1 00:00:03,120 --> 00:00:17,880 Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. 2 00:00:20,720 --> 00:00:24,000 Speaker 2: Hello and welcome to another episode of the Odd Thoughts Podcast. 3 00:00:24,040 --> 00:00:25,400 Speaker 2: I'm Tracy Alloway. 4 00:00:25,120 --> 00:00:26,320 Speaker 3: And I'm Joe Wisenthal. 5 00:00:26,600 --> 00:00:28,920 Speaker 2: Joe, do you remember the carry trade unwined? 6 00:00:29,720 --> 00:00:32,599 Speaker 3: It was so the carry trade, what's the deal? Basically 7 00:00:32,640 --> 00:00:35,559 Speaker 3: people borrow yen and buy and video and then the 8 00:00:35,600 --> 00:00:37,640 Speaker 3: yen went up and then the trades didn't work as well. 9 00:00:37,960 --> 00:00:42,160 Speaker 2: Well, that was one aspect of the commentary. 10 00:00:41,600 --> 00:00:43,680 Speaker 3: As like the Twitter version of what's happening? 11 00:00:43,840 --> 00:00:47,080 Speaker 2: Yeah, but I think actually okay, So we are recording 12 00:00:47,080 --> 00:00:51,240 Speaker 2: this on August twenty third, the carry trade unwind happened. 13 00:00:51,360 --> 00:00:54,720 Speaker 2: What was it two weeks ago? Two or three weeks ago. Yeah, 14 00:00:55,120 --> 00:00:58,120 Speaker 2: it feels like a lifetime ago, and it's kind of 15 00:00:58,160 --> 00:01:01,840 Speaker 2: remarkable how quickly it failed into the background with the 16 00:01:01,880 --> 00:01:05,920 Speaker 2: market rally and the recovery. But the conversation at the 17 00:01:05,959 --> 00:01:09,520 Speaker 2: time was that there is this carry trade, which involves 18 00:01:09,720 --> 00:01:14,560 Speaker 2: borrowing in lower yielding currencies or lower interest rate currencies 19 00:01:14,600 --> 00:01:18,240 Speaker 2: such as the yen, and then investing in higher yielding 20 00:01:18,959 --> 00:01:23,120 Speaker 2: assets like in theory, US technology stocks. 21 00:01:22,800 --> 00:01:23,759 Speaker 3: Or you US treasuries. 22 00:01:23,840 --> 00:01:26,600 Speaker 2: Yeah, but the problem is that some of the discourse 23 00:01:26,880 --> 00:01:30,720 Speaker 2: around this has been. I've kind of been offended by 24 00:01:30,760 --> 00:01:34,280 Speaker 2: some of it. I've seen things out there basically implying 25 00:01:34,319 --> 00:01:37,200 Speaker 2: that the entire financial system is imploding because the carry 26 00:01:37,240 --> 00:01:38,080 Speaker 2: trade is unwinding. 27 00:01:38,400 --> 00:01:43,480 Speaker 3: I mean, it's really crazy, Like how quickly that disappeared, 28 00:01:43,560 --> 00:01:46,920 Speaker 3: because you know, there was that megavol spike and we 29 00:01:46,920 --> 00:01:50,080 Speaker 3: were talking like historically high level is on par with 30 00:01:50,120 --> 00:01:52,760 Speaker 3: some of the financial crises, and then you know, the 31 00:01:52,800 --> 00:01:55,520 Speaker 3: expectation is like, at a minimum, this takes a while 32 00:01:55,560 --> 00:01:58,280 Speaker 3: to settle down. Yeah, and it's settled down in about 33 00:01:59,200 --> 00:02:02,760 Speaker 3: fifteen minutes, in a day and a half. Absolutely, what 34 00:02:02,800 --> 00:02:05,280 Speaker 3: was that? What is the carry trade? Because there is 35 00:02:05,280 --> 00:02:08,120 Speaker 3: this sort of caricature version that is out there, who 36 00:02:08,160 --> 00:02:10,920 Speaker 3: actually is engaging in it? Is it still going on? 37 00:02:11,320 --> 00:02:13,640 Speaker 3: Many questions in my head remain unanswered. 38 00:02:13,800 --> 00:02:15,800 Speaker 2: Yeah, and one of the big ones is just how 39 00:02:15,880 --> 00:02:18,880 Speaker 2: big is it actually? And one of the funny things 40 00:02:18,880 --> 00:02:21,079 Speaker 2: that happened a few weeks ago is people were basically 41 00:02:21,080 --> 00:02:23,840 Speaker 2: looking at all the yen denominated assets in the world, 42 00:02:23,840 --> 00:02:27,440 Speaker 2: like the entire Japanese banking system, and saying, this is 43 00:02:27,560 --> 00:02:29,560 Speaker 2: the carry trade. This is how big it is. 44 00:02:29,960 --> 00:02:32,040 Speaker 3: Okay, let's clear up some misconceptions. 45 00:02:32,080 --> 00:02:34,200 Speaker 2: We are going to do that right now, and I 46 00:02:34,240 --> 00:02:36,360 Speaker 2: am so pleased to say that we do, in fact 47 00:02:36,639 --> 00:02:40,200 Speaker 2: have the perfect guest. We are recording here in Jackson, Haw, 48 00:02:40,200 --> 00:02:45,160 Speaker 2: Wayoming for the Kansas Fed Economic Symposium, and we have 49 00:02:45,240 --> 00:02:48,280 Speaker 2: once again run into one of our favorite all Thoughts guests, 50 00:02:48,320 --> 00:02:51,120 Speaker 2: an expert on this exact topic. We're going to be 51 00:02:51,160 --> 00:02:54,000 Speaker 2: speaking with Hyun Sung Shin. He is, of course, the 52 00:02:54,120 --> 00:02:56,920 Speaker 2: economic advisor and head of research for the Bank for 53 00:02:57,000 --> 00:03:00,480 Speaker 2: International Settlements and he's been looking at the carry trade 54 00:03:00,600 --> 00:03:01,519 Speaker 2: for years now. 55 00:03:01,400 --> 00:03:03,480 Speaker 3: So Ken he actually knows what he's talking about. 56 00:03:03,639 --> 00:03:07,040 Speaker 2: Yes, Kian, thank you so much for coming on odd lots. 57 00:03:06,880 --> 00:03:08,000 Speaker 4: Thank you for having me again. 58 00:03:08,240 --> 00:03:13,000 Speaker 2: It's so good to see you again. Absolutely beautiful Jackson Hall. Absolutely, 59 00:03:13,040 --> 00:03:15,760 Speaker 2: I'm so glad we could make this happen, and that 60 00:03:15,919 --> 00:03:18,160 Speaker 2: I am kind of glad that the carry trade unwind 61 00:03:18,200 --> 00:03:19,120 Speaker 2: happened just a couple. 62 00:03:19,000 --> 00:03:19,440 Speaker 5: Of weeks ago. 63 00:03:19,639 --> 00:03:20,399 Speaker 3: Something to talk about. 64 00:03:20,600 --> 00:03:22,440 Speaker 2: Yeah, and you happen to be here and you're an 65 00:03:22,440 --> 00:03:25,480 Speaker 2: expert on this, So let's start with something very basic. 66 00:03:25,960 --> 00:03:27,160 Speaker 2: What is the carry trade? 67 00:03:28,400 --> 00:03:33,280 Speaker 5: The carry trade is a financial transaction where you borrow 68 00:03:33,440 --> 00:03:37,280 Speaker 5: a currency with a low interest rate and then investor 69 00:03:37,320 --> 00:03:41,480 Speaker 5: proceeds in other higher yielding assets, and I think the 70 00:03:41,720 --> 00:03:44,160 Speaker 5: you know, the classical version of a carriage. 71 00:03:43,880 --> 00:03:45,840 Speaker 4: Trade would be where you borrow. 72 00:03:46,080 --> 00:03:49,360 Speaker 5: I mean, it's basically a currency transaction where you borrow 73 00:03:49,400 --> 00:03:52,080 Speaker 5: a currency with a low interest rate and invest in 74 00:03:52,120 --> 00:03:56,200 Speaker 5: a in a higher interest rate currency. But the way 75 00:03:56,280 --> 00:03:59,520 Speaker 5: that the carry trade was portrayed in the recent discussion, 76 00:04:00,040 --> 00:04:03,520 Speaker 5: I think that was you know, described in much broader terms, 77 00:04:04,040 --> 00:04:07,080 Speaker 5: where you were going into all kinds of different assets 78 00:04:07,080 --> 00:04:10,720 Speaker 5: and Joe, as you describe, it was a very short 79 00:04:10,760 --> 00:04:12,880 Speaker 5: lived episode of stress, but. 80 00:04:12,920 --> 00:04:14,440 Speaker 4: At the time it was pretty intense. 81 00:04:14,560 --> 00:04:16,920 Speaker 5: Yeah, and you know, I think, you know, we can 82 00:04:16,960 --> 00:04:20,400 Speaker 5: now look back on it with some relief that nothing broke. 83 00:04:20,640 --> 00:04:24,120 Speaker 5: You know, there was no financial market dysfunction as we 84 00:04:24,160 --> 00:04:27,520 Speaker 5: saw during the March twenty twenty episode for example. So 85 00:04:27,839 --> 00:04:30,800 Speaker 5: now we're now back to something which looks more normal. 86 00:04:30,839 --> 00:04:32,840 Speaker 5: But I think we should try and learn some lessons 87 00:04:33,200 --> 00:04:34,159 Speaker 5: from that episode. 88 00:04:34,480 --> 00:04:39,040 Speaker 3: Absolutely, and you know, obviously there's a lot that's still 89 00:04:39,040 --> 00:04:41,760 Speaker 3: out there and much to be learned before we even 90 00:04:41,800 --> 00:04:44,159 Speaker 3: get to the future. I mean, you described what a 91 00:04:44,200 --> 00:04:47,560 Speaker 3: sort of classical carrier trait is and what we're talking about, 92 00:04:47,640 --> 00:04:49,719 Speaker 3: and I joked in the beginning, you know, it's like 93 00:04:50,000 --> 00:04:54,720 Speaker 3: borrow yen cheaply and then by bitcoin or whatever. But actually, 94 00:04:54,839 --> 00:04:58,880 Speaker 3: like when we talk about this, who are the actors involved? 95 00:04:59,520 --> 00:05:03,040 Speaker 3: Is it seculators who see a spread? Is it institutions 96 00:05:03,080 --> 00:05:06,760 Speaker 3: like insurance companies, etc. That have some sort of like 97 00:05:07,080 --> 00:05:11,200 Speaker 3: larger structural reason. Like who actually is engaged in such 98 00:05:11,240 --> 00:05:12,200 Speaker 3: type of activities. 99 00:05:12,480 --> 00:05:14,760 Speaker 5: It's really the whole ecosystem, if you like, I think 100 00:05:14,839 --> 00:05:19,080 Speaker 5: the main actors would shift from from time to time. 101 00:05:19,880 --> 00:05:21,920 Speaker 5: I think one way that we could try and approach 102 00:05:21,960 --> 00:05:25,040 Speaker 5: this question is, you know, as Tracy alluded to earlier, 103 00:05:25,040 --> 00:05:27,440 Speaker 5: have large is this you know, what's the most reliable 104 00:05:27,440 --> 00:05:30,159 Speaker 5: way of trying to gauge this? Now, one way of 105 00:05:30,200 --> 00:05:33,320 Speaker 5: doing that is to look at the on balance sheet 106 00:05:33,440 --> 00:05:35,760 Speaker 5: lending in yend and at. 107 00:05:35,640 --> 00:05:36,320 Speaker 4: The BIS is. 108 00:05:36,320 --> 00:05:39,000 Speaker 5: You know, we receive data from our member central banks. 109 00:05:39,760 --> 00:05:43,560 Speaker 5: We collected and then we distributed, and we've been doing 110 00:05:43,560 --> 00:05:46,159 Speaker 5: it since nineteen seventy seven, so in a way we 111 00:05:46,200 --> 00:05:49,800 Speaker 5: are the curators of this very important banking data of 112 00:05:50,360 --> 00:05:53,240 Speaker 5: international banking business. So one thing that we can look 113 00:05:53,279 --> 00:05:56,599 Speaker 5: at in that data set would be what is the 114 00:05:56,640 --> 00:06:00,720 Speaker 5: cross border lending that is yen denominated, or even if 115 00:06:00,760 --> 00:06:04,040 Speaker 5: it's not cross border, what is the en denominated lending 116 00:06:04,120 --> 00:06:06,400 Speaker 5: as a foreign currency, so you know, even if the 117 00:06:06,480 --> 00:06:10,719 Speaker 5: loan is booked in a country outside Japan, it's it's 118 00:06:10,720 --> 00:06:13,840 Speaker 5: in yen, and it's it's in foreign currency. Now, one 119 00:06:13,880 --> 00:06:15,640 Speaker 5: of the things that I put in a tweet thread 120 00:06:15,839 --> 00:06:19,280 Speaker 5: is that if you look at that that number, there 121 00:06:19,400 --> 00:06:24,480 Speaker 5: was clearly a very sharp increase in yen borrowing as 122 00:06:24,600 --> 00:06:28,280 Speaker 5: foreign currency in twenty two to twenty three. But it's 123 00:06:28,320 --> 00:06:33,120 Speaker 5: something like forty trillion yen, So you know, that's quite large, 124 00:06:33,640 --> 00:06:37,040 Speaker 5: you know, two hundred and seventy billion dollars roughly depending 125 00:06:37,080 --> 00:06:40,040 Speaker 5: on exchange rate, But it's not the kind of numbers 126 00:06:40,040 --> 00:06:42,719 Speaker 5: that were being banded about in the markets, and not 127 00:06:42,800 --> 00:06:45,600 Speaker 5: all of that is going to be you know, engaged 128 00:06:45,640 --> 00:06:48,039 Speaker 5: in yen carry trade. The other way of you know, 129 00:06:48,080 --> 00:06:51,279 Speaker 5: thinking about this how is how does that borrowing take place? 130 00:06:51,320 --> 00:06:54,159 Speaker 5: And one thing that is quite interesting is that a 131 00:06:54,160 --> 00:06:57,080 Speaker 5: lot of the cross border lending is happening through the 132 00:06:57,440 --> 00:07:00,440 Speaker 5: interoffice accounts, which is to say, if there's a foreign 133 00:07:00,440 --> 00:07:04,400 Speaker 5: banking group which has an office in Japan, how much 134 00:07:04,600 --> 00:07:07,560 Speaker 5: is the subsidiary or the office in Japan lending out 135 00:07:07,560 --> 00:07:10,760 Speaker 5: to the headquarters in Yen. And that turns out to 136 00:07:10,760 --> 00:07:13,640 Speaker 5: be a preciseable chunk of that. Of that forty trillion, 137 00:07:13,640 --> 00:07:17,800 Speaker 5: it's around fourteen trillion would be you know that that interoffice. 138 00:07:17,840 --> 00:07:22,400 Speaker 5: But much more important than this on balance sheet is 139 00:07:22,600 --> 00:07:28,080 Speaker 5: the off balance sheet transactions. And here the crucial market 140 00:07:28,160 --> 00:07:31,800 Speaker 5: is the FX swap market. And FX swaps are where 141 00:07:32,760 --> 00:07:36,160 Speaker 5: you know, one party would deliver one currency. So if 142 00:07:36,200 --> 00:07:40,360 Speaker 5: I deliver dollars to the counterparty, counterparty. 143 00:07:39,840 --> 00:07:41,480 Speaker 4: Would give me the equivalent in yen. 144 00:07:42,960 --> 00:07:46,600 Speaker 5: With the promise that that transaction would be reversed at 145 00:07:46,600 --> 00:07:49,080 Speaker 5: a set date in the future at an agreed exchange rate. 146 00:07:49,160 --> 00:07:52,480 Speaker 5: So the exchange rate is fixed at that point. And normally, 147 00:07:52,600 --> 00:07:55,480 Speaker 5: if I'm a dollar provider, what I do is I 148 00:07:55,600 --> 00:07:58,960 Speaker 5: provide the dollars, I receive the yen in return, But 149 00:07:59,040 --> 00:08:01,880 Speaker 5: because I need to repay the yen, I need to 150 00:08:01,960 --> 00:08:04,000 Speaker 5: keep it in a safe place, so I would park 151 00:08:04,040 --> 00:08:06,200 Speaker 5: it in a safe in a yen asset. 152 00:08:07,400 --> 00:08:11,040 Speaker 2: Just to be clear, Typically FX swaps it's it's not 153 00:08:11,080 --> 00:08:13,720 Speaker 2: really a trade per se, or it's not often a trade. 154 00:08:13,760 --> 00:08:15,600 Speaker 2: It's more of a hedging activity. So if I have 155 00:08:15,640 --> 00:08:18,080 Speaker 2: a lot of yen exposure, I want to offset some 156 00:08:18,200 --> 00:08:20,680 Speaker 2: of that by acquiring dollars and vice versa. 157 00:08:20,880 --> 00:08:25,280 Speaker 5: Yeah, and that's exactly the classical the use case for 158 00:08:25,040 --> 00:08:28,080 Speaker 5: a for a swap contract. But the but the issue 159 00:08:28,160 --> 00:08:31,200 Speaker 5: here is if I receive the yen rather than parking 160 00:08:31,240 --> 00:08:33,160 Speaker 5: it in a safe place, what if I just sell 161 00:08:33,200 --> 00:08:37,880 Speaker 5: that yen on the spot market and acquire dollars, Then 162 00:08:37,960 --> 00:08:40,719 Speaker 5: I have a naked yen obligation which I will need 163 00:08:40,760 --> 00:08:43,400 Speaker 5: to meet at the time by repurchasing the yen on 164 00:08:43,440 --> 00:08:46,959 Speaker 5: the spot market. And that market is pretty sizeable. It's 165 00:08:47,000 --> 00:08:52,720 Speaker 5: around fourteen trillion dollars the swap market between yen and 166 00:08:52,800 --> 00:08:53,560 Speaker 5: another currency. 167 00:08:53,600 --> 00:08:55,160 Speaker 4: That's you know, that's. 168 00:08:55,080 --> 00:08:58,439 Speaker 5: Quite a bit larger than the two hundred and seventy 169 00:08:58,440 --> 00:09:00,000 Speaker 5: billion that I mentioned earlier. 170 00:09:00,360 --> 00:09:04,320 Speaker 3: Just so as Tracy characterized it, there is sort of 171 00:09:04,360 --> 00:09:08,360 Speaker 3: a natural hedging need for those sort of swaps. What 172 00:09:08,520 --> 00:09:12,120 Speaker 3: types of institutions have that need to engage in the 173 00:09:12,720 --> 00:09:13,280 Speaker 3: slot market. 174 00:09:13,400 --> 00:09:17,440 Speaker 5: It's both financial and non financial. I think typically the 175 00:09:17,480 --> 00:09:21,920 Speaker 5: textbook case is of a non financial institution. So, you know, 176 00:09:21,960 --> 00:09:25,720 Speaker 5: if I am an exporter or an importer, you know, 177 00:09:25,760 --> 00:09:28,560 Speaker 5: I would like to pay for you know, the goods 178 00:09:28,559 --> 00:09:31,960 Speaker 5: in advance, but then I need to hedge the currency 179 00:09:31,960 --> 00:09:36,480 Speaker 5: exposure in the meantime until the you know, the maturity 180 00:09:36,480 --> 00:09:40,000 Speaker 5: of that swap. What we've seen though, is that since 181 00:09:40,040 --> 00:09:45,320 Speaker 5: the global financial crisis, it's the financial uses of the 182 00:09:45,400 --> 00:09:48,720 Speaker 5: FX swap market which has really grown much larger. So 183 00:09:49,040 --> 00:09:52,360 Speaker 5: it's fair to say that it's the financial uses of 184 00:09:52,400 --> 00:09:56,120 Speaker 5: the FX swaps which are the line share of the 185 00:09:56,280 --> 00:09:59,160 Speaker 5: of the FX swap market. And I think it raises 186 00:09:59,200 --> 00:10:04,280 Speaker 5: perhaps a deeper question, which is, if you're not constrained 187 00:10:04,320 --> 00:10:07,200 Speaker 5: by the funding currency in what you can invest in 188 00:10:07,800 --> 00:10:10,600 Speaker 5: by using the swap market. In other words, suppose I 189 00:10:10,600 --> 00:10:14,440 Speaker 5: can only raise funding in one currency. Well, typically that 190 00:10:14,559 --> 00:10:17,319 Speaker 5: means that, you know, unless you have balance sheet mismatches, 191 00:10:17,760 --> 00:10:21,360 Speaker 5: you would need to invest mostly in that same currency. 192 00:10:22,000 --> 00:10:25,760 Speaker 5: But through the swap market, you can basically overcome you know, 193 00:10:25,800 --> 00:10:29,920 Speaker 5: that particular constraint. And what that means is it's much 194 00:10:30,440 --> 00:10:34,280 Speaker 5: better to think of financial conditions in global terms rather 195 00:10:34,320 --> 00:10:37,960 Speaker 5: than simply country by country, because you can you can always, 196 00:10:38,400 --> 00:10:42,840 Speaker 5: you know, deploy the funding in one currency and invest 197 00:10:42,880 --> 00:10:45,760 Speaker 5: in the assets of another currency. 198 00:11:00,160 --> 00:11:04,360 Speaker 2: It sounds also like it's additional liquidity if you can 199 00:11:04,480 --> 00:11:09,160 Speaker 2: use FX swaps to bypass you know, specific currency constraints 200 00:11:09,200 --> 00:11:12,360 Speaker 2: in terms of funding capacity. If I was I don't 201 00:11:12,400 --> 00:11:17,920 Speaker 2: know an emerging market like exporter, and I needed dollar funds. 202 00:11:18,280 --> 00:11:21,200 Speaker 2: Obviously there's a limit to the amount of dollars that 203 00:11:21,240 --> 00:11:23,319 Speaker 2: I can get in a situation like that. But if 204 00:11:23,320 --> 00:11:25,080 Speaker 2: I know that I can go into the FX swap 205 00:11:25,160 --> 00:11:30,320 Speaker 2: market and get that additional liquidity, it presumably expands credit 206 00:11:30,360 --> 00:11:31,280 Speaker 2: in the overall system. 207 00:11:31,559 --> 00:11:35,600 Speaker 5: In contractual terms, a swap is completely symmetric because you 208 00:11:35,600 --> 00:11:39,040 Speaker 5: know one party is providing one currency in return for 209 00:11:39,080 --> 00:11:42,040 Speaker 5: the other and vice versa for the other party. But 210 00:11:42,320 --> 00:11:46,480 Speaker 5: from time to time, when financial conditions vary across different currencies, 211 00:11:46,480 --> 00:11:49,760 Speaker 5: different markets, there is a if you like a lead 212 00:11:49,920 --> 00:11:54,160 Speaker 5: party in asking for that transaction, and you know there 213 00:11:54,240 --> 00:11:56,720 Speaker 5: is a market if you like response in supplying it. 214 00:11:56,760 --> 00:11:58,880 Speaker 5: So let me give you an example. So if I 215 00:11:59,040 --> 00:12:02,800 Speaker 5: am a let's say I'm a Euro area insurance company, 216 00:12:03,559 --> 00:12:08,480 Speaker 5: and I would like a globally diversified portfolio including dollar assets. 217 00:12:09,040 --> 00:12:11,880 Speaker 5: But most of my obligations are in euros, and so 218 00:12:12,520 --> 00:12:15,720 Speaker 5: if I were to invest, you know, nakedly in dollars, 219 00:12:15,760 --> 00:12:17,320 Speaker 5: there would be a currency you know, there'll be a 220 00:12:17,360 --> 00:12:20,280 Speaker 5: currency mismatch on my balance sheet. And this is where 221 00:12:20,320 --> 00:12:23,480 Speaker 5: I would go to the swap market. I would swap 222 00:12:23,520 --> 00:12:26,480 Speaker 5: the euros into dollars and that I would invest the 223 00:12:26,559 --> 00:12:30,720 Speaker 5: proceeds into dollar ponds, for example, in a way that's 224 00:12:30,800 --> 00:12:33,600 Speaker 5: like borrowing dollars. I mean, the economic rationale is very 225 00:12:33,640 --> 00:12:37,559 Speaker 5: similar to borrowing dollars in order to invest, but it's 226 00:12:37,600 --> 00:12:40,520 Speaker 5: not treated as borrowing in the conventional accounting sets because 227 00:12:40,520 --> 00:12:43,160 Speaker 5: you know it's a swap. There is also a countervailing, 228 00:12:43,400 --> 00:12:46,760 Speaker 5: you know, a transaction the other way, but you can 229 00:12:46,760 --> 00:12:50,320 Speaker 5: normally track what's called an EFFC swap basis to see 230 00:12:50,360 --> 00:12:53,800 Speaker 5: which direction that transaction is going. So it turns out 231 00:12:53,840 --> 00:12:59,440 Speaker 5: that typically normally it is more expensive to borrow dollars 232 00:12:59,520 --> 00:13:02,720 Speaker 5: in the swap market then it is to borrow dollars 233 00:13:02,760 --> 00:13:06,640 Speaker 5: in the dollar money market. And that extra premium is 234 00:13:06,679 --> 00:13:10,000 Speaker 5: if you like the additional price you have to pay 235 00:13:10,480 --> 00:13:12,839 Speaker 5: in order to access dollars. Now coming back to the 236 00:13:12,920 --> 00:13:17,400 Speaker 5: yen story, although most of the time, you know, financial 237 00:13:17,400 --> 00:13:20,400 Speaker 5: institutions are borrowing dollars in the swap market in order 238 00:13:20,400 --> 00:13:22,920 Speaker 5: to invest in dollar acidence, that's typically the direction of 239 00:13:22,920 --> 00:13:26,800 Speaker 5: the trade. This is why you know during financial stress periods, 240 00:13:27,679 --> 00:13:30,400 Speaker 5: you know these effects swap bases, you know spike and 241 00:13:30,400 --> 00:13:32,760 Speaker 5: then there has to be central bank swap lines to 242 00:13:33,400 --> 00:13:37,360 Speaker 5: quill et cetera. But there's nothing in principle that says 243 00:13:37,400 --> 00:13:40,520 Speaker 5: it always has to go towards a dollar, right if 244 00:13:40,880 --> 00:13:44,400 Speaker 5: your intention is to engage in a yen carry trade, 245 00:13:44,720 --> 00:13:48,560 Speaker 5: but through using EFFCS swaps, you know, you could borrow 246 00:13:48,640 --> 00:13:52,720 Speaker 5: yen and then you know, acquire that en obligation by 247 00:13:52,760 --> 00:13:56,560 Speaker 5: going through the swap. And so one telltale sign is 248 00:13:56,640 --> 00:13:59,960 Speaker 5: what happened to the effects swap basis during this recent episode. 249 00:14:00,200 --> 00:14:02,760 Speaker 5: And in fact, one of the interesting findings is that 250 00:14:02,880 --> 00:14:06,679 Speaker 5: the dollar effects basis versus the yen you know, hardly budged. 251 00:14:06,760 --> 00:14:09,320 Speaker 5: It's actually, you know, a very small movement, which is 252 00:14:10,040 --> 00:14:12,240 Speaker 5: very atypical of a financial stress event. 253 00:14:12,840 --> 00:14:15,360 Speaker 2: Yeah, how did Why is that? Because I would have 254 00:14:15,400 --> 00:14:20,320 Speaker 2: assumed that the people providing swaps, who I assume are 255 00:14:20,440 --> 00:14:25,000 Speaker 2: dealer banks of some sort, with such volatility in the 256 00:14:25,080 --> 00:14:27,240 Speaker 2: currency rate, I would have thought that they would back 257 00:14:27,280 --> 00:14:30,440 Speaker 2: away from providing that liquidity and so the basis would 258 00:14:30,440 --> 00:14:30,880 Speaker 2: blow out. 259 00:14:31,640 --> 00:14:34,520 Speaker 5: So there was definitely a little bit of that, but 260 00:14:34,600 --> 00:14:37,960 Speaker 5: it was by no means the same magnitude as we saw, 261 00:14:37,960 --> 00:14:40,760 Speaker 5: for example, in the March twenty twenty episode. And the 262 00:14:40,800 --> 00:14:45,040 Speaker 5: reasoning would be that in that case, the if you like. 263 00:14:45,160 --> 00:14:50,360 Speaker 5: The party that was driving that particular transaction wasn't borrowing dollars, 264 00:14:50,440 --> 00:14:53,000 Speaker 5: which needed to be you know, repaid in this scramble 265 00:14:53,080 --> 00:14:56,160 Speaker 5: for dollars, but rather it was the you know, repayment 266 00:14:56,160 --> 00:14:58,680 Speaker 5: of yen. Oh I see, okay, so it goes the 267 00:14:58,720 --> 00:14:59,160 Speaker 5: other way. 268 00:14:59,480 --> 00:15:03,240 Speaker 3: So, you know, so much sort of happened during that 269 00:15:04,000 --> 00:15:07,880 Speaker 3: I don't know, there's sort of like the mini crisis 270 00:15:08,000 --> 00:15:11,920 Speaker 3: of July thirty first to August sixth of twenty twenty four, 271 00:15:12,000 --> 00:15:12,840 Speaker 3: and it came in went. 272 00:15:12,840 --> 00:15:13,880 Speaker 2: That should be the official name. 273 00:15:13,960 --> 00:15:15,760 Speaker 3: Yeah, that's a name of that. So you know, there 274 00:15:15,800 --> 00:15:18,840 Speaker 3: was a FED meeting that perceived perhaps to be a 275 00:15:18,840 --> 00:15:22,680 Speaker 3: little hawkers. Then we got a week unemployment report. Then 276 00:15:22,840 --> 00:15:24,800 Speaker 3: of course, you know, the end had been creeping up 277 00:15:25,000 --> 00:15:27,200 Speaker 3: right now, and you know, we'll probably still be learning more. 278 00:15:27,440 --> 00:15:29,840 Speaker 3: What is the story that you tell, like what actually 279 00:15:30,000 --> 00:15:34,280 Speaker 3: happened in those six or seven days that triggered such 280 00:15:34,320 --> 00:15:36,520 Speaker 3: a move and then triggered such a move that was 281 00:15:36,560 --> 00:15:39,080 Speaker 3: able to reverse so easily. What you're basic what happened 282 00:15:39,080 --> 00:15:39,440 Speaker 3: that week? 283 00:15:39,600 --> 00:15:43,440 Speaker 5: Yeah, and clearly, Joe, there was quite a bit of 284 00:15:43,480 --> 00:15:45,960 Speaker 5: action in the currency markets. But I think what you're 285 00:15:45,960 --> 00:15:49,600 Speaker 5: referring to is the fact that equity markets were you know, 286 00:15:50,000 --> 00:15:52,720 Speaker 5: impacted very broadly across the world in a way that 287 00:15:52,760 --> 00:15:56,040 Speaker 5: you wouldn't have expected if it were a sort of 288 00:15:56,080 --> 00:15:58,240 Speaker 5: narrow carriy trait story. And indeed, I think there is 289 00:15:58,280 --> 00:16:01,960 Speaker 5: something to that in the probably we're we're putting too 290 00:16:02,040 --> 00:16:05,640 Speaker 5: much weight on the carriage trade as a key theme 291 00:16:05,880 --> 00:16:10,920 Speaker 5: of what happened in early August. In that yes, I 292 00:16:10,960 --> 00:16:14,280 Speaker 5: mean there may have been the classical carriage traits going 293 00:16:14,320 --> 00:16:17,720 Speaker 5: on where you borrow yen and then you invest in 294 00:16:17,720 --> 00:16:21,360 Speaker 5: the high yielding currencies. You can see which currencies fell 295 00:16:21,480 --> 00:16:25,640 Speaker 5: most in early August, and they were the Mexican peso, 296 00:16:26,240 --> 00:16:29,280 Speaker 5: Columbian peso, and the rand. So these, you know, these 297 00:16:29,280 --> 00:16:32,880 Speaker 5: were the destination currencies for those classical carriage trades. But 298 00:16:32,960 --> 00:16:36,320 Speaker 5: I think it's it's not really enough to explain why 299 00:16:36,360 --> 00:16:39,640 Speaker 5: there was this much more broad based stress, especially in 300 00:16:39,720 --> 00:16:43,400 Speaker 5: the in the equity markets. And I think here we 301 00:16:43,520 --> 00:16:45,520 Speaker 5: have to think about the broad issues to do with 302 00:16:46,320 --> 00:16:49,520 Speaker 5: how you know risk is managed, how you know risk 303 00:16:49,680 --> 00:16:50,840 Speaker 5: management itself. 304 00:16:51,160 --> 00:16:52,200 Speaker 4: Risk management in. 305 00:16:52,200 --> 00:16:57,320 Speaker 5: The form of loss mitigation also generates some potential for 306 00:16:57,400 --> 00:17:01,080 Speaker 5: amplification that could actually you know, make things you know 307 00:17:01,160 --> 00:17:04,199 Speaker 5: more volatile. So let me explain what I mean by that. So, 308 00:17:04,640 --> 00:17:07,399 Speaker 5: if I have a value at risk rule that says, 309 00:17:07,440 --> 00:17:11,040 Speaker 5: you know, if my risk is triggered beyond this this 310 00:17:11,240 --> 00:17:15,240 Speaker 5: var level, then I cut my position. That means I sell, 311 00:17:15,440 --> 00:17:18,560 Speaker 5: or if I'm lending, I cut my lines, et cetera. 312 00:17:19,320 --> 00:17:21,600 Speaker 5: From the point of view of the borrower or from 313 00:17:21,640 --> 00:17:23,760 Speaker 5: the point of view of the of the market as 314 00:17:23,800 --> 00:17:25,960 Speaker 5: a whole. You know, that is something that would actually 315 00:17:26,200 --> 00:17:29,080 Speaker 5: you know, amplify, you know, whatever stress that was there 316 00:17:29,119 --> 00:17:32,320 Speaker 5: in the first place. If I'm a lender and I 317 00:17:32,359 --> 00:17:36,600 Speaker 5: set margins, or if I'm a CECP, a central counterparty 318 00:17:36,760 --> 00:17:39,119 Speaker 5: or an exchange, you know, there is a margin that 319 00:17:39,200 --> 00:17:41,919 Speaker 5: I ask for, you know, the various contracts that I 320 00:17:41,960 --> 00:17:45,439 Speaker 5: deal with. Typically during stress periods, those margins go up. 321 00:17:45,440 --> 00:17:48,840 Speaker 5: So that's kind of deleveraging. Now, the way that we 322 00:17:49,080 --> 00:17:53,280 Speaker 5: deal with risk is precisely to mitigate loss, and there 323 00:17:53,320 --> 00:17:55,840 Speaker 5: is this you know, spillover effect that goes to the 324 00:17:55,840 --> 00:17:58,879 Speaker 5: broader market. And I wonder whether we should you know, 325 00:17:58,920 --> 00:18:03,439 Speaker 5: look back on the events of early August and if 326 00:18:03,480 --> 00:18:06,119 Speaker 5: you like, apply that lens to you know, to the 327 00:18:06,160 --> 00:18:10,360 Speaker 5: events back then. So if you know, for example, I 328 00:18:10,400 --> 00:18:13,800 Speaker 5: was not you know, borrowing in and investing in technology 329 00:18:13,840 --> 00:18:16,199 Speaker 5: stocks as you as you suggested, But it's just that 330 00:18:16,720 --> 00:18:19,920 Speaker 5: you know, you know, within my firm, you know, there 331 00:18:20,000 --> 00:18:22,680 Speaker 5: is a team that is doing a classical carrier trade, 332 00:18:23,520 --> 00:18:25,600 Speaker 5: but there is also a team that is you know, 333 00:18:25,720 --> 00:18:28,879 Speaker 5: leveraged the US tech stocks. But one team doesn't know 334 00:18:28,920 --> 00:18:30,600 Speaker 5: what the other team is doing. So let's say, you know, 335 00:18:30,680 --> 00:18:32,760 Speaker 5: one pod doesn't know what the other pod is doing. 336 00:18:33,200 --> 00:18:33,760 Speaker 4: But from the. 337 00:18:33,720 --> 00:18:35,919 Speaker 5: Firm's point of view, it looks as if you know 338 00:18:35,960 --> 00:18:38,280 Speaker 5: in aggregate that you know there is a short end 339 00:18:38,280 --> 00:18:42,960 Speaker 5: position and the long position in technology stocks, and if 340 00:18:43,000 --> 00:18:46,800 Speaker 5: that you know, risk constraint is triggered somehow, it's going 341 00:18:46,840 --> 00:18:50,880 Speaker 5: to have a much broader implication, much broader repercussion through 342 00:18:50,920 --> 00:18:51,800 Speaker 5: all of the wholdings. 343 00:18:52,560 --> 00:18:54,439 Speaker 2: This kind of reminds me there used to be that 344 00:18:54,640 --> 00:18:57,520 Speaker 2: saying about in a crisis, you sell what you can, 345 00:18:57,920 --> 00:19:00,840 Speaker 2: not necessarily what's most impact. Did So it might be 346 00:19:00,920 --> 00:19:04,399 Speaker 2: that the most volatility is falling in the currency market 347 00:19:04,720 --> 00:19:07,680 Speaker 2: and in the carry trade, but the thing that you're 348 00:19:07,720 --> 00:19:12,159 Speaker 2: selling to reduce your risk exposure is something totally different. 349 00:19:12,240 --> 00:19:14,600 Speaker 2: Just because you can, or because it's easier to do 350 00:19:14,760 --> 00:19:18,359 Speaker 2: in an extremely volatile environment, and if you. 351 00:19:18,480 --> 00:19:21,000 Speaker 5: Like, it's the it's the risk limits that are triggered. 352 00:19:21,119 --> 00:19:23,600 Speaker 5: And the way that risk limits work is if the 353 00:19:23,600 --> 00:19:27,880 Speaker 5: aggregate portfolio is suffering losses, then the risk limits are 354 00:19:27,920 --> 00:19:32,000 Speaker 5: tightened for all the different you know, different assett that 355 00:19:32,080 --> 00:19:34,199 Speaker 5: you own. And I think, you know, there is I 356 00:19:34,200 --> 00:19:36,280 Speaker 5: think something that we need to think about in terms 357 00:19:36,280 --> 00:19:37,640 Speaker 5: of how we can mitigate some. 358 00:19:37,600 --> 00:19:38,840 Speaker 4: Of these some of these issues. 359 00:19:38,880 --> 00:19:43,720 Speaker 5: And going back to the the FX swap discussion, the 360 00:19:43,800 --> 00:19:46,560 Speaker 5: BIS also collects data on FX swaps. You know, we 361 00:19:46,600 --> 00:19:49,919 Speaker 5: have the six monthly release of our over the counter 362 00:19:50,040 --> 00:19:53,119 Speaker 5: derivative statistics and the numbers that I've given you you know, 363 00:19:53,160 --> 00:19:55,159 Speaker 5: either all from from our data, it's all on our 364 00:19:55,200 --> 00:19:58,080 Speaker 5: web page. I think there is probably more scope for 365 00:19:58,160 --> 00:20:02,320 Speaker 5: us to have more refect fine data. For example, you know, 366 00:20:02,359 --> 00:20:05,480 Speaker 5: who is the instigator in having the effects well, you 367 00:20:05,480 --> 00:20:07,080 Speaker 5: know drawn up in the first place, So who is 368 00:20:07,119 --> 00:20:10,800 Speaker 5: the lead party, where is it being booked? What are 369 00:20:10,840 --> 00:20:13,640 Speaker 5: the sectors that the two parties are coming from. At 370 00:20:13,640 --> 00:20:16,199 Speaker 5: the moment, we don't have that kind of data, but 371 00:20:16,720 --> 00:20:19,240 Speaker 5: this is something that the BIS is working very hard 372 00:20:19,280 --> 00:20:23,800 Speaker 5: to try and assemble. And given the shift away from 373 00:20:24,400 --> 00:20:27,120 Speaker 5: the very bank centric system to something which is much 374 00:20:27,160 --> 00:20:29,840 Speaker 5: more a market based system which we have now. I 375 00:20:29,840 --> 00:20:32,080 Speaker 5: think this is really, you know, something that we need 376 00:20:32,119 --> 00:20:33,440 Speaker 5: to do as a matter of vergency. 377 00:20:49,280 --> 00:20:51,080 Speaker 3: So can we actually, I want to go back to 378 00:20:51,160 --> 00:20:55,000 Speaker 3: your point about, you know, financial conditions being a global phenomenon, 379 00:20:55,040 --> 00:20:57,960 Speaker 3: because that has been one of the questions here in 380 00:20:58,040 --> 00:21:01,280 Speaker 3: the US, and there are people scratching their heads financial 381 00:21:01,280 --> 00:21:04,600 Speaker 3: conditions by some measures being tight, but spreads being very 382 00:21:04,680 --> 00:21:07,480 Speaker 3: narrow for credit and of course the stock market having 383 00:21:07,720 --> 00:21:10,960 Speaker 3: rocketed up. Can you flesh that out a little bit 384 00:21:11,040 --> 00:21:13,560 Speaker 3: more like this sort of like how we should rethink 385 00:21:13,720 --> 00:21:17,000 Speaker 3: financial conditions in a world of sort of like easy 386 00:21:17,119 --> 00:21:19,800 Speaker 3: swapping between currencies on a non bank basis. 387 00:21:20,040 --> 00:21:23,679 Speaker 5: Sure, sure, I mean that's a very very important issue, actually, Joe. 388 00:21:23,880 --> 00:21:27,280 Speaker 5: You know, when you look at the typical financial conditions index, 389 00:21:27,440 --> 00:21:29,600 Speaker 5: let's say, you know, you take the Golden SAX index, 390 00:21:29,640 --> 00:21:32,720 Speaker 5: which is probably the best known. There are two components there. 391 00:21:32,800 --> 00:21:36,000 Speaker 5: One is really just about how high our interest rates, 392 00:21:36,000 --> 00:21:39,400 Speaker 5: how high a yields. There's another set of indicators which 393 00:21:39,440 --> 00:21:41,960 Speaker 5: measure how tight are the credit spreads? You know, what's 394 00:21:41,960 --> 00:21:45,480 Speaker 5: the dollar doing that kind of thing. And what's really 395 00:21:45,560 --> 00:21:49,199 Speaker 5: been quite surprising is that even though rates have been 396 00:21:49,280 --> 00:21:53,280 Speaker 5: raised to quite high levels. So the rates, those indicators 397 00:21:53,280 --> 00:21:55,760 Speaker 5: that point to how our interest rates are they've been 398 00:21:55,840 --> 00:21:59,960 Speaker 5: quite tight. But stock markets, credit spreads, you know, they've 399 00:22:00,119 --> 00:22:02,280 Speaker 5: been extremely accommodated. 400 00:22:02,560 --> 00:22:03,800 Speaker 4: And I think one way that. 401 00:22:03,760 --> 00:22:06,199 Speaker 5: You know, we could rationalize this is that, you know, 402 00:22:06,400 --> 00:22:10,680 Speaker 5: if we have a world where essentially money is fungible 403 00:22:11,080 --> 00:22:15,399 Speaker 5: across currencies, basically what swap does is to make money 404 00:22:15,440 --> 00:22:18,600 Speaker 5: fungible across currencies. You know, five dollars I can get 405 00:22:18,760 --> 00:22:24,600 Speaker 5: you know, yen vice versa. And in that kind of environment, 406 00:22:24,760 --> 00:22:29,879 Speaker 5: it's not simply how much the US money supply is, 407 00:22:30,040 --> 00:22:33,600 Speaker 5: how much you know, the Euro money supply is that matters. 408 00:22:34,040 --> 00:22:36,720 Speaker 4: It's really about what the global picture is. 409 00:22:37,320 --> 00:22:39,680 Speaker 5: And what are the marginal rates at which one is 410 00:22:39,720 --> 00:22:43,760 Speaker 5: swapped into the other. And I think one potential explanation 411 00:22:43,880 --> 00:22:47,320 Speaker 5: for why financial conditions have been, you know, so accommodative 412 00:22:47,400 --> 00:22:50,159 Speaker 5: in spite of the very high rates is that, you know, 413 00:22:50,560 --> 00:22:53,600 Speaker 5: money will flow to the most accompetentive section of the 414 00:22:53,640 --> 00:22:57,280 Speaker 5: money market, and the swap is the instrument that's going 415 00:22:57,320 --> 00:23:00,800 Speaker 5: to really you know, give you that fungibility. And when 416 00:23:00,800 --> 00:23:04,760 Speaker 5: we look at the growth of the aggregates, it's been, 417 00:23:05,200 --> 00:23:07,439 Speaker 5: you know, it's been quite rapid. So if we go 418 00:23:07,520 --> 00:23:10,680 Speaker 5: back to the GFC. Before the GFC, the global financial 419 00:23:10,680 --> 00:23:13,159 Speaker 5: system it was very much a bank based system, and 420 00:23:13,240 --> 00:23:16,520 Speaker 5: the GFC was you know, in essence of banking crisis, 421 00:23:16,560 --> 00:23:21,120 Speaker 5: and the existing BIS banking statistics covered that really well. 422 00:23:21,160 --> 00:23:23,359 Speaker 5: You know, in some of my work as an academic, 423 00:23:23,520 --> 00:23:26,639 Speaker 5: you know, I relied really a lot on the BIS 424 00:23:27,080 --> 00:23:31,119 Speaker 5: banking data to really you know, document what happened in 425 00:23:31,160 --> 00:23:35,320 Speaker 5: the lead up to and then the resolution. But since 426 00:23:35,359 --> 00:23:38,760 Speaker 5: the GFC, we've moved very much to a market based 427 00:23:38,800 --> 00:23:43,160 Speaker 5: system where the non bank financial intermediaries are taking on 428 00:23:43,240 --> 00:23:48,159 Speaker 5: a much bigger role. And in that world, the banking 429 00:23:48,160 --> 00:23:50,959 Speaker 5: statistics that the BIS puts out is only looking at 430 00:23:50,960 --> 00:23:54,640 Speaker 5: a very small part of the overall universe, and increasingly 431 00:23:55,280 --> 00:23:59,640 Speaker 5: it's the EFS, swap market and other market based intermediation 432 00:24:00,080 --> 00:24:03,320 Speaker 5: figures that we need to keep track of. And so 433 00:24:03,320 --> 00:24:07,040 Speaker 5: in that sense, it's quite important for us to update 434 00:24:07,560 --> 00:24:11,560 Speaker 5: our perspective on how markets work, what kinds of indicators 435 00:24:11,640 --> 00:24:14,520 Speaker 5: we need to keep track of, and basically make sure 436 00:24:14,920 --> 00:24:17,360 Speaker 5: that the official statistics are really up to scratch. 437 00:24:18,359 --> 00:24:21,399 Speaker 2: So in the two or three weeks since the carry 438 00:24:21,440 --> 00:24:25,040 Speaker 2: trade hit the headlines, the yen dollar exchange rate has 439 00:24:25,119 --> 00:24:28,640 Speaker 2: normalized somewhat. But if you had to, if you had 440 00:24:28,640 --> 00:24:32,800 Speaker 2: to take an educated guess, how does the carry trade 441 00:24:32,960 --> 00:24:36,720 Speaker 2: re establish itself or how does it evolve from here? 442 00:24:36,800 --> 00:24:40,920 Speaker 2: Because I have to imagine there's some lingering memory, even 443 00:24:40,920 --> 00:24:43,080 Speaker 2: if it feels like a lifetime ago, that this actually 444 00:24:43,119 --> 00:24:47,080 Speaker 2: happened on the market. So what happens next in terms 445 00:24:47,080 --> 00:24:48,480 Speaker 2: of the carry trades evolution? 446 00:24:49,240 --> 00:24:51,879 Speaker 5: Well, actually, I think you know, you've had guests on 447 00:24:51,880 --> 00:24:55,159 Speaker 5: on odd lots where one of their big themes was, 448 00:24:55,680 --> 00:24:57,920 Speaker 5: you know, we're waiting for this big crash because it's 449 00:24:57,920 --> 00:24:59,840 Speaker 5: going to present a huge opportunity for us to come 450 00:25:01,000 --> 00:25:03,680 Speaker 5: and really pick up some bargains. And you know, if 451 00:25:03,680 --> 00:25:06,840 Speaker 5: you were following this and you had spare powder on 452 00:25:07,280 --> 00:25:10,159 Speaker 5: August fifth, for example, that was the Monday, then there 453 00:25:10,160 --> 00:25:12,160 Speaker 5: were huge opportunities out there. I mean, you know, think 454 00:25:12,200 --> 00:25:15,399 Speaker 5: about the Vics. The Vics hit sixty five on the 455 00:25:15,440 --> 00:25:19,600 Speaker 5: morning of August fifth. So I think we have to 456 00:25:19,640 --> 00:25:23,200 Speaker 5: assume that many of the people who are very who 457 00:25:23,200 --> 00:25:27,119 Speaker 5: are very you know, agile, are already back in And 458 00:25:27,160 --> 00:25:29,520 Speaker 5: I think what we need to think about is, well, 459 00:25:29,640 --> 00:25:32,639 Speaker 5: first of all, we have to you know, we have 460 00:25:32,720 --> 00:25:37,560 Speaker 5: to be thankful that nothing broke, But at the same time, 461 00:25:37,600 --> 00:25:39,560 Speaker 5: you know, you know, we can't be complacent and say, well, 462 00:25:39,560 --> 00:25:41,320 Speaker 5: that's it, we can forget about it. I think we 463 00:25:41,400 --> 00:25:45,160 Speaker 5: have to learn some lessons from that episode, and one 464 00:25:45,200 --> 00:25:47,399 Speaker 5: of those lessons is some of the standard ways I've 465 00:25:47,440 --> 00:25:49,440 Speaker 5: been looking at markets may not be adequate. We have 466 00:25:49,520 --> 00:25:52,280 Speaker 5: to look at some of these bigger pictures ues, especially 467 00:25:52,840 --> 00:25:55,840 Speaker 5: those big aggregates that have been off the radar for 468 00:25:55,920 --> 00:25:58,359 Speaker 5: various reasons, and we have to bring them back on 469 00:25:58,400 --> 00:26:01,919 Speaker 5: the radar. And I think when we think about, you know, 470 00:26:02,040 --> 00:26:05,240 Speaker 5: the broader policy questions as well, especially in monetary policy, 471 00:26:05,680 --> 00:26:09,080 Speaker 5: financial conditions are absolutely key. They're a key input into 472 00:26:09,119 --> 00:26:13,359 Speaker 5: how we conduct monetary policy. And so even for that question, 473 00:26:13,680 --> 00:26:16,560 Speaker 5: how will financial conditions involve, we have to think about 474 00:26:16,560 --> 00:26:17,320 Speaker 5: this big a picture. 475 00:26:17,760 --> 00:26:22,040 Speaker 3: Thinking back to that week. From a sort of fundamentals standpoint, 476 00:26:22,440 --> 00:26:25,399 Speaker 3: there was nothing that major that had happened, you know, 477 00:26:25,600 --> 00:26:29,640 Speaker 3: like I think maybe the unemployment rate cod people will 478 00:26:29,640 --> 00:26:33,080 Speaker 3: buy surprise, but data is noisy and there are surprises 479 00:26:33,080 --> 00:26:35,280 Speaker 3: all the time in both directions. Maybe the FED, I 480 00:26:35,280 --> 00:26:38,800 Speaker 3: don't know, the Bank of Japan, obviously, they're a little 481 00:26:38,800 --> 00:26:42,399 Speaker 3: bit out of cycle, perhaps with other central banks. I 482 00:26:42,480 --> 00:26:45,119 Speaker 3: think actually today we got a two point seven percent 483 00:26:45,240 --> 00:26:47,320 Speaker 3: inflation reading, so maybe it's all higher, but there was 484 00:26:47,359 --> 00:26:51,240 Speaker 3: nothing like that unexpected. Think about like risks going forward, 485 00:26:51,720 --> 00:26:53,720 Speaker 3: the fact that you could have such a sharp move 486 00:26:53,840 --> 00:26:57,840 Speaker 3: in such a short term. What does that say generally 487 00:26:57,960 --> 00:27:00,679 Speaker 3: about the broader I don't know, structure of the financial system. 488 00:27:00,680 --> 00:27:04,320 Speaker 3: And nothing broke and it did quiet down extraordinarily fast, 489 00:27:04,359 --> 00:27:06,639 Speaker 3: But what does it say about the structure of the 490 00:27:06,680 --> 00:27:10,240 Speaker 3: financial system or broadly that's something that sharp can happen 491 00:27:10,280 --> 00:27:13,720 Speaker 3: without some seemingly you know, major fundamental surprise. 492 00:27:13,960 --> 00:27:18,080 Speaker 5: And you're absolutely right. So the fundamental economic news was 493 00:27:18,119 --> 00:27:20,160 Speaker 5: not you know, that bigger surprise. I mean, there were 494 00:27:20,160 --> 00:27:23,680 Speaker 5: some surprises at the margin, but nothing major. I think 495 00:27:23,720 --> 00:27:27,359 Speaker 5: what it does point to is the power of amplification 496 00:27:27,400 --> 00:27:32,040 Speaker 5: effects of various sorts. Yeah, and you know, as officials, 497 00:27:32,080 --> 00:27:34,280 Speaker 5: you know, as policymakers, we need to think about how 498 00:27:34,280 --> 00:27:39,200 Speaker 5: do we dampen those amplification effects in a way that's 499 00:27:39,240 --> 00:27:42,040 Speaker 5: going to you know, preserve financial stability and not have 500 00:27:42,240 --> 00:27:45,640 Speaker 5: one of these episodes feed into the real economy. And 501 00:27:45,800 --> 00:27:48,840 Speaker 5: you know, the typical response we would go to would 502 00:27:48,880 --> 00:27:52,480 Speaker 5: be something like regulation. If these were banks, you know, 503 00:27:52,520 --> 00:27:54,200 Speaker 5: that would be the sort of in the first port 504 00:27:54,240 --> 00:27:56,480 Speaker 5: of call. But because if these are non banks, some 505 00:27:56,520 --> 00:27:59,679 Speaker 5: of them, many of them are not regulated, that's not 506 00:27:59,800 --> 00:28:03,119 Speaker 5: really you know, the first port of call. But you know, 507 00:28:03,160 --> 00:28:06,280 Speaker 5: there are points of contact with a regulated financial sector 508 00:28:06,359 --> 00:28:08,359 Speaker 5: where we can do something. I think one of the 509 00:28:08,400 --> 00:28:11,000 Speaker 5: things that one of the lessons we learned during March 510 00:28:11,000 --> 00:28:14,400 Speaker 5: twenty twenty, you know, with the treasury market, you know stress, 511 00:28:15,000 --> 00:28:16,560 Speaker 5: was that we need to make sure that we don't 512 00:28:16,560 --> 00:28:21,719 Speaker 5: have these hugely pro cyclical margin you know variation that 513 00:28:21,880 --> 00:28:24,480 Speaker 5: means that there are four sellers onto the market. Now 514 00:28:24,560 --> 00:28:27,720 Speaker 5: you know these huge swings are justified. Well, you know, 515 00:28:27,760 --> 00:28:30,360 Speaker 5: some people were justified saying, look, I need to protect 516 00:28:30,840 --> 00:28:33,359 Speaker 5: my solvency by you know, raising the margins. But that 517 00:28:33,400 --> 00:28:38,400 Speaker 5: has huge repercussions for the others. So from a systemic perspective, 518 00:28:39,160 --> 00:28:41,720 Speaker 5: you know, that has negative spillover effects. So that's one 519 00:28:41,720 --> 00:28:44,880 Speaker 5: example where if we can make sure that margins are 520 00:28:45,880 --> 00:28:49,080 Speaker 5: margins don't get eroded too thinly during good time so 521 00:28:49,120 --> 00:28:51,480 Speaker 5: that you know, they're raised very sharply, that's that's really 522 00:28:51,520 --> 00:28:54,240 Speaker 5: a no brainer, and that's something that the official sector 523 00:28:54,600 --> 00:28:57,719 Speaker 5: has worked on we actually, of course, need to have 524 00:28:58,240 --> 00:29:03,120 Speaker 5: much better data on these other aggregates that you know, 525 00:29:03,400 --> 00:29:06,920 Speaker 5: have now emerged as being very very important, and the 526 00:29:06,960 --> 00:29:09,240 Speaker 5: BIS is on that is on that case, you know, 527 00:29:09,280 --> 00:29:11,840 Speaker 5: we are working very hard to make it much more 528 00:29:11,880 --> 00:29:14,360 Speaker 5: detail so that it's going to be much more useful. 529 00:29:14,480 --> 00:29:17,840 Speaker 5: But it's going to be a continual, you know, struggle, Joe, 530 00:29:17,880 --> 00:29:20,640 Speaker 5: because you can never declare victory because you know, the 531 00:29:20,680 --> 00:29:23,760 Speaker 5: financial system is always evolving and you're just you know, 532 00:29:23,760 --> 00:29:26,239 Speaker 5: you're playing catch up all the time. It's just a 533 00:29:26,280 --> 00:29:29,960 Speaker 5: case of how badly behind are you, you know, with 534 00:29:30,040 --> 00:29:30,800 Speaker 5: the realities. 535 00:29:31,520 --> 00:29:34,160 Speaker 2: I have just one more question, which is thinking back 536 00:29:34,200 --> 00:29:39,360 Speaker 2: to August fifth, when markets were tanking, there were, or 537 00:29:39,400 --> 00:29:43,360 Speaker 2: at least there was one prominent call for one hundred 538 00:29:43,400 --> 00:29:49,040 Speaker 2: basis point emergency rate cut. And I really don't mean 539 00:29:49,120 --> 00:29:53,440 Speaker 2: to be mean spirited here, because you know, hindsight is 540 00:29:53,520 --> 00:29:56,320 Speaker 2: twenty twenty and we all get things wrong from time 541 00:29:56,400 --> 00:29:59,120 Speaker 2: to time. But I'm just very curious we're here at 542 00:29:59,240 --> 00:30:02,960 Speaker 2: Jackson Hall with a number of high profile policy makers. 543 00:30:03,960 --> 00:30:07,120 Speaker 2: Is there any discussion of that call or any like. 544 00:30:07,720 --> 00:30:12,680 Speaker 2: Are people talking about how ridiculous maybe that that call 545 00:30:12,800 --> 00:30:15,880 Speaker 2: actually was at the time The idea that the FED 546 00:30:16,000 --> 00:30:19,080 Speaker 2: was going to cut rates one hundred bases points, and 547 00:30:19,160 --> 00:30:23,000 Speaker 2: now to two or three weeks later, we have markets 548 00:30:23,040 --> 00:30:27,160 Speaker 2: near all time highs, the FX exchange rate has normalized 549 00:30:27,160 --> 00:30:30,040 Speaker 2: to some degree, and a lot of this is just 550 00:30:30,160 --> 00:30:31,320 Speaker 2: in the rear view mirror. 551 00:30:31,920 --> 00:30:34,080 Speaker 5: I think we have to look at this with a 552 00:30:34,080 --> 00:30:37,360 Speaker 5: bit more sympathy, Tracy. I don't think we can say 553 00:30:37,520 --> 00:30:40,400 Speaker 5: definitively yes or no. You know, if we think back 554 00:30:40,440 --> 00:30:45,440 Speaker 5: to the summer of nineteen ninety eight when LTCM Long 555 00:30:45,480 --> 00:30:50,360 Speaker 5: Term Capital Management hedge fund failed, there was tremendous stress there, 556 00:30:50,400 --> 00:30:52,680 Speaker 5: and you know, there was an intermeding cut at that 557 00:30:52,800 --> 00:30:56,880 Speaker 5: point because what you know, we could see then was 558 00:30:56,960 --> 00:31:00,800 Speaker 5: that the real economy looked to be, you know, showing 559 00:31:00,880 --> 00:31:04,360 Speaker 5: signs of being affected. And similarly, I think with March 560 00:31:04,400 --> 00:31:07,200 Speaker 5: twenty twenty, you know that was a treasury market. Clearly 561 00:31:07,640 --> 00:31:10,720 Speaker 5: fixed income is much more closely tied with the real economy. 562 00:31:11,080 --> 00:31:14,160 Speaker 5: So I would never say never, But you know, if 563 00:31:14,200 --> 00:31:17,360 Speaker 5: it's so, what are we looking at in deciding whether 564 00:31:17,400 --> 00:31:21,080 Speaker 5: you would go in and to intervene, Well, you're looking 565 00:31:21,120 --> 00:31:24,320 Speaker 5: for signs of complete dysfunction in the market, where the 566 00:31:24,320 --> 00:31:27,000 Speaker 5: market is just broken down and nothing is you know, 567 00:31:27,080 --> 00:31:30,080 Speaker 5: being sold or bought, and this means that the flow 568 00:31:30,120 --> 00:31:33,440 Speaker 5: of finance to real economic activity is really suffering. I 569 00:31:33,440 --> 00:31:36,280 Speaker 5: think if you see signs of that, then I think, 570 00:31:36,320 --> 00:31:40,160 Speaker 5: you know, there is a stronger argument for an extraordinary intervention. 571 00:31:40,280 --> 00:31:42,760 Speaker 5: But as you say, I think, you know, looking back, 572 00:31:43,360 --> 00:31:47,000 Speaker 5: although it was a pretty you know, intense period, those 573 00:31:47,000 --> 00:31:50,200 Speaker 5: two days in retrospect, wasn't the kind of thing that 574 00:31:50,320 --> 00:31:51,760 Speaker 5: needed extraordinary intervention. 575 00:31:52,600 --> 00:31:55,760 Speaker 3: I just have one last question, and I guess it's 576 00:31:55,800 --> 00:31:58,720 Speaker 3: sort of broad, but it's also one that I think 577 00:31:58,760 --> 00:32:01,400 Speaker 3: some of our listeners are curious about, and I'm so 578 00:32:01,440 --> 00:32:04,320 Speaker 3: I'm curious about from the BIS perspective, Like people are 579 00:32:04,360 --> 00:32:09,640 Speaker 3: always very interested in the idea of like speculative excess bubbles, 580 00:32:09,880 --> 00:32:13,040 Speaker 3: et cetera. I'm curious from the BIS perspective, do we 581 00:32:13,240 --> 00:32:17,560 Speaker 3: have reliable measures that can observe that. Do we have 582 00:32:17,760 --> 00:32:19,920 Speaker 3: you know, you could feel it in the error sometimes 583 00:32:19,920 --> 00:32:22,440 Speaker 3: people are talking about AI or whatever it is at 584 00:32:22,440 --> 00:32:25,720 Speaker 3: any given time, But do we have good tools to 585 00:32:25,880 --> 00:32:30,160 Speaker 3: quantify sort of the level of what we'd call speculation 586 00:32:30,360 --> 00:32:32,400 Speaker 3: in the market and at any given time. 587 00:32:32,640 --> 00:32:38,200 Speaker 5: We always have good measures when in retrospect, so we 588 00:32:38,240 --> 00:32:40,600 Speaker 5: can always look back to the previous crisis. Yeah, so, 589 00:32:40,840 --> 00:32:44,360 Speaker 5: oh wow, we should have taken notice of that. So, 590 00:32:44,440 --> 00:32:46,160 Speaker 5: you know, if we go back to the GFC, it 591 00:32:46,200 --> 00:32:48,960 Speaker 5: was a growth rate of credit, it was growth rate 592 00:32:49,000 --> 00:32:51,720 Speaker 5: of cross border lending and in particular the growth rate 593 00:32:52,320 --> 00:32:55,320 Speaker 5: of crossborder lending and dollars, which was you know, making 594 00:32:55,320 --> 00:32:58,760 Speaker 5: this round trip from the US to Europe back to 595 00:32:58,800 --> 00:33:03,960 Speaker 5: the US. And what tends to happen. And I think 596 00:33:04,000 --> 00:33:08,360 Speaker 5: the BIS, like any other efficiency institution, is guilty to 597 00:33:08,400 --> 00:33:10,240 Speaker 5: some extent, is that, you know, we draw up a 598 00:33:10,320 --> 00:33:14,200 Speaker 5: checklist and say, well, next time, let's not ignore A, 599 00:33:14,360 --> 00:33:16,520 Speaker 5: B and C, and let's have a list that we 600 00:33:16,760 --> 00:33:19,960 Speaker 5: check and of course, you know, we have this accumulated 601 00:33:20,320 --> 00:33:24,160 Speaker 5: checklist that we take along with us we as we 602 00:33:24,240 --> 00:33:28,200 Speaker 5: experience market. But it's never going to be adequate, right, 603 00:33:28,280 --> 00:33:32,239 Speaker 5: So this time around, what happened was not really you know, 604 00:33:32,400 --> 00:33:35,560 Speaker 5: central to some of our checklists. So, you know, I think, 605 00:33:35,840 --> 00:33:38,400 Speaker 5: to be fair, I think the BIS is probably the 606 00:33:38,440 --> 00:33:41,240 Speaker 5: best place to draw up. 607 00:33:41,160 --> 00:33:44,720 Speaker 4: A checklist that is closest to you know, what's going on. 608 00:33:45,160 --> 00:33:47,840 Speaker 5: You know, we are pretty close to the ground and 609 00:33:47,880 --> 00:33:50,920 Speaker 5: in following these things, and we have very good data. 610 00:33:51,040 --> 00:33:54,040 Speaker 5: But it's something that needs constant effort. Right, It's like 611 00:33:54,480 --> 00:33:57,680 Speaker 5: it's not something that just comes easily and it's simply 612 00:33:57,720 --> 00:34:00,360 Speaker 5: a matter of you know, effortless, you know brilliant that 613 00:34:00,440 --> 00:34:04,000 Speaker 5: gives you that it's something that always needs effort. We 614 00:34:04,080 --> 00:34:05,920 Speaker 5: have to keep you know, we have to keep studying, 615 00:34:05,920 --> 00:34:08,600 Speaker 5: we have to keep looking, and so it's going to 616 00:34:08,640 --> 00:34:09,760 Speaker 5: be a never ending struggle. 617 00:34:10,400 --> 00:34:13,160 Speaker 2: All right, Well we both look forward to the BIS 618 00:34:13,239 --> 00:34:16,600 Speaker 2: bubble index that you will inevitably be building. But h 619 00:34:16,880 --> 00:34:18,800 Speaker 2: thank you so much for coming back on All Loots. 620 00:34:18,840 --> 00:34:21,440 Speaker 5: That was amazing, Yeah, fantastic, Thanks for inviting me back, 621 00:34:21,480 --> 00:34:38,640 Speaker 5: because yeah, great conversation, Joe. 622 00:34:38,680 --> 00:34:40,719 Speaker 2: I'm so glad that we could catch up with him 623 00:34:40,800 --> 00:34:43,600 Speaker 2: and that he was basically our first episode on the 624 00:34:43,640 --> 00:34:44,360 Speaker 2: carry trade. 625 00:34:44,600 --> 00:34:47,240 Speaker 3: I love I love talking to Hugh and it's always 626 00:34:47,360 --> 00:34:51,640 Speaker 3: just like incredibly illuminating and pleasant and great, many interesting 627 00:34:51,719 --> 00:34:54,720 Speaker 3: things there. I mean, for one, I sort of appreciated 628 00:34:55,160 --> 00:34:57,800 Speaker 3: him just explaining what the carry trade is, that different 629 00:34:57,800 --> 00:35:00,239 Speaker 3: types of actors, whether you're an import or export, or 630 00:35:00,280 --> 00:35:04,040 Speaker 3: why you would want to engage in it. Like again, 631 00:35:04,200 --> 00:35:06,680 Speaker 3: just I don't know misinformation is the right word, but 632 00:35:06,719 --> 00:35:09,160 Speaker 3: the amount of people who want to appine on something 633 00:35:09,239 --> 00:35:10,880 Speaker 3: like this for the first of the people who actually 634 00:35:11,560 --> 00:35:14,040 Speaker 3: have some insight is a there's quite a gap. 635 00:35:14,239 --> 00:35:18,000 Speaker 2: Well, I do think the nuance on causality is kind 636 00:35:18,040 --> 00:35:20,320 Speaker 2: of important there, So the idea that okay, two things 637 00:35:20,400 --> 00:35:23,239 Speaker 2: kind of happened at the same time, which is the 638 00:35:23,280 --> 00:35:27,040 Speaker 2: carry trade unwound and US stock sold off, But that 639 00:35:27,080 --> 00:35:31,120 Speaker 2: doesn't necessarily mean that one thing is directly causing the other. 640 00:35:31,560 --> 00:35:34,720 Speaker 3: Right, And it gets to like the joke every time 641 00:35:35,080 --> 00:35:37,000 Speaker 3: you know, there's some big market event and someone goes, oh, 642 00:35:37,040 --> 00:35:40,080 Speaker 3: pod blew up. But it's sort of like that, which 643 00:35:40,120 --> 00:35:43,080 Speaker 3: is basically it really if there is some volatility, if 644 00:35:43,160 --> 00:35:47,399 Speaker 3: you're losing money, it doesn't really matter what strategy you're 645 00:35:47,480 --> 00:35:49,880 Speaker 3: using or whether that strategy is central to it. You 646 00:35:49,960 --> 00:35:52,160 Speaker 3: sell something right, and so you still have that effect. 647 00:35:52,480 --> 00:35:55,120 Speaker 2: Someone taps you on the shoulder and says, reduce leverage, 648 00:35:55,200 --> 00:35:57,799 Speaker 2: So you reduce leverage. The other thing I thought was 649 00:35:57,840 --> 00:36:02,040 Speaker 2: really interesting was the idea of the fungibility yes of money. 650 00:36:02,120 --> 00:36:04,240 Speaker 2: And I think we've talked about it on the podcast 651 00:36:04,280 --> 00:36:07,080 Speaker 2: before and I've certainly mentioned in the newsletter, but I 652 00:36:07,120 --> 00:36:09,799 Speaker 2: do feel there is a sense that okay, interest rates 653 00:36:09,920 --> 00:36:13,320 Speaker 2: went up in the US, and so credit and dollars 654 00:36:13,400 --> 00:36:17,040 Speaker 2: became more expensive, but that doesn't mean that they became 655 00:36:17,560 --> 00:36:18,400 Speaker 2: less available. 656 00:36:18,840 --> 00:36:23,080 Speaker 3: Yeah. No, that's such a fascinating idea, and the idea 657 00:36:23,120 --> 00:36:26,640 Speaker 3: of like a global the need for a global financial 658 00:36:26,719 --> 00:36:29,640 Speaker 3: Conditions Index or something like that. And if you're just 659 00:36:29,719 --> 00:36:32,799 Speaker 3: looking at the US in isolation, there are things that 660 00:36:32,840 --> 00:36:36,360 Speaker 3: don't seem to make total sense in terms of especially 661 00:36:36,400 --> 00:36:38,920 Speaker 3: the disconnect between what happens with rates and what happened 662 00:36:38,960 --> 00:36:41,520 Speaker 3: with spreads over the last couple of years. But that 663 00:36:41,640 --> 00:36:44,920 Speaker 3: perhaps if you sort of aggregate everything together and recognize 664 00:36:44,920 --> 00:36:48,000 Speaker 3: that any there are multiple places to get funding or 665 00:36:48,040 --> 00:36:51,879 Speaker 3: get liquidity, maybe some of these puzzle pieces fit together 666 00:36:51,920 --> 00:36:52,359 Speaker 3: a bit more. 667 00:36:52,520 --> 00:36:52,759 Speaker 5: Yeah. 668 00:36:52,760 --> 00:36:55,360 Speaker 2: So I'm looking forward to the Global Financial Conditions Index 669 00:36:55,400 --> 00:36:56,400 Speaker 2: and the Bubble Index. 670 00:36:56,520 --> 00:36:59,960 Speaker 3: Yes, many many indexes for the BIS to get out. 671 00:37:00,080 --> 00:37:02,359 Speaker 3: But if there's any entity that I feel confident could 672 00:37:02,360 --> 00:37:04,000 Speaker 3: do it, it'd be Hun in his team. 673 00:37:04,160 --> 00:37:05,200 Speaker 2: All right, shall we leave it there? 674 00:37:05,280 --> 00:37:05,960 Speaker 3: Let's leave it there. 675 00:37:06,080 --> 00:37:08,800 Speaker 2: This has been another episode of the Odd Lots podcast. 676 00:37:08,880 --> 00:37:11,760 Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway 677 00:37:11,880 --> 00:37:13,040 Speaker 2: and I'm Joe Wisenthal. 678 00:37:13,080 --> 00:37:15,719 Speaker 3: You can follow me at The Stalwart follow Hun Song Shin. 679 00:37:15,840 --> 00:37:19,680 Speaker 3: He's at hun song Shin, follow our producers Kerman Rodriguez 680 00:37:19,719 --> 00:37:22,880 Speaker 3: at Kerman Ermann, desh Ol Bennett at Dashbot, and Kilbrooks 681 00:37:22,880 --> 00:37:26,000 Speaker 3: at Kilbrooks. Thank you to our producer Moses Ondem. 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