1 00:00:10,520 --> 00:00:14,800 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,880 --> 00:00:20,319 Speaker 1: I'm Joe Wast and I'm Tracy Allaway. Tracy, have you 3 00:00:20,360 --> 00:00:23,959 Speaker 1: ever noticed like we've had all this market volatility lately, 4 00:00:24,720 --> 00:00:27,440 Speaker 1: and regardless of what we're talking about, it feels like 5 00:00:27,520 --> 00:00:29,560 Speaker 1: the action that we see in the trading of the 6 00:00:29,640 --> 00:00:34,320 Speaker 1: US dollar is central to almost every conversation that we have. Yeah, 7 00:00:34,400 --> 00:00:38,199 Speaker 1: that's true. It certainly feels like well, from my position 8 00:00:38,479 --> 00:00:40,680 Speaker 1: in this part of the world, in Hong Kong, very 9 00:00:40,680 --> 00:00:42,720 Speaker 1: close to China, it feels like a lot of the 10 00:00:42,760 --> 00:00:46,640 Speaker 1: emerging market volatility and weakness has definitely been pinned on 11 00:00:46,680 --> 00:00:50,000 Speaker 1: the dollar recently, right exactly. And it's also kind of 12 00:00:50,040 --> 00:00:53,920 Speaker 1: weird because basically everything is priced in dollars, so I've 13 00:00:53,960 --> 00:00:58,680 Speaker 1: always had a hard time wrapping my head around what 14 00:00:59,040 --> 00:01:02,920 Speaker 1: is a move move in the US dollar versus what 15 00:01:03,160 --> 00:01:06,920 Speaker 1: is other stuff moving around price of the US dollars? 16 00:01:06,959 --> 00:01:11,400 Speaker 1: That makes sense? Oh no, this sounds like a currencies episode. 17 00:01:11,520 --> 00:01:13,760 Speaker 1: And you know that currencies are my least favorite thing 18 00:01:13,800 --> 00:01:16,679 Speaker 1: to talk about because, as you point out, everything is 19 00:01:16,720 --> 00:01:19,560 Speaker 1: always relative, right. It's kind of like if you're standing 20 00:01:19,600 --> 00:01:22,440 Speaker 1: on Earth, then you say, oh, the sun is rising 21 00:01:23,120 --> 00:01:25,399 Speaker 1: and the sun is falling depending on the time of 22 00:01:25,400 --> 00:01:28,160 Speaker 1: the day, but we know that in the universe, the 23 00:01:28,240 --> 00:01:31,200 Speaker 1: sun doesn't actually move at all, and everything moves around it. 24 00:01:31,240 --> 00:01:33,399 Speaker 1: And I've always sort of kind of thought of the 25 00:01:33,440 --> 00:01:36,319 Speaker 1: dollar this way, like sometimes we talk about the dollar 26 00:01:36,400 --> 00:01:38,800 Speaker 1: going up and down, but sometimes it seems like it 27 00:01:38,880 --> 00:01:41,319 Speaker 1: might make sense to just talk about everything else that's 28 00:01:41,360 --> 00:01:45,040 Speaker 1: priced relative to the dollar, and the conversation always kind 29 00:01:45,040 --> 00:01:48,520 Speaker 1: of hurts my head. I would broadly agree with that. 30 00:01:48,560 --> 00:01:51,720 Speaker 1: And of course, the financial system revolves around the dollar, 31 00:01:51,800 --> 00:01:54,600 Speaker 1: and the dollar holds that very special position in the 32 00:01:54,640 --> 00:01:58,360 Speaker 1: financial system, which is that it is the world's reserve currency, 33 00:01:58,440 --> 00:02:02,840 Speaker 1: which gives it an ster layer of complexity. Isn't that fun? Yeah, 34 00:02:02,920 --> 00:02:06,000 Speaker 1: So both of us get our head hurt by currency 35 00:02:06,800 --> 00:02:10,440 Speaker 1: conversations and trying to wrap our head about around the 36 00:02:10,520 --> 00:02:13,000 Speaker 1: role of the dollar in the financial system. So I'm 37 00:02:13,120 --> 00:02:16,480 Speaker 1: very excited about the guest we have on today. We're 38 00:02:16,480 --> 00:02:20,399 Speaker 1: going to talk about how to think about valuing currencies, 39 00:02:20,440 --> 00:02:24,040 Speaker 1: how to think about valuing the dollar with a long 40 00:02:24,360 --> 00:02:27,960 Speaker 1: time that a an expert in the world of currencies. 41 00:02:28,360 --> 00:02:31,760 Speaker 1: He is Mark Chandler. He's a managing partner at Bannockburn 42 00:02:31,840 --> 00:02:35,079 Speaker 1: Global forex and he is going to break it all 43 00:02:35,240 --> 00:02:38,480 Speaker 1: down for us today. So Mark, thank you very much 44 00:02:38,520 --> 00:02:40,880 Speaker 1: for joining us. Thank you. I don't know about your headaches, 45 00:02:40,919 --> 00:02:42,600 Speaker 1: but I can tell you this that there's two types 46 00:02:42,600 --> 00:02:44,079 Speaker 1: of people I think in the world, people who give 47 00:02:44,080 --> 00:02:46,359 Speaker 1: headaches and people who get headaches. And I'm a giver. 48 00:02:46,560 --> 00:02:49,000 Speaker 1: You're gonna give us both headaches, both headaches, I think, 49 00:02:49,240 --> 00:02:51,720 Speaker 1: and I thought, you're gonna be here to relieve our headaches. 50 00:02:52,080 --> 00:02:55,520 Speaker 1: The incredible thing is how complicated for and exchanges. And 51 00:02:55,560 --> 00:02:58,160 Speaker 1: I think that you put two currency strategist and you'll 52 00:02:58,160 --> 00:03:01,320 Speaker 1: get three different opinions, and think that that's the challenges. 53 00:03:01,440 --> 00:03:03,080 Speaker 1: I think that you guys hit it in the sense 54 00:03:03,080 --> 00:03:06,639 Speaker 1: that currencies are central, the dollar es central. But valuation. 55 00:03:06,720 --> 00:03:08,959 Speaker 1: You know, when you think about stocks and bonds, there's 56 00:03:08,960 --> 00:03:12,240 Speaker 1: a clear model of the valuation either an earning stream, 57 00:03:12,400 --> 00:03:16,239 Speaker 1: free cash flow, breakup, value, replacement costs, all more or 58 00:03:16,320 --> 00:03:19,720 Speaker 1: less agreed upon models to evaluate equities. And you can 59 00:03:19,760 --> 00:03:24,000 Speaker 1: do the same thing with fixed income NBAS. Economists can 60 00:03:24,040 --> 00:03:27,080 Speaker 1: project the future value of the earning stream. But it 61 00:03:27,080 --> 00:03:29,400 Speaker 1: comes to currencies and their pure form, they don't have 62 00:03:29,440 --> 00:03:31,800 Speaker 1: an earning stream. You can turn them into a deposit 63 00:03:31,840 --> 00:03:33,400 Speaker 1: and then they have yields, and then we can talk 64 00:03:33,400 --> 00:03:36,080 Speaker 1: about interest rate differentials. But in their pure form, we 65 00:03:36,160 --> 00:03:39,080 Speaker 1: live in an era of fiat currencies where money has 66 00:03:39,080 --> 00:03:41,800 Speaker 1: no value except the value we give it. It's not 67 00:03:41,840 --> 00:03:44,800 Speaker 1: backed by gold or silver anymore, it's not backed by commodities. 68 00:03:45,240 --> 00:03:47,880 Speaker 1: They're free floating for the most part of the major currencies, 69 00:03:48,480 --> 00:03:52,240 Speaker 1: and so valuation becomes much more elusive. I think that's 70 00:03:52,240 --> 00:03:54,280 Speaker 1: what a source of headaches are people, not only all 71 00:03:54,320 --> 00:03:56,800 Speaker 1: the other problems with valuation on the head why both 72 00:03:57,080 --> 00:04:00,480 Speaker 1: Tracy and I get headaches talking about this topic? Okay, 73 00:04:00,560 --> 00:04:03,640 Speaker 1: So on that note, I mean you just mentioned mark that, 74 00:04:03,800 --> 00:04:06,240 Speaker 1: unlike a stock or a bond that generates some sort 75 00:04:06,240 --> 00:04:11,120 Speaker 1: of cash flow, currencies aren't really doing that. So how 76 00:04:11,160 --> 00:04:15,480 Speaker 1: do you go about valuing currencies? And does the value 77 00:04:15,560 --> 00:04:19,599 Speaker 1: of a currency have to come from it moving up 78 00:04:19,640 --> 00:04:22,840 Speaker 1: against something else. That's a good question. So how do 79 00:04:22,880 --> 00:04:26,400 Speaker 1: we evaluate currencies? I think there's even the among economists, 80 00:04:26,400 --> 00:04:29,359 Speaker 1: there's a few agreed upon tools that give one a 81 00:04:29,440 --> 00:04:33,760 Speaker 1: handle on valuation. I use w c RS on Bloomberg, 82 00:04:34,200 --> 00:04:36,359 Speaker 1: and that'll give you thank you for the plugs they 83 00:04:36,400 --> 00:04:39,840 Speaker 1: should that. They'll give you the uh the change in 84 00:04:39,880 --> 00:04:42,680 Speaker 1: the day, but towards the bottom of it you get 85 00:04:43,520 --> 00:04:46,800 Speaker 1: purchasing power parity p p P. I think of this 86 00:04:46,920 --> 00:04:49,960 Speaker 1: sometimes as the famous one everybody's familiar with, probably the 87 00:04:49,960 --> 00:04:52,520 Speaker 1: Big Mac, and the idea that the Big Mac should 88 00:04:52,640 --> 00:04:55,800 Speaker 1: should sell very roughly the same amount in various countries, 89 00:04:56,279 --> 00:04:59,400 Speaker 1: and and if they don't, it's because of a currency misalignment. 90 00:05:00,279 --> 00:05:03,359 Speaker 1: It's kind of a basic approach, and the idea is 91 00:05:03,400 --> 00:05:07,120 Speaker 1: that currencies ought to equalize. The currency should move to 92 00:05:07,160 --> 00:05:10,200 Speaker 1: equalize the basket of treatable goods. So whether you do 93 00:05:10,320 --> 00:05:13,760 Speaker 1: with a iPad or you do with a Starbucks cappuccino, 94 00:05:13,920 --> 00:05:16,200 Speaker 1: you do with the Big Mac, you get roughly the 95 00:05:16,240 --> 00:05:19,120 Speaker 1: same general thing, and that is that the value of 96 00:05:19,200 --> 00:05:23,520 Speaker 1: currency is based on what it can buy. So let's 97 00:05:23,680 --> 00:05:26,760 Speaker 1: talk about the famous Big Mac index and just really 98 00:05:26,800 --> 00:05:28,920 Speaker 1: drill down, because I think you made an important point 99 00:05:28,920 --> 00:05:31,560 Speaker 1: that I want to make sure people understand a big Mac. 100 00:05:31,839 --> 00:05:37,240 Speaker 1: Pretty much everywhere, whether it's Tokyo, whether it's Zurich, Switzerland, 101 00:05:37,320 --> 00:05:40,080 Speaker 1: whether it's New York City, whether it's somewhere in China, 102 00:05:40,680 --> 00:05:44,719 Speaker 1: it's roughly the same ingredients. Probably there are some tweaks 103 00:05:44,760 --> 00:05:47,440 Speaker 1: here and there, but there's some flour or there's some wheat, 104 00:05:47,880 --> 00:05:50,839 Speaker 1: and there's beef, and there's a certain amount of human 105 00:05:50,920 --> 00:05:53,960 Speaker 1: labor that it takes to assemble a big mac and 106 00:05:54,000 --> 00:05:57,040 Speaker 1: the pickles and the tomatoes, and so they are roughly 107 00:05:57,080 --> 00:06:00,200 Speaker 1: the exact same product everywhere. And so what can you 108 00:06:00,320 --> 00:06:03,640 Speaker 1: tell if a big mac is much more expensive and 109 00:06:03,680 --> 00:06:06,960 Speaker 1: at a given moment in say Switzerland, than it is 110 00:06:07,000 --> 00:06:11,000 Speaker 1: in China, what does that tell you about currency valuation? 111 00:06:11,080 --> 00:06:13,120 Speaker 1: So that are the the economists would argue that where 112 00:06:13,160 --> 00:06:15,840 Speaker 1: the big mac is more expensive, it's where the currency 113 00:06:15,920 --> 00:06:19,119 Speaker 1: is undervalued. And so you go around, You go around 114 00:06:19,120 --> 00:06:20,640 Speaker 1: to find out where the big mac is cheap, and 115 00:06:20,640 --> 00:06:23,680 Speaker 1: they'll tell you where the currencies are rich. And so 116 00:06:23,720 --> 00:06:25,920 Speaker 1: I think that I had a colleague once who came 117 00:06:25,920 --> 00:06:27,920 Speaker 1: to New York from London. It was amazed at how 118 00:06:28,000 --> 00:06:30,440 Speaker 1: cheap the big macs were. That's all he ate while 119 00:06:30,480 --> 00:06:33,039 Speaker 1: he was here. But no matter how many eight, it 120 00:06:33,080 --> 00:06:36,279 Speaker 1: didn't help bring the prices into alignment. He he himself 121 00:06:36,320 --> 00:06:41,839 Speaker 1: wasn't able to close the arbitrage exactly, just shy. But 122 00:06:41,880 --> 00:06:44,880 Speaker 1: I think that wait, wait, wait, okay, um, So I 123 00:06:44,880 --> 00:06:47,040 Speaker 1: have a question on this, and sorry to be labor 124 00:06:47,240 --> 00:06:50,600 Speaker 1: the big MAC point, But wouldn't some of the currency 125 00:06:50,640 --> 00:06:57,200 Speaker 1: fluctuation come from differences and say labor costs between countries exactly? 126 00:06:57,240 --> 00:06:59,040 Speaker 1: I think you hit Tracy on the key point here 127 00:06:59,080 --> 00:07:02,120 Speaker 1: is that the that these kind of person power parity 128 00:07:02,320 --> 00:07:05,200 Speaker 1: only measure the price of goods, so they might be 129 00:07:05,240 --> 00:07:08,440 Speaker 1: implicit in there. Some e commists will use instead of 130 00:07:08,880 --> 00:07:11,400 Speaker 1: the big MAC, will use measures of inflation, and then 131 00:07:11,440 --> 00:07:15,320 Speaker 1: you can use something such as like unit labor costs two, 132 00:07:15,320 --> 00:07:17,720 Speaker 1: so you value you depreciate the couragcies by some kind 133 00:07:17,720 --> 00:07:19,800 Speaker 1: of index based on unit labor costs, and that gets 134 00:07:19,840 --> 00:07:23,120 Speaker 1: around that problem that I think you're right about if 135 00:07:23,120 --> 00:07:25,760 Speaker 1: you think about the labor as a Chinese labor, Mexican 136 00:07:25,840 --> 00:07:28,840 Speaker 1: labor compared to American labor, especially as we hype minimum wage. 137 00:07:28,840 --> 00:07:31,119 Speaker 1: And we've talked to say ten dollars or fifteen dollars 138 00:07:31,160 --> 00:07:33,320 Speaker 1: an hour to make a big MAC compared to a 139 00:07:33,320 --> 00:07:36,000 Speaker 1: few dollars in some other countries. But the other problem 140 00:07:36,080 --> 00:07:38,840 Speaker 1: with the person power parity comments have tried to come 141 00:07:38,880 --> 00:07:41,320 Speaker 1: up with new models who address this. It seems that 142 00:07:41,360 --> 00:07:46,560 Speaker 1: in modern production the cost of capital is important, so 143 00:07:46,600 --> 00:07:48,280 Speaker 1: in some ways then the cost of capital is not 144 00:07:48,320 --> 00:07:50,200 Speaker 1: really picked up and I think gets to your point 145 00:07:50,280 --> 00:07:53,720 Speaker 1: tracing not just about labor costs, but cost of capital rents. 146 00:07:55,000 --> 00:07:57,160 Speaker 1: In Hong Kong, maybe you have high rents. It's you know, 147 00:07:57,440 --> 00:08:00,120 Speaker 1: like Manhattan's uson island, people have to build up, so 148 00:08:00,160 --> 00:08:02,320 Speaker 1: maybe rents are elevated, and that will that will raise 149 00:08:02,360 --> 00:08:05,440 Speaker 1: the cost of doing business, including selling Big Max or 150 00:08:05,560 --> 00:08:11,640 Speaker 1: Starbucks cappuccinos. So ultimately, although people do like models such 151 00:08:11,680 --> 00:08:13,800 Speaker 1: as the Big Mac index, it only gets you so 152 00:08:13,880 --> 00:08:17,000 Speaker 1: far because while there are certain baskets of tradeable goods 153 00:08:17,040 --> 00:08:20,960 Speaker 1: like wheat or beef that really should equalize everywhere in 154 00:08:21,000 --> 00:08:25,000 Speaker 1: any given location, there are enough local idiosyncratic things that 155 00:08:25,000 --> 00:08:27,040 Speaker 1: that is just not enough to tell you whether our 156 00:08:27,080 --> 00:08:29,080 Speaker 1: currency is going to go up or down exactly. And 157 00:08:29,080 --> 00:08:31,080 Speaker 1: and to your point, the you can look at the 158 00:08:31,160 --> 00:08:33,600 Speaker 1: variance of Big MAXI on the world, or you can 159 00:08:33,640 --> 00:08:35,800 Speaker 1: look at the Big Mac variance within the United States. 160 00:08:36,640 --> 00:08:38,439 Speaker 1: And the variance in the United States also cannot be 161 00:08:38,480 --> 00:08:42,640 Speaker 1: accounted for by simply a currency misalignment, you'd imagine. So, 162 00:08:42,760 --> 00:08:44,400 Speaker 1: but they kind of have come up with these and 163 00:08:44,440 --> 00:08:46,520 Speaker 1: it's also available on the w c RS page for 164 00:08:46,600 --> 00:08:51,760 Speaker 1: you is they call it, You've got real equilibrium exchange rates, 165 00:08:51,800 --> 00:08:53,840 Speaker 1: which try to make sense of both the current account 166 00:08:53,840 --> 00:08:57,320 Speaker 1: to trade balance as well as capital flows. The idea 167 00:08:57,440 --> 00:09:01,520 Speaker 1: is here that currencies ought to equalize bring the capital 168 00:09:01,559 --> 00:09:04,840 Speaker 1: account or the current account into balance, and so there 169 00:09:04,840 --> 00:09:07,200 Speaker 1: would be another measure. So you'd incorporate then not only 170 00:09:07,320 --> 00:09:10,600 Speaker 1: the differential inflation, but the differential in the current account 171 00:09:10,600 --> 00:09:13,040 Speaker 1: and the capital account to bring that into another model. 172 00:09:13,200 --> 00:09:15,640 Speaker 1: And they more or less tend to all point the 173 00:09:15,679 --> 00:09:18,400 Speaker 1: same direction. Currency that are overvalued, like the Swiss shrink, 174 00:09:18,800 --> 00:09:20,920 Speaker 1: is still overvalued almost no matter how you want to 175 00:09:20,920 --> 00:09:22,880 Speaker 1: look at it. What it really determined that the magnitude 176 00:09:22,880 --> 00:09:26,559 Speaker 1: of the overvaluation. So shall we talk about the dollar, because, 177 00:09:26,600 --> 00:09:28,800 Speaker 1: as Joe mentioned in the intro, there has been a 178 00:09:28,840 --> 00:09:32,040 Speaker 1: lot of attention focused on the dollar recently, maybe more 179 00:09:32,120 --> 00:09:37,040 Speaker 1: so than usual. How special is the dollar? How special 180 00:09:37,080 --> 00:09:39,400 Speaker 1: is the dollar? Can I say very? I mean, and 181 00:09:39,400 --> 00:09:41,400 Speaker 1: by that I mean the foreign exchange market. This is 182 00:09:41,400 --> 00:09:45,240 Speaker 1: why I really like it. The average daily turnover five 183 00:09:45,320 --> 00:09:47,920 Speaker 1: point three trillion dollars a day that comes from the 184 00:09:47,920 --> 00:09:50,839 Speaker 1: Bank for International Settlements that does a survey every three years, 185 00:09:51,679 --> 00:09:54,840 Speaker 1: five point three trillion dollars a day. That means in 186 00:09:54,880 --> 00:09:57,920 Speaker 1: one week, does enough turnover in the foreign exchange market 187 00:09:57,920 --> 00:10:01,280 Speaker 1: to cover world trade for a year, you know. And 188 00:10:01,320 --> 00:10:03,920 Speaker 1: so it's it's a huge market and the dollar is 189 00:10:04,320 --> 00:10:09,000 Speaker 1: on one side of roughly the trades. Why is it 190 00:10:09,160 --> 00:10:11,960 Speaker 1: so big? I mean, if you say the size of 191 00:10:12,000 --> 00:10:17,439 Speaker 1: the trade and currencies dwarfs actual world trade, is it? 192 00:10:17,520 --> 00:10:20,560 Speaker 1: Is it just speculative trading? Like what what drives these 193 00:10:20,679 --> 00:10:23,080 Speaker 1: massive flows? Yeah? Share? So the one point is that 194 00:10:23,200 --> 00:10:25,600 Speaker 1: trade is a big part of it, but it's relatively 195 00:10:25,600 --> 00:10:28,720 Speaker 1: a small part of it. Capital flows are much bigger 196 00:10:29,120 --> 00:10:32,080 Speaker 1: than than trade flows and capital flows you think about 197 00:10:32,160 --> 00:10:36,640 Speaker 1: the internationalization of portfolios buying foreign bonds and stocks compared 198 00:10:36,679 --> 00:10:38,240 Speaker 1: to the trade I didn't think of between the U 199 00:10:38,280 --> 00:10:40,760 Speaker 1: S And Canada, for example, among the two largest trading 200 00:10:40,760 --> 00:10:43,760 Speaker 1: partners in the world. Capital flows are much bigger than 201 00:10:43,760 --> 00:10:48,000 Speaker 1: the trade flows, and the capital flows require currency transactions, 202 00:10:48,000 --> 00:10:51,360 Speaker 1: but also hedging. Also think about how the industry works. 203 00:10:52,080 --> 00:10:55,040 Speaker 1: So you are a bloomberg, you deciety getting some revenue 204 00:10:55,080 --> 00:10:58,160 Speaker 1: in in Mexican pesos, and so what do you do 205 00:10:58,240 --> 00:11:01,400 Speaker 1: with that Mexican pesos? Well, maybe would hedge them by 206 00:11:01,400 --> 00:11:04,000 Speaker 1: selling pasos in the forward market or the futures market 207 00:11:04,280 --> 00:11:07,400 Speaker 1: to protect you from a depreciation of the pace. So so, 208 00:11:07,679 --> 00:11:09,679 Speaker 1: but then also you have an order, I say, a 209 00:11:09,760 --> 00:11:12,520 Speaker 1: hundred million pasos, You give it to your favorite bank, 210 00:11:12,920 --> 00:11:14,600 Speaker 1: and that that that bank might break it up into 211 00:11:14,600 --> 00:11:16,920 Speaker 1: smaller pieces give it to other banks. So in some 212 00:11:16,960 --> 00:11:21,600 Speaker 1: ways foreign exchange trading is like um passing a hot 213 00:11:21,600 --> 00:11:24,280 Speaker 1: potato around. Who's got the risk, who's managing the risk? 214 00:11:24,400 --> 00:11:27,439 Speaker 1: And you get paid to manage the risk. That actually 215 00:11:27,840 --> 00:11:32,080 Speaker 1: brings me to a question that I'm meant to ask earlier, 216 00:11:32,120 --> 00:11:35,280 Speaker 1: but it's sort of a nice pause. You mentioned you 217 00:11:35,360 --> 00:11:39,160 Speaker 1: get paid ultimately to manage the risk, to hold the 218 00:11:39,240 --> 00:11:42,840 Speaker 1: hot potato of currency risk. Tell us a little bit 219 00:11:42,880 --> 00:11:46,880 Speaker 1: about your career. You've been analyzing this for a long time, 220 00:11:47,200 --> 00:11:49,600 Speaker 1: and I assume you've talked to a lot of people 221 00:11:49,679 --> 00:11:52,120 Speaker 1: in exactly that position who feel that they need to 222 00:11:52,720 --> 00:11:55,120 Speaker 1: manage that risk. Just tell us a step back and 223 00:11:55,200 --> 00:11:58,760 Speaker 1: sort of tell us about your experience in this market. Sure, 224 00:11:58,800 --> 00:12:00,240 Speaker 1: So when I first got out of score, well, the 225 00:12:00,240 --> 00:12:02,840 Speaker 1: only thing I do is right, I had to graduate degrees. 226 00:12:03,080 --> 00:12:04,920 Speaker 1: I knew what unemployment was, but I wouldn't have a 227 00:12:04,960 --> 00:12:07,720 Speaker 1: clue as what unemployment meant for interest rates or currencies. 228 00:12:08,240 --> 00:12:10,160 Speaker 1: And the first job I had was as a journalist 229 00:12:10,160 --> 00:12:13,560 Speaker 1: on the floor the Chicago Markettil Exchange covering the currency markets, 230 00:12:13,760 --> 00:12:15,840 Speaker 1: and I just read this book called The Dollar at 231 00:12:15,880 --> 00:12:19,839 Speaker 1: its Rivals by an Italian economist, Para Bonni, and he 232 00:12:19,960 --> 00:12:22,840 Speaker 1: sort of argued that the currency markets in the modern 233 00:12:22,880 --> 00:12:26,960 Speaker 1: world is where nation states fight out national interest They 234 00:12:27,800 --> 00:12:31,400 Speaker 1: wars are deadly and they're messy and the destructive, and 235 00:12:31,640 --> 00:12:34,280 Speaker 1: we want to avoid those and so how can nation 236 00:12:34,360 --> 00:12:38,040 Speaker 1: states compete? And so from Pere Barney's views that I 237 00:12:38,120 --> 00:12:40,440 Speaker 1: really took early in my career is that the currency 238 00:12:40,480 --> 00:12:45,320 Speaker 1: markets is that arena in which the national companies, national corporates, 239 00:12:45,400 --> 00:12:50,040 Speaker 1: national finance theres would fight out national interests. And from 240 00:12:50,080 --> 00:12:52,880 Speaker 1: being a journalist, I found out that the markets reward 241 00:12:52,920 --> 00:12:55,120 Speaker 1: people to have an opinion. And it's funny about the 242 00:12:55,200 --> 00:12:57,280 Speaker 1: having an opinion. They don't have to be right. The 243 00:12:57,360 --> 00:12:59,440 Speaker 1: idea is not so much being right, but sometimes it's 244 00:12:59,480 --> 00:13:01,560 Speaker 1: offering a Yeah. I think I think you had recently 245 00:13:01,559 --> 00:13:03,520 Speaker 1: sent out a tweet or a note about how poor 246 00:13:03,520 --> 00:13:06,200 Speaker 1: econoists are at forecast in the future, sort of like 247 00:13:06,240 --> 00:13:08,520 Speaker 1: the old Yogi Bearras story about how difficult it is 248 00:13:08,520 --> 00:13:12,160 Speaker 1: to forecast, especially about the future. And I think it's true, 249 00:13:12,360 --> 00:13:14,400 Speaker 1: but I think that the value added of strategies like 250 00:13:14,440 --> 00:13:16,760 Speaker 1: myself and I don't claim to any great track record 251 00:13:16,800 --> 00:13:19,720 Speaker 1: and forecasting the day to day moves, but I think 252 00:13:19,720 --> 00:13:22,600 Speaker 1: that the value added comes from trying to explain the 253 00:13:22,679 --> 00:13:27,360 Speaker 1: framework how these different variables are interacting, So providing a 254 00:13:27,480 --> 00:13:31,120 Speaker 1: like a framework of which variables are important, which aren't important, 255 00:13:31,240 --> 00:13:34,440 Speaker 1: trying to help people navigate this mind field. And so 256 00:13:34,520 --> 00:13:36,880 Speaker 1: from there, I just became from one analysts job to 257 00:13:36,920 --> 00:13:40,480 Speaker 1: another banks hedge funds, and has oftentimes gotten to trade myself, 258 00:13:40,880 --> 00:13:43,040 Speaker 1: whether that prop desks at a hedge funt of having 259 00:13:43,040 --> 00:13:46,000 Speaker 1: a small fund myself. And I find that analyzing the 260 00:13:46,080 --> 00:13:48,760 Speaker 1: market is one thing and trading it is a different 261 00:13:48,800 --> 00:13:51,000 Speaker 1: It's a different set of skills. Like does it really 262 00:13:51,040 --> 00:13:54,480 Speaker 1: matter fundamentally whether the YROs at one thirteen and want 263 00:13:54,480 --> 00:13:57,280 Speaker 1: their teen fifty five? Not really, but it could matter 264 00:13:57,320 --> 00:13:59,800 Speaker 1: a lot to your daily PoDL or to your own position, 265 00:14:00,320 --> 00:14:03,360 Speaker 1: And so knowing like stops technical analysis. What are short 266 00:14:03,480 --> 00:14:07,800 Speaker 1: term movers like market positioning put call ratios versus long 267 00:14:07,920 --> 00:14:10,800 Speaker 1: term fundamental drivers? And I think it's hard for especially 268 00:14:10,840 --> 00:14:12,600 Speaker 1: early in my career, I thought it was very difficult 269 00:14:12,640 --> 00:14:15,880 Speaker 1: to manage both having a short term view, I think 270 00:14:15,920 --> 00:14:17,559 Speaker 1: the dollar is going to fall, but a long term view, 271 00:14:17,559 --> 00:14:19,080 Speaker 1: I think the dollar is going to go up. And 272 00:14:19,160 --> 00:14:21,720 Speaker 1: how to manage those I think that's tricky as well 273 00:14:21,760 --> 00:14:24,680 Speaker 1: as in taking positions with your views or having to 274 00:14:24,720 --> 00:14:43,760 Speaker 1: take a position against your views. So that analogy of 275 00:14:44,000 --> 00:14:48,120 Speaker 1: currencies being sort of um financial warfare is really interesting. 276 00:14:48,240 --> 00:14:51,160 Speaker 1: Does that mean that the inevitable state of currencies is 277 00:14:51,240 --> 00:14:54,400 Speaker 1: always one of aggression? And does that mean that someone 278 00:14:54,600 --> 00:14:58,320 Speaker 1: is always out there trying to unseat the dollar as 279 00:14:58,400 --> 00:15:01,400 Speaker 1: the sort of center of the global financial system. That's 280 00:15:01,440 --> 00:15:03,440 Speaker 1: a good question. I do think that. I think that's 281 00:15:03,480 --> 00:15:06,000 Speaker 1: partly what bitcoin was about. I remember when the Euro 282 00:15:06,160 --> 00:15:07,720 Speaker 1: was born that people thought the Euro was not going 283 00:15:07,760 --> 00:15:10,240 Speaker 1: to replace the dollar. Every so often someone tells me 284 00:15:10,320 --> 00:15:12,120 Speaker 1: that the Chinese R and B is going to replace 285 00:15:12,160 --> 00:15:14,920 Speaker 1: the dollar. I started think that an important turning point 286 00:15:15,000 --> 00:15:18,680 Speaker 1: took place in that was when Robert Rubin took over 287 00:15:18,720 --> 00:15:21,960 Speaker 1: at the Treasury from Lloyd Benson, and that was the 288 00:15:22,000 --> 00:15:24,680 Speaker 1: beginning of the strong dollar policy. And I know there's 289 00:15:24,680 --> 00:15:26,920 Speaker 1: a lot of confusion of what a strong dollar policy means. 290 00:15:27,200 --> 00:15:30,960 Speaker 1: We had one Treasury secretary who suggested a strong dollar 291 00:15:31,080 --> 00:15:36,880 Speaker 1: was one that was difficult to counterfeit. Now it's a 292 00:15:36,920 --> 00:15:40,280 Speaker 1: good interesting but I think that the here's what I 293 00:15:40,280 --> 00:15:43,640 Speaker 1: think it really means. I think that starting in the 294 00:15:43,760 --> 00:15:46,560 Speaker 1: US said we will not weaponize the foreign exchange market. 295 00:15:47,080 --> 00:15:50,440 Speaker 1: Remember the crash in seven. A couple of months before that, 296 00:15:50,600 --> 00:15:52,960 Speaker 1: James Baker threatened the Germans that if they didn't stimulate 297 00:15:53,000 --> 00:15:56,440 Speaker 1: the economy, he let the dollar fall. Lloyd Benson early 298 00:15:57,040 --> 00:16:00,240 Speaker 1: threatened the Japanese if they didn't reduce their tera. I 299 00:16:00,280 --> 00:16:02,680 Speaker 1: think on cars uh, he would let the dollar fall. 300 00:16:02,720 --> 00:16:06,080 Speaker 1: Against the end, the US had weaponized the foreign exchange market, 301 00:16:06,200 --> 00:16:09,400 Speaker 1: or had had acted as a weapon as weaponized the dollar. 302 00:16:09,960 --> 00:16:13,280 Speaker 1: And after there's been an agreement not only for the 303 00:16:13,440 --> 00:16:16,160 Speaker 1: US but through the G seven and then ratified by 304 00:16:16,200 --> 00:16:20,040 Speaker 1: the G twenty not to use the currency market as 305 00:16:20,080 --> 00:16:21,400 Speaker 1: a weapon. And that the way they say it is 306 00:16:21,440 --> 00:16:24,040 Speaker 1: something like that the market the termine exchange rates. So 307 00:16:24,160 --> 00:16:27,600 Speaker 1: it's not that the policy is to have an always 308 00:16:27,640 --> 00:16:32,120 Speaker 1: strengthening dollar. It's that we won't use the dollar explicitly 309 00:16:32,400 --> 00:16:35,440 Speaker 1: as a tool to sort of gain trade advantage, which 310 00:16:35,480 --> 00:16:38,040 Speaker 1: of course raises the question is the era of the 311 00:16:38,120 --> 00:16:42,640 Speaker 1: strong dollar coming to an end? Trump clearly talks about 312 00:16:42,840 --> 00:16:46,680 Speaker 1: the UH the currency market different than his predecessors. I 313 00:16:46,720 --> 00:16:49,080 Speaker 1: think it's safe to say, yeah, I think that Trump 314 00:16:49,440 --> 00:16:53,240 Speaker 1: various and trying to re weaponize the foreign exchange market. 315 00:16:53,280 --> 00:16:56,760 Speaker 1: But I've noted that other policy makers haven't taken his 316 00:16:56,840 --> 00:17:00,200 Speaker 1: bait yet. There's some stuff about the edges, but think 317 00:17:00,200 --> 00:17:03,080 Speaker 1: that I would describe as really weaponizing the currency markets. 318 00:17:03,160 --> 00:17:05,600 Speaker 1: Even some of Trump's comments, I'd say because they were ignored. 319 00:17:05,680 --> 00:17:08,280 Speaker 1: It takes two to tango. Because his comments were ignored, 320 00:17:08,560 --> 00:17:10,399 Speaker 1: I think it helps mean that people are trying to 321 00:17:10,480 --> 00:17:13,639 Speaker 1: like look beyond those kind of provocations. But I do 322 00:17:13,760 --> 00:17:16,280 Speaker 1: think that it is possible they would go back into 323 00:17:16,320 --> 00:17:18,720 Speaker 1: the sort of dog eat dog world and we weaponized 324 00:17:18,720 --> 00:17:20,760 Speaker 1: a foreign exchange market. I think there's talk about that. 325 00:17:20,880 --> 00:17:23,120 Speaker 1: That's why I'm so sensitive and I see people talking 326 00:17:23,119 --> 00:17:25,520 Speaker 1: about currency wars because it's sort of like an arms 327 00:17:25,560 --> 00:17:28,800 Speaker 1: control agreement. We could blow each other up Russia at Charina, 328 00:17:28,840 --> 00:17:31,160 Speaker 1: we can blow ourselves up many times over, but we've 329 00:17:31,200 --> 00:17:33,480 Speaker 1: agreed not to use certain types of weapons. And I 330 00:17:33,520 --> 00:17:35,760 Speaker 1: think that's the same thing that foreign exchange market. The 331 00:17:35,920 --> 00:17:38,280 Speaker 1: arms control can break down with a different leader, with 332 00:17:38,320 --> 00:17:41,520 Speaker 1: a different set of circumstances. I mean, there did seem 333 00:17:41,560 --> 00:17:45,320 Speaker 1: to be some confusion. Maybe there still is, but certainly 334 00:17:45,400 --> 00:17:48,560 Speaker 1: in the first few months of Trump becoming president, it 335 00:17:48,680 --> 00:17:51,879 Speaker 1: seemed like he himself was confused about whether or not 336 00:17:52,440 --> 00:17:56,280 Speaker 1: he wanted a strong dollar or a week dollar. Do 337 00:17:56,440 --> 00:17:59,920 Speaker 1: you think he's leaning towards one side now and what's 338 00:18:00,160 --> 00:18:04,160 Speaker 1: the difference between the two or what does a strong 339 00:18:04,280 --> 00:18:08,280 Speaker 1: dollar mean for the U. S economy versus a week dollar. Well, 340 00:18:08,320 --> 00:18:10,880 Speaker 1: I think that I can't really speak to Trump's state 341 00:18:10,920 --> 00:18:14,399 Speaker 1: of mind. Who can? But I tend to think that 342 00:18:14,520 --> 00:18:17,159 Speaker 1: he's just more opportunistic. Sometimes when a strong dollar it 343 00:18:17,240 --> 00:18:19,800 Speaker 1: looks like it's as about a conference in America, he 344 00:18:19,920 --> 00:18:22,320 Speaker 1: likes it. And when he sees it sees US corporates 345 00:18:22,359 --> 00:18:24,960 Speaker 1: completing about a strong dollar and impact on earnings, he 346 00:18:25,040 --> 00:18:27,600 Speaker 1: doesn't like it so much. But generally I think that 347 00:18:28,160 --> 00:18:30,680 Speaker 1: what people, I think want is not a strong dollar 348 00:18:30,800 --> 00:18:32,880 Speaker 1: or a week dollar, but they want a dollar that's 349 00:18:32,880 --> 00:18:35,080 Speaker 1: like appropriate for where we are in the business cycle. 350 00:18:35,760 --> 00:18:38,879 Speaker 1: I mean, why do other countries accumulate treasuries. They typically 351 00:18:38,920 --> 00:18:42,840 Speaker 1: accumulate treasuries because they're preventing their courtesies from strengthening, which 352 00:18:42,920 --> 00:18:45,480 Speaker 1: is preventing the dollar from weakening, which is preventing, say, 353 00:18:45,520 --> 00:18:49,480 Speaker 1: other macro economic adjustments, and so I would think that 354 00:18:49,560 --> 00:18:51,760 Speaker 1: what we want now, I've just given that the US 355 00:18:51,840 --> 00:18:56,800 Speaker 1: economy is still growing relatively quickly while Europe slowing down. 356 00:18:56,880 --> 00:19:00,159 Speaker 1: In fact, Germany had a contraction in Q three, Pan 357 00:19:00,280 --> 00:19:03,280 Speaker 1: which is the world's third largest economy, contracted in Q three. 358 00:19:04,240 --> 00:19:07,360 Speaker 1: China is slowing down. The FED is tightening. No other, 359 00:19:07,600 --> 00:19:10,400 Speaker 1: no other major central bankers tightening as aggressively as the FED. 360 00:19:11,040 --> 00:19:13,760 Speaker 1: And so I think in these circumstances, the dollar is 361 00:19:13,760 --> 00:19:15,320 Speaker 1: going to go up. And one of these sort of 362 00:19:15,440 --> 00:19:19,399 Speaker 1: uh methodological things that I look at, besides interest rate differentials, 363 00:19:19,520 --> 00:19:24,080 Speaker 1: is the policy mix tight monetary policy or tighter monetary policy, 364 00:19:24,359 --> 00:19:28,160 Speaker 1: looser fiscal policy. I look for countries with that policy mix, 365 00:19:28,640 --> 00:19:32,000 Speaker 1: that policy mixes associated with stronger currencies. That's what Reagan 366 00:19:32,040 --> 00:19:34,600 Speaker 1: Volker had, That's what Germany had when the Berlin Wall 367 00:19:34,720 --> 00:19:37,119 Speaker 1: felt that's that led to a super deutsch Mark, that 368 00:19:37,240 --> 00:19:40,800 Speaker 1: led to the collapse of the exchange rate mechanism and 369 00:19:40,840 --> 00:19:43,240 Speaker 1: then the birth of the Euro. And so I look 370 00:19:43,240 --> 00:19:45,359 Speaker 1: for countries with this kind of policy mix, and to extent, 371 00:19:45,440 --> 00:19:48,000 Speaker 1: the US pursues this policy mix. I still like the dollar. 372 00:19:48,600 --> 00:19:50,840 Speaker 1: But to Joe's point, that might be coming to an end. 373 00:19:50,920 --> 00:19:55,240 Speaker 1: I see some reports that suggests that maybe after exploding 374 00:19:55,280 --> 00:19:57,520 Speaker 1: the budget deficit in the US through these tax cuts 375 00:19:57,560 --> 00:20:01,719 Speaker 1: and spending increases, now it looks like, uh, some political forces, 376 00:20:01,720 --> 00:20:03,560 Speaker 1: including perhaps the White House, is not going to come 377 00:20:03,560 --> 00:20:05,320 Speaker 1: back and try to cut some benefits to try to 378 00:20:05,359 --> 00:20:08,040 Speaker 1: help balance the budget. So if the US goes from 379 00:20:08,720 --> 00:20:13,200 Speaker 1: tighter monetary looser fiscal to the opposite, Fed pauses maybe 380 00:20:13,240 --> 00:20:17,040 Speaker 1: has to cut rates, government goes from fiscal expansion to 381 00:20:17,119 --> 00:20:20,639 Speaker 1: fiscal tightening, that might be trouble for the dollar. So 382 00:20:21,160 --> 00:20:25,439 Speaker 1: big picture, and you mentioned the Reagan Vulkar era. One 383 00:20:25,480 --> 00:20:27,240 Speaker 1: of the things that you and I have talked about 384 00:20:27,560 --> 00:20:30,440 Speaker 1: when you've come on TV a few times is this 385 00:20:30,720 --> 00:20:35,159 Speaker 1: idea of like three recent big dollar ble runs. So 386 00:20:35,320 --> 00:20:38,680 Speaker 1: Reagan had a really big dollarable run, Clinton had a 387 00:20:38,920 --> 00:20:42,240 Speaker 1: dollarable run. You talk. I think we first started talking 388 00:20:42,240 --> 00:20:44,840 Speaker 1: about the current bull run really definitely under the Obama 389 00:20:45,000 --> 00:20:48,880 Speaker 1: and it's continued through Trump. Big picture like how long 390 00:20:49,080 --> 00:20:52,000 Speaker 1: could it go? And what drives sort of multi year 391 00:20:52,560 --> 00:20:55,520 Speaker 1: sustained shifts in the price of the dollar. Yeah, that's 392 00:20:55,520 --> 00:20:56,680 Speaker 1: why I one of the things that really like about 393 00:20:56,680 --> 00:20:59,080 Speaker 1: the phone exchange market. In some ways it's forgiving, and 394 00:20:59,160 --> 00:21:03,119 Speaker 1: you have these long term trends, and unlike say currents, 395 00:21:03,359 --> 00:21:05,320 Speaker 1: unlike interest rates, are bars which are much more tied 396 00:21:05,359 --> 00:21:08,320 Speaker 1: to the business cycle. Currencies because as you were saying, curacy, 397 00:21:08,320 --> 00:21:09,960 Speaker 1: they're partly relative value. How do we know it's the 398 00:21:10,000 --> 00:21:11,920 Speaker 1: dollar moving not the euro, or how do we know 399 00:21:11,960 --> 00:21:13,439 Speaker 1: it's the dollar not the Mexican pay So I think 400 00:21:13,440 --> 00:21:14,960 Speaker 1: that's where the art of it comes in and try 401 00:21:15,000 --> 00:21:17,680 Speaker 1: to look at what the context of it matters. So 402 00:21:17,960 --> 00:21:20,480 Speaker 1: in my view, I'm anticipating the dollar to continue to 403 00:21:20,760 --> 00:21:23,840 Speaker 1: be relatively firm through the middle of next year. Around 404 00:21:23,840 --> 00:21:27,560 Speaker 1: the middle of expect the Federal reserved to pause, and 405 00:21:27,600 --> 00:21:29,280 Speaker 1: when we don't know what the when the Fed pauses, 406 00:21:29,320 --> 00:21:31,119 Speaker 1: we don't know it's gonna pause in the sense that 407 00:21:31,440 --> 00:21:33,440 Speaker 1: so they say they the June meeting and they don't 408 00:21:33,480 --> 00:21:35,919 Speaker 1: high grades in June. Is that a pause or how 409 00:21:35,960 --> 00:21:37,639 Speaker 1: do we know they won't hip grades in July? So 410 00:21:37,720 --> 00:21:39,719 Speaker 1: the Federal have to indicate to us that they're pausing, 411 00:21:40,080 --> 00:21:41,760 Speaker 1: and sometimes in the past the Fed has done that 412 00:21:42,000 --> 00:21:44,760 Speaker 1: by hiking grades fifty basis points a cutting rates fifty 413 00:21:44,760 --> 00:21:46,919 Speaker 1: basis points to sort of sort of ended with an 414 00:21:46,920 --> 00:21:49,800 Speaker 1: exclamation point. But I'm thinking this time the fedges pauses, 415 00:21:49,880 --> 00:21:53,040 Speaker 1: lets us know they pause, and around that same time, 416 00:21:53,359 --> 00:21:56,640 Speaker 1: I think we'll see other countries. For example, the ECB 417 00:21:57,080 --> 00:21:59,760 Speaker 1: is talking about raising interest rates, possibly at the end 418 00:21:59,800 --> 00:22:03,399 Speaker 1: of summer, so around the time they FED pauses, theoretically 419 00:22:03,440 --> 00:22:06,000 Speaker 1: the ECB could raise interest rates, and I think that 420 00:22:06,119 --> 00:22:09,920 Speaker 1: there goes my big divergent story, and there goes what 421 00:22:10,080 --> 00:22:12,399 Speaker 1: could be the tipping point at the end of the 422 00:22:12,480 --> 00:22:17,520 Speaker 1: big dollar supercycle. So if that were to happen, would 423 00:22:17,560 --> 00:22:20,640 Speaker 1: those moves, the corresponding moves in the FX market, would 424 00:22:20,680 --> 00:22:23,400 Speaker 1: those just be telling us something about where those respective 425 00:22:23,440 --> 00:22:26,280 Speaker 1: economies are in the business cycle. Yeah, I think that 426 00:22:26,440 --> 00:22:28,440 Speaker 1: not just the business cycle tracy, but I also would 427 00:22:28,440 --> 00:22:31,879 Speaker 1: think about like monetary policy. You know, I think that 428 00:22:32,200 --> 00:22:35,120 Speaker 1: sometimes that interest rates and currencies are both prices of money. 429 00:22:36,040 --> 00:22:38,800 Speaker 1: So I think that in general, there's two explanatory models 430 00:22:38,840 --> 00:22:42,080 Speaker 1: that economists that strategies to use. One is the external balance. 431 00:22:42,640 --> 00:22:45,200 Speaker 1: Countries with the trade deficit or current account deficit ought 432 00:22:45,200 --> 00:22:48,240 Speaker 1: to have weaker currencies, so the ferry goes and countries 433 00:22:48,280 --> 00:22:51,320 Speaker 1: they have strong have strong trade surpluses OC current account 434 00:22:51,320 --> 00:22:54,879 Speaker 1: surpluses like China should have appreciating currencies. That's sort of 435 00:22:54,960 --> 00:22:59,600 Speaker 1: one model that currencies ought to equalize, bring into equilibrium 436 00:22:59,640 --> 00:23:03,160 Speaker 1: trade counts, external accounts. The other model, which I tend 437 00:23:03,160 --> 00:23:06,840 Speaker 1: to emphasize, focuses on interest rate differentials, yield curve shapes 438 00:23:07,640 --> 00:23:11,000 Speaker 1: policy mixes, and right now the US premieres. You know, 439 00:23:11,200 --> 00:23:14,160 Speaker 1: sometimes people talk about this exhorbited privilege the US has 440 00:23:14,240 --> 00:23:18,119 Speaker 1: having the dollar as a reserve currency. But oftentimes the 441 00:23:18,160 --> 00:23:20,800 Speaker 1: exorbited privilege was lower interest rates. But right now the 442 00:23:21,000 --> 00:23:24,640 Speaker 1: US is having much higher interest rates, almost record high 443 00:23:24,720 --> 00:23:28,240 Speaker 1: interest rates against Germany. It's got near record high interest 444 00:23:28,320 --> 00:23:31,240 Speaker 1: rates against Japan. There's no privilege here. The US is 445 00:23:31,240 --> 00:23:33,800 Speaker 1: paying higher interesting because the markets demanding it, because it's 446 00:23:33,800 --> 00:23:38,320 Speaker 1: strong growth, higher inflation, and lots of supply. And so 447 00:23:38,440 --> 00:23:40,600 Speaker 1: with those change, I think we have to be sensitive 448 00:23:40,640 --> 00:23:42,840 Speaker 1: to that, watch those changes, and change the view on 449 00:23:42,880 --> 00:23:47,240 Speaker 1: the currencies. Let's tackle one of the big questions that 450 00:23:47,280 --> 00:23:50,600 Speaker 1: you've alluded to earlier, which is the perennial obsession with 451 00:23:51,080 --> 00:23:55,680 Speaker 1: will the dollar one day be dethroned by another currency 452 00:23:56,119 --> 00:23:58,680 Speaker 1: or or maybe in theory, when we live at a 453 00:23:58,760 --> 00:24:03,439 Speaker 1: sort of multi reserve currency world, where there's no single uh, 454 00:24:03,600 --> 00:24:06,440 Speaker 1: there's no single dominant currency. And of course right now, 455 00:24:06,720 --> 00:24:10,160 Speaker 1: if there's one currency that people talk about as theoretically 456 00:24:10,240 --> 00:24:12,800 Speaker 1: one day putting a challenge to the dollar, still obviously 457 00:24:13,359 --> 00:24:16,800 Speaker 1: the Chinese currency, although it's nowhere yet. What would it 458 00:24:16,920 --> 00:24:20,880 Speaker 1: take for that to happen? For the whatever that means, 459 00:24:21,000 --> 00:24:22,680 Speaker 1: I don't even know what it means for sure, but 460 00:24:22,800 --> 00:24:25,879 Speaker 1: whatever that means for the dollar to be dethroned in 461 00:24:26,080 --> 00:24:28,920 Speaker 1: some way, what would it take for that to happen? Yeah? Sure, 462 00:24:28,920 --> 00:24:30,439 Speaker 1: I think I think about this a lot, because I mean, 463 00:24:30,560 --> 00:24:31,960 Speaker 1: not only are we living in a time where the 464 00:24:32,119 --> 00:24:34,479 Speaker 1: US power, where we've seen the rise of other countries, 465 00:24:34,520 --> 00:24:36,560 Speaker 1: with the U S share of world GDP is not 466 00:24:36,680 --> 00:24:39,720 Speaker 1: what it was a twenty or forty years ago. So 467 00:24:39,800 --> 00:24:42,560 Speaker 1: I know what conditions can the dollar be dethroned as 468 00:24:42,640 --> 00:24:45,160 Speaker 1: the as a numera area, as a number one currency. 469 00:24:45,560 --> 00:24:49,280 Speaker 1: I had two scenarios. One is if the US abdicates 470 00:24:49,560 --> 00:24:51,040 Speaker 1: and in some ways that's what some people think, that's 471 00:24:51,080 --> 00:24:53,879 Speaker 1: what Trump is doing, and we see this among some 472 00:24:53,920 --> 00:24:56,399 Speaker 1: of the economists, to free trades not in US interest. 473 00:24:56,760 --> 00:24:58,560 Speaker 1: Having the reserve currency of the world is not in 474 00:24:58,680 --> 00:25:02,720 Speaker 1: US interests. It's expensive. There's more money dollars in circulation 475 00:25:02,760 --> 00:25:04,879 Speaker 1: outside the US and inside the US. How can you 476 00:25:05,000 --> 00:25:08,840 Speaker 1: manage your economy like this? So it's possibly we advocate. 477 00:25:08,880 --> 00:25:10,240 Speaker 1: We just say we don't longer want to do this, 478 00:25:10,840 --> 00:25:12,840 Speaker 1: And one way we would do that is by making 479 00:25:12,880 --> 00:25:16,320 Speaker 1: it more difficult to trade US treasuries, which is where 480 00:25:16,320 --> 00:25:19,560 Speaker 1: the reserves are really held it. Another scenario would be 481 00:25:19,560 --> 00:25:22,240 Speaker 1: if there was a compelling alternative. You know, we both 482 00:25:22,320 --> 00:25:25,240 Speaker 1: use the same kind of keyboard, Q W E R T, right, 483 00:25:25,560 --> 00:25:26,920 Speaker 1: and if you said to me, this is not really 484 00:25:26,920 --> 00:25:29,920 Speaker 1: a good keyboard. It's not ergonomically sound, you hurt your risk, 485 00:25:29,960 --> 00:25:32,760 Speaker 1: you get cardinals, tunnel syndrome, all these bad things happen. 486 00:25:32,960 --> 00:25:35,080 Speaker 1: You've got a better keyboard. It can't just be a 487 00:25:35,160 --> 00:25:37,000 Speaker 1: little bit better. It's got to be a lot better 488 00:25:37,280 --> 00:25:39,640 Speaker 1: for me to make this transition. And so having something 489 00:25:39,720 --> 00:25:41,640 Speaker 1: that's just as good as the dollar is not good enough. 490 00:25:41,960 --> 00:25:44,400 Speaker 1: It has to be superior, and right now I don't 491 00:25:44,440 --> 00:25:47,440 Speaker 1: really see anything superior. Superior might be a country that 492 00:25:47,520 --> 00:25:50,800 Speaker 1: has less of an external deficit, has a lower you know, 493 00:25:50,880 --> 00:25:53,000 Speaker 1: the U S has a debt to GDP of close 494 00:25:53,040 --> 00:25:55,480 Speaker 1: to a pent. So he's find me a country that 495 00:25:55,560 --> 00:25:58,760 Speaker 1: has less debt external surplus. He said, well, maybe this 496 00:25:58,840 --> 00:26:00,960 Speaker 1: country could be a better curve sy for the long 497 00:26:01,119 --> 00:26:05,359 Speaker 1: term store value. I don't see a compelling alternative. And 498 00:26:05,400 --> 00:26:08,120 Speaker 1: I know some Americans they worry about China, but when 499 00:26:08,160 --> 00:26:10,600 Speaker 1: I talked to Chinese officials, they know they're not even 500 00:26:10,600 --> 00:26:13,080 Speaker 1: in the game yet. If this is still early days. 501 00:26:13,119 --> 00:26:15,159 Speaker 1: They think times on their side. But we're not going 502 00:26:15,200 --> 00:26:17,440 Speaker 1: to see it. I mean, central banks move it like 503 00:26:17,520 --> 00:26:21,120 Speaker 1: glacial speeds. And we're talking about the dollar being say 504 00:26:21,240 --> 00:26:25,040 Speaker 1: roughly six or seven trillion dollars held in reserves in 505 00:26:25,280 --> 00:26:29,680 Speaker 1: treasuries versus a couple of hundred billion held in Chinese currency. 506 00:26:30,119 --> 00:26:32,600 Speaker 1: So we we if it takes a long time, and 507 00:26:32,720 --> 00:26:35,800 Speaker 1: I think that we really need a clear alternative. And 508 00:26:35,920 --> 00:26:38,440 Speaker 1: I thought maybe some people thought bitcoins was gonna be it. 509 00:26:39,000 --> 00:26:40,679 Speaker 1: Remember the europe people thought now that there was an 510 00:26:40,720 --> 00:26:44,560 Speaker 1: alternative China. I just don't see something that's compelling enough 511 00:26:44,640 --> 00:26:46,399 Speaker 1: to say that the depth and breath of the U. S. 512 00:26:46,480 --> 00:26:50,000 Speaker 1: Treasury market can be replaced by anybody. Well, mark on 513 00:26:50,200 --> 00:26:53,119 Speaker 1: that forward looking note, on that speculative note about the 514 00:26:53,200 --> 00:26:56,560 Speaker 1: future currency, Thank you very much for joining us. And 515 00:26:56,640 --> 00:26:59,199 Speaker 1: although I'd say you did sort of give us headaches. 516 00:26:59,240 --> 00:27:19,160 Speaker 1: I do think she clarified to really important topic. Thank you. So, Tracy, wait, 517 00:27:19,600 --> 00:27:21,360 Speaker 1: do you have more of a headache now or less 518 00:27:21,359 --> 00:27:27,879 Speaker 1: of a headache? I'm trying to think. I actually, I 519 00:27:27,960 --> 00:27:30,800 Speaker 1: think Mark laid stuff out very very clearly. But I 520 00:27:30,880 --> 00:27:35,840 Speaker 1: think it's impossible to fundamentally resolve the tensions of currencies, 521 00:27:36,040 --> 00:27:38,359 Speaker 1: which are that they are all relative. So even when 522 00:27:38,440 --> 00:27:42,520 Speaker 1: we're talking, for instance, about big bull runs in the dollar, 523 00:27:42,720 --> 00:27:45,280 Speaker 1: you know, he mentioned those three historic ones, one of 524 00:27:45,320 --> 00:27:50,119 Speaker 1: which we're possibly and now it seems like the opposite 525 00:27:50,160 --> 00:27:53,040 Speaker 1: side of that argument would be, well, maybe the rest 526 00:27:53,080 --> 00:27:56,080 Speaker 1: of the world was just doing terribly during that time, right. 527 00:27:56,119 --> 00:27:59,040 Speaker 1: I thought that was a really interesting point about currencies 528 00:27:59,359 --> 00:28:02,639 Speaker 1: as a a asset class, so to speak, that's not 529 00:28:02,960 --> 00:28:05,600 Speaker 1: all that cyclical with the rest of the economy. So 530 00:28:05,720 --> 00:28:07,640 Speaker 1: stocks sort of go up in a boom and down 531 00:28:07,680 --> 00:28:10,960 Speaker 1: in a recession, and interest rates go up typically during 532 00:28:11,000 --> 00:28:14,440 Speaker 1: growth periods, and down in a recession, and that currency 533 00:28:14,560 --> 00:28:19,440 Speaker 1: has the have these long cycles that don't correspond neatly 534 00:28:19,960 --> 00:28:22,880 Speaker 1: to to the data. I thought that was an interesting point. 535 00:28:22,920 --> 00:28:25,840 Speaker 1: I hadn't quite thought of it like that before. Yeah, 536 00:28:26,000 --> 00:28:29,000 Speaker 1: and it's definitely interesting to just think more about what 537 00:28:29,200 --> 00:28:31,800 Speaker 1: the dollar actually is and how we're assigning a value 538 00:28:31,840 --> 00:28:35,760 Speaker 1: to it, given that eventually almost everything ends up being 539 00:28:35,920 --> 00:28:38,680 Speaker 1: converted into dollars in one way or another. And you know, 540 00:28:38,800 --> 00:28:42,440 Speaker 1: people talk about all these different financial assets from bonds 541 00:28:42,480 --> 00:28:45,480 Speaker 1: to stocks, to commodities going up or going down, and 542 00:28:45,920 --> 00:28:48,360 Speaker 1: all of those have some sort of tie to the 543 00:28:48,440 --> 00:28:52,320 Speaker 1: green back, and we often don't have the conversation about 544 00:28:52,400 --> 00:28:55,240 Speaker 1: what's happening to the green back itself. Yeah, and this 545 00:28:55,360 --> 00:28:57,960 Speaker 1: whole idea, I actually thought that was very helpful, the 546 00:28:58,520 --> 00:29:01,920 Speaker 1: definition of a strong dollar policy, because I don't think 547 00:29:01,920 --> 00:29:04,880 Speaker 1: I'd ever quite hurt it like that, because and I 548 00:29:05,000 --> 00:29:08,480 Speaker 1: do think that the way people typically talk about it 549 00:29:09,040 --> 00:29:13,080 Speaker 1: is more that people want the dollar to appreciate, or 550 00:29:13,160 --> 00:29:16,640 Speaker 1: that an appreciating dollar is somehow the key gauge of 551 00:29:16,720 --> 00:29:20,760 Speaker 1: American economic strength or might. But that is not so much. 552 00:29:20,920 --> 00:29:23,440 Speaker 1: That is just that we're not going to play around 553 00:29:23,520 --> 00:29:28,320 Speaker 1: with it as a policy tool to win or defeat 554 00:29:28,520 --> 00:29:31,680 Speaker 1: our other countries in the realm of global trade. Yeah, 555 00:29:31,880 --> 00:29:37,000 Speaker 1: that's definitely an interesting definition. Al Right, well, uh, strong 556 00:29:37,080 --> 00:29:40,400 Speaker 1: dollar policy. Okay, This has been another episode of the 557 00:29:40,520 --> 00:29:43,440 Speaker 1: Odd Lots podcast on Tracy Alloway. You can follow me 558 00:29:43,600 --> 00:29:46,760 Speaker 1: on Twitter at Tracy Alloway and I'm Joe Wise though. 559 00:29:46,880 --> 00:29:49,920 Speaker 1: You could follow me on Twitter at the Stalwart, and 560 00:29:50,200 --> 00:29:53,080 Speaker 1: you should follow Mark on Twitter. He's got a great feed. 561 00:29:53,160 --> 00:29:56,440 Speaker 1: He's at Mark Making Sense and be sure to follow 562 00:29:56,520 --> 00:29:59,640 Speaker 1: our producer to Hope for Foreheads he's at Foreheads te 563 00:30:00,280 --> 00:30:03,560 Speaker 1: as well as the Bloomberg head of podcast, Francesca Levie 564 00:30:03,920 --> 00:30:06,520 Speaker 1: at Francesca Today. Thanks for listening.