WEBVTT - Brad Setser on the Big Surge in the Taiwanese Dollar 0:00:02.480 --> 0:00:16.400 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.560 Hello and welcome to another episode of the Odd Locks podcast. 0:00:21.600 --> 0:00:26.280 I'm Jill Wisenthal and I'm Tracy Alloway. Tracy, sometimes are 0:00:26.440 --> 0:00:30.880 old random episodes on just random things end up being 0:00:31.000 --> 0:00:31.720 kind of relevant. 0:00:32.320 --> 0:00:34.720 What do you mean sometimes? What do you mean random? 0:00:35.080 --> 0:00:37.720 All of our episodes, each of them are like our children. 0:00:37.760 --> 0:00:40.720 They're each special and relevant in their own way. That's 0:00:40.800 --> 0:00:41.280 what I say. 0:00:41.400 --> 0:00:43.640 You're right, they're all special. I would say they're all 0:00:43.640 --> 0:00:46.599 special in their own way. Some of them probably have 0:00:46.760 --> 0:00:50.400 more relevance to others. You know, this used to not 0:00:50.440 --> 0:00:53.240 even be our full time job. We just found interesting things, 0:00:53.360 --> 0:00:56.480 sometimes connected to the news, sometimes not. But I remember 0:00:56.600 --> 0:01:00.880 twenty nineteen, the first time I noticed people like talking 0:01:00.920 --> 0:01:04.760 about odd Lads before the pandemic was an episode we 0:01:04.800 --> 0:01:07.240 did on Taiwan's life insurance companies. 0:01:07.640 --> 0:01:10.800 That's right, And I guess the reason this episode kind 0:01:10.840 --> 0:01:13.440 of went viral or became a thing was because of 0:01:13.520 --> 0:01:16.240 the framing. We sort of framed it as a financial 0:01:16.319 --> 0:01:19.760 market murder mystery almost or sort of who done it? 0:01:20.160 --> 0:01:23.360 In global of financial flows? And I guess you don't 0:01:23.360 --> 0:01:25.560 get many of those. You still don't get many of those, 0:01:25.600 --> 0:01:27.920 we should do more of them. But people definitely got 0:01:27.959 --> 0:01:30.320 into this one and definitely still remember it. 0:01:30.360 --> 0:01:32.800 Definitely still remember it. Definitely get into it. So the 0:01:32.920 --> 0:01:35.480 basic gist was that it was sort of well known 0:01:35.520 --> 0:01:39.920 obviously that Taiwani's Life Insurance, which is this huge investing 0:01:39.959 --> 0:01:43.679 savings product in Taiwan, that they were a major purchaser 0:01:43.760 --> 0:01:47.320 of US treasuries, which of course leaves the companies potentially 0:01:47.520 --> 0:01:51.320 at risk for currency slippage, but that the Central Bank 0:01:51.440 --> 0:01:55.440 in Taiwan was revealed in the who done it as 0:01:55.520 --> 0:01:58.640 the entity sort of providing a hedge of sorts such 0:01:58.760 --> 0:02:02.600 that this was an economic safe trade for the life 0:02:02.600 --> 0:02:05.800 insurance companies. And of course there's only one person we 0:02:05.840 --> 0:02:07.920 could have ever been talking to who would have been 0:02:07.920 --> 0:02:09.840 able to explain this whole phenomenon. 0:02:10.040 --> 0:02:12.040 That's right, And of course we're going to be speaking 0:02:12.040 --> 0:02:16.200 to them again because it's a new month, and in fact, 0:02:16.360 --> 0:02:18.560 one of the things we've seen happening the big story 0:02:18.680 --> 0:02:22.959 so far this month is the move in the Taiwanese dollars. 0:02:22.960 --> 0:02:26.080 So we've seen this massive appreciating move in the Taiwanese 0:02:26.120 --> 0:02:29.600 dollar against the US dollar. I think just this morning 0:02:29.639 --> 0:02:33.000 alone we're recording on Monday, May fifth, it was up 0:02:33.080 --> 0:02:35.920 something like five percent just in a day against the 0:02:35.919 --> 0:02:36.520 ins dollar. 0:02:36.800 --> 0:02:38.520 It's up two and a half percent. I think that 0:02:38.639 --> 0:02:40.960 was the I think it's up like five percent total 0:02:41.400 --> 0:02:42.120 in two days. 0:02:42.240 --> 0:02:45.520 Five percent total in two days. Sorry, but still for 0:02:45.639 --> 0:02:50.120 a currency that like tends to be fairly stable and boring, 0:02:50.480 --> 0:02:53.400 this is a huge deal. So there's three certainties in 0:02:53.760 --> 0:02:57.040 financial life, right. There's death taxes and the idea that 0:02:57.080 --> 0:02:59.280 the Taiwanese life insurers are going to be buying dollar 0:02:59.360 --> 0:03:03.480 denominated assets because they can, because things have remained so 0:03:03.680 --> 0:03:07.720 stable and so boring for decades now that they can 0:03:07.800 --> 0:03:10.919 just keep on doing this trade. And then suddenly, out 0:03:10.919 --> 0:03:13.440 of nowhere, just in the past two days, we've seen 0:03:13.440 --> 0:03:17.760 this really violent shift in the way things have always 0:03:17.840 --> 0:03:20.600 been happening in Taiwan, and so we got to talk 0:03:20.600 --> 0:03:22.360 about it, and we definitely got to talk about it 0:03:22.400 --> 0:03:22.840 with Brad. 0:03:23.000 --> 0:03:24.160 We got to talk about it. 0:03:24.240 --> 0:03:27.200 Actually, I'm looking at this a three day chart. USD 0:03:27.440 --> 0:03:32.799 TWD down six point six percent since April thirtieth, crazy move. 0:03:33.200 --> 0:03:35.880 You're right, we got to talk to Brad Setzer. He's 0:03:35.920 --> 0:03:38.680 the one who's been on this story longer than anyone else. 0:03:39.000 --> 0:03:42.080 Brad Setser, Senior fellow at the Council on Foreign Relations, 0:03:42.240 --> 0:03:43.960 thank you so much for I don't know you're like 0:03:44.000 --> 0:03:47.040 coming back for like your like fifteenth odd lot's appearance. 0:03:47.640 --> 0:03:49.360 Not quite fifteen, but it's a lot. 0:03:49.560 --> 0:03:52.040 Okay, maybe I'm just exaggerating, but not by much. I 0:03:52.040 --> 0:03:54.760 don't think at this point. You know, it's interesting in 0:03:54.800 --> 0:03:57.920 the post April second environment. You know, a lot of markets, 0:03:57.920 --> 0:04:00.800 like treasuries or just the you know, treasuries and the 0:04:00.840 --> 0:04:04.400 stock market have stabilized quite a bit. Well, the currency 0:04:04.560 --> 0:04:08.360 does seem to be where the action is stepping back up. 0:04:08.400 --> 0:04:11.280 Before we get to the move that we've seen over 0:04:11.320 --> 0:04:14.080 the last few days, just for the sake of our listeners, 0:04:14.280 --> 0:04:17.040 give us the sort of top level description of the 0:04:17.080 --> 0:04:19.320 flows that we see out of Taiwan and the role 0:04:19.360 --> 0:04:22.640 of the central bank there in making that trade economical 0:04:22.839 --> 0:04:23.640 for the lifers. 0:04:24.680 --> 0:04:29.279 Well, Taiwan runs one of the biggest current account surpluses 0:04:29.320 --> 0:04:33.480 in the world. It's fluctuated between ten percent of Taiwan's 0:04:33.520 --> 0:04:36.919 GDP and fifteen percent of Taiwan's GDP is now on 0:04:37.000 --> 0:04:40.080 the high side, it's close to fifteen percent of Taiwan's 0:04:40.080 --> 0:04:41.520 GDP over. 0:04:41.320 --> 0:04:42.840 One hundred billion dollars a year. 0:04:43.279 --> 0:04:46.200 That is a big sum, and obviously a current account 0:04:46.200 --> 0:04:49.760 surplus means that someone in the economy has to on 0:04:49.920 --> 0:04:55.800 net be accumulating foreign assets, and over time that entity 0:04:55.960 --> 0:05:00.320 has shifted from you know, in the fifteen or the 0:05:00.360 --> 0:05:03.880 ten years after the Asian Financial Crisis, it was essentially 0:05:03.920 --> 0:05:08.560 the Central Bank of China a Taiwan's central bank accumulating 0:05:08.680 --> 0:05:13.880 foreign exchange reserves, mostly going into treasuries. At some point, 0:05:14.040 --> 0:05:16.120 the Central Bank of China said more or less, hey, 0:05:16.120 --> 0:05:18.719 we've got enough reserves, and maybe they were coming under 0:05:18.800 --> 0:05:21.799 a little bit of pressure from the US to manage 0:05:21.839 --> 0:05:25.400 their currency a little bit less. So the central bank 0:05:25.640 --> 0:05:29.359 and the insurance regulator in a sense worked together to 0:05:29.960 --> 0:05:33.159 make it possible for the life insurance industry, which in 0:05:33.200 --> 0:05:37.640 Taiwan is big, to add to the share of its 0:05:37.680 --> 0:05:42.200 assets which were in foreign currencies, and to increase the 0:05:42.240 --> 0:05:45.640 sales of insurance policies so that the insurance industry was 0:05:45.680 --> 0:05:49.360 growing relative to Taiwan's economy. Combine those two things, and 0:05:49.400 --> 0:05:54.080 the insurers basically from twenty ten to twenty twenty build 0:05:54.160 --> 0:05:58.119 up an enormous portfolio of foreign bonds. They put about 0:05:58.120 --> 0:06:01.599 two thirds of their total ass sets in foreign bonds, 0:06:01.600 --> 0:06:06.800 an enormous share. And as in our famous episode, there 0:06:06.880 --> 0:06:11.080 was a secret hedgebook that offset let's say a quarter 0:06:11.360 --> 0:06:14.760 of that exposure with a hedge with the central bank, 0:06:15.040 --> 0:06:19.039 which wasn't disclosed until twenty twenty. So our famous episode 0:06:19.080 --> 0:06:23.839 actually triggered a change in the central bank's policy. The 0:06:23.880 --> 0:06:27.960 central banks started disclosing that forward book in twenty twenty. 0:06:28.120 --> 0:06:31.720 After the pandemic, this flow has been more modest. It 0:06:31.760 --> 0:06:35.480 hasn't gone away, but the lifers aren't buying up the 0:06:35.600 --> 0:06:38.599 entire current account sturtplus, you're seeing a little bit more 0:06:38.800 --> 0:06:42.320 more purchases from the banking system which is now able 0:06:42.320 --> 0:06:45.840 to offer foreign currency policies. And then another favorite topic 0:06:45.880 --> 0:06:51.080 of odd lots the Taiwanese semiconductor manufacturer TSMC. When it 0:06:51.120 --> 0:06:55.239 started building chip factories fabs in Japan and in the US, 0:06:55.640 --> 0:06:59.479 that outward FDI became a big counterpart to the current 0:06:59.480 --> 0:07:03.080 accounts plus. But the effect is that, you know, Taiwan 0:07:03.160 --> 0:07:06.599 is just stuffed to the gills with unhedged holdings of 0:07:06.640 --> 0:07:07.719 dollars in dollar bonds. 0:07:09.040 --> 0:07:11.120 Never let it be said that odd lots is not 0:07:11.280 --> 0:07:15.360 an agent for change. So we actually affected the world 0:07:15.480 --> 0:07:18.840 through that episode, mostly Brad, but we gave you a platform. 0:07:18.880 --> 0:07:22.080 I guess you did very powerful one, all right. 0:07:22.280 --> 0:07:25.520 So I would definitely encourage anyone who's really interested in 0:07:25.560 --> 0:07:27.640 this topic to go back and listen to the whole 0:07:27.640 --> 0:07:29.840 thing because there's a lot of nuance in there. And 0:07:29.880 --> 0:07:32.640 you know, Joe mentioned in the intro that Taiwanese life 0:07:32.640 --> 0:07:35.160 insures buy a lot of US treasuries, but it's not 0:07:35.240 --> 0:07:38.040 just US treasuries, it's also things like US corporate bonds. 0:07:38.080 --> 0:07:40.240 And we're not going to rehash the whole thing here, 0:07:40.760 --> 0:07:43.840 but why don't we just dive into what's been happening today? 0:07:43.920 --> 0:07:47.440 So things had been changing recently, and I guess Taiwanese 0:07:47.520 --> 0:07:50.400 life insurres hadn't been buying as many US bonds as 0:07:50.400 --> 0:07:53.960 they once did, but they still have this huge enormous 0:07:54.000 --> 0:07:57.800 stack of dollar assets and they're still, you know, pretty 0:07:58.360 --> 0:08:01.800 underhedged relatively, And I think I saw some people talking 0:08:02.040 --> 0:08:05.120 that it seems like the life insurers weren't even very 0:08:05.160 --> 0:08:08.480 well hedged like comparatively. In recent months, they'd taken off 0:08:08.480 --> 0:08:10.880 some of the hedges since April. Second, do we have 0:08:10.920 --> 0:08:14.200 any indication why that was or why they wouldn't have 0:08:14.280 --> 0:08:17.320 been particularly hedged in this particular moment in time. 0:08:18.240 --> 0:08:22.120 Well, with Josh Younger, who formerly was the interest rates 0:08:22.120 --> 0:08:25.520 strategist at JP Morgan and one of the other people 0:08:25.560 --> 0:08:28.640 who had a little bit of an obsession with understanding 0:08:28.680 --> 0:08:32.440 the Taiwanese flow, we put out an estimate in January 0:08:32.480 --> 0:08:35.520 that the unhedged book of the life insurers was about 0:08:35.520 --> 0:08:38.120 two hundred billion, which is, you know, fifteen to twenty 0:08:38.120 --> 0:08:41.520 percent of their assets, a very big sum. Why is 0:08:41.679 --> 0:08:44.000 have they stayed on hedge maybe gotten a little bit 0:08:44.040 --> 0:08:48.160 more unhedged? Yeah, simple reason hedging was expensive. Hedging is 0:08:48.240 --> 0:08:52.920 essentially a function of the differential between Taiwanese short term 0:08:52.960 --> 0:08:56.600 rates and US dollars short term rates. So as the 0:08:56.880 --> 0:09:01.280 US hiked rates in twenty twenty two twenty three, they've 0:09:01.320 --> 0:09:03.640 come down a little, but they're still absolutely high. The 0:09:03.679 --> 0:09:05.560 cost of hedging went up, and I think what you 0:09:05.679 --> 0:09:09.600 see across Asia, not just in Taiwan, is that as 0:09:09.640 --> 0:09:12.960 the cost of hedging went up and as Asian currencies 0:09:13.000 --> 0:09:15.880 were basically trading on the weak side, so there was 0:09:15.920 --> 0:09:20.720 no financial penalty to being underhedged, institutions took advantage of 0:09:20.720 --> 0:09:24.360 those incentives and reduced their headge ratio. On top of that, 0:09:24.600 --> 0:09:28.679 the Taiwanese Insurance Regulator, under pressure from the life insurers, 0:09:29.240 --> 0:09:33.960 essentially allowed the lifers to substitute a foreign exchange volatility 0:09:34.000 --> 0:09:37.280 reserve for some hedging and let them go a little 0:09:37.280 --> 0:09:39.680 more unhedged going into this year. 0:09:40.040 --> 0:09:41.160 Classic kind of mistake. 0:09:42.440 --> 0:09:46.040 So it's not just a Taiwanese dollar story. Since April second, 0:09:46.240 --> 0:09:48.959 we've obviously seen this broad weakness in the US dollar. 0:09:49.200 --> 0:09:51.320 It's one of the few charts that you can find 0:09:51.320 --> 0:09:53.960 that really has not bounced at all or very little 0:09:54.080 --> 0:09:57.240 since that first week. The Bloomberg Dollar Index down broadly 0:09:57.360 --> 0:10:00.880 against everyone, but the Asian currencies, the East Asian ones 0:10:00.920 --> 0:10:03.680 have really flown. And you know what's funny is that 0:10:03.760 --> 0:10:06.000 a lot of people expected. They're like, oh, well, when 0:10:06.480 --> 0:10:08.760 tariffs come in place, then the dollar is going to 0:10:09.080 --> 0:10:11.840 strengthen and that's going to offset some of the tariffs. 0:10:11.880 --> 0:10:15.559 We've seen the exact opposite. Before we get to Taiwan specifically, 0:10:15.760 --> 0:10:19.160 what's the general story in your view for why the 0:10:19.280 --> 0:10:22.360 dollar has weakened as much as it has post April second. 0:10:22.800 --> 0:10:26.439 I think there's two general factors. The first factor is 0:10:26.480 --> 0:10:30.280 the dollar was just exceptionally strong against most Asian currencies, 0:10:30.720 --> 0:10:34.400 so the starting points do matter, and a yen at 0:10:34.440 --> 0:10:37.080 one forty five now it's not one fifty five, but 0:10:37.120 --> 0:10:40.760 one five is an incredibly weakend. Until very recently, the 0:10:40.800 --> 0:10:43.280 Taiwan dollar was on the weak side of its long 0:10:43.400 --> 0:10:47.360 term range. The Korean one was at fourteen fifty. Fourteen 0:10:47.360 --> 0:10:49.560 fifty is the level it reached during the Korean financial 0:10:49.600 --> 0:10:53.440 crisis and during the global financial crisis, and it's actually 0:10:53.440 --> 0:10:56.160 weaker than that in a real sense because of the 0:10:56.200 --> 0:10:59.360 inflation differentials. So I think it's the fundamental reason is 0:10:59.360 --> 0:11:03.760 that Asian currencies were very weak, the dollar was very strong. 0:11:04.400 --> 0:11:07.599 And then China made a policy choice not to respond 0:11:08.040 --> 0:11:10.760 to the draconian tariffs the one hundred and forty five 0:11:10.760 --> 0:11:16.120 percent tariff twenty percent from the legacy Fittinel case and 0:11:16.360 --> 0:11:19.240 one hundred and twenty five percent on the reciprocal tariff case. 0:11:19.280 --> 0:11:21.400 You know, like China is the only country that got 0:11:21.400 --> 0:11:24.000 really claberd with the reciprocal tariff. In the end, China 0:11:24.040 --> 0:11:27.160 chose not to respond by depreciating the yuan. And I 0:11:27.160 --> 0:11:30.720 think the fact that it China didn't respond that the 0:11:30.760 --> 0:11:34.959 yuan didn't depreciate, and that you know, in a sense, 0:11:35.000 --> 0:11:38.520 there was newsflow that is suggestive that there's at least 0:11:38.559 --> 0:11:41.480 some chance there'll be an agreement, or even in the 0:11:41.480 --> 0:11:44.160 absence of an agreement, a decision to pull back some 0:11:44.240 --> 0:11:46.920 of the US tariffs on China. All that laid the 0:11:47.559 --> 0:11:49.720 backdrop for this recent move. 0:12:05.800 --> 0:12:09.400 Okay, So getting back to Taiwan specifically, I'm not going 0:12:09.440 --> 0:12:12.400 to ask you if Taiwan's central bank when they would 0:12:12.400 --> 0:12:14.120 have to intervene, because I think that's kind of a 0:12:14.160 --> 0:12:16.920 boring question. But instead I'm going to ask you, what 0:12:16.960 --> 0:12:21.800 are the limitations on Taiwan's central bank in terms of intervention. 0:12:22.760 --> 0:12:23.600 That's a good question. 0:12:23.800 --> 0:12:27.199 The usual intervention limits on a central bank's intervention is 0:12:27.440 --> 0:12:29.240 in a sense that they run out of foreign exchange 0:12:29.280 --> 0:12:32.840 and they can't borrow more. But that's what the limits 0:12:33.360 --> 0:12:37.920 you face when you're trying to prevent your currency from falling, 0:12:37.960 --> 0:12:41.440 from depreciating, when you're trying to prevent your currency from 0:12:41.559 --> 0:12:46.600 appreciating arising. There's really no intrinsic limit to how much 0:12:46.600 --> 0:12:50.160 foreign exchange a central bank can accumulate. So in that sense, 0:12:50.280 --> 0:12:53.360 the Central Bank of China could at any point step 0:12:53.400 --> 0:12:56.880 in and buy up a lot, a lot of dollar dollars. 0:12:57.360 --> 0:12:59.560 The Central Bank of China has close to six hundred 0:12:59.559 --> 0:13:02.319 billion dollars already a little more when you count it's 0:13:02.360 --> 0:13:05.240 off balance sheet. It's already holding close to one hundred 0:13:05.280 --> 0:13:08.520 percent of Taiwan's GDP and foreign exchange reserves. But there's 0:13:08.559 --> 0:13:12.000 no intrinsic limit on how high that could go. I 0:13:12.000 --> 0:13:15.760 think the limits are in a sense twofold one is. 0:13:15.800 --> 0:13:17.880 And you know, we don't really know what motivated the 0:13:17.920 --> 0:13:22.000 Central Bank of China to stay relatively restrained. I mean, 0:13:22.040 --> 0:13:24.080 I think they were in the market to smooth some 0:13:24.160 --> 0:13:26.720 of the moves. They had more or less admitted that 0:13:26.800 --> 0:13:30.720 both Friday and Monday and today, but they weren't trying 0:13:30.760 --> 0:13:33.000 to stop the move. They were trying to smooth the move. 0:13:33.240 --> 0:13:35.520 And one reason why is maybe they thought the life 0:13:35.600 --> 0:13:38.920 insurance industry had gotten a little bit too aggressive, it 0:13:38.960 --> 0:13:42.160 was not paying enough attention to risk, and they were 0:13:42.200 --> 0:13:45.480 afraid that if the Central Bank of China came in 0:13:45.640 --> 0:13:49.640 too quickly stop the move too rapidly, in a sense, 0:13:49.679 --> 0:13:53.760 the lifers wouldn't learn a useful lesson in risk management. 0:13:54.120 --> 0:13:57.840 So you can call that thesis one the second thesis 0:13:57.960 --> 0:14:01.319 is that the central bank is feeling a little bit 0:14:01.360 --> 0:14:05.400 of heat from the United States, partially because the US 0:14:05.480 --> 0:14:08.720 Treasury is preparing it's next for an exchange report. That 0:14:08.760 --> 0:14:12.200 report may be out any day, Partially because Peter Navarro 0:14:12.360 --> 0:14:16.800 has long thought that the Taiwanese dollar was undervalued, Partially 0:14:16.800 --> 0:14:21.520 because currency has been a topic in the negotiations over 0:14:21.560 --> 0:14:24.920 these supposed deals with most Asian countries, and so the 0:14:24.920 --> 0:14:28.000 Central Bank of China may have been a little bit reluctant. 0:14:28.000 --> 0:14:29.960 Central Bank of China's Taiwan Central Bank may be a 0:14:30.040 --> 0:14:33.880 little bit reluctant to just put an absolute block on 0:14:34.040 --> 0:14:37.560 this move and in the process draw attention to the 0:14:37.600 --> 0:14:43.200 fact that Taiwan's currency is heavily managed, that Taiwan keeps 0:14:43.200 --> 0:14:47.600 his currency from appreciating when necessary, at least historically through 0:14:47.640 --> 0:14:50.640 actions of the central bank, which some people would call manipulation. 0:14:51.600 --> 0:14:55.120 So there's a few different ways this could go. And 0:14:55.160 --> 0:14:59.800 as you mentioned, perhaps one possibility is that Taiwan, along 0:14:59.840 --> 0:15:03.400 with Korea, maybe along with other East Asian countries, as 0:15:03.520 --> 0:15:06.520 part of a possible trade deal, if there is going 0:15:06.600 --> 0:15:08.840 to be one, maybe they're going to let their currencies 0:15:08.880 --> 0:15:11.840 strengthen and let that do some work in terms of 0:15:12.080 --> 0:15:15.640 balancing out trade. Another possibility, and I'm curious, you know, 0:15:15.680 --> 0:15:17.840 just sort of where this game's out. Could you see 0:15:17.840 --> 0:15:22.440 a scenario in which these countries reinvest more of their 0:15:22.560 --> 0:15:25.960 dollar inflows into like something that resembles consumer demand or 0:15:26.000 --> 0:15:31.280 domestic demand and produce the sort of global demand for goods, 0:15:31.360 --> 0:15:33.400 perhaps some from the United States or services from the 0:15:33.520 --> 0:15:37.440 United States. That leads to, you know, some sort of 0:15:37.480 --> 0:15:41.200 the type of desirable balance that the new administration would 0:15:41.240 --> 0:15:41.720 like to see. 0:15:42.400 --> 0:15:45.320 Well, I mean, I think those in a sense are 0:15:45.920 --> 0:15:49.720 part of the discussion. They aren't mutually exclusive. You can 0:15:49.800 --> 0:15:53.800 let your currency appreciate and then try to take steps 0:15:54.160 --> 0:15:59.040 using your domestic fiscal capacity or the government as opposed 0:15:59.040 --> 0:16:01.720 to the central banks balance sheet to support domestic demand. 0:16:02.240 --> 0:16:04.800 That would be a very sensible thing, frankly for Taiwan 0:16:04.920 --> 0:16:08.240 to do. Running a fifteen percent of GDP current accounts 0:16:08.320 --> 0:16:12.160 for plus in perpetuity effectively has meant that Taiwan has 0:16:12.200 --> 0:16:16.280 been overpaying for US dollar bonds for the past fifteen years, 0:16:16.640 --> 0:16:20.480 and it's accumulating an ever bigger forward looking financial loss 0:16:20.760 --> 0:16:24.280 from the inevitable currency move. Because the Taiwan dollar is 0:16:24.360 --> 0:16:28.320 by any measure, incredibly weak. Some part of the Taiwanese 0:16:28.360 --> 0:16:31.600 economy just has to overpay for US financial assets and 0:16:31.680 --> 0:16:34.360 build up a loss. You may say that doesn't make sense. 0:16:34.400 --> 0:16:36.920 We should be investing more in our own people, We 0:16:36.920 --> 0:16:39.800 should be building out our social welfare system. The same 0:16:39.840 --> 0:16:44.280 issues that China faces actually are relevant in Taiwan. The 0:16:44.400 --> 0:16:46.760 government doesn't run a much of a fiscal deficit. The 0:16:46.800 --> 0:16:49.560 government actually doesn't spend very much on defense either. So 0:16:49.880 --> 0:16:53.640 for Taiwan's case, there's a pretty clear and compelling case 0:16:54.280 --> 0:16:58.920 that they should have a more aggressive fiscal policy, more 0:16:58.960 --> 0:17:02.640 investment in their own defense, and a bigger and more 0:17:02.680 --> 0:17:05.280 generous social safety net. All that, though, takes time, and 0:17:05.320 --> 0:17:09.040 you're starting from a fifteen percent of GDP current account surplus. 0:17:09.040 --> 0:17:13.040 That surplus isn't going to go away. TSMC still has 0:17:13.080 --> 0:17:16.760 a very dominant position in logic chips, so their export 0:17:16.800 --> 0:17:21.800 position won't be enormously impacted by moves in the Taiwan dollar, 0:17:21.800 --> 0:17:24.160 at least not in my judgment. So I think there 0:17:24.200 --> 0:17:26.680 is a separate set of questions about how you manage 0:17:26.720 --> 0:17:29.080 the risk that has already been built up in the 0:17:29.119 --> 0:17:31.520 insurance sector, and what I would like to see the 0:17:31.560 --> 0:17:34.360 central bank do is set up a hedging program so 0:17:34.400 --> 0:17:36.679 that the lifers can hedge pretty much directly with the 0:17:36.720 --> 0:17:41.120 central bank and thereby reduce the financial stability risk. If 0:17:41.119 --> 0:17:44.399 the Taiwan dollar continues to appreciate, take away some of 0:17:44.440 --> 0:17:48.280 the pressure on the central bank to avoid appreciation. I 0:17:48.280 --> 0:17:52.560 think that would facilitate a broader move in Taiwan's currency. 0:17:52.920 --> 0:17:58.280 And no doubt you're right, Taiwan, Korea, Japan all prefer 0:17:58.359 --> 0:18:01.879 to appreciate when all their currencies are going up together, 0:18:02.359 --> 0:18:05.000 and I think that was some of the negotiations around 0:18:05.040 --> 0:18:08.439 China is at least potentially an opportunity to make some 0:18:08.560 --> 0:18:11.080 progress on the rebalancing front in a healthy way. 0:18:12.240 --> 0:18:14.479 Okay, so I'm going to ask, I guess just the 0:18:14.520 --> 0:18:18.640 really blunt question to this point, but is this basically 0:18:18.640 --> 0:18:21.160 a win for Trump? You know, if I think back 0:18:21.760 --> 0:18:25.840 US officials, perhaps even you have basically been complaining of 0:18:26.280 --> 0:18:28.359 if you're going to be diplomatic about it, under the 0:18:28.440 --> 0:18:32.359 radar currency intervention by Taiwan's central bank, and other people 0:18:32.440 --> 0:18:35.919 not being diplomatic would call it outright currency manipulation in 0:18:35.960 --> 0:18:40.119 Taiwan for years now, Suddenly the Taiwanese dollar has appreciated 0:18:40.200 --> 0:18:42.520 by six point six percent in the space of a 0:18:42.520 --> 0:18:43.880 few days. Is that a win? 0:18:44.960 --> 0:18:48.120 Not yet, We're still at around thirty. We've gone from 0:18:48.119 --> 0:18:50.840 whatever around thirty three to a round thirty. In the 0:18:50.880 --> 0:18:53.560 past the Taiwan dollar has gotten up to around twenty eight. 0:18:54.080 --> 0:18:55.920 I think in order for it to be a real win, 0:18:56.440 --> 0:18:59.560 we have to see evidence that Taiwan is allowing its 0:18:59.560 --> 0:19:04.360 currency to strengthen through the levels which the central bank 0:19:04.400 --> 0:19:08.520 has historically defended in the sense of defended against pressure 0:19:08.560 --> 0:19:12.000 from appreciation, not the usual sense of the word. So 0:19:12.040 --> 0:19:15.440 I mean there is a broader I guess irony, which 0:19:15.480 --> 0:19:18.560 is I don't think the administration was hoping for a 0:19:18.680 --> 0:19:20.879 dollar selloff. A lot of the talk around a mar 0:19:20.880 --> 0:19:23.960 Alago accord was trying to mitigate the risks that tariffs 0:19:23.960 --> 0:19:27.480 would lead to the dollar to appreciate and thereby undermine 0:19:27.800 --> 0:19:31.120 some of the expected benefits from the Trump administration's point. 0:19:30.920 --> 0:19:32.520 Of view of the tariffs. 0:19:33.240 --> 0:19:35.520 But it is certainly the case that the most effective 0:19:35.520 --> 0:19:37.639 way to bring the US trade deficit down is just 0:19:37.680 --> 0:19:40.960 to get the dollar weaken and so if one effect 0:19:41.080 --> 0:19:45.240 of Trump's policies is to reduce the appeal of the 0:19:45.359 --> 0:19:49.320 US as a destination for foreign investors, including some foreign 0:19:49.320 --> 0:19:55.720 investors who were maybe overly eager to buy US financial assets. 0:19:56.240 --> 0:20:00.320 That would prompt some adjustment. I think that adjustment what 0:20:00.480 --> 0:20:03.560 is going to happen to some degree independent of Trump. 0:20:04.000 --> 0:20:05.840 But you know, let's see. I mean, if Scott Besson 0:20:05.880 --> 0:20:11.160 can engineer a coordinated appreciation of all Asian currencies, and 0:20:11.240 --> 0:20:14.879 that the net result of all these trade deal negotiations, 0:20:14.880 --> 0:20:16.479 which are seeming to be a little broader than just 0:20:16.520 --> 0:20:21.160 trade negotiations, is a meaningful change in the level of 0:20:21.640 --> 0:20:25.320 all of the Asian foreign exchange complex against the dollar. 0:20:25.560 --> 0:20:26.960 That would be a win in my view. 0:20:27.480 --> 0:20:30.320 And then again, just on this point, you've set out 0:20:30.520 --> 0:20:34.359 very brilliantly already the impact that Taiwanese life insurers and 0:20:34.440 --> 0:20:38.280 some of the other big Taiwanese investors have on I guess, 0:20:38.480 --> 0:20:42.040 I guess I would say three buckets of assets slash 0:20:42.160 --> 0:20:46.760 financial markets, so US treasuries, corporate credit, and then the 0:20:46.880 --> 0:20:50.200 interest rates space, where we see them as big players 0:20:50.359 --> 0:20:54.240 in rate volatility in various ways. How would you expect 0:20:54.280 --> 0:20:57.560 those three buckets to be impacted by what we've just 0:20:57.600 --> 0:20:59.080 seen over the past few days. 0:21:00.040 --> 0:21:03.920 Well, I think there's already been some important shifts. Josh 0:21:04.000 --> 0:21:08.159 Hunger and I highlighted that the Taiwanese lifers have not 0:21:08.280 --> 0:21:11.440 been big buyers of so called callable bonds, bonds which 0:21:11.480 --> 0:21:14.719 can be called by the issuer if rates fall. They 0:21:14.720 --> 0:21:17.280 bought a lot of those before the covid as port 0:21:17.280 --> 0:21:21.920 of a yield pickup strategy, but that particular bid has 0:21:21.960 --> 0:21:24.720 sort of disappeared, and that had in turn had knocked 0:21:24.720 --> 0:21:28.320 on effects on the agency market. So there's already been 0:21:28.359 --> 0:21:32.960 some adjustments as a result of the slowdown in Taiwanese 0:21:33.040 --> 0:21:37.000 lifers purchases over the past few years. In the fact, 0:21:37.040 --> 0:21:39.920 they've gotten a little bit more conservative right now, where 0:21:39.960 --> 0:21:44.320 the lifers are particularly important is for long dated US 0:21:44.320 --> 0:21:48.240 corporate bonds twenty year plus, that kind of STAD investment 0:21:48.280 --> 0:21:51.160 grade corporates, and then a lot of dollar bonds issued 0:21:51.200 --> 0:21:55.560 by relatively high grade emerging markets and Asian issuers. The 0:21:55.720 --> 0:22:00.840 lifers themselves tend not to be super heavy and treasuries. 0:22:00.880 --> 0:22:03.760 I mean, they have some, but they're not the dominant 0:22:03.880 --> 0:22:07.240 buyer of treasuries out of Taiwan. The dominant buyer of 0:22:07.280 --> 0:22:09.760 treasuries out of Taiwan tends to be the Central Bank 0:22:10.160 --> 0:22:12.800 or the banking system. So what I think will happen 0:22:13.000 --> 0:22:16.080 if the lifers are no longer willing or trying to 0:22:16.160 --> 0:22:19.200 reduce their dollar book is they're going to see less 0:22:19.200 --> 0:22:23.440 demand for corporate bonds, including some in some particular corners 0:22:23.440 --> 0:22:25.960 of the market where they're very important. And then you're 0:22:25.960 --> 0:22:28.280 going to see if the Central Bank of China comes 0:22:28.320 --> 0:22:32.040 in and intervenes pretty either to smooth the move or 0:22:32.080 --> 0:22:34.800 to at some point cap the move, then you'll see 0:22:34.840 --> 0:22:38.080 a rotation and demand back towards treasuries. One of the 0:22:38.160 --> 0:22:40.640 ironies that I don't think a lot of people kind 0:22:40.640 --> 0:22:44.600 of have internalized is that central bank demand for treasuries 0:22:44.880 --> 0:22:48.840 tends to be very correlated with dollar weakness. Countries that 0:22:48.920 --> 0:22:51.399 don't want their currency to appreciate or don't want their 0:22:51.440 --> 0:22:54.680 currency to appreciate too quickly intervene in the market they 0:22:54.680 --> 0:22:57.880 buy dollars, and central banks tend to be the player 0:22:58.359 --> 0:23:01.080 that is least inclined to buy corporate debt to take 0:23:01.119 --> 0:23:04.159