WEBVTT - How To Analyze The Currency Markets 0:00:10.520 --> 0:00:14.800 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.880 --> 0:00:20.319 I'm Joe Wast and I'm Tracy Allaway. Tracy, have you 0:00:20.360 --> 0:00:23.959 ever noticed like we've had all this market volatility lately, 0:00:24.720 --> 0:00:27.440 and regardless of what we're talking about, it feels like 0:00:27.520 --> 0:00:29.560 the action that we see in the trading of the 0:00:29.640 --> 0:00:34.320 US dollar is central to almost every conversation that we have. Yeah, 0:00:34.400 --> 0:00:38.199 that's true. It certainly feels like well, from my position 0:00:38.479 --> 0:00:40.680 in this part of the world, in Hong Kong, very 0:00:40.680 --> 0:00:42.720 close to China, it feels like a lot of the 0:00:42.760 --> 0:00:46.640 emerging market volatility and weakness has definitely been pinned on 0:00:46.680 --> 0:00:50.000 the dollar recently, right exactly. And it's also kind of 0:00:50.040 --> 0:00:53.920 weird because basically everything is priced in dollars, so I've 0:00:53.960 --> 0:00:58.680 always had a hard time wrapping my head around what 0:00:59.040 --> 0:01:02.920 is a move move in the US dollar versus what 0:01:03.160 --> 0:01:06.920 is other stuff moving around price of the US dollars? 0:01:06.959 --> 0:01:11.400 That makes sense? Oh no, this sounds like a currencies episode. 0:01:11.520 --> 0:01:13.760 And you know that currencies are my least favorite thing 0:01:13.800 --> 0:01:16.679 to talk about because, as you point out, everything is 0:01:16.720 --> 0:01:19.560 always relative, right. It's kind of like if you're standing 0:01:19.600 --> 0:01:22.440 on Earth, then you say, oh, the sun is rising 0:01:23.120 --> 0:01:25.399 and the sun is falling depending on the time of 0:01:25.400 --> 0:01:28.160 the day, but we know that in the universe, the 0:01:28.240 --> 0:01:31.200 sun doesn't actually move at all, and everything moves around it. 0:01:31.240 --> 0:01:33.399 And I've always sort of kind of thought of the 0:01:33.440 --> 0:01:36.319 dollar this way, like sometimes we talk about the dollar 0:01:36.400 --> 0:01:38.800 going up and down, but sometimes it seems like it 0:01:38.880 --> 0:01:41.319 might make sense to just talk about everything else that's 0:01:41.360 --> 0:01:45.040 priced relative to the dollar, and the conversation always kind 0:01:45.040 --> 0:01:48.520 of hurts my head. I would broadly agree with that. 0:01:48.560 --> 0:01:51.720 And of course, the financial system revolves around the dollar, 0:01:51.800 --> 0:01:54.600 and the dollar holds that very special position in the 0:01:54.640 --> 0:01:58.360 financial system, which is that it is the world's reserve currency, 0:01:58.440 --> 0:02:02.840 which gives it an ster layer of complexity. Isn't that fun? Yeah, 0:02:02.920 --> 0:02:06.000 So both of us get our head hurt by currency 0:02:06.800 --> 0:02:10.440 conversations and trying to wrap our head about around the 0:02:10.520 --> 0:02:13.000 role of the dollar in the financial system. So I'm 0:02:13.120 --> 0:02:16.480 very excited about the guest we have on today. We're 0:02:16.480 --> 0:02:20.399 going to talk about how to think about valuing currencies, 0:02:20.440 --> 0:02:24.040 how to think about valuing the dollar with a long 0:02:24.360 --> 0:02:27.960 time that a an expert in the world of currencies. 0:02:28.360 --> 0:02:31.760 He is Mark Chandler. He's a managing partner at Bannockburn 0:02:31.840 --> 0:02:35.079 Global forex and he is going to break it all 0:02:35.240 --> 0:02:38.480 down for us today. So Mark, thank you very much 0:02:38.520 --> 0:02:40.880 for joining us. Thank you. I don't know about your headaches, 0:02:40.919 --> 0:02:42.600 but I can tell you this that there's two types 0:02:42.600 --> 0:02:44.079 of people I think in the world, people who give 0:02:44.080 --> 0:02:46.359 headaches and people who get headaches. And I'm a giver. 0:02:46.560 --> 0:02:49.000 You're gonna give us both headaches, both headaches, I think, 0:02:49.240 --> 0:02:51.720 and I thought, you're gonna be here to relieve our headaches. 0:02:52.080 --> 0:02:55.520 The incredible thing is how complicated for and exchanges. And 0:02:55.560 --> 0:02:58.160 I think that you put two currency strategist and you'll 0:02:58.160 --> 0:03:01.320 get three different opinions, and think that that's the challenges. 0:03:01.440 --> 0:03:03.080 I think that you guys hit it in the sense 0:03:03.080 --> 0:03:06.639 that currencies are central, the dollar es central. But valuation. 0:03:06.720 --> 0:03:08.959 You know, when you think about stocks and bonds, there's 0:03:08.960 --> 0:03:12.240 a clear model of the valuation either an earning stream, 0:03:12.400 --> 0:03:16.239 free cash flow, breakup, value, replacement costs, all more or 0:03:16.320 --> 0:03:19.720 less agreed upon models to evaluate equities. And you can 0:03:19.760 --> 0:03:24.000 do the same thing with fixed income NBAS. Economists can 0:03:24.040 --> 0:03:27.080 project the future value of the earning stream. But it 0:03:27.080 --> 0:03:29.400 comes to currencies and their pure form, they don't have 0:03:29.440 --> 0:03:31.800 an earning stream. You can turn them into a deposit 0:03:31.840 --> 0:03:33.400 and then they have yields, and then we can talk 0:03:33.400 --> 0:03:36.080 about interest rate differentials. But in their pure form, we 0:03:36.160 --> 0:03:39.080 live in an era of fiat currencies where money has 0:03:39.080 --> 0:03:41.800 no value except the value we give it. It's not 0:03:41.840 --> 0:03:44.800 backed by gold or silver anymore, it's not backed by commodities. 0:03:45.240 --> 0:03:47.880 They're free floating for the most part of the major currencies, 0:03:48.480 --> 0:03:52.240 and so valuation becomes much more elusive. I think that's 0:03:52.240 --> 0:03:54.280 what a source of headaches are people, not only all 0:03:54.320 --> 0:03:56.800 the other problems with valuation on the head why both 0:03:57.080 --> 0:04:00.480 Tracy and I get headaches talking about this topic? Okay, 0:04:00.560 --> 0:04:03.640 So on that note, I mean you just mentioned mark that, 0:04:03.800 --> 0:04:06.240 unlike a stock or a bond that generates some sort 0:04:06.240 --> 0:04:11.120 of cash flow, currencies aren't really doing that. So how 0:04:11.160 --> 0:04:15.480 do you go about valuing currencies? And does the value 0:04:15.560 --> 0:04:19.599 of a currency have to come from it moving up 0:04:19.640 --> 0:04:22.840 against something else. That's a good question. So how do 0:04:22.880 --> 0:04:26.400 we evaluate currencies? I think there's even the among economists, 0:04:26.400 --> 0:04:29.359 there's a few agreed upon tools that give one a 0:04:29.440 --> 0:04:33.760 handle on valuation. I use w c RS on Bloomberg, 0:04:34.200 --> 0:04:36.359 and that'll give you thank you for the plugs they 0:04:36.400 --> 0:04:39.840 should that. They'll give you the uh the change in 0:04:39.880 --> 0:04:42.680 the day, but towards the bottom of it you get 0:04:43.520 --> 0:04:46.800 purchasing power parity p p P. I think of this 0:04:46.920 --> 0:04:49.960 sometimes as the famous one everybody's familiar with, probably the 0:04:49.960 --> 0:04:52.520 Big Mac, and the idea that the Big Mac should 0:04:52.640 --> 0:04:55.800 should sell very roughly the same amount in various countries, 0:04:56.279 --> 0:04:59.400 and and if they don't, it's because of a currency misalignment. 0:05:00.279 --> 0:05:03.359 It's kind of a basic approach, and the idea is 0:05:03.400 --> 0:05:07.120 that currencies ought to equalize. The currency should move to 0:05:07.160 --> 0:05:10.200 equalize the basket of treatable goods. So whether you do 0:05:10.320 --> 0:05:13.760 with a iPad or you do with a Starbucks cappuccino, 0:05:13.920 --> 0:05:16.200 you do with the Big Mac, you get roughly the 0:05:16.240 --> 0:05:19.120 same general thing, and that is that the value of 0:05:19.200 --> 0:05:23.520 currency is based on what it can buy. So let's 0:05:23.680 --> 0:05:26.760 talk about the famous Big Mac index and just really 0:05:26.800 --> 0:05:28.920 drill down, because I think you made an important point 0:05:28.920 --> 0:05:31.560 that I want to make sure people understand a big Mac. 0:05:31.839 --> 0:05:37.240 Pretty much everywhere, whether it's Tokyo, whether it's Zurich, Switzerland, 0:05:37.320 --> 0:05:40.080 whether it's New York City, whether it's somewhere in China, 0:05:40.680 --> 0:05:44.719 it's roughly the same ingredients. Probably there are some tweaks 0:05:44.760 --> 0:05:47.440 here and there, but there's some flour or there's some wheat, 0:05:47.880 --> 0:05:50.839 and there's beef, and there's a certain amount of human 0:05:50.920 --> 0:05:53.960 labor that it takes to assemble a big mac and 0:05:54.000 --> 0:05:57.040 the pickles and the tomatoes, and so they are roughly 0:05:57.080 --> 0:06:00.200 the exact same product everywhere. And so what can you 0:06:00.320 --> 0:06:03.640 tell if a big mac is much more expensive and 0:06:03.680 --> 0:06:06.960 at a given moment in say Switzerland, than it is 0:06:07.000 --> 0:06:11.000 in China, what does that tell you about currency valuation? 0:06:11.080 --> 0:06:13.120 So that are the the economists would argue that where 0:06:13.160 --> 0:06:15.840 the big mac is more expensive, it's where the currency 0:06:15.920 --> 0:06:19.119 is undervalued. And so you go around, You go around 0:06:19.120 --> 0:06:20.640 to find out where the big mac is cheap, and 0:06:20.640 --> 0:06:23.680 they'll tell you where the currencies are rich. And so 0:06:23.720 --> 0:06:25.920 I think that I had a colleague once who came 0:06:25.920 --> 0:06:27.920 to New York from London. It was amazed at how 0:06:28.000 --> 0:06:30.440 cheap the big macs were. That's all he ate while 0:06:30.480 --> 0:06:33.039 he was here. But no matter how many eight, it 0:06:33.080 --> 0:06:36.279 didn't help bring the prices into alignment. He he himself 0:06:36.320 --> 0:06:41.839 wasn't able to close the arbitrage exactly, just shy. But 0:06:41.880 --> 0:06:44.880 I think that wait, wait, wait, okay, um, So I 0:06:44.880 --> 0:06:47.040 have a question on this, and sorry to be labor 0:06:47.240 --> 0:06:50.600 the big MAC point, But wouldn't some of the currency 0:06:50.640 --> 0:06:57.200 fluctuation come from differences and say labor costs between countries exactly? 0:06:57.240 --> 0:06:59.040 I think you hit Tracy on the key point here 0:06:59.080 --> 0:07:02.120 is that the that these kind of person power parity 0:07:02.320 --> 0:07:05.200 only measure the price of goods, so they might be 0:07:05.240 --> 0:07:08.440 implicit in there. Some e commists will use instead of 0:07:08.880 --> 0:07:11.400 the big MAC, will use measures of inflation, and then 0:07:11.440 --> 0:07:15.320 you can use something such as like unit labor costs two, 0:07:15.320 --> 0:07:17.720 so you value you depreciate the couragcies by some kind 0:07:17.720 --> 0:07:19.800 of index based on unit labor costs, and that gets 0:07:19.840 --> 0:07:23.120 around that problem that I think you're right about if 0:07:23.120 --> 0:07:25.760 you think about the labor as a Chinese labor, Mexican 0:07:25.840 --> 0:07:28.840 labor compared to American labor, especially as we hype minimum wage. 0:07:28.840 --> 0:07:31.119 And we've talked to say ten dollars or fifteen dollars 0:07:31.160 --> 0:07:33.320 an hour to make a big MAC compared to a 0:07:33.320 --> 0:07:36.000 few dollars in some other countries. But the other problem 0:07:36.080 --> 0:07:38.840 with the person power parity comments have tried to come 0:07:38.880 --> 0:07:41.320 up with new models who address this. It seems that 0:07:41.360 --> 0:07:46.560 in modern production the cost of capital is important, so 0:07:46.600 --> 0:07:48.280 in some ways then the cost of capital is not 0:07:48.320 --> 0:07:50.200 really picked up and I think gets to your point 0:07:50.280 --> 0:07:53.720 tracing not just about labor costs, but cost of capital rents. 0:07:55.000 --> 0:07:57.160 In Hong Kong, maybe you have high rents. It's you know, 0:07:57.440 --> 0:08:00.120 like Manhattan's uson island, people have to build up, so 0:08:00.160 --> 0:08:02.320 maybe rents are elevated, and that will that will raise 0:08:02.360 --> 0:08:05.440 the cost of doing business, including selling Big Max or 0:08:05.560 --> 0:08:11.640 Starbucks cappuccinos. So ultimately, although people do like models such 0:08:11.680 --> 0:08:13.800 as the Big Mac index, it only gets you so 0:08:13.880 --> 0:08:17.000 far because while there are certain baskets of tradeable goods 0:08:17.040 --> 0:08:20.960 like wheat or beef that really should equalize everywhere in 0:08:21.000 --> 0:08:25.000 any given location, there are enough local idiosyncratic things that 0:08:25.000 --> 0:08:27.040 that is just not enough to tell you whether our 0:08:27.080 --> 0:08:29.080 currency is going to go up or down exactly. And 0:08:29.080 --> 0:08:31.080 and to your point, the you can look at the 0:08:31.160 --> 0:08:33.600 variance of Big MAXI on the world, or you can 0:08:33.640 --> 0:08:35.800 look at the Big Mac variance within the United States. 0:08:36.640 --> 0:08:38.439 And the variance in the United States also cannot be 0:08:38.480 --> 0:08:42.640 accounted for by simply a currency misalignment, you'd imagine. So, 0:08:42.760 --> 0:08:44.400 but they kind of have come up with these and 0:08:44.440 --> 0:08:46.520 it's also available on the w c RS page for 0:08:46.600 --> 0:08:51.760 you is they call it, You've got real equilibrium exchange rates, 0:08:51.800 --> 0:08:53.840 which try to make sense of both the current account 0:08:53.840 --> 0:08:57.320 to trade balance as well as capital flows. The idea 0:08:57.440 --> 0:09:01.520 is here that currencies ought to equalize bring the capital 0:09:01.559 --> 0:09:04.840 account or the current account into balance, and so there 0:09:04.840 --> 0:09:07.200 would be another measure. So you'd incorporate then not only 0:09:07.320 --> 0:09:10.600 the differential inflation, but the differential in the current account 0:09:10.600 --> 0:09:13.040 and the capital account to bring that into another model. 0:09:13.200 --> 0:09:15.640 And they more or less tend to all point the 0:09:15.679 --> 0:09:18.400 same direction. Currency that are overvalued, like the Swiss shrink, 0:09:18.800 --> 0:09:20.920 is still overvalued almost no matter how you want to 0:09:20.920 --> 0:09:22.880 look at it. What it really determined that the magnitude 0:09:22.880 --> 0:09:26.559 of the overvaluation. So shall we talk about the dollar, because, 0:09:26.600 --> 0:09:28.800 as Joe mentioned in the intro, there has been a 0:09:28.840 --> 0:09:32.040 lot of attention focused on the dollar recently, maybe more 0:09:32.120 --> 0:09:37.040 so than usual. How special is the dollar? How special 0:09:37.080 --> 0:09:39.400 is the dollar? Can I say very? I mean, and 0:09:39.400 --> 0:09:41.400 by that I mean the foreign exchange market. This is 0:09:41.400 --> 0:09:45.240 why I really like it. The average daily turnover five 0:09:45.320 --> 0:09:47.920 point three trillion dollars a day that comes from the 0:09:47.920 --> 0:09:50.839 Bank for International Settlements that does a survey every three years, 0:09:51.679 --> 0:09:54.840 five point three trillion dollars a day. That means in 0:09:54.880 --> 0:09:57.920 one week, does enough turnover in the foreign exchange market 0:09:57.920 --> 0:10:01.280 to cover world trade for a year, you know. And 0:10:01.320 --> 0:10:03.920 so it's it's a huge market and the dollar is 0:10:04.320 --> 0:10:09.000 on one side of roughly the trades. Why is it 0:10:09.160 --> 0:10:11.960 so big? I mean, if you say the size of 0:10:12.000 --> 0:10:17.439 the trade and currencies dwarfs actual world trade, is it? 0:10:17.520 --> 0:10:20.560 Is it just speculative trading? Like what what drives these 0:10:20.679 --> 0:10:23.080 massive flows? Yeah? Share? So the one point is that 0:10:23.200 --> 0:10:25.600 trade is a big part of it, but it's relatively 0:10:25.600 --> 0:10:28.720 a small part of it. Capital flows are much bigger 0:10:29.120 --> 0:10:32.080 than than trade flows and capital flows you think about 0:10:32.160 --> 0:10:36.640 the internationalization of portfolios buying foreign bonds and stocks compared 0:10:36.679 --> 0:10:38.240 to the trade I didn't think of between the U 0:10:38.280 --> 0:10:40.760 S And Canada, for example, among the two largest trading 0:10:40.760 --> 0:10:43.760 partners in the world. Capital flows are much bigger than 0:10:43.760 --> 0:10:48.000 the trade flows, and the capital flows require currency transactions, 0:10:48.000 --> 0:10:51.360 but also hedging. Also think about how the industry works. 0:10:52.080 --> 0:10:55.040 So you are a bloomberg, you deciety getting some revenue 0:10:55.080 --> 0:10:58.160 in in Mexican pesos, and so what do you do 0:10:58.240 --> 0:11:01.400 with that Mexican pesos? Well, maybe would hedge them by 0:11:01.400 --> 0:11:04.000 selling pasos in the forward market or the futures market 0:11:04.280 --> 0:11:07.400 to protect you from a depreciation of the pace. So so, 0:11:07.679 --> 0:11:09.679 but then also you have an order, I say, a 0:11:09.760 --> 0:11:12.520 hundred million pasos, You give it to your favorite bank, 0:11:12.920 --> 0:11:14.600 and that that that bank might break it up into 0:11:14.600 --> 0:11:16.920 smaller pieces give it to other banks. So in some 0:11:16.960 --> 0:11:21.600 ways foreign exchange trading is like um passing a hot 0:11:21.600 --> 0:11:24.280 potato around. Who's got the risk, who's managing the risk? 0:11:24.400 --> 0:11:27.439 And you get paid to manage the risk. That actually 0:11:27.840 --> 0:11:32.080 brings me to a question that I'm meant to ask earlier, 0:11:32.120 --> 0:11:35.280 but it's sort of a nice pause. You mentioned you 0:11:35.360 --> 0:11:39.160 get paid ultimately to manage the risk, to hold the 0:11:39.240 --> 0:11:42.840 hot potato of currency risk. Tell us a little bit 0:11:42.880 --> 0:11:46.880 about your career. You've been analyzing this for a long time, 0:11:47.200 --> 0:11:49.600 and I assume you've talked to a lot of people 0:11:49.679 --> 0:11:52.120 in exactly that position who feel that they need to 0:11:52.720 --> 0:11:55.120 manage that risk. Just tell us a step back and 0:11:55.200 --> 0:11:58.760 sort of tell us about your experience in this market. Sure, 0:11:58.800 --> 0:12:00.240 So when I first got out of score, well, the 0:12:00.240 --> 0:12:02.840 only thing I do is right, I had to graduate degrees. 0:12:03.080 --> 0:12:04.920 I knew what unemployment was, but I wouldn't have a 0:12:04.960 --> 0:12:07.720 clue as what unemployment meant for interest rates or currencies. 0:12:08.240 --> 0:12:10.160 And the first job I had was as a journalist 0:12:10.160 --> 0:12:13.560 on the floor the Chicago Markettil Exchange covering the currency markets, 0:12:13.760 --> 0:12:15.840 and I just read this book called The Dollar at 0:12:15.880 --> 0:12:19.839 its Rivals by an Italian economist, Para Bonni, and he 0:12:19.960 --> 0:12:22.840 sort of argued that the currency markets in the modern 0:12:22.880 --> 0:12:26.960 world is where nation states fight out national interest They 0:12:27.800 --> 0:12:31.400 wars are deadly and they're messy and the destructive, and 0:12:31.640 --> 0:12:34.280 we want to avoid those and so how can nation 0:12:34.360 --> 0:12:38.040 states compete? And so from Pere Barney's views that I 0:12:38.120 --> 0:12:40.440 really took early in my career is that the currency 0:12:40.480 --> 0:12:45.320 markets is that arena in which the national companies, national corporates, 0:12:45.400 --> 0:12:50.040 national finance theres would fight out national interests. And from 0:12:50.080 --> 0:12:52.880 being a journalist, I found out that the markets reward 0:12:52.920 --> 0:12:55.120 people to have an opinion. And it's funny about the 0:12:55.200 --> 0:12:57.280 having an opinion. They don't have to be right. The 0:12:57.360 --> 0:12:59.440 idea is not so much being right, but sometimes it's 0:12:59.480 --> 0:13:01.560 offering a Yeah. I think I think you had recently 0:13:01.559 --> 0:13:03.520 sent out a tweet or a note about how poor 0:13:03.520 --> 0:13:06.200 econoists are at forecast in the future, sort of like 0:13:06.240 --> 0:13:08.520 the old Yogi Bearras story about how difficult it is 0:13:08.520 --> 0:13:12.160 to forecast, especially about the future. And I think it's true, 0:13:12.360 --> 0:13:14.400 but I think that the value added of strategies like 0:13:14.440 --> 0:13:16.760 myself and I don't claim to any great track record 0:13:16.800 --> 0:13:19.720 and forecasting the day to day moves, but I think 0:13:19.720 --> 0:13:22.600 that the value added comes from trying to explain the 0:13:22.679 --> 0:13:27.360 framework how these different variables are interacting, So providing a 0:13:27.480 --> 0:13:31.120 like a framework of which variables are important, which aren't important, 0:13:31.240 --> 0:13:34.440 trying to help people navigate this mind field. And so 0:13:34.520 --> 0:13:36.880 from there, I just became from one analysts job to 0:13:36.920 --> 0:13:40.480 another banks hedge funds, and has oftentimes gotten to trade myself, 0:13:40.880 --> 0:13:43.040 whether that prop desks at a hedge funt of having 0:13:43.040 --> 0:13:46.000 a small fund myself. And I find that analyzing the 0:13:46.080 --> 0:13:48.760 market is one thing and trading it is a different 0:13:48.800 --> 0:13:51.000 It's a different set of skills. Like does it really 0:13:51.040 --> 0:13:54.480 matter fundamentally whether the YROs at one thirteen and want 0:13:54.480 --> 0:13:57.280 their teen fifty five? Not really, but it could matter 0:13:57.320 --> 0:13:59.800 a lot to your daily PoDL or to your own position, 0:14:00.320 --> 0:14:03.360 And so knowing like stops technical analysis. What are short 0:14:03.480 --> 0:14:07.800 term movers like market positioning put call ratios versus long 0:14:07.920 --> 0:14:10.800 term fundamental drivers? And I think it's hard for especially 0:14:10.840 --> 0:14:12.600 early in my career, I thought it was very difficult 0:14:12.640 --> 0:14:15.880 to manage both having a short term view, I think 0:14:15.920 --> 0:14:17.559 the dollar is going to fall, but a long term view, 0:14:17.559 --> 0:14:19.080 I think the dollar is going to go up. And 0:14:19.160 --> 0:14:21.720 how to manage those I think that's tricky as well 0:14:21.760 --> 0:14:24.680 as in taking positions with your views or having to 0:14:24.720 --> 0:14:43.760 take a position against your views. So that analogy of 0:14:44.000 --> 0:14:48.120 currencies being sort of um financial warfare is really interesting. 0:14:48.240 --> 0:14:51.160 Does that mean that the inevitable state of currencies is 0:14:51.240 --> 0:14:54.400 always one of aggression? And does that mean that someone 0:14:54.600 --> 0:14:58.320 is always out there trying to unseat the dollar as 0:14:58.400 --> 0:15:01.400 the sort of center of the global financial system. That's 0:15:01.440 --> 0:15:03.440 a good question. I do think that. I think that's 0:15:03.480 --> 0:15:06.000 partly what bitcoin was about. I remember when the Euro 0:15:06.160 --> 0:15:07.720 was born that people thought the Euro was not going 0:15:07.760 --> 0:15:10.240 to replace the dollar. Every so often someone tells me 0:15:10.320 --> 0:15:12.120 that the Chinese R and B is going to replace 0:15:12.160 --> 0:15:14.920 the dollar. I started think that an important turning point 0:15:15.000 --> 0:15:18.680 took place in that was when Robert Rubin took over 0:15:18.720 --> 0:15:21.960 at the Treasury from Lloyd Benson, and that was the 0:15:22.000 --> 0:15:24.680 beginning of the strong dollar policy. And I know there's 0:15:24.680 --> 0:15:26.920 a lot of confusion of what a strong dollar policy means. 0:15:27.200 --> 0:15:30.960 We had one Treasury secretary who suggested a strong dollar 0:15:31.080 --> 0:15:36.880 was one that was difficult to counterfeit. Now it's a 0:15:36.920 --> 0:15:40.280 good interesting but I think that the here's what I 0:15:40.280 --> 0:15:43.640 think it really means. I think that starting in the 0:15:43.760 --> 0:15:46.560 US said we will not weaponize the foreign exchange market. 0:15:47.080 --> 0:15:50.440 Remember the crash in seven. A couple of months before that, 0:15:50.600 --> 0:15:52.960 James Baker threatened the Germans that if they didn't stimulate 0:15:53.000 --> 0:15:56.440 the economy, he let the dollar fall. Lloyd Benson early 0:15:57.040 --> 0:16:00.240 threatened the Japanese if they didn't reduce their tera. I 0:16:00.280 --> 0:16:02.680 think on cars uh, he would let the dollar fall. 0:16:02.720 --> 0:16:06.080 Against the end, the US had weaponized the foreign exchange market, 0:16:06.200 --> 0:16:09.400 or had had acted as a weapon as weaponized the dollar. 0:16:09.960 --> 0:16:13.280 And after there's been an agreement not only for the 0:16:13.440 --> 0:16:16.160 US but through the G seven and then ratified by 0:16:16.200 --> 0:16:20.040 the G twenty not to use the currency market as 0:16:20.080 --> 0:16:21.400 a weapon. And that the way they say it is 0:16:21.440 --> 0:16:24.040 something like that the market the termine exchange rates. So 0:16:24.160 --> 0:16:27.600 it's not that the policy is to have an always 0:16:27.640 --> 0:16:32.120 strengthening dollar. It's that we won't use the dollar explicitly 0:16:32.400 --> 0:16:35.440 as a tool to sort of gain trade advantage, which 0:16:35.480 --> 0:16:38.040 of course raises the question is the era of the 0:16:38.120 --> 0:16:42.640 strong dollar coming to an end? Trump clearly talks about 0:16:42.840 --> 0:16:46.680 the UH the currency market different than his predecessors. I 0:16:46.720 --> 0:16:49.080 think it's safe to say, yeah, I think that Trump 0:16:49.440 --> 0:16:53.240 various and trying to re weaponize the foreign exchange market. 0:16:53.280 --> 0:16:56.760 But I've noted that other policy makers haven't taken his 0:16:56.840 --> 0:17:00.200 bait yet. There's some stuff about the edges, but think 0:17:00.200 --> 0:17:03.080 that I would describe as really weaponizing the currency markets. 0:17:03.160 --> 0:17:05.600 Even some of Trump's comments, I'd say because they were ignored. 0:17:05.680 --> 0:17:08.280 It takes two to tango. Because his comments were ignored, 0:17:08.560 --> 0:17:10.399 I think it helps mean that people are trying to 0:17:10.480 --> 0:17:13.639 like look beyond those kind of provocations. But I do 0:17:13.760 --> 0:17:16.280 think that it is possible they would go back into 0:17:16.320 --> 0:17:18.720 the sort of dog eat dog world and we weaponized 0:17:18.720 --> 0:17:20.760 a foreign exchange market. I think there's talk about that. 0:17:20.880 --> 0:17:23.120 That's why I'm so sensitive and I see people talking 0:17:23.119 --> 0:17:25.520 about currency wars because it's sort of like an arms 0:17:25.560 --> 0:17:28.800 control agreement. We could blow each other up Russia at Charina, 0:17:28.840 --> 0:17:31.160 we can blow ourselves up many times over, but we've 0:17:31.200 --> 0:17:33.480 agreed not to use certain types of weapons. And I 0:17:33.520 --> 0:17:35.760 think that's the same thing that foreign exchange market. The 0:17:35.920 --> 0:17:38.280 arms control can break down with a different leader, with 0:17:38.320 --> 0:17:41.520 a different set of circumstances. I mean, there did seem 0:17:41.560 --> 0:17:45.320 to be some confusion. Maybe there still is, but certainly 0:17:45.400 --> 0:17:48.560 in the first few months of Trump becoming president, it 0:17:48.680 --> 0:17:51.879 seemed like he himself was confused about whether or not 0:17:52.440 --> 0:17:56.280 he wanted a strong dollar or a week dollar. Do 0:17:56.440 --> 0:17:59.920 you think he's leaning towards one side now and what's 0:18:00.160 --> 0:18:04.160 the difference between the two or what does a strong 0:18:04.280 --> 0:18:08.280 dollar mean for the U. S economy versus a week dollar. Well, 0:18:08.320 --> 0:18:10.880 I think that I can't really speak to Trump's state 0:18:10.920 --> 0:18:14.399 of mind. Who can? But I tend to think that 0:18:14.520 --> 0:18:17.159 he's just more opportunistic. Sometimes when a strong dollar it 0:18:17.240 --> 0:18:19.800 looks like it's as about a conference in America, he 0:18:19.920 --> 0:18:22.320 likes it. And when he sees it sees US corporates 0:18:22.359 --> 0:18:24.960 completing about a strong dollar and impact on earnings, he 0:18:25.040 --> 0:18:27.600 doesn't like it so much. But generally I think that 0:18:28.160 --> 0:18:30.680 what people, I think want is not a strong dollar 0:18:30.800 --> 0:18:32.880 or a week dollar, but they want a dollar that's 0:18:32.880 --> 0:18:35.080 like appropriate for where we are in the business cycle. 0:18:35.760 --> 0:18:38.879 I mean, why do other countries accumulate treasuries. They typically 0:18:38.920 --> 0:18:42.840 accumulate treasuries because they're preventing their courtesies from strengthening, which 0:18:42.920 --> 0:18:45.480 is preventing the dollar from weakening, which is preventing, say, 0:18:45.520 --> 0:18:49.480 other macro economic adjustments, and so I would think that 0:18:49.560 --> 0:18:51.760 what we want now, I've just given that the US 0:18:51.840 --> 0:18:56.800 economy is still growing relatively quickly while Europe slowing down. 0:18:56.880 --> 0:19:00.159 In fact, Germany had a contraction in Q three, Pan 0:19:00.280 --> 0:19:03.280 which is the world's third largest economy, contracted in Q three. 0:19:04.240 --> 0:19:07.360 China is slowing down. The FED is tightening. No other, 0:19:07.600 --> 0:19:10.400 no other major central bankers tightening as aggressively as the FED. 0:19:11.040 --> 0:19:13.760 And so I think in these circumstances, the dollar is 0:19:13.760 --> 0:19:15.320 going to go up. And one of these sort of 0:19:15.440 --> 0:19:19.399 uh methodological things that I look at, besides interest rate differentials, 0:19:19.520 --> 0:19:24.080 is the policy mix tight monetary policy or tighter monetary policy, 0:19:24.359 --> 0:19:28.160 looser fiscal policy. I look for countries with that policy mix, 0:19:28.640 --> 0:19:32.000 that policy mixes associated with stronger currencies. That's what Reagan 0:19:32.040 --> 0:19:34.600 Volker had, That's what Germany had when the Berlin Wall 0:19:34.720 --> 0:19:37.119 felt that's that led to a super deutsch Mark, that 0:19:37.240 --> 0:19:40.800 led to the collapse of the exchange rate mechanism and 0:19:40.840 --> 0:19:43.240 then the birth of the Euro. And so I look 0:19:43.240 --> 0:19:45.359 for countries with this kind of policy mix, and to extent, 0:19:45.440 --> 0:19:48.000 the US pursues this policy mix. I still like the dollar. 0:19:48.600 --> 0:19:50.840 But to Joe's point, that might be coming to an end. 0:19:50.920 --> 0:19:55.240 I see some reports that suggests that maybe after exploding 0:19:55.280 --> 0:19:57.520 the budget deficit in the US through these tax cuts 0:19:57.560 --> 0:20:01.719 and spending increases, now it looks like, uh, some political forces, 0:20:01.720 --> 0:20:03.560 including perhaps the White House, is not going to come 0:20:03.560 --> 0:20:05.320 back and try to cut some benefits to try to 0:20:05.359 --> 0:20:08.040 help balance the budget. So if the US goes from 0:20:08.720 --> 0:20:13.200 tighter monetary looser fiscal to the opposite, Fed pauses maybe 0:20:13.240 --> 0:20:17.040 has to cut rates, government goes from fiscal expansion to 0:20:17.119 --> 0:20:20.639 fiscal tightening, that might be trouble for the dollar. So 0:20:21.160 --> 0:20:25.439 big picture, and you mentioned the Reagan Vulkar era. One 0:20:25.480 --> 0:20:27.240 of the things that you and I have talked about 0:20:27.560 --> 0:20:30.440 when you've come on TV a few times is this 0:20:30.720 --> 0:20:35.159 idea of like three recent big dollar ble runs. So 0:20:35.320 --> 0:20:38.680 Reagan had a really big dollarable run, Clinton had a 0:20:38.920 --> 0:20:42.240 dollarable run. You talk. I think we first started talking 0:20:42.240 --> 0:20:44.840 about the current bull run really definitely under the Obama 0:20:45.000 --> 0:20:48.880 and it's continued through Trump. Big picture like how long 0:20:49.080 --> 0:20:52.000 could it go? And what drives sort of multi year 0:20:52.560 --> 0:20:55.520 sustained shifts in the price of the dollar. Yeah, that's 0:20:55.520 --> 0:20:56.680 why I one of the things that really like about 0:20:56.680 --> 0:20:59.080 the phone exchange market. In some ways it's forgiving, and 0:20:59.160 --> 0:21:03.119 you have these long term trends, and unlike say currents, 0:21:03.359 --> 0:21:05.320 unlike interest rates, are bars which are much more tied 0:21:05.359 --> 0:21:08.320 to the business cycle. Currencies because as you were saying, curacy, 0:21:08.320 --> 0:21:09.960 they're partly relative value. How do we know it's the 0:21:10.000 --> 0:21:11.920 dollar moving not the euro, or how do we know 0:21:11.960 --> 0:21:13.439 it's the dollar not the Mexican pay So I think 0:21:13.440 --> 0:21:14.960 that's where the art of it comes in and try 0:21:15.000 --> 0:21:17.680