WEBVTT - The Great Bond Car Wreck — in Slow Motion 0:00:02.720 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:17.079 --> 0:00:20.040 I'm definitely Flannder's the head of governments and economics at Bloomberg. 0:00:20.120 --> 0:00:22.319 And this is Trumponomics, the podcast that looks at the 0:00:22.360 --> 0:00:25.680 economic world of Donald Trump, how he's shaking the global 0:00:25.680 --> 0:00:28.640 economy and what on earth is going to happen next. Well, 0:00:28.680 --> 0:00:31.000 this week, I'm sorry, but we need to talk about bonds, 0:00:31.160 --> 0:00:34.600 government bonds, because investors have turned against them in a 0:00:34.600 --> 0:00:37.600 big way in the major developed economies in the past week, 0:00:37.800 --> 0:00:40.640 in what's been called a slow motion car wreck that 0:00:40.680 --> 0:00:43.280 could affect us all, especially anyone looking to take a 0:00:43.320 --> 0:00:46.720 loan out or refinance their house. Now, remember that a 0:00:46.720 --> 0:00:49.320 sovereign bond is an IOU that a government sells to 0:00:49.400 --> 0:00:51.839 investors when it hasn't raised enough money in taxes to 0:00:51.840 --> 0:00:54.279 pay for all their spending, which these days is all 0:00:54.320 --> 0:00:56.720 the time. There's a lot that affects the price of 0:00:56.760 --> 0:01:00.000 that debt, but broadly, when investors are keen, the value 0:01:00.120 --> 0:01:02.400 of the iou goes up and the yield the interest 0:01:02.480 --> 0:01:05.760 rate the government has to pay, goes down. That happened 0:01:05.800 --> 0:01:09.280 for many years after the global financial crisis, governments found 0:01:09.280 --> 0:01:12.720 borrowing cheaper and cheaper, but yields have been rising off 0:01:12.760 --> 0:01:16.240 and on since COVID, and last week years went up 0:01:16.319 --> 0:01:19.360 everywhere all at once in a way that made even 0:01:19.400 --> 0:01:23.080 the more gray haired Bloomberg types pay attention. We're recording 0:01:23.120 --> 0:01:26.440 this on Tuesday morning, US time, and the yield, the 0:01:26.520 --> 0:01:29.320 interest rate on the very long term thirty year US 0:01:29.440 --> 0:01:32.560 treasury has just risen to its highest level since the 0:01:32.560 --> 0:01:35.520 eve of the global financial crisis in two thousand and seven. 0:01:35.800 --> 0:01:38.520 And it's not just the US. In Japan and the UK, 0:01:38.760 --> 0:01:41.880 for example, the thirty year yield is the highest it's 0:01:41.920 --> 0:01:46.880 been this century. Now this matters, obviously for government's funding costs. 0:01:47.160 --> 0:01:49.760 Taken together, the past week could mean tens of billions 0:01:49.760 --> 0:01:52.080 in interest payments by governments that could otherwise have been 0:01:52.120 --> 0:01:55.520 spent on other things. But it also matters for markets 0:01:55.520 --> 0:01:57.760 as a whole, because of what it might tell us 0:01:57.800 --> 0:02:00.240 about the impact of the war in a rack on 0:02:00.240 --> 0:02:04.000 the global economy, the future rate of inflation, and also 0:02:04.320 --> 0:02:07.320 what it might tell us about the basic standing of 0:02:07.360 --> 0:02:10.920 the so called advanced economies. Because you can't help noticing 0:02:11.360 --> 0:02:15.079 many emerging market governments have not seen investors running for 0:02:15.120 --> 0:02:16.760 the hills in the past week. In fact, many of 0:02:16.800 --> 0:02:21.600 their currencies have been going up. Well, there's so much 0:02:21.639 --> 0:02:24.560 to discuss, and my two guests have already written some 0:02:24.639 --> 0:02:27.400 excellent commentary on it that I thought was worth sharing 0:02:27.800 --> 0:02:30.440 on the show. Robin Brooks, a senior Fellow now at 0:02:30.440 --> 0:02:33.600 the Brookings Institution, was formerly chief Economist at the Institute 0:02:33.639 --> 0:02:37.680 for International Finance and chief FX strategist at Goldman Sachs. 0:02:37.720 --> 0:02:39.840 He writes a lot of good stuff on his substack, 0:02:40.160 --> 0:02:44.360 but one piece this week, entitled Liz Trust Bond market 0:02:44.400 --> 0:02:47.919 blow Ups particularly caught my eye. Robin, thanks very much 0:02:47.960 --> 0:02:49.880 waking up early on the West Coast for us. 0:02:50.160 --> 0:02:51.200 Thanks for having me on. 0:02:51.480 --> 0:02:54.400 And John Author's a senior editor for Markets and Bloomberg 0:02:54.400 --> 0:02:59.160 Opinion columnist, long time Financial Times journalist, Welcome back to 0:02:59.200 --> 0:02:59.520 the show. 0:02:59.600 --> 0:03:01.040 John, Thanks for having me. 0:03:02.520 --> 0:03:05.200 I did steal in my quote earlier. I stole the 0:03:05.240 --> 0:03:08.040 title of your column today, the Great Bond car Wreck 0:03:08.200 --> 0:03:13.760 in slow Motion, without going into everything all at once, briefly, 0:03:14.360 --> 0:03:16.639 are we right to be taking the last week pretty 0:03:16.680 --> 0:03:18.400 seriously what's going on in bond market? 0:03:19.360 --> 0:03:22.200 Yes, you should always take what's going on in the 0:03:23.280 --> 0:03:27.360 treasury market very seriously, indeed, because it ultimately is the 0:03:27.400 --> 0:03:28.680 closest approach. 0:03:28.600 --> 0:03:30.960 We have to a risk free rate. 0:03:31.240 --> 0:03:33.280 Yes, there's no such thing as a risk pre rate, 0:03:33.560 --> 0:03:36.840 but for any number of different financial calculations, the closest 0:03:36.840 --> 0:03:38.520 approach to it, for one, that is assumed to be 0:03:38.560 --> 0:03:39.560 the risk pre rates of the. 0:03:39.520 --> 0:03:40.680 Ten year treasury yields. 0:03:40.840 --> 0:03:42.080 So it's a base for everything. 0:03:42.560 --> 0:03:45.600 It's a base that finds its way into an awful 0:03:45.680 --> 0:03:49.680 lot of financial calculations that you would not connect in 0:03:49.760 --> 0:03:53.640 any way intuitively to the treasury market. So it's a 0:03:53.720 --> 0:03:57.520 very big deal, obviously primarily for US mortgages, for the 0:03:57.640 --> 0:04:01.320 US companies trying to raise finance, or Uncle Sam trying 0:04:01.320 --> 0:04:04.720 to finance itself. I think the other point to make 0:04:05.040 --> 0:04:09.240 is that there is perhaps a greater, more important meaning 0:04:09.520 --> 0:04:13.000 when global bond markets move together. So there are very 0:04:13.040 --> 0:04:19.160 specific local factors in Japan with Sanatakaichi, with France with 0:04:19.600 --> 0:04:23.120 the great difficulties there that Macron is having, with the 0:04:23.360 --> 0:04:27.320 legislature there, with the UK and all the ructions at 0:04:27.320 --> 0:04:29.960 the top of the labour parts, and there are certainly clear, 0:04:30.440 --> 0:04:33.480 different idiosyncratic things going on in all of those countries. 0:04:33.480 --> 0:04:36.520 But it's still has to be pointed out that it's 0:04:36.560 --> 0:04:38.479 difficult if you look at a chart to tell the 0:04:38.480 --> 0:04:40.040 difference between their bond markets. 0:04:40.120 --> 0:04:42.799 They have all started surging. 0:04:43.400 --> 0:04:46.000 Bond yields have started surging upwards at the same time, 0:04:46.080 --> 0:04:50.960 and that is ultimately because of uniform concerns. 0:04:50.120 --> 0:04:53.520 About fiscal space and about inflation. 0:04:54.000 --> 0:04:54.279 Robin. 0:04:54.400 --> 0:04:56.040 I did see a nice kind of quote in one 0:04:56.040 --> 0:04:58.320 of the many Bloomberg pieces about this was that the 0:04:58.360 --> 0:05:01.720 developed world has too much debt, little fiscal discipline, and 0:05:01.760 --> 0:05:05.440 no political appetite for fixing either. Do you think that's 0:05:05.480 --> 0:05:08.279 been driving the last week and why has it happened 0:05:08.360 --> 0:05:10.119 so quickly in such a short time. 0:05:11.160 --> 0:05:14.400 Well, I think that's the key question, Stephanie, And let 0:05:14.400 --> 0:05:18.520 me just add to what John said the three points. 0:05:18.600 --> 0:05:24.680 The first is that COVID saw fiscal stimulus globally of 0:05:24.720 --> 0:05:28.359 a magnitude and a global coordination that we've never really 0:05:28.400 --> 0:05:31.560 seen before. I remember talking to a policy maker at 0:05:31.600 --> 0:05:36.240 the time and they said, you know, we don't know 0:05:36.320 --> 0:05:39.039 what the long term consequences of this are going to be. 0:05:39.240 --> 0:05:43.360 So many countries issuing so much debt simultaneously, and I 0:05:43.360 --> 0:05:47.159 think part of what we're seeing in recent months, including 0:05:47.279 --> 0:05:50.960 this week, is the bill is coming due for that. 0:05:51.600 --> 0:05:56.160 The second thing is that the decade before COVID, we 0:05:56.160 --> 0:05:59.320 were all convinced that inflation would be low forever, that 0:05:59.400 --> 0:06:02.120 interest rates would be low forever. We were all telling 0:06:02.200 --> 0:06:06.760 ourselves that we were in a new paradigm and output 0:06:06.839 --> 0:06:10.640 gaps were big, and so that meant you could issue 0:06:10.680 --> 0:06:15.039 lots of debt without interest rates going up very much. 0:06:15.800 --> 0:06:22.520 And that caused governments to run deficits that even after COVID, 0:06:22.560 --> 0:06:25.520 even with COVID long gone, are way wider than they 0:06:25.560 --> 0:06:27.560 were before. So if you look at the US government, 0:06:27.680 --> 0:06:31.719 the deficits running around six percent of GDP, other governments 0:06:31.760 --> 0:06:34.560 are running deficits, they're way wider before COVID. So not 0:06:34.640 --> 0:06:39.200 only did we do a huge debt issuance binge during COVID, 0:06:39.279 --> 0:06:43.120 but we continue to run really loose fiscal policy. And 0:06:43.160 --> 0:06:47.039 then the third thing is that inflation, which we thought 0:06:47.080 --> 0:06:49.720 was always going to be low, has turned out to not. 0:06:49.920 --> 0:06:50.840 Always be low. 0:06:50.880 --> 0:06:54.080 We had the post COVID inflation surge and now we 0:06:54.120 --> 0:06:56.320 have a run on oil prices and what that means 0:06:56.320 --> 0:06:59.720 for inflation. So I think, Stephanie, to come back to 0:06:59.720 --> 0:07:03.880 your question, all of what's going on in debt markets 0:07:03.880 --> 0:07:08.640 has been brewing for many years. Long term interest rates, 0:07:08.720 --> 0:07:15.240 which in particular capture risk premium and expectations among investors 0:07:15.320 --> 0:07:17.760 for what governments might do, and of course the big 0:07:17.760 --> 0:07:20.960 bugbearers that governments will be tempted to inflate away debt, 0:07:21.080 --> 0:07:24.960 right to print money, to lean on central banks to 0:07:25.200 --> 0:07:28.520 make debt go away. I think all these fears have 0:07:28.600 --> 0:07:32.200 been coming to a head over the past year, and 0:07:32.280 --> 0:07:36.520 it's not a surprise that in connection with that we've 0:07:36.560 --> 0:07:40.200 seen the debasement trades. So precious metals go through the right. 0:07:40.400 --> 0:07:44.400 To expect the debasement trade for those who might get 0:07:44.440 --> 0:07:45.680 panicked even more by. 0:07:45.560 --> 0:07:50.480 Hearing that people buying any kind of safe haven asset 0:07:51.040 --> 0:07:55.320 that will protect them from governments inflating away debt. So 0:07:55.400 --> 0:08:00.040 that is gold, silver, platinum, palladium, you name it. But 0:08:00.040 --> 0:08:04.160 it's also currencies and debt of countries with very low 0:08:04.200 --> 0:08:08.520 debt levels. So for example, Switzerland is kind of the Sinoquannon, 0:08:08.680 --> 0:08:11.680 but Sweden all the Scandies are part of that too. 0:08:12.280 --> 0:08:14.280 You make the point, John, I was struggling with last 0:08:14.280 --> 0:08:16.320 week actually because in the UK, obviously there was a 0:08:16.440 --> 0:08:20.320 lot of noise coming out of Westminster, and in Britain 0:08:20.440 --> 0:08:22.840 we like nothing better than to say that we're in 0:08:22.880 --> 0:08:25.760 the worst possible state relative Doughty body else, and everyone 0:08:25.800 --> 0:08:28.040 wanted to look at the bonds and say, the reason 0:08:28.120 --> 0:08:30.320 why yields have gone up so much is because this 0:08:30.480 --> 0:08:32.960 government is terrible and this government is a mess. And 0:08:33.040 --> 0:08:35.000 I found myself in a rether difficult position saying, well, 0:08:35.040 --> 0:08:37.600 this is that is true, but actually there's a lot 0:08:37.640 --> 0:08:40.000 going on, And in fact, the biggest factor that's increased 0:08:40.000 --> 0:08:42.160 the cost of government was these other things going on. 0:08:42.480 --> 0:08:44.840 And as you say, you can't necessarily tell the difference 0:08:44.840 --> 0:08:47.199 between their political crisis and the things going on in 0:08:47.240 --> 0:08:52.320 the US. But we've just been talking about long term things, 0:08:52.360 --> 0:08:57.079 structural things affecting the way that investors would look at 0:08:57.240 --> 0:09:00.199 bond yields. So you still might say, okay, but why 0:09:00.200 --> 0:09:01.839 has it all happened in the last week. I mean, 0:09:01.920 --> 0:09:05.920 is it sort of people suddenly realizing that the straight 0:09:05.960 --> 0:09:07.559 of horror moos is going to be shut for a 0:09:07.600 --> 0:09:10.120 long time because they can't be suddenly realizing that governments 0:09:10.160 --> 0:09:11.400 don't want to cut borrowing. 0:09:12.200 --> 0:09:15.600 There is I mean, Malcolm Gladwell got rich with this 0:09:15.720 --> 0:09:20.120 infuriating concept of the tipping point without ever explaining exactly 0:09:20.160 --> 0:09:22.360 when or why a tipping point will happen. There are 0:09:22.360 --> 0:09:25.000 such things as tipping points. Plainly, this happens in markets 0:09:25.120 --> 0:09:27.720 when some kind of a weird psychological chourn or some 0:09:27.840 --> 0:09:32.880 point in mass psychology is reached and things start to 0:09:32.920 --> 0:09:36.280 move very fast. It would be ridiculous to say this 0:09:36.400 --> 0:09:38.240 is all about the straight of Horne Moos. 0:09:38.480 --> 0:09:41.599 However, plainly that's the trigger at the moment. If you 0:09:41.679 --> 0:09:42.040 want to. 0:09:42.000 --> 0:09:45.600 Talk in the short term about why particularly this was 0:09:45.600 --> 0:09:49.280 a trigger, my best guess is that there was some 0:09:49.400 --> 0:09:53.560 hope out of Beijing last week that there would be 0:09:53.640 --> 0:09:58.000 some pressure from China on Iran to reopen the strait, 0:09:58.840 --> 0:10:01.800 and it didn't happen, evidently, And if you look at 0:10:02.160 --> 0:10:05.840 prices for Brent prices for December, they continue to reach 0:10:06.400 --> 0:10:09.120 a new high for the crisis. We're now above ninety 0:10:09.160 --> 0:10:11.640 dollars for Brent at the end of the year. That 0:10:11.800 --> 0:10:16.520 is followed by people in bond markets. They are being 0:10:16.559 --> 0:10:20.200 told by the oil market that yes, this isn't a 0:10:20.280 --> 0:10:24.360 transitory thing, this is going to last for a while, 0:10:24.679 --> 0:10:31.520 and therefore the risks for creating an inflationary impulse have risen. Ultimately, again, 0:10:31.720 --> 0:10:35.559 it's an irritating glad well, it's happened to happen last week. 0:10:36.000 --> 0:10:40.720 If you wanted a specific moment last week that helped 0:10:40.760 --> 0:10:45.839 things run, maybe let's try to make ourselves feel important 0:10:45.840 --> 0:10:48.360 as Brits. Maybe the guilt's market helped. But the main 0:10:48.400 --> 0:10:52.040 thing is oil. If we're really expecting crew to be 0:10:52.080 --> 0:10:55.360 above ninety dollars by the end of this year, which 0:10:55.400 --> 0:10:58.000 we weren't even a few weeks ago, there does come 0:10:58.040 --> 0:11:00.680 a point of view just have to act on that. 0:11:01.760 --> 0:11:03.560 We tend to say as economists, well, if you have 0:11:03.600 --> 0:11:06.079 these long term structural changes, and inact our economists, you 0:11:06.200 --> 0:11:08.439 think that there's a kind of long term increase in 0:11:08.440 --> 0:11:11.240 interest rates in the sort of neutral real interest rate 0:11:11.320 --> 0:11:15.440 globally from lots of big tectonic forces. But you tend 0:11:15.440 --> 0:11:19.720 to say that's manageable. If it happens over time, slowly, 0:11:20.080 --> 0:11:22.240 a big increase like we've seen in the last week, 0:11:22.280 --> 0:11:24.600 and certainly the big increase in borrowing costs we've had 0:11:24.640 --> 0:11:27.280 since the start of the Iran crisis, then you start 0:11:27.320 --> 0:11:31.600 to worry. US treasuries are the kind of central common 0:11:31.600 --> 0:11:34.880 denominator for the whole global financial system, and there have 0:11:35.000 --> 0:11:38.920 been worries at various times in recent past about the 0:11:38.960 --> 0:11:41.960 short term liquidity in those enormous markets that you would 0:11:41.960 --> 0:11:45.560 have thought would never happen. Are you nervous about unexploded 0:11:45.720 --> 0:11:48.520 sort of grenades that could go off just from this 0:11:48.679 --> 0:11:50.319 move having happened so fast. 0:11:51.240 --> 0:11:54.160 Yeah, if you remember that to long term capital management, 0:11:54.320 --> 0:11:56.920 or particularly to two thousand and seven two thousand and eight, 0:11:56.960 --> 0:12:01.400 you always have to be concerned about that. I think 0:12:01.440 --> 0:12:06.040 this Robins piece covered some of our own analytics at Bloomberg. 0:12:05.559 --> 0:12:09.160 That I mean Japan and the UK. 0:12:09.520 --> 0:12:12.480 You can see some signs of stress, but still nothing 0:12:12.920 --> 0:12:17.760 like the very serious financial accent that happened with Liz Truss. 0:12:17.920 --> 0:12:24.600 There's no really clear sign of stressed trading here in 0:12:25.240 --> 0:12:26.480 particularly here in the US. 0:12:26.520 --> 0:12:28.000 Obviously there was that. 0:12:27.920 --> 0:12:32.880 Would be a reason for very great concern. This looks 0:12:33.960 --> 0:12:37.199 more even if we've reached some kind of a tipping point, 0:12:37.480 --> 0:12:42.559 more like a healthy as far as it goes, a healthy. 0:12:42.640 --> 0:12:44.640 Adjustment, a healthy realization. 0:12:45.679 --> 0:12:48.720 Then the concern obviously has to come into other markets. 0:12:48.760 --> 0:12:52.480 Are they really going to deal with what the bond 0:12:52.559 --> 0:12:54.360 market is telling them? 0:12:54.360 --> 0:12:56.600 Which soap? Are they? In many cases are not. 0:12:57.600 --> 0:12:59.360 The other thing is, if you've lived through two thousand 0:12:59.360 --> 0:13:01.080 and seventy two, you can get it. 0:13:01.240 --> 0:13:04.200 You can get into this thing as that. So it's fine. 0:13:04.200 --> 0:13:07.320 It's true we have we have too many terrible things 0:13:07.320 --> 0:13:08.000 to compare it to. 0:13:08.080 --> 0:13:08.600 It's true. 0:13:08.880 --> 0:13:13.000 Yes it's not in that territory at all, but but 0:13:13.080 --> 0:13:15.080 it is it ought to be healthy. There is no 0:13:15.240 --> 0:13:20.760 clear sign of really dangerous instability or liquidity to this state. 0:13:20.840 --> 0:13:22.800 Well, John, you're not a central banker, but I suspect 0:13:22.880 --> 0:13:24.560 you know we could in a few weeks time, depending 0:13:24.559 --> 0:13:25.960 on what happens, we can come back to you with 0:13:26.040 --> 0:13:28.240 healthy the way people came back to came back to 0:13:28.360 --> 0:13:29.840 j Powell with transitory. 0:13:30.280 --> 0:13:30.559 Robin. 0:13:30.600 --> 0:13:33.480 I quoted your substack about the Liz Trusts bond market 0:13:33.559 --> 0:13:35.840 blow ups, and I think when people hear that phrase, 0:13:35.880 --> 0:13:39.679 they will think, oh, he's talking about great drama and 0:13:39.840 --> 0:13:42.960 crazy politicians doing things. But actually you made a specific 0:13:43.040 --> 0:13:46.280 point that actually relates to this healthiness thing. Because what 0:13:46.320 --> 0:13:49.920 we might call in a developed economy, a healthy adjustment 0:13:49.920 --> 0:13:53.040 in bond markets wouldn't usually come with a fall in 0:13:53.080 --> 0:13:55.240 the currency. So that was the thing that you'd highlighted, 0:13:55.240 --> 0:13:57.360 and I just wanted to dig into that. 0:13:57.360 --> 0:14:01.960 A bit in the g So, in advanced economies, typically 0:14:02.720 --> 0:14:06.680 higher yields mean a stronger currency, right, it increases the 0:14:06.760 --> 0:14:09.920 yield that you get a holding that currency, So it 0:14:10.000 --> 0:14:17.080 is very unusual to see yield spike and the currency fall. 0:14:17.280 --> 0:14:21.400 That is kind of what happens in emerging markets, and 0:14:21.480 --> 0:14:26.720 it is a symptom usually of policy credibility being relatively low, 0:14:27.560 --> 0:14:32.480 so that when you have a shock, people aren't confident 0:14:32.600 --> 0:14:36.000 that the policy framework is stable, and so they are 0:14:36.040 --> 0:14:40.440 worried about central bank credibility being undermined, the central bank 0:14:40.480 --> 0:14:43.640 being pushed into printing money, and therefore a loss of 0:14:43.720 --> 0:14:46.080 value across the board, and so they bail on the country, 0:14:46.080 --> 0:14:50.320 They sell all assets, and so the currency falls in 0:14:50.360 --> 0:14:53.560 addition to government bond prices falling and yields going up. 0:14:54.200 --> 0:14:57.880 The biggest example of this that we've had in the 0:14:57.920 --> 0:15:02.120 G ten, or I should say the most volatile and 0:15:02.240 --> 0:15:05.240 kind of the loudest, was the UK in the LDI 0:15:05.400 --> 0:15:08.920 blow up in twenty twenty two in September and October. 0:15:08.960 --> 0:15:12.840 But the thing is we're seeing more and more of 0:15:12.920 --> 0:15:17.640 these instances across the G ten, and I think that's 0:15:17.680 --> 0:15:23.480 symptomatic of US converging in the G ten down to EM, 0:15:23.880 --> 0:15:26.800 and of course that also means EM converging up to 0:15:27.040 --> 0:15:31.120 the G ten. And another example of a similar blow 0:15:31.200 --> 0:15:35.080 up is the US in April twenty twenty five when 0:15:35.320 --> 0:15:38.800 Trump rolled out reciprocal tariffs and everyone was wondering what 0:15:39.000 --> 0:15:44.200 was going on. The dollar fell as yield spiked. That 0:15:44.320 --> 0:15:47.920 was a very scary episode. And as you know, the 0:15:48.040 --> 0:15:51.520 US treasury market has major vulnerabilities because of the basis 0:15:51.560 --> 0:15:54.720 trade and the swap spread trade. Those are high pockets 0:15:54.760 --> 0:15:59.720 of leverage which wobbled at the time. And then the 0:15:59.760 --> 0:16:03.040 thing that I highlight in my substack piece is Japan. 0:16:03.240 --> 0:16:06.000 Japan is the mother of all of this has been 0:16:06.360 --> 0:16:11.240 in a Liz Trust style sell off for two years. 0:16:11.280 --> 0:16:14.400 It's crazy and it doesn't really get the attention that 0:16:14.480 --> 0:16:18.120 it should. But yields, especially at the long end, have 0:16:18.280 --> 0:16:24.120 been rising continuously in any G ten currency setting. You 0:16:24.120 --> 0:16:26.760 would think that that would boost the yen, but the 0:16:26.840 --> 0:16:30.840 yen has been falling and it is really really worrying. 0:16:31.040 --> 0:16:34.880 And it basically to me says, if I think about 0:16:35.200 --> 0:16:39.960 what should the yield for Japan be, then with gross 0:16:40.040 --> 0:16:42.360 debt of two hundred and forty percent of GDP, basically 0:16:42.400 --> 0:16:45.080 markets are saying, well, I would like a yield that's 0:16:45.200 --> 0:16:47.720 much higher. I want to be compensated for all the 0:16:47.840 --> 0:16:51.000 risks that come with such a high debt level, what 0:16:51.040 --> 0:16:55.080 we're getting is a far lower yield, and so I'm 0:16:55.080 --> 0:16:59.440 going to sell the currency. And so all the shenanigans 0:16:59.640 --> 0:17:03.600 that Japan currently is trying, and I'm referring specifically to 0:17:03.800 --> 0:17:05.560 official effects intervention, you know that. 0:17:05.520 --> 0:17:06.680 Stuff, it just doesn't work. 0:17:06.720 --> 0:17:09.320 It's basically just signaling a government in denial. 0:17:26.000 --> 0:17:26.280 Robin. 0:17:26.400 --> 0:17:28.800 The way you sort of particularly cross my radar when 0:17:28.840 --> 0:17:30.560 I was sort of first involved in this world was 0:17:30.560 --> 0:17:33.960 as chief economists the Institut International Finance. That's the institution 0:17:34.040 --> 0:17:36.360 that sort of has particularly gathers a lot of good 0:17:36.400 --> 0:17:39.960 information on what's going on with investment flows across the world. 0:17:40.000 --> 0:17:41.840 And I just wonder, as someone who sat for a 0:17:41.880 --> 0:17:44.960 long time looking at both emerging market economies and the 0:17:45.040 --> 0:17:48.800 big G ten economies, are we getting to the point 0:17:49.000 --> 0:17:52.040 that or at least the trends that you're talking about, 0:17:52.080 --> 0:17:53.960 does that mean that you're going to start not being 0:17:54.000 --> 0:17:55.439 able to tell the difference? You know, if you're not 0:17:55.480 --> 0:17:58.159 given the name of a country and you look at 0:17:58.240 --> 0:18:00.479 their bond market, they're currency done, and it's that you're 0:18:00.520 --> 0:18:02.000 going to start not being able to tell the difference 0:18:02.040 --> 0:18:04.080 between them. Are we already at that point. 0:18:04.760 --> 0:18:08.119 We're already well on the way to that. If you 0:18:08.240 --> 0:18:11.280 think of Eastern European economies, some of which are now 0:18:11.320 --> 0:18:13.600 in the EU, you know, back in the nineties they 0:18:13.600 --> 0:18:17.600 were considered emerging markets. I think they on most metrics 0:18:17.640 --> 0:18:21.080 these days surpass some of the older members of the 0:18:21.119 --> 0:18:24.879 EU in terms of their fundamentals and debt levels. But 0:18:25.480 --> 0:18:29.600 let me give you a concrete example of an emerging 0:18:29.640 --> 0:18:34.000 market that really stood out positively after COVID. G ten 0:18:34.119 --> 0:18:38.800 central banks were trapped in kind of this pre pandemic 0:18:39.320 --> 0:18:42.199 think bubble, which was inflation will always be low, and 0:18:42.240 --> 0:18:46.000 so they dismissed the inflation surge that happened after COVID. 0:18:46.520 --> 0:18:48.560 And then you look at a central bank in Brazil 0:18:49.960 --> 0:18:52.840 which basically said, yeah, no, we're going to hike, and 0:18:52.880 --> 0:18:56.560 they hiked early and much quicker than G ten central banks. 0:18:57.200 --> 0:19:01.119 So we are seeing a shift, of course, has been 0:19:01.200 --> 0:19:03.920 a long time coming, as you say, and I think 0:19:04.080 --> 0:19:07.479 emerging markets if you look at their currencies against the dollar. 0:19:08.240 --> 0:19:11.520 One of the things that I've been highlighting is that 0:19:11.840 --> 0:19:16.080 emerging work currencies are on a big trend appreciation against 0:19:16.080 --> 0:19:20.240 the US dollar, and that's really about convergence of em 0:19:20.400 --> 0:19:25.600 Central Bank and other policy making decision making and credibility 0:19:26.040 --> 0:19:26.840 to the G ten. 0:19:27.440 --> 0:19:29.640 It does make me think, John, we tend to talk 0:19:29.640 --> 0:19:32.760 about the US having an exorbitant privilege because of its 0:19:33.080 --> 0:19:35.520 the dollar status, and obviously that's still the case in 0:19:35.600 --> 0:19:39.040 many ways. But in a way, these G ten economies 0:19:39.080 --> 0:19:41.560 have been trading on a kind of exorbitant privilege that 0:19:41.640 --> 0:19:43.760 somehow they felt they could get away with having these 0:19:43.840 --> 0:19:45.879 very high debt levels and they could do everything that 0:19:45.920 --> 0:19:50.159 emerging market economies do. But somehow, because they were developed 0:19:50.160 --> 0:19:52.120 and advanced and they've been around for a long time, 0:19:52.160 --> 0:19:54.040 they could get away with it. And people would specifically 0:19:54.119 --> 0:19:56.280 point to Japan as the example of that. Well, they 0:19:56.320 --> 0:19:59.200 still don't have to pay very much to borrow despite 0:19:59.240 --> 0:20:02.840 having these extraordinarily high debt rates. I mean, is that 0:20:02.960 --> 0:20:06.159 just now very rapidly going into the past. 0:20:07.280 --> 0:20:10.520 Yes, it is, but there are still some very important 0:20:10.840 --> 0:20:15.879 market effects of that dawning realization. The one way to 0:20:16.240 --> 0:20:18.960 measure this that I think is fascinating is that is 0:20:19.000 --> 0:20:23.320 the carry trade, which for the uninitiated is a very 0:20:23.320 --> 0:20:26.680 popular way of playing the foreign exchange markets, where you 0:20:26.880 --> 0:20:31.880 borrow from a currency that has a low rate such 0:20:31.920 --> 0:20:36.360 as most obviously the yen and parket in a currency 0:20:36.400 --> 0:20:39.080 with a much higher where you can get much higher rates, 0:20:39.720 --> 0:20:42.800 such as at the moment, the Mexican peso, and you 0:20:43.640 --> 0:20:46.679 pocket the difference between those two interest rates, known as 0:20:46.760 --> 0:20:49.760 the carry and providing there isn't a sudden turn in 0:20:49.800 --> 0:20:52.359 the interest rate in the exchange rate against you, you 0:20:52.359 --> 0:20:57.320 make money. The Japanese yen Mexican peso carry trade has 0:20:57.400 --> 0:21:00.159 made a higher total return in this decade than the 0:21:00.280 --> 0:21:03.159 S and P five hundred. All it is is just 0:21:03.600 --> 0:21:06.959 leveraging the fact that Mexico knows it's got a problem 0:21:07.000 --> 0:21:10.359 with inflation and will hYP rate as soon as it 0:21:10.440 --> 0:21:13.560 sees there's a risk of inflation rising because it's an 0:21:13.560 --> 0:21:16.600 emerging market that's been hit several times in living memory 0:21:16.640 --> 0:21:20.600 by terrible financial crises because of this, while Japan is 0:21:20.640 --> 0:21:24.560 a country where you need to be about sixty years 0:21:24.560 --> 0:21:27.600 old to remember there being any problem with inflation at all, 0:21:28.240 --> 0:21:31.080 and behave differently, and you can simply make that kind 0:21:31.160 --> 0:21:33.800 of that kind of money you can do better than 0:21:34.320 --> 0:21:38.440 buying the US stock market, just by leveraging that difference. 0:21:38.480 --> 0:21:41.840 Now that that cannot go on much longer, it seems 0:21:41.840 --> 0:21:42.080 to me. 0:21:42.480 --> 0:21:45.280 So you've mentioned the equity market, and I did want 0:21:45.320 --> 0:21:46.800 to ask you maybe this is sort of the last 0:21:46.840 --> 0:21:49.000 bit of our conversation, but you know, anyone listening to 0:21:49.080 --> 0:21:51.840 this would think, wow, the world's quite scary place. I mean, 0:21:51.840 --> 0:21:55.119 not only have we got the obvious Iran war, but 0:21:55.200 --> 0:21:57.199 actually the market's telling us that inflation is going to 0:21:57.200 --> 0:22:03.040 stay higher, that the governments credibility across the advanced economies, 0:22:03.080 --> 0:22:05.879 the economies that still play an enormous role in the 0:22:05.920 --> 0:22:10.000 global economy, their credibility is shot. They're not able to 0:22:10.040 --> 0:22:12.760 convince investors that they're really going to do the difficult 0:22:12.840 --> 0:22:17.280 things to reduce their deficits. And we know that the 0:22:17.359 --> 0:22:19.600 voters in those countries don't want to do anything, don't 0:22:19.640 --> 0:22:22.600 want to face up to that reality. Particularly. But despite 0:22:22.640 --> 0:22:26.440 all of those long term fears that are supposedly represented 0:22:26.840 --> 0:22:29.399 embodied in this big increase in the cost of borrowing 0:22:29.440 --> 0:22:32.840 for governments, the equity markets don't seem to have really 0:22:32.880 --> 0:22:33.879 noticed or cared. 0:22:33.920 --> 0:22:34.840 How does that work? 0:22:35.640 --> 0:22:38.840