:19:27,000 Speaker 1: to the size of Korea's economy. So the question is, okay, 292 00:19:27,040 --> 00:19:32,680 Speaker 1: can you trace back and find who is providing the 293 00:19:32,680 --> 00:19:38,199 Speaker 1: the counterparty, who's providing the hedge. The obvious answer is 294 00:19:38,200 --> 00:19:42,640 Speaker 1: that the Taiwanese life insurers have started selling dollar denominated 295 00:19:42,680 --> 00:19:46,480 Speaker 1: policies inside Taiwan, so that gets rid of the mismatch 296 00:19:46,560 --> 00:19:49,640 Speaker 1: because rather than selling Taiwan dollar policies, you sell US 297 00:19:49,720 --> 00:19:54,000 Speaker 1: dollar policies. You're naturally matched against US dollar assets, but 298 00:19:54,080 --> 00:19:58,600 Speaker 1: that only can cover roughly of the six billion in 299 00:19:58,600 --> 00:20:03,639 Speaker 1: foreign assets. That still leaves Ballpark fifty billion, So some 300 00:20:03,760 --> 00:20:06,159 Speaker 1: of that has been emerging. Some of that has been emerging. 301 00:20:06,200 --> 00:20:10,000 Speaker 1: The trend has been to push the risk into Taiwanese 302 00:20:10,359 --> 00:20:13,400 Speaker 1: savers to Taiwanese households. You could think that's a consumer 303 00:20:13,400 --> 00:20:19,639 Speaker 1: protection financial protection issue because Taiwanese savers are presumably expecting 304 00:20:19,680 --> 00:20:23,880 Speaker 1: a taiwan dollar return, but technically they've bought US dollar 305 00:20:23,960 --> 00:20:28,120 Speaker 1: denominated policies, and if the Taiwanese dollar were to appreciate, 306 00:20:28,560 --> 00:20:32,320 Speaker 1: which arguably it should, you shouldn't run of GDP trade 307 00:20:32,320 --> 00:20:37,120 Speaker 1: surpluses forever. Then they would face significant losses on their 308 00:20:37,600 --> 00:20:42,240 Speaker 1: relatively safe retirement accounts. But clearly that's been one of 309 00:20:42,280 --> 00:20:45,280 Speaker 1: the ways the life insurance sector has laid off some 310 00:20:45,400 --> 00:20:48,560 Speaker 1: of this risk. Another portion of the risk is just 311 00:20:48,680 --> 00:20:52,560 Speaker 1: taken on directly by the life insurers. Somewhere between twenty 312 00:20:52,560 --> 00:20:56,480 Speaker 1: and depending on the time, is just run as an 313 00:20:56,520 --> 00:21:00,080 Speaker 1: open foreign currency position, so there is no hedge, just 314 00:21:00,119 --> 00:21:02,080 Speaker 1: straight up long do They're just straight up long dollars. 315 00:21:02,119 --> 00:21:05,840 Speaker 1: If Taiwan dollar were to appreciate, they would take a 316 00:21:05,840 --> 00:21:08,199 Speaker 1: head out of their capital. No. I mean, this is 317 00:21:08,200 --> 00:21:11,359 Speaker 1: a pretty big open position relative to the size of 318 00:21:11,400 --> 00:21:17,000 Speaker 1: their capital, certainly relative to the size of Taiwan's economy. 319 00:21:17,280 --> 00:21:19,920 Speaker 1: But then all right, you still got about three hundred 320 00:21:20,240 --> 00:21:25,800 Speaker 1: billion of Taiwan's GDP which is hedged. So you kind 321 00:21:25,800 --> 00:21:29,280 Speaker 1: of start having to get into the mechanics of cross 322 00:21:29,320 --> 00:21:33,280 Speaker 1: currency hedging, and this gets super technical. This is the 323 00:21:33,960 --> 00:21:35,560 Speaker 1: this is the this is where I like sort of 324 00:21:35,680 --> 00:21:37,840 Speaker 1: check out. It's just Brad and Tracy tire for the 325 00:21:37,880 --> 00:21:39,720 Speaker 1: rest of the episodes. I'm just gonna listen from here on. 326 00:21:40,240 --> 00:21:45,920 Speaker 1: If you are doing a standard cross currency hedge, uh, 327 00:21:46,080 --> 00:21:52,320 Speaker 1: someone who has dollars offshore will typically swap those dollars 328 00:21:52,960 --> 00:21:56,880 Speaker 1: or the Taiwan dollar. UH. The offshore investor will get 329 00:21:56,920 --> 00:22:01,879 Speaker 1: taiwan dollars and that money will then be invested in 330 00:22:02,000 --> 00:22:06,200 Speaker 1: either a Taiwanese bank account or a Taiwanese government bond. 331 00:22:06,920 --> 00:22:10,080 Speaker 1: I mean, that's in principle how cross currency hedging works. 332 00:22:10,560 --> 00:22:13,760 Speaker 1: That is what you see in Japan. There's this enormous 333 00:22:13,800 --> 00:22:18,680 Speaker 1: flow from the cross currency hedging into Japanese government bonds, 334 00:22:19,160 --> 00:22:22,879 Speaker 1: which is simply foreign investors with dollars, swapping those dollars 335 00:22:22,920 --> 00:22:25,400 Speaker 1: for yend, collecting a premium, and then parking the money 336 00:22:25,400 --> 00:22:28,240 Speaker 1: in Japanese government bonds. So there are certain things you 337 00:22:28,240 --> 00:22:34,720 Speaker 1: would see if foreign investors were supplying the the hedge. 338 00:22:34,920 --> 00:22:39,080 Speaker 1: You would see a large inflow from offshore investors into 339 00:22:39,200 --> 00:22:43,680 Speaker 1: Taiwanese dollar instruments, and you just don't see that. There's 340 00:22:43,920 --> 00:22:47,720 Speaker 1: actually a financial control, financial account control, so foreign investors 341 00:22:47,720 --> 00:22:51,600 Speaker 1: are not allowed to buy Taiwanese dollar denominated government bonds. 342 00:22:52,000 --> 00:22:56,080 Speaker 1: Taiwan hasn't wanted that inflow, and the bank flow is 343 00:22:56,119 --> 00:23:01,199 Speaker 1: all in dollars, so that's not explaining the hedge. The 344 00:23:01,240 --> 00:23:06,600 Speaker 1: hedge seems to be coming from local entities. Now what 345 00:23:06,720 --> 00:23:10,360 Speaker 1: local entities could be providing the hedge. You could have 346 00:23:10,560 --> 00:23:14,640 Speaker 1: Taiwanese companies going out and borrowing in dollars and then 347 00:23:14,760 --> 00:23:19,160 Speaker 1: swapping dollars back into Taiwan dollar. That would allow them 348 00:23:19,200 --> 00:23:22,720 Speaker 1: to finance their domestic investment perhaps more cheaply, but you 349 00:23:22,720 --> 00:23:24,200 Speaker 1: can kind of look at that and see and it's 350 00:23:24,200 --> 00:23:27,239 Speaker 1: not that big. So then you can look at the 351 00:23:27,400 --> 00:23:31,640 Speaker 1: commercial banking sector, which would be a classic source of hedges. 352 00:23:32,600 --> 00:23:36,320 Speaker 1: And when a banking sector is providing a lot of hedges, 353 00:23:37,200 --> 00:23:42,640 Speaker 1: they need to take in more dollars deposits offshore borrowing 354 00:23:43,000 --> 00:23:46,560 Speaker 1: than they have lent out. Then there's a spare surplus 355 00:23:46,640 --> 00:23:51,200 Speaker 1: of dollars. They swapped those dollars for the lifers Taiwan 356 00:23:51,240 --> 00:23:55,359 Speaker 1: dollars and then they basically get Taiwan dollar funding and 357 00:23:55,400 --> 00:23:58,000 Speaker 1: the lifers get US dollar funding. So it's in a 358 00:23:58,080 --> 00:24:01,919 Speaker 1: complicated way, it becomes a it becomes cheaper in a 359 00:24:01,960 --> 00:24:05,600 Speaker 1: sense for a Taiwanese bank to take in a dollar deposit, 360 00:24:06,200 --> 00:24:09,600 Speaker 1: swap it with the life insurers who have Taiwan dollar, 361 00:24:10,119 --> 00:24:12,400 Speaker 1: and then use the Taiwan dollars that they got from 362 00:24:12,400 --> 00:24:15,720 Speaker 1: the life insurers to finance their Taiwan dollar winding. So 363 00:24:15,840 --> 00:24:19,719 Speaker 1: conceptually that could be a funding source, and it is. 364 00:24:20,520 --> 00:24:26,720 Speaker 1: There's fifty issue billion of funding from the commercial banking system. 365 00:24:26,760 --> 00:24:29,080 Speaker 1: But you add this all up and there's still a gap. 366 00:24:29,840 --> 00:24:35,080 Speaker 1: You can't find a set of counter parties equal to 367 00:24:36,119 --> 00:24:40,919 Speaker 1: the four and fifty billion dollar hedging need, which becomes 368 00:24:40,920 --> 00:24:43,200 Speaker 1: a three billion dollar hedging need once you account for 369 00:24:43,240 --> 00:24:47,720 Speaker 1: the open position. But you just can't find counterparties that 370 00:24:47,840 --> 00:24:52,359 Speaker 1: add up to three billion dollars except if you look 371 00:24:53,160 --> 00:24:56,800 Speaker 1: to the Central Bank of China, the missing force in 372 00:24:56,840 --> 00:25:00,160 Speaker 1: the market, not the PBOC. Just to be clear, are 373 00:25:00,200 --> 00:25:06,959 Speaker 1: not the People's Bank of China. Absolutely the I mean, 374 00:25:06,960 --> 00:25:11,119 Speaker 1: it would be easier if you could call uhai You know, 375 00:25:11,200 --> 00:25:13,320 Speaker 1: you can call it Taiwan Central Bank. You just call 376 00:25:13,359 --> 00:25:16,800 Speaker 1: it the Central Bank of Taiwan because it gets back 377 00:25:16,840 --> 00:25:20,280 Speaker 1: to the Taiwan is not a country question. So it 378 00:25:20,400 --> 00:25:22,840 Speaker 1: is technically the Central Bank of the Republic of China 379 00:25:23,280 --> 00:25:26,080 Speaker 1: in Taipei. If it just it just to add one 380 00:25:26,160 --> 00:25:29,080 Speaker 1: last complicat, and it's just you know, it just is 381 00:25:29,119 --> 00:25:32,639 Speaker 1: what it is, and so CBC if you want to 382 00:25:32,720 --> 00:25:35,080 Speaker 1: use the standard acronym central Bank of the Republic of China, 383 00:25:35,119 --> 00:25:39,000 Speaker 1: central Bank of China. The People's Bank is the People's 384 00:25:39,040 --> 00:26:01,720 Speaker 1: Bank of China. People legacy of communism da okay, But 385 00:26:01,800 --> 00:26:06,600 Speaker 1: you talked earlier about how in many ways, Taiwan Central Bank, 386 00:26:06,720 --> 00:26:12,200 Speaker 1: the CBC, has a sort of different or unusual reporting 387 00:26:12,240 --> 00:26:14,240 Speaker 1: regime when it comes to a lot of things. So 388 00:26:15,320 --> 00:26:19,560 Speaker 1: how did you go about actually unpicking whether or not 389 00:26:19,880 --> 00:26:24,560 Speaker 1: the central bank had anything to do with the ffex 390 00:26:24,640 --> 00:26:30,600 Speaker 1: hedging of the Taiwanese insured. So if Taiwan Central Bank 391 00:26:30,720 --> 00:26:35,520 Speaker 1: acted like a standard central bank and followed the global 392 00:26:35,600 --> 00:26:41,080 Speaker 1: reporting conventions, you could look at a footnote, line item 393 00:26:41,119 --> 00:26:45,560 Speaker 1: and the standard International Reserve reporting template and you can 394 00:26:45,680 --> 00:26:50,120 Speaker 1: essentially see how much foreign exchange a central bank has 395 00:26:50,200 --> 00:26:54,880 Speaker 1: swapped for local currency. It shows up as a forward 396 00:26:55,160 --> 00:26:58,000 Speaker 1: position as the just so because of the way the 397 00:26:58,000 --> 00:27:01,080 Speaker 1: accounting for works for a central bank. So there are 398 00:27:01,119 --> 00:27:05,679 Speaker 1: central banks elsewhere in Asia, the Monetary Authority of Singapore, 399 00:27:07,040 --> 00:27:12,040 Speaker 1: the Central Bank of Korea, the Central Bank of Thailand 400 00:27:12,520 --> 00:27:16,520 Speaker 1: that have significant forward positions because of the swaps that 401 00:27:16,600 --> 00:27:21,040 Speaker 1: they engage in with local counterparties, but those are reported. 402 00:27:21,400 --> 00:27:27,439 Speaker 1: Taiwan has said we're not reporting this. They've refused to 403 00:27:27,680 --> 00:27:35,639 Speaker 1: voluntarily follow the standard Global reserve reporting template, so you 404 00:27:35,800 --> 00:27:43,200 Speaker 1: can't directly measure Taiwan's hedging or the amount of head 405 00:27:43,200 --> 00:27:46,560 Speaker 1: dollar hedges the Central bank provides the life insurance sector. 406 00:27:47,000 --> 00:27:53,119 Speaker 1: It's just it's the unknown, it's the mystery variable. And 407 00:27:53,200 --> 00:27:55,560 Speaker 1: you know, people have been asking the Taiwanese to report 408 00:27:55,560 --> 00:27:58,440 Speaker 1: this number for a long time. This Treasury has US 409 00:27:58,480 --> 00:28:01,719 Speaker 1: Treasury has been asking Taiwan to report this because this 410 00:28:01,800 --> 00:28:04,840 Speaker 1: is a It turns out that buying a dollar in 411 00:28:04,880 --> 00:28:07,639 Speaker 1: the spot market and then swapping it makes it disappear 412 00:28:07,720 --> 00:28:12,600 Speaker 1: from your balance sheet. So when you buy a dollar 413 00:28:12,680 --> 00:28:16,920 Speaker 1: and swap it out, you have this forward UH commitment 414 00:28:16,960 --> 00:28:19,080 Speaker 1: to buy a dollar back in the future, but you're 415 00:28:19,119 --> 00:28:21,520 Speaker 1: not holding a dollar and you're not reporting the dollar. 416 00:28:21,960 --> 00:28:25,280 Speaker 1: And since people count on the reported level of reserves 417 00:28:25,280 --> 00:28:29,439 Speaker 1: to measure how much UH, any government is intervening in 418 00:28:29,440 --> 00:28:34,200 Speaker 1: the foreign exchange market. Without knowing the forward book, which 419 00:28:34,240 --> 00:28:36,800 Speaker 1: is the leg part consequence of the swaps book, you 420 00:28:36,840 --> 00:28:39,160 Speaker 1: don't actually know how much the central bank is intervening 421 00:28:39,200 --> 00:28:42,560 Speaker 1: in the spot market. So there's been pressure on Taiwan 422 00:28:42,640 --> 00:28:49,840 Speaker 1: too reveal more to report using standard international conventions, and 423 00:28:49,920 --> 00:28:53,400 Speaker 1: that the Central Bank of China Taipei has just refused. 424 00:28:54,800 --> 00:28:56,760 Speaker 1: So you had to go look. And you know, I 425 00:28:56,800 --> 00:29:00,600 Speaker 1: did this work with co author a blogger Concentrated Ambiguity 426 00:29:00,680 --> 00:29:07,480 Speaker 1: who's an expert on many things Asian institutional investors but 427 00:29:07,600 --> 00:29:11,920 Speaker 1: also central bank pseudonymous concentrating and I love, I love 428 00:29:11,960 --> 00:29:14,920 Speaker 1: the modern era. It's like a work between former Treasury 429 00:29:15,480 --> 00:29:19,680 Speaker 1: employe BRD center and pseudonymous blogger concentrated ambiguity. But he 430 00:29:19,800 --> 00:29:24,760 Speaker 1: is a market participant. UM, I think you can judge 431 00:29:25,280 --> 00:29:28,880 Speaker 1: his work from no doubt it. I mean, he really 432 00:29:29,040 --> 00:29:32,520 Speaker 1: is genuinely an expert both in central banks and a 433 00:29:32,600 --> 00:29:35,760 Speaker 1: cross currency edging undoubted. I wanted to ask about this so, 434 00:29:36,320 --> 00:29:38,960 Speaker 1: I mean one thing, one thing that any reader of 435 00:29:39,480 --> 00:29:42,200 Speaker 1: this particular series will get is the amount of work 436 00:29:42,280 --> 00:29:45,440 Speaker 1: that went into it. Absolutely. Did you ever consider just 437 00:29:45,720 --> 00:29:49,080 Speaker 1: calling up, you know, someone at a time when he's 438 00:29:49,160 --> 00:29:52,120 Speaker 1: life insurance company or maybe a market participant who's on 439 00:29:52,280 --> 00:29:55,680 Speaker 1: an ex hedging desk at a large counterparty bank and 440 00:29:55,840 --> 00:29:58,960 Speaker 1: just going like, hey, what have you heard about this issue? 441 00:29:59,120 --> 00:30:03,040 Speaker 1: Like what it's sort of gossip or color is there 442 00:30:03,160 --> 00:30:08,800 Speaker 1: in the market about this particular dynamic. So the lifers 443 00:30:08,920 --> 00:30:13,000 Speaker 1: are not gonna like give away their secrets. Um. So 444 00:30:13,960 --> 00:30:18,080 Speaker 1: I've never tried that. UM. I've actually been slapped a 445 00:30:18,120 --> 00:30:20,640 Speaker 1: few times by the Taiwanese for writing things that the 446 00:30:20,680 --> 00:30:23,400 Speaker 1: central Bank of China did not approve of I am 447 00:30:23,440 --> 00:30:28,080 Speaker 1: not the favorite former Treasury officials think tank fellow for 448 00:30:28,200 --> 00:30:32,120 Speaker 1: getting information from the Taiwanese. I did write a blog 449 00:30:33,120 --> 00:30:36,160 Speaker 1: a couple of years ago about how Taiwan was sort 450 00:30:36,160 --> 00:30:38,960 Speaker 1: of like the opposite of Argentina. Argentina too much foreign 451 00:30:38,960 --> 00:30:43,000 Speaker 1: currency debt that when the paso deppreciates, they blow up, 452 00:30:43,680 --> 00:30:46,880 Speaker 1: And I asked, well, is Taiwan in the opposite position, 453 00:30:46,960 --> 00:30:50,040 Speaker 1: too many foreign currency assets? If the Taiwan dollar appreciates, 454 00:30:50,080 --> 00:30:54,240 Speaker 1: will they blow up? And that blog actually got a 455 00:30:54,360 --> 00:30:56,880 Speaker 1: lot of h I got a lot of feedback on 456 00:30:56,960 --> 00:30:58,840 Speaker 1: that blog, which I wasn't really expecting. I thought this 457 00:30:58,960 --> 00:31:01,720 Speaker 1: was a really kind of super or esoteric interest of mine. 458 00:31:02,360 --> 00:31:03,600 Speaker 1: It was going to be one of those things that 459 00:31:03,680 --> 00:31:06,040 Speaker 1: I write that no one pays attention to. And you know, 460 00:31:06,080 --> 00:31:08,200 Speaker 1: in general, if I write about China, people pay a 461 00:31:08,280 --> 00:31:10,600 Speaker 1: lot of attention to it, and if I write about 462 00:31:10,640 --> 00:31:14,520 Speaker 1: something like Puerto Rico or even Turkey, a lot of 463 00:31:14,520 --> 00:31:17,240 Speaker 1: Turkey less, so I get a lot less attention. And 464 00:31:17,400 --> 00:31:20,280 Speaker 1: I figured Taiwan is gonna get no attention. But I 465 00:31:20,280 --> 00:31:26,920 Speaker 1: actually got a lot of emails from trading desk in 466 00:31:27,080 --> 00:31:30,920 Speaker 1: New York who we're dealing with various parts of the 467 00:31:31,120 --> 00:31:36,400 Speaker 1: Taiwanese flow. So if you're selling thirty year US corporate bonds, 468 00:31:36,880 --> 00:31:39,200 Speaker 1: you pay a lot of attention to what the Taiwanese 469 00:31:39,240 --> 00:31:42,160 Speaker 1: life insures are doing. And if you're on an interest 470 00:31:42,320 --> 00:31:46,160 Speaker 1: rates derivative desk, and this gets you know, even more complicated, 471 00:31:47,520 --> 00:31:50,240 Speaker 1: you're on an interest rates derivative desk, You're the fuel 472 00:31:50,400 --> 00:31:53,320 Speaker 1: for your desk in New York are the collible bonds 473 00:31:53,400 --> 00:31:57,560 Speaker 1: that you're selling to the Taiwanese insurance sector. So these 474 00:31:57,840 --> 00:32:02,160 Speaker 1: parts of the market in New York were actually had 475 00:32:02,160 --> 00:32:07,360 Speaker 1: developed pretty sophisticated models for estimating the flow coming out 476 00:32:07,400 --> 00:32:10,800 Speaker 1: of Taiwan, what fraction was going to be hedge, when 477 00:32:10,880 --> 00:32:14,040 Speaker 1: would you hit a foreign currency issue in a limit, 478 00:32:14,680 --> 00:32:21,640 Speaker 1: when might this flow stop? And there were various investment 479 00:32:21,680 --> 00:32:24,280 Speaker 1: bank reports generally done from the point of view of 480 00:32:24,960 --> 00:32:27,000 Speaker 1: when will this flow stop and what will that mean 481 00:32:27,120 --> 00:32:30,360 Speaker 1: for our corner of the corporate credit market that had 482 00:32:30,440 --> 00:32:32,760 Speaker 1: done some a lot of the same financial forensics that 483 00:32:32,840 --> 00:32:36,440 Speaker 1: we did, and the Josh Younger of JP Morgan obviously 484 00:32:36,560 --> 00:32:40,400 Speaker 1: has been a leader in doing this kind of analysis. 485 00:32:41,080 --> 00:32:44,480 Speaker 1: Just to be clear, not only are Taiwanese insurers a 486 00:32:44,640 --> 00:32:48,240 Speaker 1: large source of demand for US dollar denominated assets, but 487 00:32:48,280 --> 00:32:52,960 Speaker 1: they're also a big buyer and seller of basically interest 488 00:32:53,040 --> 00:32:57,200 Speaker 1: rate volatility in the market as well, So a number 489 00:32:57,280 --> 00:33:01,320 Speaker 1: of different functions for different and very important assets. I mean, 490 00:33:01,360 --> 00:33:05,360 Speaker 1: I think what's interesting is that, you know, the Taiwanese 491 00:33:05,440 --> 00:33:09,720 Speaker 1: are a small part of the overall US corporate credit market, 492 00:33:09,840 --> 00:33:13,120 Speaker 1: small but not insignificant. They become a very big part 493 00:33:13,280 --> 00:33:16,800 Speaker 1: of certain corners of the market, so Asian dollar bonds, 494 00:33:17,080 --> 00:33:21,600 Speaker 1: US callibles, thirty year fixed rate corporate issue ince things 495 00:33:21,680 --> 00:33:26,880 Speaker 1: where there isn't so much demand from the traditional investors 496 00:33:26,920 --> 00:33:29,760 Speaker 1: in US corporate credit. I guess I wanna go back 497 00:33:30,480 --> 00:33:33,520 Speaker 1: and when you that missing piece? So how did you 498 00:33:34,280 --> 00:33:37,120 Speaker 1: the final step? Because as you say, they no one 499 00:33:37,200 --> 00:33:39,800 Speaker 1: in Taiwan is going to answer your phone calls, and 500 00:33:40,000 --> 00:33:44,200 Speaker 1: they don't publish that information despite treasure pressure from the 501 00:33:44,280 --> 00:33:47,280 Speaker 1: Treasury to talk about the degree to which the central 502 00:33:47,320 --> 00:33:50,760 Speaker 1: bank is intervening in the foreign exchange market, Where specifically 503 00:33:51,560 --> 00:33:54,600 Speaker 1: did you find this missing piece? So you have to 504 00:33:54,680 --> 00:33:59,480 Speaker 1: be a sort of connoisseur of of bank balance sheets, 505 00:33:59,480 --> 00:34:04,360 Speaker 1: in central bank balance sheets to appreciate this. But the 506 00:34:04,480 --> 00:34:09,080 Speaker 1: Central Bank of China has historically, so before the Global 507 00:34:09,120 --> 00:34:13,160 Speaker 1: financial crisis, published its net worth on a monthly basis. 508 00:34:13,760 --> 00:34:17,840 Speaker 1: It's the gap between its assets and its liabilities. And 509 00:34:17,960 --> 00:34:20,600 Speaker 1: since the Central Bank of China the Central Bank of Taiwan, 510 00:34:21,880 --> 00:34:24,000 Speaker 1: it's all of its assets for a very long time 511 00:34:24,080 --> 00:34:27,440 Speaker 1: because they've been a heavy intervener, are in foreign currency. 512 00:34:28,360 --> 00:34:32,960 Speaker 1: All the liabilities are in Taiwan dollar. So the main 513 00:34:33,320 --> 00:34:39,040 Speaker 1: driver of the net worth has been foreign exchangements. And 514 00:34:39,200 --> 00:34:42,400 Speaker 1: you could find an almost perfect correlation between foreign exchange 515 00:34:42,480 --> 00:34:46,240 Speaker 1: moves and changes in the net worth of Taiwan Central 516 00:34:46,280 --> 00:34:51,520 Speaker 1: Bank before the Global financial crisis. After the Global financial crisis, 517 00:34:51,640 --> 00:34:56,080 Speaker 1: the reported net worth change, it stopped being as volatile, 518 00:34:56,600 --> 00:35:00,200 Speaker 1: it stopped moving with the Taiwan dollar US dollar right, 519 00:35:01,320 --> 00:35:09,000 Speaker 1: And we noticed or perhaps discovered that other assets and 520 00:35:09,120 --> 00:35:15,520 Speaker 1: other liabilities had a very strong correlation with moves in 521 00:35:15,560 --> 00:35:18,879 Speaker 1: the exchange rate. And if you do the math right, 522 00:35:19,600 --> 00:35:23,640 Speaker 1: you can some together the net position and other and others. 523 00:35:23,719 --> 00:35:27,239 Speaker 1: You know, just like this throw away let's not go 524 00:35:27,400 --> 00:35:30,640 Speaker 1: into the details, let's hide things kind of account. That's 525 00:35:30,680 --> 00:35:35,279 Speaker 1: always what other is right. And what we concluded was 526 00:35:35,360 --> 00:35:41,120 Speaker 1: that there was a revaluation account embedded in other liabilities 527 00:35:41,120 --> 00:35:44,120 Speaker 1: and other in the net other liabilities, and so when 528 00:35:44,200 --> 00:35:48,680 Speaker 1: you add the reported net worth with net other you 529 00:35:48,840 --> 00:35:54,000 Speaker 1: get a series which more or less tracks the exchange 530 00:35:54,080 --> 00:35:57,880 Speaker 1: rate as it should, because there's nothing that changed the 531 00:35:58,160 --> 00:36:02,920 Speaker 1: fact that taiwan On central banks reported net worth should 532 00:36:02,960 --> 00:36:04,719 Speaker 1: be a function of the exchange rate because all their 533 00:36:04,719 --> 00:36:06,719 Speaker 1: assets are in foreign currency, all their liabilities there are 534 00:36:06,719 --> 00:36:10,040 Speaker 1: still domestic currency. So you can find this and established 535 00:36:10,080 --> 00:36:14,000 Speaker 1: this correlation, and then you ask, are the moves in 536 00:36:14,120 --> 00:36:20,360 Speaker 1: this constructed series consistent with the reported foreign exchange reserves 537 00:36:20,760 --> 00:36:24,480 Speaker 1: of the central bank, And it turns out there's a 538 00:36:24,600 --> 00:36:28,960 Speaker 1: little bit more movement and is explained by their reported 539 00:36:29,000 --> 00:36:32,920 Speaker 1: for an exchange reserves with the most obvious explanation for 540 00:36:33,000 --> 00:36:35,839 Speaker 1: the greater movement. You know, it's movement when it should move, 541 00:36:36,760 --> 00:36:40,560 Speaker 1: being that they have more foreign assets than they are 542 00:36:40,600 --> 00:36:47,319 Speaker 1: disclosing e g. The inferred Swapswook? Can I just say? 543 00:36:48,200 --> 00:36:52,239 Speaker 1: I actually like, wasn't breathing in I was so no. 544 00:36:52,360 --> 00:36:54,279 Speaker 1: I was like, you know, Tracy, like you said up, 545 00:36:54,360 --> 00:36:55,920 Speaker 1: was like this, who done it? And I think that 546 00:36:56,000 --> 00:36:58,040 Speaker 1: was good? But then by the end listening to that, 547 00:36:58,160 --> 00:37:01,839 Speaker 1: I actually noticed myself, I was like, well, that's gonna 548 00:37:01,880 --> 00:37:05,399 Speaker 1: be the answer here, and I think exciting. I think 549 00:37:05,440 --> 00:37:08,359 Speaker 1: we need Laura, our producer, to add like the dunt 550 00:37:08,440 --> 00:37:12,720 Speaker 1: dunt dump music onto this just yea, yeah, no, seriously, 551 00:37:12,840 --> 00:37:14,840 Speaker 1: I like that's like I started noticing that. I was like, 552 00:37:14,880 --> 00:37:17,040 Speaker 1: oh my god, I really am It was pretty fun 553 00:37:17,120 --> 00:37:18,719 Speaker 1: to do and it literally am at the edge of 554 00:37:18,800 --> 00:37:21,080 Speaker 1: my seat waiting for that answer. And there was a 555 00:37:21,200 --> 00:37:22,919 Speaker 1: moment and then and then, and just to be clear, 556 00:37:23,719 --> 00:37:27,040 Speaker 1: that gap you just described is the size of the 557 00:37:27,160 --> 00:37:30,359 Speaker 1: missing hedge for the life vers more or less. It's 558 00:37:30,360 --> 00:37:33,279 Speaker 1: more or less, so we estimate, and the math is complicated, 559 00:37:34,040 --> 00:37:38,200 Speaker 1: about a hundred and thirty billion of greater foreign assets 560 00:37:38,760 --> 00:37:41,719 Speaker 1: than Taiwan discloses in its foreign exchange reserves, so they 561 00:37:41,800 --> 00:37:46,719 Speaker 1: have it would push their total foreign exchange reserves up 562 00:37:46,760 --> 00:37:48,920 Speaker 1: from a little under five billion now would push it 563 00:37:49,000 --> 00:37:52,600 Speaker 1: up to about six And that's roughly what we think 564 00:37:52,719 --> 00:37:58,279 Speaker 1: the missing hedge is on the life and sure side. 565 00:37:58,320 --> 00:38:00,279 Speaker 1: So we tried to get at it from both sides 566 00:38:00,360 --> 00:38:03,760 Speaker 1: of the equation. Is their demand for this kind of swap? 567 00:38:04,280 --> 00:38:07,640 Speaker 1: And then is there evidence that the central bank is supply? 568 00:38:08,680 --> 00:38:13,239 Speaker 1: So the inference here is that not only is uh 569 00:38:13,840 --> 00:38:17,400 Speaker 1: the central bank basically on on the other side of 570 00:38:17,520 --> 00:38:21,759 Speaker 1: a lot of this hedging activity, but also that it's 571 00:38:21,800 --> 00:38:25,319 Speaker 1: effectively well I guess it's suppressing hedging costs, but it's 572 00:38:25,360 --> 00:38:30,839 Speaker 1: also suppressing the Taiwanese dollar. It's it's currency intervention, right, 573 00:38:30,920 --> 00:38:34,320 Speaker 1: I mean, this is evidence that Taiwan has been intervening 574 00:38:34,400 --> 00:38:39,399 Speaker 1: more heavily than it reports, And in a sense, it's 575 00:38:39,440 --> 00:38:42,920 Speaker 1: an evidence that the shift where we started, you know, 576 00:38:43,040 --> 00:38:45,839 Speaker 1: the shift from a world where the Asian savings glut 577 00:38:46,239 --> 00:38:50,040 Speaker 1: flowed through central bank reserves into the U S Treasury market. 578 00:38:50,640 --> 00:38:54,040 Speaker 1: You know that change supposedly to a world where Asian 579 00:38:54,120 --> 00:38:57,879 Speaker 1: savings glut throw flowed through private intermediaries into the US 580 00:38:57,960 --> 00:39:02,399 Speaker 1: corporate credit market. Well, it turns out the change wasn't clean. 581 00:39:03,200 --> 00:39:07,000 Speaker 1: That some fraction of the flow into corporate credit market 582 00:39:07,080 --> 00:39:10,600 Speaker 1: from the lifers was using money that the Central Bank 583 00:39:10,680 --> 00:39:14,200 Speaker 1: of China had bought, in effect, swapped or lent to 584 00:39:14,360 --> 00:39:18,560 Speaker 1: the lifers. So the the the intervention has been a 585 00:39:18,719 --> 00:39:23,200 Speaker 1: bigger contributor to the outflow from Asia, then you would 586 00:39:23,360 --> 00:39:27,520 Speaker 1: guess from the reported data. So is this you know, 587 00:39:27,680 --> 00:39:29,759 Speaker 1: you throw around these numbers about the size of the 588 00:39:29,880 --> 00:39:34,200 Speaker 1: life insurance sector relative to GDP, and a huge part 589 00:39:34,280 --> 00:39:36,640 Speaker 1: of the ability for that to go on is obviously 590 00:39:37,239 --> 00:39:40,120 Speaker 1: um you know, as you revealed the central bank engaging 591 00:39:40,160 --> 00:39:44,200 Speaker 1: in FX hedging, is it sustainable or is there a 592 00:39:44,320 --> 00:39:48,759 Speaker 1: plausible scenario in which the central bank could run out 593 00:39:48,800 --> 00:39:52,400 Speaker 1: of its ability to provide that service to the lifers 594 00:39:52,560 --> 00:39:56,760 Speaker 1: and create serious financial instability in Taiwan or perhaps elsewhere, 595 00:39:57,320 --> 00:39:59,480 Speaker 1: or perhaps part of the credit markets that are so 596 00:39:59,600 --> 00:40:06,319 Speaker 1: depend on purchasing buying from Taiwan. Well, theoretically, as many 597 00:40:06,400 --> 00:40:10,359 Speaker 1: people have noted, I think, going back to two Keynes, Uh, 598 00:40:11,120 --> 00:40:13,880 Speaker 1: there is no upper limit on the foreign assets that 599 00:40:13,960 --> 00:40:17,680 Speaker 1: a central bank can accumulate. There is a lower limit 600 00:40:18,120 --> 00:40:21,280 Speaker 1: you have you cannot go below zero. So in that sense, 601 00:40:21,680 --> 00:40:26,080 Speaker 1: there is no necessary reason why the Central Bank of 602 00:40:26,920 --> 00:40:31,359 Speaker 1: of China and the Central Bank of Taiwan couldn't take 603 00:40:31,440 --> 00:40:35,279 Speaker 1: a foreign asset position of acent of Taiwan's GDP and 604 00:40:35,520 --> 00:40:41,320 Speaker 1: raise that two of Taiwan's GDP. There probably is a 605 00:40:41,440 --> 00:40:47,400 Speaker 1: limit to the lifer's ability to continue to invest in 606 00:40:47,600 --> 00:40:50,759 Speaker 1: foreign bonds at their current pace. You know, if you 607 00:40:50,840 --> 00:40:56,480 Speaker 1: put if you raise your foreign allocation from forty to seventy, 608 00:40:57,800 --> 00:41:00,200 Speaker 1: you probably can't go from seventy to a hundred. You 609 00:41:00,280 --> 00:41:03,360 Speaker 1: do need a few assets in your own currency, So 610 00:41:03,480 --> 00:41:06,800 Speaker 1: at some point the growth in the Taiwanese lifers foreign 611 00:41:06,960 --> 00:41:11,839 Speaker 1: currency portfolio will need to be proportionate to the growth 612 00:41:11,920 --> 00:41:14,960 Speaker 1: in their assets. But there is no limit on the 613 00:41:15,040 --> 00:41:19,160 Speaker 1: central banks ability to intervene and buy foreign currency other 614 00:41:19,280 --> 00:41:22,799 Speaker 1: than perhaps the limits imposed by its trading partners. Even 615 00:41:22,840 --> 00:41:26,400 Speaker 1: if there's no technical mathematical limit, and the size of 616 00:41:26,440 --> 00:41:31,040 Speaker 1: the balance sheet can and can grow arbitrually large, could 617 00:41:31,120 --> 00:41:34,320 Speaker 1: it be a situation in which this ceases to be 618 00:41:34,400 --> 00:41:40,160 Speaker 1: appropriate monetary policy for the other non insurance needs of 619 00:41:40,360 --> 00:41:45,120 Speaker 1: the domestic Taiwanese economy. And as such, even if theoretically 620 00:41:45,200 --> 00:41:50,040 Speaker 1: they could continue to subsidize or prop up the lifers, 621 00:41:50,239 --> 00:41:54,799 Speaker 1: this starts to create other imbalances or domestic problems. Yes, 622 00:41:55,000 --> 00:41:59,080 Speaker 1: so supposed Taiwan's economy were to start to boom. Yeah, 623 00:41:59,360 --> 00:42:02,439 Speaker 1: and suppose is the central bank wanted to raise interest rates. 624 00:42:02,920 --> 00:42:07,399 Speaker 1: And suppose the US economy and the European economy we're 625 00:42:07,760 --> 00:42:10,440 Speaker 1: in the doldrums, and so US interest rates were low. 626 00:42:11,200 --> 00:42:15,480 Speaker 1: The balance sheet of the Taiwanese Central Bank is a 627 00:42:15,880 --> 00:42:19,359 Speaker 1: mix of dollar and Euro assets on one hand, which 628 00:42:19,440 --> 00:42:24,359 Speaker 1: have a certain yield and Taiwanese dollars currency which pay nothing, 629 00:42:24,840 --> 00:42:29,480 Speaker 1: and Taiwanese dollar sterilization instruments. I think of it as 630 00:42:29,520 --> 00:42:32,560 Speaker 1: central bank bills which pay a Taiwanese dollar interest rate. 631 00:42:33,200 --> 00:42:37,080 Speaker 1: Once you have a really big balance sheet, the interest 632 00:42:37,200 --> 00:42:43,279 Speaker 1: cost on your central bank bills become potential constraint. So 633 00:42:44,000 --> 00:42:46,400 Speaker 1: part of the reason why Taiwan has been able to 634 00:42:46,440 --> 00:42:49,200 Speaker 1: accumulate such a big balance sheet central bank has been 635 00:42:49,200 --> 00:42:51,399 Speaker 1: able to accumulate such a big balance sheet is because 636 00:42:51,440 --> 00:42:55,120 Speaker 1: Taiwanese dollar rates have been low. If Taiwanese dollar rates 637 00:42:55,120 --> 00:42:57,680 Speaker 1: were to go up, it's not that you can't have 638 00:42:57,920 --> 00:43:00,400 Speaker 1: this big balance sheet. Is that this big balance she 639 00:43:00,520 --> 00:43:05,279 Speaker 1: starts to become much more costly. Yeah. The more you 640 00:43:05,440 --> 00:43:09,280 Speaker 1: continue this, the more foreign currency you accumulate, the bigger 641 00:43:09,400 --> 00:43:12,759 Speaker 1: your capital loss. And there's this big question about what 642 00:43:12,880 --> 00:43:15,239 Speaker 1: doesn't mean if a central bank has negative equity but 643 00:43:15,440 --> 00:43:19,240 Speaker 1: bigger The conceptually your capital loss is when the currency 644 00:43:19,360 --> 00:43:22,800 Speaker 1: ultimately appreciates. So you can try to hold it down forever, 645 00:43:23,719 --> 00:43:28,040 Speaker 1: but unless you can really do it forever, Eventually, when 646 00:43:28,120 --> 00:43:32,400 Speaker 1: the currency does appreciate, you'll take a bigger Just on 647 00:43:32,520 --> 00:43:36,160 Speaker 1: the global financial stability question, that that Joe Kind of 648 00:43:36,200 --> 00:43:40,160 Speaker 1: alluded to. When people think about risks to the financial 649 00:43:40,200 --> 00:43:42,399 Speaker 1: system right now, one of the things that you often hear, 650 00:43:42,800 --> 00:43:44,279 Speaker 1: you know, whether it's from the i m F for 651 00:43:44,440 --> 00:43:48,520 Speaker 1: the Bank for International Settlements, is the idea of excesses 652 00:43:48,840 --> 00:43:51,279 Speaker 1: in corporate credit, that we might get a bunch of 653 00:43:51,360 --> 00:43:54,400 Speaker 1: defaults or you might get a bunch of downgrades that 654 00:43:54,800 --> 00:43:59,680 Speaker 1: cause about a forced selling. Could it be that instead 655 00:43:59,760 --> 00:44:04,440 Speaker 1: of looking at credit risk, we should be considering effects 656 00:44:04,600 --> 00:44:07,600 Speaker 1: risk based on the fact that one of our very 657 00:44:07,760 --> 00:44:12,200 Speaker 1: very big buyers in this space might actually be quite 658 00:44:12,640 --> 00:44:17,600 Speaker 1: effects sensitive. I think that's a very important point. The 659 00:44:18,400 --> 00:44:23,359 Speaker 1: stress that leads to a fall off and demand from 660 00:44:23,600 --> 00:44:28,000 Speaker 1: Taiwan or from any of the other Asian countries fall 661 00:44:28,040 --> 00:44:30,760 Speaker 1: off and demand for the corporate for US corporate credit 662 00:44:31,280 --> 00:44:35,120 Speaker 1: couldn't just be a sharp appreciation of their currencies, because 663 00:44:35,239 --> 00:44:40,120 Speaker 1: that e roads the capital that has been used to 664 00:44:40,239 --> 00:44:45,800 Speaker 1: take and support the open foreign currency positions behind the 665 00:44:45,960 --> 00:44:50,440 Speaker 1: unhedged portion of this. The Taiwanese book, but also you know, 666 00:44:50,560 --> 00:44:53,960 Speaker 1: the Japanese have an unhedged book. Korea maybe a little 667 00:44:54,040 --> 00:44:57,000 Speaker 1: less so. But there's a range of investors who've been 668 00:44:57,040 --> 00:45:01,959 Speaker 1: taking partially hedge bat on currency hedge batches on US 669 00:45:02,000 --> 00:45:06,640 Speaker 1: corporate credit and therefore are potentially their capital could be 670 00:45:06,719 --> 00:45:12,360 Speaker 1: eroded not by a a large losses on a US 671 00:45:12,400 --> 00:45:16,200 Speaker 1: company that goes into default, but rather by foreign exchangements. 672 00:45:17,560 --> 00:45:21,239 Speaker 1: Brad setser, that was just phenomenal. I was not big 673 00:45:21,280 --> 00:45:23,800 Speaker 1: facetious earlier when I said I I had noticed myself 674 00:45:23,880 --> 00:45:27,120 Speaker 1: stopped breathing. I was very excited to have this conversation, 675 00:45:27,239 --> 00:45:29,200 Speaker 1: and it was like five times more exciting than I 676 00:45:29,320 --> 00:45:35,040 Speaker 1: even appreciate it. If if this gets people interested in 677 00:45:35,520 --> 00:45:39,440 Speaker 1: people are gonna be balance of payments, financial forensics, I'll 678 00:45:39,480 --> 00:45:44,400 Speaker 1: be thrown fantastic work, really impressive you and your co 679 00:45:44,600 --> 00:45:48,759 Speaker 1: author concentrated ambiguity. Thank you so much for coming on 680 00:45:49,160 --> 00:45:53,560 Speaker 1: and really doing a phenomenal job of putting into UH. 681 00:45:53,800 --> 00:45:57,120 Speaker 1: I'd say pretty relatively plain English. What is an extraordinary 682 00:45:58,120 --> 00:46:01,640 Speaker 1: complicated subject. So great to have you back on the show. Thanks, 683 00:46:02,200 --> 00:46:18,680 Speaker 1: Thank you, Brad well deserved fourth appearance on All thoughts, Joe. 684 00:46:19,120 --> 00:46:22,879 Speaker 1: I really enjoyed that conversation, not least because it hit 685 00:46:23,040 --> 00:46:26,239 Speaker 1: on a number of my favorite topics, you know, a 686 00:46:26,280 --> 00:46:30,480 Speaker 1: cross currency, basis, swaps, and corporate credit. I love discussing, 687 00:46:30,600 --> 00:46:33,920 Speaker 1: but also because I get to roll out random facts 688 00:46:34,000 --> 00:46:37,520 Speaker 1: of knowledge such as, this is the reason why the 689 00:46:37,600 --> 00:46:41,960 Speaker 1: world's fastest growing E t F market is actually in Taiwan, 690 00:46:42,280 --> 00:46:44,480 Speaker 1: and no one would have expected that, but that's where 691 00:46:44,520 --> 00:46:47,600 Speaker 1: it is for all the reasons we just discussed. Yeah, 692 00:46:47,719 --> 00:46:50,240 Speaker 1: I I was not aware of that, So I learned 693 00:46:50,560 --> 00:46:53,440 Speaker 1: something new from you just now. No. I love that 694 00:46:53,640 --> 00:46:55,719 Speaker 1: episode two. I mean, you know, kind of like we 695 00:46:55,800 --> 00:46:57,360 Speaker 1: were talking about it, or as I was mentioning in 696 00:46:57,400 --> 00:47:00,920 Speaker 1: the beginning, this was like sort of a continuation of 697 00:47:01,040 --> 00:47:03,800 Speaker 1: some themes we've been talking about lately on recent episodes, 698 00:47:03,840 --> 00:47:06,439 Speaker 1: like with Michael Pettis and so forth. But I love 699 00:47:06,640 --> 00:47:11,120 Speaker 1: the sort of taking from the macro to the qual 700 00:47:11,480 --> 00:47:14,160 Speaker 1: something in between macro and micro because we can talk 701 00:47:14,800 --> 00:47:16,840 Speaker 1: all the time about, oh, there's a lot of savers 702 00:47:17,200 --> 00:47:19,880 Speaker 1: in various East Asian countries and that flows through to 703 00:47:19,960 --> 00:47:24,360 Speaker 1: other economies and interesting ways. But I think actually really 704 00:47:24,560 --> 00:47:28,720 Speaker 1: drilling down to a sort of hyper specific level about 705 00:47:29,160 --> 00:47:32,200 Speaker 1: how the dollar or how a Taiwan East dollar that's 706 00:47:32,360 --> 00:47:36,200 Speaker 1: earned by a family in Taiwan gets put into a 707 00:47:36,280 --> 00:47:40,120 Speaker 1: life insurance company which has all these different things is 708 00:47:40,160 --> 00:47:42,480 Speaker 1: just super interesting to work out. And the fact that 709 00:47:42,760 --> 00:47:44,520 Speaker 1: there was a puzzle at the end of it made 710 00:47:44,560 --> 00:47:48,520 Speaker 1: it even more interesting, right, And I think that's exactly 711 00:47:48,600 --> 00:47:51,600 Speaker 1: that's exactly right. So that dollar kind of ends up 712 00:47:51,640 --> 00:47:53,960 Speaker 1: flowing into a US asset, but then you have to 713 00:47:54,040 --> 00:47:57,160 Speaker 1: talk about the feedback loop when it starts to go 714 00:47:57,360 --> 00:48:00,520 Speaker 1: the other way. And the reason I was thinking about 715 00:48:00,560 --> 00:48:04,200 Speaker 1: that is do you remember repo madness back in September 716 00:48:04,520 --> 00:48:09,359 Speaker 1: and that actually started feeding into cross currency swaps um 717 00:48:10,000 --> 00:48:12,160 Speaker 1: and so that you know, even something like that that 718 00:48:12,280 --> 00:48:17,520 Speaker 1: seems completely unconnected to Taiwanese life insurers, if you listen 719 00:48:17,560 --> 00:48:20,320 Speaker 1: to the discussion we just had, it actually could have 720 00:48:20,400 --> 00:48:22,719 Speaker 1: an impact. No, absolutely, because I remember like we had 721 00:48:22,800 --> 00:48:25,600 Speaker 1: that we had a Sultan Posar on this and we 722 00:48:25,760 --> 00:48:29,640 Speaker 1: were talking to him prior to even the repo market 723 00:48:29,800 --> 00:48:31,759 Speaker 1: going crazy, but he was well ahead of the curve. 724 00:48:32,239 --> 00:48:34,760 Speaker 1: But I think it was on this exact subject because 725 00:48:34,760 --> 00:48:38,400 Speaker 1: he was talking about the challenge of these Asian buyers 726 00:48:38,480 --> 00:48:41,399 Speaker 1: of US denominated debt in the world in which US 727 00:48:41,480 --> 00:48:44,279 Speaker 1: denominated debt doesn't yield very much, and of course that 728 00:48:44,520 --> 00:48:48,120 Speaker 1: increases demand for direct holdings at the Central Bank, which 729 00:48:48,200 --> 00:48:50,400 Speaker 1: is part of why there was a reserve shortage. So 730 00:48:50,480 --> 00:48:52,320 Speaker 1: it's all connected. I think we're gonna have re Sultan 731 00:48:52,360 --> 00:48:54,319 Speaker 1: back on the show at some point soon. So well, 732 00:48:54,360 --> 00:48:56,640 Speaker 1: now we have to know I thought about that during 733 00:48:56,680 --> 00:48:58,680 Speaker 1: this about how it was connected to that, and I'm 734 00:48:58,719 --> 00:49:01,640 Speaker 1: glad you remembered to make that point here because I 735 00:49:01,719 --> 00:49:04,359 Speaker 1: do think that's really interesting aspect here. All right, Well, 736 00:49:04,440 --> 00:49:10,280 Speaker 1: a fantastic conversation. If you haven't read Brad Setzer's full series, 737 00:49:10,840 --> 00:49:13,520 Speaker 1: you should definitely go on his blog and and look 738 00:49:13,560 --> 00:49:15,480 Speaker 1: it up. And like we said at the beginning, it 739 00:49:15,800 --> 00:49:18,920 Speaker 1: does read like a sort of financial markets who done it? 740 00:49:19,239 --> 00:49:24,319 Speaker 1: It's very entertaining, absolutely must read. I think after having 741 00:49:24,400 --> 00:49:27,760 Speaker 1: listened to this conversation, it'll make the reading you perhaps 742 00:49:27,840 --> 00:49:30,279 Speaker 1: even more compelling because then you can sort you're gonna 743 00:49:30,320 --> 00:49:32,160 Speaker 1: go back and read it. I'm going to read it again, 744 00:49:32,400 --> 00:49:34,360 Speaker 1: cannot You can print it out, take it to the 745 00:49:34,400 --> 00:49:37,919 Speaker 1: playground with you for for next time. That is my plan. 746 00:49:39,680 --> 00:49:43,120 Speaker 1: This has been another episode of the Odd Lots Podcast. 747 00:49:43,280 --> 00:49:46,040 Speaker 1: I'm Joe Wisn'tal. You can follow me on Twitter at 748 00:49:46,080 --> 00:49:49,719 Speaker 1: the Stalwart and I'm Tracy Alloway. You can follow me 749 00:49:49,880 --> 00:49:53,680 Speaker 1: on Twitter at Tracy Alloway. And you should definitely follow 750 00:49:53,800 --> 00:49:58,040 Speaker 1: our guest on Twitter, Brad Setser at Brad Setser, and 751 00:49:58,200 --> 00:50:00,600 Speaker 1: again go read his work. It's fantast a stick And 752 00:50:00,760 --> 00:50:04,200 Speaker 1: be sure to follow our producer on Twitter, Laura Carlson. 753 00:50:04,320 --> 00:50:07,840 Speaker 1: She's at Laura M. Carlson. We've just given her a 754 00:50:07,960 --> 00:50:10,239 Speaker 1: very long episode to turn around in a short time, 755 00:50:10,400 --> 00:50:13,600 Speaker 1: so she definitely deserves a follow, And follow all the 756 00:50:13,640 --> 00:50:17,640 Speaker 1: Bloomberg podcasts on Twitter with our new handle at podcast. 757 00:50:18,040 --> 00:50:18,800 Speaker 1: Thanks for listening.