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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Locks podcast.

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Speaker 2: I'm Jill Wisenthal and I'm Tracy Alloway. Tracy, sometimes are

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Speaker 2: old random episodes on just random things end up being

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Speaker 2: kind of relevant.

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Speaker 3: What do you mean sometimes? What do you mean random?

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Speaker 3: All of our episodes, each of them are like our children.

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Speaker 3: They're each special and relevant in their own way. That's

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Speaker 3: what I say.

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Speaker 2: You're right, they're all special. I would say they're all

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Speaker 2: special in their own way. Some of them probably have

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Speaker 2: more relevance to others. You know, this used to not

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Speaker 2: even be our full time job. We just found interesting things,

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Speaker 2: sometimes connected to the news, sometimes not. But I remember

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Speaker 2: twenty nineteen, the first time I noticed people like talking

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Speaker 2: about odd Lads before the pandemic was an episode we

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Speaker 2: did on Taiwan's life insurance companies.

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Speaker 3: That's right, And I guess the reason this episode kind

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Speaker 3: of went viral or became a thing was because of

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Speaker 3: the framing. We sort of framed it as a financial

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Speaker 3: market murder mystery almost or sort of who done it?

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Speaker 3: In global of financial flows? And I guess you don't

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Speaker 3: get many of those. You still don't get many of those,

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Speaker 3: we should do more of them. But people definitely got

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Speaker 3: into this one and definitely still remember it.

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Speaker 2: Definitely still remember it. Definitely get into it. So the

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Speaker 2: basic gist was that it was sort of well known

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Speaker 2: obviously that Taiwani's Life Insurance, which is this huge investing

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Speaker 2: savings product in Taiwan, that they were a major purchaser

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Speaker 2: of US treasuries, which of course leaves the companies potentially

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Speaker 2: at risk for currency slippage, but that the Central Bank

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Speaker 2: in Taiwan was revealed in the who done it as

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Speaker 2: the entity sort of providing a hedge of sorts such

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Speaker 2: that this was an economic safe trade for the life

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Speaker 2: insurance companies. And of course there's only one person we

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Speaker 2: could have ever been talking to who would have been

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Speaker 2: able to explain this whole phenomenon.

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Speaker 3: That's right, And of course we're going to be speaking

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Speaker 3: to them again because it's a new month, and in fact,

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Speaker 3: one of the things we've seen happening the big story

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Speaker 3: so far this month is the move in the Taiwanese dollars.

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Speaker 3: So we've seen this massive appreciating move in the Taiwanese

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Speaker 3: dollar against the US dollar. I think just this morning

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Speaker 3: alone we're recording on Monday, May fifth, it was up

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Speaker 3: something like five percent just in a day against the

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Speaker 3: ins dollar.

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Speaker 2: It's up two and a half percent. I think that

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Speaker 2: was the I think it's up like five percent total

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Speaker 2: in two days.

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Speaker 3: Five percent total in two days. Sorry, but still for

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Speaker 3: a currency that like tends to be fairly stable and boring,

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Speaker 3: this is a huge deal. So there's three certainties in

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Speaker 3: financial life, right. There's death taxes and the idea that

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Speaker 3: the Taiwanese life insurers are going to be buying dollar

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Speaker 3: denominated assets because they can, because things have remained so

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Speaker 3: stable and so boring for decades now that they can

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Speaker 3: just keep on doing this trade. And then suddenly, out

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Speaker 3: of nowhere, just in the past two days, we've seen

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Speaker 3: this really violent shift in the way things have always

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Speaker 3: been happening in Taiwan, and so we got to talk

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Speaker 3: about it, and we definitely got to talk about it

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Speaker 3: with Brad.

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Speaker 4: We got to talk about it.

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Speaker 2: Actually, I'm looking at this a three day chart. USD

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Speaker 2: TWD down six point six percent since April thirtieth, crazy move.

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Speaker 2: You're right, we got to talk to Brad Setzer. He's

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Speaker 2: the one who's been on this story longer than anyone else.

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Speaker 2: Brad Setser, Senior fellow at the Council on Foreign Relations,

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Speaker 2: thank you so much for I don't know you're like

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Speaker 2: coming back for like your like fifteenth odd lot's appearance.

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Speaker 4: Not quite fifteen, but it's a lot.

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Speaker 2: Okay, maybe I'm just exaggerating, but not by much. I

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Speaker 2: don't think at this point. You know, it's interesting in

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Speaker 2: the post April second environment. You know, a lot of markets,

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Speaker 2: like treasuries or just the you know, treasuries and the

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Speaker 2: stock market have stabilized quite a bit. Well, the currency

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Speaker 2: does seem to be where the action is stepping back up.

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Speaker 2: Before we get to the move that we've seen over

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Speaker 2: the last few days, just for the sake of our listeners,

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Speaker 2: give us the sort of top level description of the

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Speaker 2: flows that we see out of Taiwan and the role

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Speaker 2: of the central bank there in making that trade economical

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Speaker 2: for the lifers.

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Speaker 5: Well, Taiwan runs one of the biggest current account surpluses

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Speaker 5: in the world. It's fluctuated between ten percent of Taiwan's

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Speaker 5: GDP and fifteen percent of Taiwan's GDP is now on

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Speaker 5: the high side, it's close to fifteen percent of Taiwan's

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Speaker 5: GDP over.

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Speaker 4: One hundred billion dollars a year.

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Speaker 5: That is a big sum, and obviously a current account

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Speaker 5: surplus means that someone in the economy has to on

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Speaker 5: net be accumulating foreign assets, and over time that entity

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Speaker 5: has shifted from you know, in the fifteen or the

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Speaker 5: ten years after the Asian Financial Crisis, it was essentially

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Speaker 5: the Central Bank of China a Taiwan's central bank accumulating

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Speaker 5: foreign exchange reserves, mostly going into treasuries. At some point,

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Speaker 5: the Central Bank of China said more or less, hey,

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Speaker 5: we've got enough reserves, and maybe they were coming under

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Speaker 5: a little bit of pressure from the US to manage

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Speaker 5: their currency a little bit less. So the central bank

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Speaker 5: and the insurance regulator in a sense worked together to

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Speaker 5: make it possible for the life insurance industry, which in

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Speaker 5: Taiwan is big, to add to the share of its

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Speaker 5: assets which were in foreign currencies, and to increase the

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Speaker 5: sales of insurance policies so that the insurance industry was

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Speaker 5: growing relative to Taiwan's economy. Combine those two things, and

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Speaker 5: the insurers basically from twenty ten to twenty twenty build

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Speaker 5: up an enormous portfolio of foreign bonds. They put about

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Speaker 5: two thirds of their total ass sets in foreign bonds,

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Speaker 5: an enormous share. And as in our famous episode, there

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Speaker 5: was a secret hedgebook that offset let's say a quarter

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Speaker 5: of that exposure with a hedge with the central bank,

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Speaker 5: which wasn't disclosed until twenty twenty. So our famous episode

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Speaker 5: actually triggered a change in the central bank's policy. The

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Speaker 5: central banks started disclosing that forward book in twenty twenty.

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Speaker 5: After the pandemic, this flow has been more modest. It

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Speaker 5: hasn't gone away, but the lifers aren't buying up the

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Speaker 5: entire current account sturtplus, you're seeing a little bit more

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Speaker 5: more purchases from the banking system which is now able

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Speaker 5: to offer foreign currency policies. And then another favorite topic

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Speaker 5: of odd lots the Taiwanese semiconductor manufacturer TSMC. When it

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Speaker 5: started building chip factories fabs in Japan and in the US,

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Speaker 5: that outward FDI became a big counterpart to the current

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Speaker 5: accounts plus. But the effect is that, you know, Taiwan

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Speaker 5: is just stuffed to the gills with unhedged holdings of

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Speaker 5: dollars in dollar bonds.

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Speaker 3: Never let it be said that odd lots is not

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Speaker 3: an agent for change. So we actually affected the world

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Speaker 3: through that episode, mostly Brad, but we gave you a platform.

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Speaker 4: I guess you did very powerful one, all right.

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Speaker 3: So I would definitely encourage anyone who's really interested in

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Speaker 3: this topic to go back and listen to the whole

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Speaker 3: thing because there's a lot of nuance in there. And

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Speaker 3: you know, Joe mentioned in the intro that Taiwanese life

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Speaker 3: insures buy a lot of US treasuries, but it's not

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Speaker 3: just US treasuries, it's also things like US corporate bonds.

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Speaker 3: And we're not going to rehash the whole thing here,

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Speaker 3: but why don't we just dive into what's been happening today?

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Speaker 3: So things had been changing recently, and I guess Taiwanese

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Speaker 3: life insurres hadn't been buying as many US bonds as

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Speaker 3: they once did, but they still have this huge enormous

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Speaker 3: stack of dollar assets and they're still, you know, pretty

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Speaker 3: underhedged relatively, And I think I saw some people talking

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Speaker 3: that it seems like the life insurers weren't even very

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Speaker 3: well hedged like comparatively. In recent months, they'd taken off

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Speaker 3: some of the hedges since April. Second, do we have

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Speaker 3: any indication why that was or why they wouldn't have

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Speaker 3: been particularly hedged in this particular moment in time.

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Speaker 5: Well, with Josh Younger, who formerly was the interest rates

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Speaker 5: strategist at JP Morgan and one of the other people

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Speaker 5: who had a little bit of an obsession with understanding

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Speaker 5: the Taiwanese flow, we put out an estimate in January

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Speaker 5: that the unhedged book of the life insurers was about

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Speaker 5: two hundred billion, which is, you know, fifteen to twenty

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Speaker 5: percent of their assets, a very big sum. Why is

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Speaker 5: have they stayed on hedge maybe gotten a little bit

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Speaker 5: more unhedged? Yeah, simple reason hedging was expensive. Hedging is

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Speaker 5: essentially a function of the differential between Taiwanese short term

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Speaker 5: rates and US dollars short term rates. So as the

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Speaker 5: US hiked rates in twenty twenty two twenty three, they've

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Speaker 5: come down a little, but they're still absolutely high. The

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Speaker 5: cost of hedging went up, and I think what you

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Speaker 5: see across Asia, not just in Taiwan, is that as

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Speaker 5: the cost of hedging went up and as Asian currencies

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Speaker 5: were basically trading on the weak side, so there was

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Speaker 5: no financial penalty to being underhedged, institutions took advantage of

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Speaker 5: those incentives and reduced their headge ratio. On top of that,

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Speaker 5: the Taiwanese Insurance Regulator, under pressure from the life insurers,

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Speaker 5: essentially allowed the lifers to substitute a foreign exchange volatility

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Speaker 5: reserve for some hedging and let them go a little

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Speaker 5: more unhedged going into this year.

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Speaker 4: Classic kind of mistake.

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Speaker 2: So it's not just a Taiwanese dollar story. Since April second,

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Speaker 2: we've obviously seen this broad weakness in the US dollar.

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Speaker 2: It's one of the few charts that you can find

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Speaker 2: that really has not bounced at all or very little

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Speaker 2: since that first week. The Bloomberg Dollar Index down broadly

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Speaker 2: against everyone, but the Asian currencies, the East Asian ones

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Speaker 2: have really flown. And you know what's funny is that

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Speaker 2: a lot of people expected. They're like, oh, well, when

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Speaker 2: tariffs come in place, then the dollar is going to

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Speaker 2: strengthen and that's going to offset some of the tariffs.

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Speaker 2: We've seen the exact opposite. Before we get to Taiwan specifically,

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Speaker 2: what's the general story in your view for why the

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Speaker 2: dollar has weakened as much as it has post April second.

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Speaker 5: I think there's two general factors. The first factor is

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Speaker 5: the dollar was just exceptionally strong against most Asian currencies,

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Speaker 5: so the starting points do matter, and a yen at

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Speaker 5: one forty five now it's not one fifty five, but

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Speaker 5: one five is an incredibly weakend. Until very recently, the

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Speaker 5: Taiwan dollar was on the weak side of its long

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Speaker 5: term range. The Korean one was at fourteen fifty. Fourteen

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Speaker 5: fifty is the level it reached during the Korean financial

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Speaker 5: crisis and during the global financial crisis, and it's actually

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Speaker 5: weaker than that in a real sense because of the

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Speaker 5: inflation differentials. So I think it's the fundamental reason is

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Speaker 5: that Asian currencies were very weak, the dollar was very strong.

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Speaker 5: And then China made a policy choice not to respond

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Speaker 5: to the draconian tariffs the one hundred and forty five

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Speaker 5: percent tariff twenty percent from the legacy Fittinel case and

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Speaker 5: one hundred and twenty five percent on the reciprocal tariff case.

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Speaker 5: You know, like China is the only country that got

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Speaker 5: really claberd with the reciprocal tariff. In the end, China

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Speaker 5: chose not to respond by depreciating the yuan. And I

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Speaker 5: think the fact that it China didn't respond that the

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Speaker 5: yuan didn't depreciate, and that you know, in a sense,

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Speaker 5: there was newsflow that is suggestive that there's at least

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Speaker 5: some chance there'll be an agreement, or even in the

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Speaker 5: absence of an agreement, a decision to pull back some

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Speaker 5: of the US tariffs on China. All that laid the

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Speaker 5: backdrop for this recent move.

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Speaker 3: Okay, So getting back to Taiwan specifically, I'm not going

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Speaker 3: to ask you if Taiwan's central bank when they would

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Speaker 3: have to intervene, because I think that's kind of a

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Speaker 3: boring question. But instead I'm going to ask you, what

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Speaker 3: are the limitations on Taiwan's central bank in terms of intervention.

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Speaker 4: That's a good question.

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Speaker 5: The usual intervention limits on a central bank's intervention is

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Speaker 5: in a sense that they run out of foreign exchange

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Speaker 5: and they can't borrow more. But that's what the limits

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Speaker 5: you face when you're trying to prevent your currency from falling,

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Speaker 5: from depreciating, when you're trying to prevent your currency from

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Speaker 5: appreciating arising. There's really no intrinsic limit to how much

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Speaker 5: foreign exchange a central bank can accumulate. So in that sense,

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Speaker 5: the Central Bank of China could at any point step

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Speaker 5: in and buy up a lot, a lot of dollar dollars.

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Speaker 5: The Central Bank of China has close to six hundred

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Speaker 5: billion dollars already a little more when you count it's

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Speaker 5: off balance sheet. It's already holding close to one hundred

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Speaker 5: percent of Taiwan's GDP and foreign exchange reserves. But there's

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Speaker 5: no intrinsic limit on how high that could go. I

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Speaker 5: think the limits are in a sense twofold one is.

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Speaker 5: And you know, we don't really know what motivated the

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Speaker 5: Central Bank of China to stay relatively restrained. I mean,

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Speaker 5: I think they were in the market to smooth some

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Speaker 5: of the moves. They had more or less admitted that

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Speaker 5: both Friday and Monday and today, but they weren't trying

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Speaker 5: to stop the move. They were trying to smooth the move.

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Speaker 5: And one reason why is maybe they thought the life

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Speaker 5: insurance industry had gotten a little bit too aggressive, it

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Speaker 5: was not paying enough attention to risk, and they were

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Speaker 5: afraid that if the Central Bank of China came in

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Speaker 5: too quickly stop the move too rapidly, in a sense,

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Speaker 5: the lifers wouldn't learn a useful lesson in risk management.

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Speaker 5: So you can call that thesis one the second thesis

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Speaker 5: is that the central bank is feeling a little bit

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Speaker 5: of heat from the United States, partially because the US

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Speaker 5: Treasury is preparing it's next for an exchange report. That

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Speaker 5: report may be out any day, Partially because Peter Navarro

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Speaker 5: has long thought that the Taiwanese dollar was undervalued, Partially

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Speaker 5: because currency has been a topic in the negotiations over

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Speaker 5: these supposed deals with most Asian countries, and so the

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Speaker 5: Central Bank of China may have been a little bit reluctant.

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Speaker 5: Central Bank of China's Taiwan Central Bank may be a

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Speaker 5: little bit reluctant to just put an absolute block on

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Speaker 5: this move and in the process draw attention to the

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Speaker 5: fact that Taiwan's currency is heavily managed, that Taiwan keeps

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Speaker 5: his currency from appreciating when necessary, at least historically through

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Speaker 5: actions of the central bank, which some people would call manipulation.

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Speaker 2: So there's a few different ways this could go. And

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Speaker 2: as you mentioned, perhaps one possibility is that Taiwan, along

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Speaker 2: with Korea, maybe along with other East Asian countries, as

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Speaker 2: part of a possible trade deal, if there is going

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Speaker 2: to be one, maybe they're going to let their currencies

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Speaker 2: strengthen and let that do some work in terms of

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Speaker 2: balancing out trade. Another possibility, and I'm curious, you know,

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Speaker 2: just sort of where this game's out. Could you see

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Speaker 2: a scenario in which these countries reinvest more of their

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Speaker 2: dollar inflows into like something that resembles consumer demand or

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Speaker 2: domestic demand and produce the sort of global demand for goods,

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Speaker 2: perhaps some from the United States or services from the

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Speaker 2: United States. That leads to, you know, some sort of

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Speaker 2: the type of desirable balance that the new administration would

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Speaker 2: like to see.

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Speaker 5: Well, I mean, I think those in a sense are

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Speaker 5: part of the discussion. They aren't mutually exclusive. You can

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Speaker 5: let your currency appreciate and then try to take steps

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Speaker 5: using your domestic fiscal capacity or the government as opposed

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Speaker 5: to the central banks balance sheet to support domestic demand.

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Speaker 5: That would be a very sensible thing, frankly for Taiwan

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Speaker 5: to do. Running a fifteen percent of GDP current accounts

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Speaker 5: for plus in perpetuity effectively has meant that Taiwan has

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Speaker 5: been overpaying for US dollar bonds for the past fifteen years,

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Speaker 5: and it's accumulating an ever bigger forward looking financial loss

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Speaker 5: from the inevitable currency move. Because the Taiwan dollar is

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Speaker 5: by any measure, incredibly weak. Some part of the Taiwanese

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Speaker 5: economy just has to overpay for US financial assets and

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Speaker 5: build up a loss. You may say that doesn't make sense.

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Speaker 5: We should be investing more in our own people, We

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Speaker 5: should be building out our social welfare system. The same

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Speaker 5: issues that China faces actually are relevant in Taiwan. The

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Speaker 5: government doesn't run a much of a fiscal deficit. The

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Speaker 5: government actually doesn't spend very much on defense either. So

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Speaker 5: for Taiwan's case, there's a pretty clear and compelling case

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Speaker 5: that they should have a more aggressive fiscal policy, more

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Speaker 5: investment in their own defense, and a bigger and more

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Speaker 5: generous social safety net. All that, though, takes time, and

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Speaker 5: you're starting from a fifteen percent of GDP current account surplus.

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Speaker 5: That surplus isn't going to go away. TSMC still has

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Speaker 5: a very dominant position in logic chips, so their export

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Speaker 5: position won't be enormously impacted by moves in the Taiwan dollar,

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Speaker 5: at least not in my judgment. So I think there

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Speaker 5: is a separate set of questions about how you manage

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Speaker 5: the risk that has already been built up in the

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Speaker 5: insurance sector, and what I would like to see the

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Speaker 5: central bank do is set up a hedging program so

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Speaker 5: that the lifers can hedge pretty much directly with the

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Speaker 5: central bank and thereby reduce the financial stability risk. If

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Speaker 5: the Taiwan dollar continues to appreciate, take away some of

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Speaker 5: the pressure on the central bank to avoid appreciation. I

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Speaker 5: think that would facilitate a broader move in Taiwan's currency.

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Speaker 5: And no doubt you're right, Taiwan, Korea, Japan all prefer

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Speaker 5: to appreciate when all their currencies are going up together,

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Speaker 5: and I think that was some of the negotiations around

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Speaker 5: China is at least potentially an opportunity to make some

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Speaker 5: progress on the rebalancing front in a healthy way.

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Speaker 3: Okay, so I'm going to ask, I guess just the

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Speaker 3: really blunt question to this point, but is this basically

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Speaker 3: a win for Trump? You know, if I think back

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Speaker 3: US officials, perhaps even you have basically been complaining of

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Speaker 3: if you're going to be diplomatic about it, under the

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Speaker 3: radar currency intervention by Taiwan's central bank, and other people

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Speaker 3: not being diplomatic would call it outright currency manipulation in

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Speaker 3: Taiwan for years now, Suddenly the Taiwanese dollar has appreciated

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Speaker 3: by six point six percent in the space of a

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Speaker 3: few days. Is that a win?

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Speaker 5: Not yet, We're still at around thirty. We've gone from

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Speaker 5: whatever around thirty three to a round thirty. In the

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Speaker 5: past the Taiwan dollar has gotten up to around twenty eight.

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Speaker 5: I think in order for it to be a real win,

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Speaker 5: we have to see evidence that Taiwan is allowing its

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Speaker 5: currency to strengthen through the levels which the central bank

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Speaker 5: has historically defended in the sense of defended against pressure

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Speaker 5: from appreciation, not the usual sense of the word. So

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Speaker 5: I mean there is a broader I guess irony, which

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Speaker 5: is I don't think the administration was hoping for a

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Speaker 5: dollar selloff. A lot of the talk around a mar

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Speaker 5: Alago accord was trying to mitigate the risks that tariffs

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Speaker 5: would lead to the dollar to appreciate and thereby undermine

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Speaker 5: some of the expected benefits from the Trump administration's point.

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Speaker 4: Of view of the tariffs.

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Speaker 5: But it is certainly the case that the most effective

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Speaker 5: way to bring the US trade deficit down is just

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Speaker 5: to get the dollar weaken and so if one effect

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Speaker 5: of Trump's policies is to reduce the appeal of the

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Speaker 5: US as a destination for foreign investors, including some foreign

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Speaker 5: investors who were maybe overly eager to buy US financial assets.

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Speaker 5: That would prompt some adjustment. I think that adjustment what

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Speaker 5: is going to happen to some degree independent of Trump.

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Speaker 5: But you know, let's see. I mean, if Scott Besson

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Speaker 5: can engineer a coordinated appreciation of all Asian currencies, and

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Speaker 5: that the net result of all these trade deal negotiations,

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Speaker 5: which are seeming to be a little broader than just

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Speaker 5: trade negotiations, is a meaningful change in the level of

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Speaker 5: all of the Asian foreign exchange complex against the dollar.

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Speaker 4: That would be a win in my view.

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Speaker 3: And then again, just on this point, you've set out

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Speaker 3: very brilliantly already the impact that Taiwanese life insurers and

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Speaker 3: some of the other big Taiwanese investors have on I guess,

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Speaker 3: I guess I would say three buckets of assets slash

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Speaker 3: financial markets, so US treasuries, corporate credit, and then the

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Speaker 3: interest rates space, where we see them as big players

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Speaker 3: in rate volatility in various ways. How would you expect

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Speaker 3: those three buckets to be impacted by what we've just

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Speaker 3: seen over the past few days.

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Speaker 5: Well, I think there's already been some important shifts. Josh

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Speaker 5: Hunger and I highlighted that the Taiwanese lifers have not

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Speaker 5: been big buyers of so called callable bonds, bonds which

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Speaker 5: can be called by the issuer if rates fall. They

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Speaker 5: bought a lot of those before the covid as port

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Speaker 5: of a yield pickup strategy, but that particular bid has

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Speaker 5: sort of disappeared, and that had in turn had knocked

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Speaker 5: on effects on the agency market. So there's already been

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Speaker 5: some adjustments as a result of the slowdown in Taiwanese

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Speaker 5: lifers purchases over the past few years. In the fact,

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Speaker 5: they've gotten a little bit more conservative right now, where

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Speaker 5: the lifers are particularly important is for long dated US

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Speaker 5: corporate bonds twenty year plus, that kind of STAD investment

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Speaker 5: grade corporates, and then a lot of dollar bonds issued

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Speaker 5: by relatively high grade emerging markets and Asian issuers. The

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Speaker 5: lifers themselves tend not to be super heavy and treasuries.

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Speaker 5: I mean, they have some, but they're not the dominant

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Speaker 5: buyer of treasuries out of Taiwan. The dominant buyer of

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Speaker 5: treasuries out of Taiwan tends to be the Central Bank

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Speaker 5: or the banking system. So what I think will happen

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Speaker 5: if the lifers are no longer willing or trying to

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Speaker 5: reduce their dollar book is they're going to see less

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Speaker 5: demand for corporate bonds, including some in some particular corners

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Speaker 5: of the market where they're very important. And then you're

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Speaker 5: going to see if the Central Bank of China comes

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Speaker 5: in and intervenes pretty either to smooth the move or

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Speaker 5: to at some point cap the move, then you'll see

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Speaker 5: a rotation and demand back towards treasuries. One of the

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Speaker 5: ironies that I don't think a lot of people kind

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Speaker 5: of have internalized is that central bank demand for treasuries

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Speaker 5: tends to be very correlated with dollar weakness. Countries that

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Speaker 5: don't want their currency to appreciate or don't want their

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Speaker 5: currency to appreciate too quickly intervene in the market they

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Speaker 5: buy dollars, and central banks tend to be the player

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Speaker 5: that is least inclined to buy corporate debt to take

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Speaker 5: credit risk, and most inclined just to plow that money

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Speaker 5: into the treasury market and typically into the shorter end

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Speaker 5: of the curve. So that's kind of the rotation that

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Speaker 5: I would expect going forward. I don't think you're going

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Speaker 5: to see big changes in the Treasury book because I

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Speaker 5: think you're going to see this central bank bid. There's

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Speaker 5: a small subtle question that comes up. If the Central

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Speaker 5: Bank of China does what I suggested, which opens up

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Speaker 5: a hedging facility with its banking system and ultimately with

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Speaker 5: its insurers, that would take dollars. But I think one

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Speaker 5: thing that the US has done over the past five

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Speaker 5: years is that it's created a repo facility for foreign

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Speaker 5: central banks, and that really is the kind of facility

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Speaker 5: that would allow a central bank like Taiwan Central Bank

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Speaker 5: that has a ton of dollar bonds to get dollar

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Speaker 5: cash without selling its bonds. So I think you could

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Speaker 5: have some sort of coordination there that could effectively help

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Speaker 5: the lifers close.

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Speaker 4: Some of the hedg you need.

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Speaker 5: So that's one of the things I'd like to see happen,

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Speaker 5: and I think that would facilitate an orderly appreciation of

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Speaker 5: the Taiwan dollar, one that doesn't break the back of

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Speaker 5: its insurance industry.

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Speaker 2: Thank you so much, Brad Setzer at the Council on

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Speaker 2: Foreign Relations. Thank you so much for coming back on

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Speaker 2: odd lots. The only one who could have explained it

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Speaker 2: as clearly as you do. Really appreciate it.

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Speaker 4: Well, thanks for letting me talk about one of my great.

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Speaker 2: Passions, love talking to Brad, Love the return of the

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Speaker 2: relevance of this sort of what seemed like a niche thing.

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Speaker 3: Joe, I'm just gonna say, you need to live your

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Speaker 3: life every day like Taiwanese life insurers are the biggest

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Speaker 3: story in the world. No, that's how to do it.

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Speaker 2: You know what, all ironically that you're right that we

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Speaker 2: should never do episodes period, that you and I don't

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00:25:00,600 --> 00:25:03,520
Speaker 2: consider the most important story of the day. Like that's

437
00:25:03,520 --> 00:25:05,760
Speaker 2: just a good editorial dictum to live by.

438
00:25:05,640 --> 00:25:08,480
Speaker 3: Isn't it excellent? Yes, I mean this is definitely the

439
00:25:08,520 --> 00:25:10,240
Speaker 3: case at the moment. This is the story.

440
00:25:10,760 --> 00:25:11,880
Speaker 4: It is the story.

441
00:25:12,080 --> 00:25:14,199
Speaker 2: And like, you know what's interesting is okay, here you

442
00:25:14,240 --> 00:25:17,040
Speaker 2: have this huge line on the screen and this big jump,

443
00:25:17,040 --> 00:25:20,240
Speaker 2: and it intersects with the financial markets, and you know,

444
00:25:20,680 --> 00:25:23,159
Speaker 2: looking at the stocks today, you know, it's not like

445
00:25:23,200 --> 00:25:26,000
Speaker 2: we've seen some major spill over it in fact s

446
00:25:26,080 --> 00:25:29,000
Speaker 2: and P five hundred is barely down right now. But

447
00:25:29,160 --> 00:25:31,840
Speaker 2: still it's hard not to get anxious when you see

448
00:25:31,840 --> 00:25:34,959
Speaker 2: like big ninety degree angles in a chart. You know,

449
00:25:35,119 --> 00:25:36,160
Speaker 2: us TTWD.

450
00:25:36,480 --> 00:25:38,199
Speaker 3: So I have two things to say about this. So

451
00:25:38,359 --> 00:25:40,560
Speaker 3: number one, I don't think a lot of investors are

452
00:25:40,680 --> 00:25:45,320
Speaker 3: very good at thinking about basically international financial flows. Yeah,

453
00:25:45,320 --> 00:25:48,639
Speaker 3: and I would say that of financial media organizations as well.

454
00:25:48,720 --> 00:25:52,600
Speaker 3: I have long said that every financial media organization that

455
00:25:52,680 --> 00:25:57,040
Speaker 3: takes itself seriously should have a global flows correspondent, and

456
00:25:57,080 --> 00:25:59,600
Speaker 3: to my knowledge, I don't think anyone does still. But

457
00:25:59,640 --> 00:26:02,199
Speaker 3: then secondly, the other thing I would say is I

458
00:26:02,320 --> 00:26:05,200
Speaker 3: mentioned that we're into May, and so everyone is looking

459
00:26:05,320 --> 00:26:08,960
Speaker 3: past at the month that has been April, a wild April,

460
00:26:09,200 --> 00:26:11,040
Speaker 3: and all the headlines are like, oh, it was a

461
00:26:11,119 --> 00:26:14,080
Speaker 3: crazy thirty days. But look, the S and P five

462
00:26:14,160 --> 00:26:16,720
Speaker 3: hundred is back to where it was before Liberation Day,

463
00:26:16,800 --> 00:26:20,399
Speaker 3: and so everything's fine, It's all good now. But that

464
00:26:20,520 --> 00:26:24,440
Speaker 3: doesn't really sit right if you start to look at

465
00:26:24,680 --> 00:26:28,840
Speaker 3: places like the flows data or the currency data. Right

466
00:26:28,920 --> 00:26:31,199
Speaker 3: the US dollar is still down quite a lot. You

467
00:26:31,200 --> 00:26:36,320
Speaker 3: can find little examples of risk premiums in various markets

468
00:26:36,359 --> 00:26:39,320
Speaker 3: still being higher than they were on April. Second, and

469
00:26:39,400 --> 00:26:41,399
Speaker 3: a lot of those are in the currency space or

470
00:26:41,400 --> 00:26:45,320
Speaker 3: the bond space, because this is where foreign investors are

471
00:26:45,359 --> 00:26:50,080
Speaker 3: really thinking about. I guess the existential crisis or existential

472
00:26:50,119 --> 00:26:54,960
Speaker 3: angst of investing with America. And again, like in my mind,

473
00:26:55,000 --> 00:26:57,640
Speaker 3: if you're talking about a trade war and the impacts

474
00:26:57,680 --> 00:27:00,440
Speaker 3: of a potential trade war, it would be in those

475
00:27:00,480 --> 00:27:04,160
Speaker 3: global international flows, the way big pools of capital move

476
00:27:04,200 --> 00:27:07,200
Speaker 3: around the world. And so I think it's really interesting

477
00:27:07,240 --> 00:27:09,879
Speaker 3: to me that we are seeing those kind of breakages

478
00:27:09,920 --> 00:27:12,840
Speaker 3: at least in the Taiwanese dollar and the US dollar

479
00:27:12,880 --> 00:27:15,320
Speaker 3: at the moment. Like that is indicative of the idea

480
00:27:15,400 --> 00:27:19,040
Speaker 3: that no, there is actually something really big and important

481
00:27:19,119 --> 00:27:21,600
Speaker 3: happening in the world at the moment, and it's not

482
00:27:21,760 --> 00:27:24,040
Speaker 3: just about the S and P five hundred.

483
00:27:23,920 --> 00:27:24,639
Speaker 4: Right, because NS in P.

484
00:27:24,800 --> 00:27:27,440
Speaker 2: Five hundred is a large part about big tech stocks

485
00:27:27,640 --> 00:27:29,080
Speaker 2: and they're doing fine.

486
00:27:29,200 --> 00:27:30,040
Speaker 4: It seems fine.

487
00:27:30,320 --> 00:27:33,160
Speaker 2: You know, they're still like building big AI data centers

488
00:27:33,160 --> 00:27:36,080
Speaker 2: and all that stuff. But to your point, there's other

489
00:27:36,160 --> 00:27:39,640
Speaker 2: stuff going on in the world besides tech stocks still

490
00:27:39,680 --> 00:27:40,640
Speaker 2: continuing to go up.

491
00:27:40,880 --> 00:27:42,640
Speaker 3: Yes, indeed, shall we leave it there for now?

492
00:27:42,720 --> 00:27:43,440
Speaker 4: Let's leave it there.

493
00:27:43,720 --> 00:27:46,120
Speaker 3: This has been another episode of the add Thoughts podcast.

494
00:27:46,200 --> 00:27:49,000
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway

495
00:27:49,200 --> 00:27:50,440
Speaker 3: and I'm Joe Wisenthal.

496
00:27:50,480 --> 00:27:53,199
Speaker 2: You can follow me at the Stalwart. Follow Brad Setser

497
00:27:53,280 --> 00:27:57,359
Speaker 2: He's at Brad Underscore Setser. Follow our producers Kerman, Rodriguez

498
00:27:57,400 --> 00:28:01,200
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499
00:28:01,600 --> 00:28:04,400
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500
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501
00:28:07,560 --> 00:28:09,600
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504
00:28:14,960 --> 00:28:17,159
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