Speaker 1: Hello, add lots listeners. I'm Stephen Carroll, the host of
Speaker 1: Bloomberg's Here's Why podcast, where we break down a key
Speaker 1: story in the news. We borrow Joe for our latest episode,
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Speaker 1: radio news. I haven't seen yet a sense of Okay,
Speaker 1: where's my safe haven? Where do I go and park myself?
Speaker 1: The US is benefiting right now from kind of the
Speaker 1: safe haven trade at the moment. If you can find
Speaker 1: me a safe haven in this market, I'd be the
Speaker 1: first one to sign up for that. We do see
Speaker 1: some of the safe havens seems doesn't perform as good
Speaker 1: as we expect it. For example, go and silver, Japanese
Speaker 1: here and the bones. In times of trouble, investors often
Speaker 1: look for safer ground. During previous crises, that's meant to
Speaker 1: rush into assets like US treasuries, the dollar, the Swiss
Speaker 1: franc or gold. But the turmoil caused by President Trump's
Speaker 1: trade taras last year the traditional safe haven trades as
Speaker 1: investor has turned away from US assets and the latest
Speaker 1: conflict in the Middle East has seen another shift. Here's
Speaker 1: why the Iran war is prompting a safe haven rethink.
Speaker 1: Joe Eisenthal House to Bloomberg's Odd Lots podcast joins us
Speaker 1: now for more. Joe, great to talk to you. Can
Speaker 1: you help us understand first of all the background here?
Speaker 1: What makes a good safe haven asset? Why are treasuries
Speaker 1: or the Swiss frank or gold considered a place to
Speaker 1: shelter from market turmoil.
Speaker 2: The thing that investors are always looking for is some
Speaker 2: sort of asset that is not strictly correlated to growth
Speaker 2: or to risk asset. So what is a risk asset
Speaker 2: or risk asset is an asset that goes up when
Speaker 2: things are going well. So stock market classic risk asset.
Speaker 2: You're feeling optimistic, you think the world is going to
Speaker 2: be good all things equal, you want to buy more stocks,
Speaker 2: gas st is. Then you have other assets that are
Speaker 2: characterized as safe havens, and so there's something about their
Speaker 2: properties in which you expect to be paid back, you
Speaker 2: expect to hold their value even if things aren't going great.
Speaker 2: So gold obviously a classic one. People have been using
Speaker 2: it for money for thousands of years and so by
Speaker 2: and large you expect them. It'll still have monetary possibilities
Speaker 2: in a thousand years. The performance of gold is not
Speaker 2: contingent on things going particularly well in the economy. Treasuries
Speaker 2: are another example. The US is you know, maybe it's
Speaker 2: changed a little bit, but by a large stable and
Speaker 2: the coupon payments are simply contingent on legally required payments
Speaker 2: from the US government, and so again those payments will
Speaker 2: happen regardless of whether the economy is strong or bad
Speaker 2: or whatever it is. So that has safe haven properties
Speaker 2: all around the world. Generally speaking, the US has had
Speaker 2: very little inflation over the years, certainly relative to many countries,
Speaker 2: and so therefore the dollar holds its value relatively well.
Speaker 2: It's accepted almost everywhere, and so it is safe haven property.
Speaker 2: So basically, what people gravitate to in times of stress,
Speaker 2: and it's a little different are assets that are not
Speaker 2: correlated to the business cycle, that can perform and hold
Speaker 2: their value even if things aren't going well.
Speaker 1: So what was different than during the tariff turmoil of
Speaker 1: last year because some of these traditional safe havens seemed
Speaker 1: a bit less attractive.
Speaker 2: Yeah, So I think the way to think about it
Speaker 2: is that you know, safe havenness is something that kicks
Speaker 2: in at specific times. And so let's go back to
Speaker 2: the tariffs. Did it create a true crisis? Crisis is
Speaker 2: in like a run on the banks, et cetera. No,
Speaker 2: not really. There was a lot of anxiety and so forth.
Speaker 2: But the net effect of tariffs where for many people
Speaker 2: around the world, the US looked like a less attractive
Speaker 2: place to invest. It would be more costly to do
Speaker 2: business here, and so forth, and so well, in this
Speaker 2: environment you saw the dollar weakening.
Speaker 1: Right.
Speaker 2: This really did not have much to do with its
Speaker 2: safe haven properties per se. It was just the dollar
Speaker 2: being another currency, and investors around the world look and say, okay,
Speaker 2: this is not great for economic management. I don't really
Speaker 2: want to put more assets on the ground in the
Speaker 2: US because importing goods in the factories and so for
Speaker 2: it'll be more expensive, and so then they sell dollars.
Speaker 2: Now you fast forward to the war in Iran, and
Speaker 2: this is very different. The dimensions of the currency are
Speaker 2: not about broader conditions. This is there is a war
Speaker 2: going on. We do not know how long this war
Speaker 2: is going to go on. War spiral out of control,
Speaker 2: even if they're meant to be contained. This is a
Speaker 2: historical fact. In that environment, people are not thinking about
Speaker 2: is the US a good place to invest right now?
Speaker 2: They're thinking, I am scared. I want to have my
Speaker 2: money and something that is likely to roughly retain its
Speaker 2: value for a year and now five years from now,
Speaker 2: et cetera. And by that measure, the dollar is a
Speaker 2: relatively attractive option. So at times, these what we call
Speaker 2: save haven assets performed differently. In twenty twenty five, the
Speaker 2: dollar performed like an investment asset. Oh, I don't really
Speaker 2: want to hold it so much, because the US is
Speaker 2: a less attractive environment. Today the dollar looks good. It's
Speaker 2: a safe haven asset, not because the US is a
Speaker 2: great place to invest per se, but because those properties,
Speaker 2: those safe haven properties have kicked in.
Speaker 1: So how does that work then in this moment for treasuries.
Speaker 2: Yeah, another great question. What makes treasuries a safe haven? Obviously,
Speaker 2: it's the fact that the US is very credit worthy,
Speaker 2: that the US borrows in its own currency, so therefore
Speaker 2: there is no prospect of the treasury like running out
Speaker 2: of money. It can always print it and so forth.
Speaker 2: And so what gives treasuries a safe haven property is
Speaker 2: the fact that that payment is guaranteed by the US government. Now,
Speaker 2: another factor in the pricing of treasuries is inflation. And
Speaker 2: so if you have, like I say, you know treasury
Speaker 2: that it pays a four percent coupon, you get a
Speaker 2: four percent yield every year. But inflation, let's say it
Speaker 2: goes to six percent, that is a money losing investment, right,
Speaker 2: The real value of that treasury, that coupon payment is
Speaker 2: not keeping up with inflation, so you don't on to
Speaker 2: hold it. With the war, people are worried about inflation.
Speaker 2: I mean, obviously we've seen oil prices spike. Wars are
Speaker 2: costly just from a sort of budgetary standpoint, They require
Speaker 2: more fiscal expenditure, They put strains on resources of all sorts.
Speaker 2: We may have to massively ramp up missile production, that
Speaker 2: puts strains on the real economy. All of these things
Speaker 2: taken to be per se inflationary. So then you look
Speaker 2: and you're like, if you're an investor, someone's selling you
Speaker 2: a treasury, You're thinking, you know what, I want to
Speaker 2: hire yield to compensate for this inflation. So it's the
Speaker 2: type of thing once again where the same ass but
Speaker 2: in a different environment. The safe haven properties aren't kicking
Speaker 2: in for that moment. Now, I do think it's worth
Speaker 2: noting that, like you can watch, say like the VIX
Speaker 2: for example, a measure of financial conditions and sort of
Speaker 2: a pure measure of how anxious people are feeling. If
Speaker 2: you get a major VIX spike, there is a good
Speaker 2: chance that people will buy treasuries. And so what I'm
Speaker 2: saying is I mentioned all the concerns with treasuries. However,
Speaker 2: maybe that's a price people are willing to pay just
Speaker 2: for that security, and so there's a push pull here.
Speaker 2: I like the fact that the payment is guaranteed. I
Speaker 2: don't like the fact that the payment is going to
Speaker 2: keep up with inflation. If things are really breaking down,
Speaker 2: you might say, you know what, I'm willing to take
Speaker 2: a price loss. I'm willing to accept a coupon payment
Speaker 2: that is less than inflation because the fact that I
Speaker 2: get paid anything at all, and the fact that I
Speaker 2: will get my principle back at the end of the term,
Speaker 2: whether it's a ten year treasury, is worth so much
Speaker 2: to me in this period of extreme anxiety that I
Speaker 2: will use a treasury as a safe haven, even if
Speaker 2: it's a money losing investment. An analogy that I like
Speaker 2: to make is a safe deposit box. You pay the
Speaker 2: bank for the right to hold something in a safe
Speaker 2: deposit box. De facto, that means that a safe deposit
Speaker 2: box has a negative yield, and yet it is often
Speaker 2: part of someone's safe haven portfolio. I'm going to put
Speaker 2: my values balls in there, despite the fact that it
Speaker 2: costs me a little bit of money every year, because
Speaker 2: the fact that I will be able to take them
Speaker 2: out one day is worth quite a bit of peace
Speaker 2: of mind.
Speaker 1: Can you then explain to us what happened with gold,
Speaker 1: because if we look at a gold chart for the
Speaker 1: past few years, and we've talked about at length, you
Speaker 1: know number go up to absolutely quote our hike sekbox
Speaker 1: and it's book of our crypto. But this time around,
Speaker 1: we haven't seen the same rally in gold during the
Speaker 1: Iran war.
Speaker 2: Why so, first of all, as you said, gold has
Speaker 2: rallied a lot over the last several years, and it's
Speaker 2: rally during a period of I would say, sustained high inflation.
Speaker 2: The rate of inflation has come down, but inflation all
Speaker 2: around the world is still fairly high. People are worried
Speaker 2: about the you know, paper currencies holding their valume. It's
Speaker 2: gone up during a period of geopolitical attention, obviously multiple
Speaker 2: wars around the world since twenty twenty two, and so
Speaker 2: once again, you know, there's this anxiety about like sovereignty
Speaker 2: and some pretty fundamental questions, and so this is the
Speaker 2: type of environment in which people want to reach for
Speaker 2: an asset that once again, it transcends time, it transcends space,
Speaker 2: it transcends nation states, and so forth. It's a form
Speaker 2: of money that's kind of understood everywhere in the world
Speaker 2: and throughout history. So the last several years have been
Speaker 2: a really good environment for people wanting to have some
Speaker 2: allocations that people want to hold a dollar alternative. If
Speaker 2: you think back to twenty twenty two, Russia got sanctioned
Speaker 2: and lost access to a lot of the dollars that
Speaker 2: it had, and I think people around the world world,
Speaker 2: we're looking at that and you're like, you know what,
Speaker 2: maybe I want to hold fewer dollars because this could
Speaker 2: happen to me too one day, and so I want
Speaker 2: to hold gold in a vault. Now we get the
Speaker 2: war and gold hasn't done as well. I think there's
Speaker 2: probably a couple of factors you know. Something that happens
Speaker 2: in an extreme spike, and this is a little bit counterintuitive,
Speaker 2: is when you have real fear, dollars suddenly become more
Speaker 2: interesting to you because you start thinking, I have a
Speaker 2: rent bill to pay, I have a Bloomberg bill to pay,
Speaker 2: I have to pay for my terminal, I have to
Speaker 2: pay for the lights, I have to like pay for everything.
Speaker 2: You want to just survive to the next month, and
Speaker 2: the way you survive to the next month is making
Speaker 2: sure that your bills are paid. Can't pay your bills
Speaker 2: in gold, and so you think to yourself, Okay, there's
Speaker 2: big liquidations happening. I do want to hold gold long term,
Speaker 2: but in the short term I need to come up
Speaker 2: with some dollars. And so gold, having done extremely well
Speaker 2: over the last few years, it may be something that
Speaker 2: you sell in this environment. There's another drawback to gold,
Speaker 2: which is that it's costly to move right having it's
Speaker 2: heavy on like say bitcoin, or on like say the dollar,
Speaker 2: you can't just withdraw it anywhere in the world. If
Speaker 2: you have your gold in a vault in Switzerland and
Speaker 2: you move to Singapore, that gold is not available to
Speaker 2: you at a moment's notice. And so you have to
Speaker 2: think about how are you going to get it there?
Speaker 2: Or if things really go bad, how do you get
Speaker 2: your gold out of that vault. These are questions that
Speaker 2: gold investors actually have to think about sometimes. And I
Speaker 2: do wonder, given the closure of the strait of hor
Speaker 2: Moves and give it the fact that we don't know
Speaker 2: how wide the war is going to spend, maybe there
Speaker 2: is a little bit of cost to holding something in
Speaker 2: which the ability to physically move it to where you
Speaker 2: are is part of its appeal. And so perhaps at
Speaker 2: the margins this is a negative factor in gold, which
Speaker 2: is here is a type of money that has to
Speaker 2: be physically moved at a time when physical movement is
Speaker 2: under stress.
Speaker 1: Joe, fascinating stuff. Thanks so much for joining us, Joe
Speaker 1: Wisenthal Houst of Bloomberg's Odd Lots podcast. For more explanations
Speaker 1: like this from our team of three thousand journalists and
Speaker 1: analysts around the world, go to bloomberg dot com slash Explainers.
Speaker 1: I'm Stephen Carol. This is Here's why. I'll be back
Speaker 1: next week with more. Thanks for listening.