Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wast and I'm Tracy Allaway. Tracy, have you
Speaker 1: ever noticed like we've had all this market volatility lately,
Speaker 1: and regardless of what we're talking about, it feels like
Speaker 1: the action that we see in the trading of the
Speaker 1: US dollar is central to almost every conversation that we have. Yeah,
Speaker 1: that's true. It certainly feels like well, from my position
Speaker 1: in this part of the world, in Hong Kong, very
Speaker 1: close to China, it feels like a lot of the
Speaker 1: emerging market volatility and weakness has definitely been pinned on
Speaker 1: the dollar recently, right exactly. And it's also kind of
Speaker 1: weird because basically everything is priced in dollars, so I've
Speaker 1: always had a hard time wrapping my head around what
Speaker 1: is a move move in the US dollar versus what
Speaker 1: is other stuff moving around price of the US dollars?
Speaker 1: That makes sense? Oh no, this sounds like a currencies episode.
Speaker 1: And you know that currencies are my least favorite thing
Speaker 1: to talk about because, as you point out, everything is
Speaker 1: always relative, right. It's kind of like if you're standing
Speaker 1: on Earth, then you say, oh, the sun is rising
Speaker 1: and the sun is falling depending on the time of
Speaker 1: the day, but we know that in the universe, the
Speaker 1: sun doesn't actually move at all, and everything moves around it.
Speaker 1: And I've always sort of kind of thought of the
Speaker 1: dollar this way, like sometimes we talk about the dollar
Speaker 1: going up and down, but sometimes it seems like it
Speaker 1: might make sense to just talk about everything else that's
Speaker 1: priced relative to the dollar, and the conversation always kind
Speaker 1: of hurts my head. I would broadly agree with that.
Speaker 1: And of course, the financial system revolves around the dollar,
Speaker 1: and the dollar holds that very special position in the
Speaker 1: financial system, which is that it is the world's reserve currency,
Speaker 1: which gives it an ster layer of complexity. Isn't that fun? Yeah,
Speaker 1: So both of us get our head hurt by currency
Speaker 1: conversations and trying to wrap our head about around the
Speaker 1: role of the dollar in the financial system. So I'm
Speaker 1: very excited about the guest we have on today. We're
Speaker 1: going to talk about how to think about valuing currencies,
Speaker 1: how to think about valuing the dollar with a long
Speaker 1: time that a an expert in the world of currencies.
Speaker 1: He is Mark Chandler. He's a managing partner at Bannockburn
Speaker 1: Global forex and he is going to break it all
Speaker 1: down for us today. So Mark, thank you very much
Speaker 1: for joining us. Thank you. I don't know about your headaches,
Speaker 1: but I can tell you this that there's two types
Speaker 1: of people I think in the world, people who give
Speaker 1: headaches and people who get headaches. And I'm a giver.
Speaker 1: You're gonna give us both headaches, both headaches, I think,
Speaker 1: and I thought, you're gonna be here to relieve our headaches.
Speaker 1: The incredible thing is how complicated for and exchanges. And
Speaker 1: I think that you put two currency strategist and you'll
Speaker 1: get three different opinions, and think that that's the challenges.
Speaker 1: I think that you guys hit it in the sense
Speaker 1: that currencies are central, the dollar es central. But valuation.
Speaker 1: You know, when you think about stocks and bonds, there's
Speaker 1: a clear model of the valuation either an earning stream,
Speaker 1: free cash flow, breakup, value, replacement costs, all more or
Speaker 1: less agreed upon models to evaluate equities. And you can
Speaker 1: do the same thing with fixed income NBAS. Economists can
Speaker 1: project the future value of the earning stream. But it
Speaker 1: comes to currencies and their pure form, they don't have
Speaker 1: an earning stream. You can turn them into a deposit
Speaker 1: and then they have yields, and then we can talk
Speaker 1: about interest rate differentials. But in their pure form, we
Speaker 1: live in an era of fiat currencies where money has
Speaker 1: no value except the value we give it. It's not
Speaker 1: backed by gold or silver anymore, it's not backed by commodities.
Speaker 1: They're free floating for the most part of the major currencies,
Speaker 1: and so valuation becomes much more elusive. I think that's
Speaker 1: what a source of headaches are people, not only all
Speaker 1: the other problems with valuation on the head why both
Speaker 1: Tracy and I get headaches talking about this topic? Okay,
Speaker 1: So on that note, I mean you just mentioned mark that,
Speaker 1: unlike a stock or a bond that generates some sort
Speaker 1: of cash flow, currencies aren't really doing that. So how
Speaker 1: do you go about valuing currencies? And does the value
Speaker 1: of a currency have to come from it moving up
Speaker 1: against something else. That's a good question. So how do
Speaker 1: we evaluate currencies? I think there's even the among economists,
Speaker 1: there's a few agreed upon tools that give one a
Speaker 1: handle on valuation. I use w c RS on Bloomberg,
Speaker 1: and that'll give you thank you for the plugs they
Speaker 1: should that. They'll give you the uh the change in
Speaker 1: the day, but towards the bottom of it you get
Speaker 1: purchasing power parity p p P. I think of this
Speaker 1: sometimes as the famous one everybody's familiar with, probably the
Speaker 1: Big Mac, and the idea that the Big Mac should
Speaker 1: should sell very roughly the same amount in various countries,
Speaker 1: and and if they don't, it's because of a currency misalignment.
Speaker 1: It's kind of a basic approach, and the idea is
Speaker 1: that currencies ought to equalize. The currency should move to
Speaker 1: equalize the basket of treatable goods. So whether you do
Speaker 1: with a iPad or you do with a Starbucks cappuccino,
Speaker 1: you do with the Big Mac, you get roughly the
Speaker 1: same general thing, and that is that the value of
Speaker 1: currency is based on what it can buy. So let's
Speaker 1: talk about the famous Big Mac index and just really
Speaker 1: drill down, because I think you made an important point
Speaker 1: that I want to make sure people understand a big Mac.
Speaker 1: Pretty much everywhere, whether it's Tokyo, whether it's Zurich, Switzerland,
Speaker 1: whether it's New York City, whether it's somewhere in China,
Speaker 1: it's roughly the same ingredients. Probably there are some tweaks
Speaker 1: here and there, but there's some flour or there's some wheat,
Speaker 1: and there's beef, and there's a certain amount of human
Speaker 1: labor that it takes to assemble a big mac and
Speaker 1: the pickles and the tomatoes, and so they are roughly
Speaker 1: the exact same product everywhere. And so what can you
Speaker 1: tell if a big mac is much more expensive and
Speaker 1: at a given moment in say Switzerland, than it is
Speaker 1: in China, what does that tell you about currency valuation?
Speaker 1: So that are the the economists would argue that where
Speaker 1: the big mac is more expensive, it's where the currency
Speaker 1: is undervalued. And so you go around, You go around
Speaker 1: to find out where the big mac is cheap, and
Speaker 1: they'll tell you where the currencies are rich. And so
Speaker 1: I think that I had a colleague once who came
Speaker 1: to New York from London. It was amazed at how
Speaker 1: cheap the big macs were. That's all he ate while
Speaker 1: he was here. But no matter how many eight, it
Speaker 1: didn't help bring the prices into alignment. He he himself
Speaker 1: wasn't able to close the arbitrage exactly, just shy. But
Speaker 1: I think that wait, wait, wait, okay, um, So I
Speaker 1: have a question on this, and sorry to be labor
Speaker 1: the big MAC point, But wouldn't some of the currency
Speaker 1: fluctuation come from differences and say labor costs between countries exactly?
Speaker 1: I think you hit Tracy on the key point here
Speaker 1: is that the that these kind of person power parity
Speaker 1: only measure the price of goods, so they might be
Speaker 1: implicit in there. Some e commists will use instead of
Speaker 1: the big MAC, will use measures of inflation, and then
Speaker 1: you can use something such as like unit labor costs two,
Speaker 1: so you value you depreciate the couragcies by some kind
Speaker 1: of index based on unit labor costs, and that gets
Speaker 1: around that problem that I think you're right about if
Speaker 1: you think about the labor as a Chinese labor, Mexican
Speaker 1: labor compared to American labor, especially as we hype minimum wage.
Speaker 1: And we've talked to say ten dollars or fifteen dollars
Speaker 1: an hour to make a big MAC compared to a
Speaker 1: few dollars in some other countries. But the other problem
Speaker 1: with the person power parity comments have tried to come
Speaker 1: up with new models who address this. It seems that
Speaker 1: in modern production the cost of capital is important, so
Speaker 1: in some ways then the cost of capital is not
Speaker 1: really picked up and I think gets to your point
Speaker 1: tracing not just about labor costs, but cost of capital rents.
Speaker 1: In Hong Kong, maybe you have high rents. It's you know,
Speaker 1: like Manhattan's uson island, people have to build up, so
Speaker 1: maybe rents are elevated, and that will that will raise
Speaker 1: the cost of doing business, including selling Big Max or
Speaker 1: Starbucks cappuccinos. So ultimately, although people do like models such
Speaker 1: as the Big Mac index, it only gets you so
Speaker 1: far because while there are certain baskets of tradeable goods
Speaker 1: like wheat or beef that really should equalize everywhere in
Speaker 1: any given location, there are enough local idiosyncratic things that
Speaker 1: that is just not enough to tell you whether our
Speaker 1: currency is going to go up or down exactly. And
Speaker 1: and to your point, the you can look at the
Speaker 1: variance of Big MAXI on the world, or you can
Speaker 1: look at the Big Mac variance within the United States.
Speaker 1: And the variance in the United States also cannot be
Speaker 1: accounted for by simply a currency misalignment, you'd imagine. So,
Speaker 1: but they kind of have come up with these and
Speaker 1: it's also available on the w c RS page for
Speaker 1: you is they call it, You've got real equilibrium exchange rates,
Speaker 1: which try to make sense of both the current account
Speaker 1: to trade balance as well as capital flows. The idea
Speaker 1: is here that currencies ought to equalize bring the capital
Speaker 1: account or the current account into balance, and so there
Speaker 1: would be another measure. So you'd incorporate then not only
Speaker 1: the differential inflation, but the differential in the current account
Speaker 1: and the capital account to bring that into another model.
Speaker 1: And they more or less tend to all point the
Speaker 1: same direction. Currency that are overvalued, like the Swiss shrink,
Speaker 1: is still overvalued almost no matter how you want to
Speaker 1: look at it. What it really determined that the magnitude
Speaker 1: of the overvaluation. So shall we talk about the dollar, because,
Speaker 1: as Joe mentioned in the intro, there has been a
Speaker 1: lot of attention focused on the dollar recently, maybe more
Speaker 1: so than usual. How special is the dollar? How special
Speaker 1: is the dollar? Can I say very? I mean, and
Speaker 1: by that I mean the foreign exchange market. This is
Speaker 1: why I really like it. The average daily turnover five
Speaker 1: point three trillion dollars a day that comes from the
Speaker 1: Bank for International Settlements that does a survey every three years,
Speaker 1: five point three trillion dollars a day. That means in
Speaker 1: one week, does enough turnover in the foreign exchange market
Speaker 1: to cover world trade for a year, you know. And
Speaker 1: so it's it's a huge market and the dollar is
Speaker 1: on one side of roughly the trades. Why is it
Speaker 1: so big? I mean, if you say the size of
Speaker 1: the trade and currencies dwarfs actual world trade, is it?
Speaker 1: Is it just speculative trading? Like what what drives these
Speaker 1: massive flows? Yeah? Share? So the one point is that
Speaker 1: trade is a big part of it, but it's relatively
Speaker 1: a small part of it. Capital flows are much bigger
Speaker 1: than than trade flows and capital flows you think about
Speaker 1: the internationalization of portfolios buying foreign bonds and stocks compared
Speaker 1: to the trade I didn't think of between the U
Speaker 1: S And Canada, for example, among the two largest trading
Speaker 1: partners in the world. Capital flows are much bigger than
Speaker 1: the trade flows, and the capital flows require currency transactions,
Speaker 1: but also hedging. Also think about how the industry works.
Speaker 1: So you are a bloomberg, you deciety getting some revenue
Speaker 1: in in Mexican pesos, and so what do you do
Speaker 1: with that Mexican pesos? Well, maybe would hedge them by
Speaker 1: selling pasos in the forward market or the futures market
Speaker 1: to protect you from a depreciation of the pace. So so,
Speaker 1: but then also you have an order, I say, a
Speaker 1: hundred million pasos, You give it to your favorite bank,
Speaker 1: and that that that bank might break it up into
Speaker 1: smaller pieces give it to other banks. So in some
Speaker 1: ways foreign exchange trading is like um passing a hot
Speaker 1: potato around. Who's got the risk, who's managing the risk?
Speaker 1: And you get paid to manage the risk. That actually
Speaker 1: brings me to a question that I'm meant to ask earlier,
Speaker 1: but it's sort of a nice pause. You mentioned you
Speaker 1: get paid ultimately to manage the risk, to hold the
Speaker 1: hot potato of currency risk. Tell us a little bit
Speaker 1: about your career. You've been analyzing this for a long time,
Speaker 1: and I assume you've talked to a lot of people
Speaker 1: in exactly that position who feel that they need to
Speaker 1: manage that risk. Just tell us a step back and
Speaker 1: sort of tell us about your experience in this market. Sure,
Speaker 1: So when I first got out of score, well, the
Speaker 1: only thing I do is right, I had to graduate degrees.
Speaker 1: I knew what unemployment was, but I wouldn't have a
Speaker 1: clue as what unemployment meant for interest rates or currencies.
Speaker 1: And the first job I had was as a journalist
Speaker 1: on the floor the Chicago Markettil Exchange covering the currency markets,
Speaker 1: and I just read this book called The Dollar at
Speaker 1: its Rivals by an Italian economist, Para Bonni, and he
Speaker 1: sort of argued that the currency markets in the modern
Speaker 1: world is where nation states fight out national interest They
Speaker 1: wars are deadly and they're messy and the destructive, and
Speaker 1: we want to avoid those and so how can nation
Speaker 1: states compete? And so from Pere Barney's views that I
Speaker 1: really took early in my career is that the currency
Speaker 1: markets is that arena in which the national companies, national corporates,
Speaker 1: national finance theres would fight out national interests. And from
Speaker 1: being a journalist, I found out that the markets reward
Speaker 1: people to have an opinion. And it's funny about the
Speaker 1: having an opinion. They don't have to be right. The
Speaker 1: idea is not so much being right, but sometimes it's
Speaker 1: offering a Yeah. I think I think you had recently
Speaker 1: sent out a tweet or a note about how poor
Speaker 1: econoists are at forecast in the future, sort of like
Speaker 1: the old Yogi Bearras story about how difficult it is
Speaker 1: to forecast, especially about the future. And I think it's true,
Speaker 1: but I think that the value added of strategies like
Speaker 1: myself and I don't claim to any great track record
Speaker 1: and forecasting the day to day moves, but I think
Speaker 1: that the value added comes from trying to explain the
Speaker 1: framework how these different variables are interacting, So providing a
Speaker 1: like a framework of which variables are important, which aren't important,
Speaker 1: trying to help people navigate this mind field. And so
Speaker 1: from there, I just became from one analysts job to
Speaker 1: another banks hedge funds, and has oftentimes gotten to trade myself,
Speaker 1: whether that prop desks at a hedge funt of having
Speaker 1: a small fund myself. And I find that analyzing the
Speaker 1: market is one thing and trading it is a different
Speaker 1: It's a different set of skills. Like does it really
Speaker 1: matter fundamentally whether the YROs at one thirteen and want
Speaker 1: their teen fifty five? Not really, but it could matter
Speaker 1: a lot to your daily PoDL or to your own position,
Speaker 1: And so knowing like stops technical analysis. What are short
Speaker 1: term movers like market positioning put call ratios versus long
Speaker 1: term fundamental drivers? And I think it's hard for especially
Speaker 1: early in my career, I thought it was very difficult
Speaker 1: to manage both having a short term view, I think
Speaker 1: the dollar is going to fall, but a long term view,
Speaker 1: I think the dollar is going to go up. And
Speaker 1: how to manage those I think that's tricky as well
Speaker 1: as in taking positions with your views or having to
Speaker 1: take a position against your views. So that analogy of
Speaker 1: currencies being sort of um financial warfare is really interesting.
Speaker 1: Does that mean that the inevitable state of currencies is
Speaker 1: always one of aggression? And does that mean that someone
Speaker 1: is always out there trying to unseat the dollar as
Speaker 1: the sort of center of the global financial system. That's
Speaker 1: a good question. I do think that. I think that's
Speaker 1: partly what bitcoin was about. I remember when the Euro
Speaker 1: was born that people thought the Euro was not going
Speaker 1: to replace the dollar. Every so often someone tells me
Speaker 1: that the Chinese R and B is going to replace
Speaker 1: the dollar. I started think that an important turning point
Speaker 1: took place in that was when Robert Rubin took over
Speaker 1: at the Treasury from Lloyd Benson, and that was the
Speaker 1: beginning of the strong dollar policy. And I know there's
Speaker 1: a lot of confusion of what a strong dollar policy means.
Speaker 1: We had one Treasury secretary who suggested a strong dollar
Speaker 1: was one that was difficult to counterfeit. Now it's a
Speaker 1: good interesting but I think that the here's what I
Speaker 1: think it really means. I think that starting in the
Speaker 1: US said we will not weaponize the foreign exchange market.
Speaker 1: Remember the crash in seven. A couple of months before that,
Speaker 1: James Baker threatened the Germans that if they didn't stimulate
Speaker 1: the economy, he let the dollar fall. Lloyd Benson early
Speaker 1: threatened the Japanese if they didn't reduce their tera. I
Speaker 1: think on cars uh, he would let the dollar fall.
Speaker 1: Against the end, the US had weaponized the foreign exchange market,
Speaker 1: or had had acted as a weapon as weaponized the dollar.
Speaker 1: And after there's been an agreement not only for the
Speaker 1: US but through the G seven and then ratified by
Speaker 1: the G twenty not to use the currency market as
Speaker 1: a weapon. And that the way they say it is
Speaker 1: something like that the market the termine exchange rates. So
Speaker 1: it's not that the policy is to have an always
Speaker 1: strengthening dollar. It's that we won't use the dollar explicitly
Speaker 1: as a tool to sort of gain trade advantage, which
Speaker 1: of course raises the question is the era of the
Speaker 1: strong dollar coming to an end? Trump clearly talks about
Speaker 1: the UH the currency market different than his predecessors. I
Speaker 1: think it's safe to say, yeah, I think that Trump
Speaker 1: various and trying to re weaponize the foreign exchange market.
Speaker 1: But I've noted that other policy makers haven't taken his
Speaker 1: bait yet. There's some stuff about the edges, but think
Speaker 1: that I would describe as really weaponizing the currency markets.
Speaker 1: Even some of Trump's comments, I'd say because they were ignored.
Speaker 1: It takes two to tango. Because his comments were ignored,
Speaker 1: I think it helps mean that people are trying to
Speaker 1: like look beyond those kind of provocations. But I do
Speaker 1: think that it is possible they would go back into
Speaker 1: the sort of dog eat dog world and we weaponized
Speaker 1: a foreign exchange market. I think there's talk about that.
Speaker 1: That's why I'm so sensitive and I see people talking
Speaker 1: about currency wars because it's sort of like an arms
Speaker 1: control agreement. We could blow each other up Russia at Charina,
Speaker 1: we can blow ourselves up many times over, but we've
Speaker 1: agreed not to use certain types of weapons. And I
Speaker 1: think that's the same thing that foreign exchange market. The
Speaker 1: arms control can break down with a different leader, with
Speaker 1: a different set of circumstances. I mean, there did seem
Speaker 1: to be some confusion. Maybe there still is, but certainly
Speaker 1: in the first few months of Trump becoming president, it
Speaker 1: seemed like he himself was confused about whether or not
Speaker 1: he wanted a strong dollar or a week dollar. Do
Speaker 1: you think he's leaning towards one side now and what's
Speaker 1: the difference between the two or what does a strong
Speaker 1: dollar mean for the U. S economy versus a week dollar. Well,
Speaker 1: I think that I can't really speak to Trump's state
Speaker 1: of mind. Who can? But I tend to think that
Speaker 1: he's just more opportunistic. Sometimes when a strong dollar it
Speaker 1: looks like it's as about a conference in America, he
Speaker 1: likes it. And when he sees it sees US corporates
Speaker 1: completing about a strong dollar and impact on earnings, he
Speaker 1: doesn't like it so much. But generally I think that
Speaker 1: what people, I think want is not a strong dollar
Speaker 1: or a week dollar, but they want a dollar that's
Speaker 1: like appropriate for where we are in the business cycle.
Speaker 1: I mean, why do other countries accumulate treasuries. They typically
Speaker 1: accumulate treasuries because they're preventing their courtesies from strengthening, which
Speaker 1: is preventing the dollar from weakening, which is preventing, say,
Speaker 1: other macro economic adjustments, and so I would think that
Speaker 1: what we want now, I've just given that the US
Speaker 1: economy is still growing relatively quickly while Europe slowing down.
Speaker 1: In fact, Germany had a contraction in Q three, Pan
Speaker 1: which is the world's third largest economy, contracted in Q three.
Speaker 1: China is slowing down. The FED is tightening. No other,
Speaker 1: no other major central bankers tightening as aggressively as the FED.
Speaker 1: And so I think in these circumstances, the dollar is
Speaker 1: going to go up. And one of these sort of
Speaker 1: uh methodological things that I look at, besides interest rate differentials,
Speaker 1: is the policy mix tight monetary policy or tighter monetary policy,
Speaker 1: looser fiscal policy. I look for countries with that policy mix,
Speaker 1: that policy mixes associated with stronger currencies. That's what Reagan
Speaker 1: Volker had, That's what Germany had when the Berlin Wall
Speaker 1: felt that's that led to a super deutsch Mark, that
Speaker 1: led to the collapse of the exchange rate mechanism and
Speaker 1: then the birth of the Euro. And so I look
Speaker 1: for countries with this kind of policy mix, and to extent,
Speaker 1: the US pursues this policy mix. I still like the dollar.
Speaker 1: But to Joe's point, that might be coming to an end.
Speaker 1: I see some reports that suggests that maybe after exploding
Speaker 1: the budget deficit in the US through these tax cuts
Speaker 1: and spending increases, now it looks like, uh, some political forces,
Speaker 1: including perhaps the White House, is not going to come
Speaker 1: back and try to cut some benefits to try to
Speaker 1: help balance the budget. So if the US goes from
Speaker 1: tighter monetary looser fiscal to the opposite, Fed pauses maybe
Speaker 1: has to cut rates, government goes from fiscal expansion to
Speaker 1: fiscal tightening, that might be trouble for the dollar. So
Speaker 1: big picture, and you mentioned the Reagan Vulkar era. One
Speaker 1: of the things that you and I have talked about
Speaker 1: when you've come on TV a few times is this
Speaker 1: idea of like three recent big dollar ble runs. So
Speaker 1: Reagan had a really big dollarable run, Clinton had a
Speaker 1: dollarable run. You talk. I think we first started talking
Speaker 1: about the current bull run really definitely under the Obama
Speaker 1: and it's continued through Trump. Big picture like how long
Speaker 1: could it go? And what drives sort of multi year
Speaker 1: sustained shifts in the price of the dollar. Yeah, that's
Speaker 1: why I one of the things that really like about
Speaker 1: the phone exchange market. In some ways it's forgiving, and
Speaker 1: you have these long term trends, and unlike say currents,
Speaker 1: unlike interest rates, are bars which are much more tied
Speaker 1: to the business cycle. Currencies because as you were saying, curacy,
Speaker 1: they're partly relative value. How do we know it's the
Speaker 1: dollar moving not the euro, or how do we know
Speaker 1: it's the dollar not the Mexican pay So I think
Speaker 1: that's where the art of it comes in and try
Speaker 1: to look at what the context of it matters. So
Speaker 1: in my view, I'm anticipating the dollar to continue to
Speaker 1: be relatively firm through the middle of next year. Around
Speaker 1: the middle of expect the Federal reserved to pause, and
Speaker 1: when we don't know what the when the Fed pauses,
Speaker 1: we don't know it's gonna pause in the sense that
Speaker 1: so they say they the June meeting and they don't
Speaker 1: high grades in June. Is that a pause or how
Speaker 1: do we know they won't hip grades in July? So
Speaker 1: the Federal have to indicate to us that they're pausing,
Speaker 1: and sometimes in the past the Fed has done that
Speaker 1: by hiking grades fifty basis points a cutting rates fifty
Speaker 1: basis points to sort of sort of ended with an
Speaker 1: exclamation point. But I'm thinking this time the fedges pauses,
Speaker 1: lets us know they pause, and around that same time,
Speaker 1: I think we'll see other countries. For example, the ECB
Speaker 1: is talking about raising interest rates, possibly at the end
Speaker 1: of summer, so around the time they FED pauses, theoretically
Speaker 1: the ECB could raise interest rates, and I think that
Speaker 1: there goes my big divergent story, and there goes what
Speaker 1: could be the tipping point at the end of the
Speaker 1: big dollar supercycle. So if that were to happen, would
Speaker 1: those moves, the corresponding moves in the FX market, would
Speaker 1: those just be telling us something about where those respective
Speaker 1: economies are in the business cycle. Yeah, I think that
Speaker 1: not just the business cycle tracy, but I also would
Speaker 1: think about like monetary policy. You know, I think that
Speaker 1: sometimes that interest rates and currencies are both prices of money.
Speaker 1: So I think that in general, there's two explanatory models
Speaker 1: that economists that strategies to use. One is the external balance.
Speaker 1: Countries with the trade deficit or current account deficit ought
Speaker 1: to have weaker currencies, so the ferry goes and countries
Speaker 1: they have strong have strong trade surpluses OC current account
Speaker 1: surpluses like China should have appreciating currencies. That's sort of
Speaker 1: one model that currencies ought to equalize, bring into equilibrium
Speaker 1: trade counts, external accounts. The other model, which I tend
Speaker 1: to emphasize, focuses on interest rate differentials, yield curve shapes
Speaker 1: policy mixes, and right now the US premieres. You know,
Speaker 1: sometimes people talk about this exhorbited privilege the US has
Speaker 1: having the dollar as a reserve currency. But oftentimes the
Speaker 1: exorbited privilege was lower interest rates. But right now the
Speaker 1: US is having much higher interest rates, almost record high
Speaker 1: interest rates against Germany. It's got near record high interest
Speaker 1: rates against Japan. There's no privilege here. The US is
Speaker 1: paying higher interesting because the markets demanding it, because it's
Speaker 1: strong growth, higher inflation, and lots of supply. And so
Speaker 1: with those change, I think we have to be sensitive
Speaker 1: to that, watch those changes, and change the view on
Speaker 1: the currencies. Let's tackle one of the big questions that
Speaker 1: you've alluded to earlier, which is the perennial obsession with
Speaker 1: will the dollar one day be dethroned by another currency
Speaker 1: or or maybe in theory, when we live at a
Speaker 1: sort of multi reserve currency world, where there's no single uh,
Speaker 1: there's no single dominant currency. And of course right now,
Speaker 1: if there's one currency that people talk about as theoretically
Speaker 1: one day putting a challenge to the dollar, still obviously
Speaker 1: the Chinese currency, although it's nowhere yet. What would it
Speaker 1: take for that to happen? For the whatever that means,
Speaker 1: I don't even know what it means for sure, but
Speaker 1: whatever that means for the dollar to be dethroned in
Speaker 1: some way, what would it take for that to happen? Yeah? Sure,
Speaker 1: I think I think about this a lot, because I mean,
Speaker 1: not only are we living in a time where the
Speaker 1: US power, where we've seen the rise of other countries,
Speaker 1: with the U S share of world GDP is not
Speaker 1: what it was a twenty or forty years ago. So
Speaker 1: I know what conditions can the dollar be dethroned as
Speaker 1: the as a numera area, as a number one currency.
Speaker 1: I had two scenarios. One is if the US abdicates
Speaker 1: and in some ways that's what some people think, that's
Speaker 1: what Trump is doing, and we see this among some
Speaker 1: of the economists, to free trades not in US interest.
Speaker 1: Having the reserve currency of the world is not in
Speaker 1: US interests. It's expensive. There's more money dollars in circulation
Speaker 1: outside the US and inside the US. How can you
Speaker 1: manage your economy like this? So it's possibly we advocate.
Speaker 1: We just say we don't longer want to do this,
Speaker 1: And one way we would do that is by making
Speaker 1: it more difficult to trade US treasuries, which is where
Speaker 1: the reserves are really held it. Another scenario would be
Speaker 1: if there was a compelling alternative. You know, we both
Speaker 1: use the same kind of keyboard, Q W E R T, right,
Speaker 1: and if you said to me, this is not really
Speaker 1: a good keyboard. It's not ergonomically sound, you hurt your risk,
Speaker 1: you get cardinals, tunnel syndrome, all these bad things happen.
Speaker 1: You've got a better keyboard. It can't just be a
Speaker 1: little bit better. It's got to be a lot better
Speaker 1: for me to make this transition. And so having something
Speaker 1: that's just as good as the dollar is not good enough.
Speaker 1: It has to be superior, and right now I don't
Speaker 1: really see anything superior. Superior might be a country that
Speaker 1: has less of an external deficit, has a lower you know,
Speaker 1: the U S has a debt to GDP of close
Speaker 1: to a pent. So he's find me a country that
Speaker 1: has less debt external surplus. He said, well, maybe this
Speaker 1: country could be a better curve sy for the long
Speaker 1: term store value. I don't see a compelling alternative. And
Speaker 1: I know some Americans they worry about China, but when
Speaker 1: I talked to Chinese officials, they know they're not even
Speaker 1: in the game yet. If this is still early days.
Speaker 1: They think times on their side. But we're not going
Speaker 1: to see it. I mean, central banks move it like
Speaker 1: glacial speeds. And we're talking about the dollar being say
Speaker 1: roughly six or seven trillion dollars held in reserves in
Speaker 1: treasuries versus a couple of hundred billion held in Chinese currency.
Speaker 1: So we we if it takes a long time, and
Speaker 1: I think that we really need a clear alternative. And
Speaker 1: I thought maybe some people thought bitcoins was gonna be it.
Speaker 1: Remember the europe people thought now that there was an
Speaker 1: alternative China. I just don't see something that's compelling enough
Speaker 1: to say that the depth and breath of the U. S.
Speaker 1: Treasury market can be replaced by anybody. Well, mark on
Speaker 1: that forward looking note, on that speculative note about the
Speaker 1: future currency, Thank you very much for joining us. And
Speaker 1: although I'd say you did sort of give us headaches.
Speaker 1: I do think she clarified to really important topic. Thank you. So, Tracy, wait,
Speaker 1: do you have more of a headache now or less
Speaker 1: of a headache? I'm trying to think. I actually, I
Speaker 1: think Mark laid stuff out very very clearly. But I
Speaker 1: think it's impossible to fundamentally resolve the tensions of currencies,
Speaker 1: which are that they are all relative. So even when
Speaker 1: we're talking, for instance, about big bull runs in the dollar,
Speaker 1: you know, he mentioned those three historic ones, one of
Speaker 1: which we're possibly and now it seems like the opposite
Speaker 1: side of that argument would be, well, maybe the rest
Speaker 1: of the world was just doing terribly during that time, right.
Speaker 1: I thought that was a really interesting point about currencies
Speaker 1: as a a asset class, so to speak, that's not
Speaker 1: all that cyclical with the rest of the economy. So
Speaker 1: stocks sort of go up in a boom and down
Speaker 1: in a recession, and interest rates go up typically during
Speaker 1: growth periods, and down in a recession, and that currency
Speaker 1: has the have these long cycles that don't correspond neatly
Speaker 1: to to the data. I thought that was an interesting point.
Speaker 1: I hadn't quite thought of it like that before. Yeah,
Speaker 1: and it's definitely interesting to just think more about what
Speaker 1: the dollar actually is and how we're assigning a value
Speaker 1: to it, given that eventually almost everything ends up being
Speaker 1: converted into dollars in one way or another. And you know,
Speaker 1: people talk about all these different financial assets from bonds
Speaker 1: to stocks, to commodities going up or going down, and
Speaker 1: all of those have some sort of tie to the
Speaker 1: green back, and we often don't have the conversation about
Speaker 1: what's happening to the green back itself. Yeah, and this
Speaker 1: whole idea, I actually thought that was very helpful, the
Speaker 1: definition of a strong dollar policy, because I don't think
Speaker 1: I'd ever quite hurt it like that, because and I
Speaker 1: do think that the way people typically talk about it
Speaker 1: is more that people want the dollar to appreciate, or
Speaker 1: that an appreciating dollar is somehow the key gauge of
Speaker 1: American economic strength or might. But that is not so much.
Speaker 1: That is just that we're not going to play around
Speaker 1: with it as a policy tool to win or defeat
Speaker 1: our other countries in the realm of global trade. Yeah,
Speaker 1: that's definitely an interesting definition. Al Right, well, uh, strong
Speaker 1: dollar policy. Okay, This has been another episode of the
Speaker 1: Odd Lots podcast on Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway and I'm Joe Wise though.
Speaker 1: You could follow me on Twitter at the Stalwart, and
Speaker 1: you should follow Mark on Twitter. He's got a great feed.
Speaker 1: He's at Mark Making Sense and be sure to follow
Speaker 1: our producer to Hope for Foreheads he's at Foreheads te
Speaker 1: as well as the Bloomberg head of podcast, Francesca Levie
Speaker 1: at Francesca Today. Thanks for listening.