Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Locks podcast.
Speaker 2: I'm Jill Wisenthal and I'm Tracy Alloway. Tracy, sometimes are
Speaker 2: old random episodes on just random things end up being
Speaker 2: kind of relevant.
Speaker 3: What do you mean sometimes? What do you mean random?
Speaker 3: All of our episodes, each of them are like our children.
Speaker 3: They're each special and relevant in their own way. That's
Speaker 3: what I say.
Speaker 2: You're right, they're all special. I would say they're all
Speaker 2: special in their own way. Some of them probably have
Speaker 2: more relevance to others. You know, this used to not
Speaker 2: even be our full time job. We just found interesting things,
Speaker 2: sometimes connected to the news, sometimes not. But I remember
Speaker 2: twenty nineteen, the first time I noticed people like talking
Speaker 2: about odd Lads before the pandemic was an episode we
Speaker 2: did on Taiwan's life insurance companies.
Speaker 3: That's right, And I guess the reason this episode kind
Speaker 3: of went viral or became a thing was because of
Speaker 3: the framing. We sort of framed it as a financial
Speaker 3: market murder mystery almost or sort of who done it?
Speaker 3: In global of financial flows? And I guess you don't
Speaker 3: get many of those. You still don't get many of those,
Speaker 3: we should do more of them. But people definitely got
Speaker 3: into this one and definitely still remember it.
Speaker 2: Definitely still remember it. Definitely get into it. So the
Speaker 2: basic gist was that it was sort of well known
Speaker 2: obviously that Taiwani's Life Insurance, which is this huge investing
Speaker 2: savings product in Taiwan, that they were a major purchaser
Speaker 2: of US treasuries, which of course leaves the companies potentially
Speaker 2: at risk for currency slippage, but that the Central Bank
Speaker 2: in Taiwan was revealed in the who done it as
Speaker 2: the entity sort of providing a hedge of sorts such
Speaker 2: that this was an economic safe trade for the life
Speaker 2: insurance companies. And of course there's only one person we
Speaker 2: could have ever been talking to who would have been
Speaker 2: able to explain this whole phenomenon.
Speaker 3: That's right, And of course we're going to be speaking
Speaker 3: to them again because it's a new month, and in fact,
Speaker 3: one of the things we've seen happening the big story
Speaker 3: so far this month is the move in the Taiwanese dollars.
Speaker 3: So we've seen this massive appreciating move in the Taiwanese
Speaker 3: dollar against the US dollar. I think just this morning
Speaker 3: alone we're recording on Monday, May fifth, it was up
Speaker 3: something like five percent just in a day against the
Speaker 3: ins dollar.
Speaker 2: It's up two and a half percent. I think that
Speaker 2: was the I think it's up like five percent total
Speaker 2: in two days.
Speaker 3: Five percent total in two days. Sorry, but still for
Speaker 3: a currency that like tends to be fairly stable and boring,
Speaker 3: this is a huge deal. So there's three certainties in
Speaker 3: financial life, right. There's death taxes and the idea that
Speaker 3: the Taiwanese life insurers are going to be buying dollar
Speaker 3: denominated assets because they can, because things have remained so
Speaker 3: stable and so boring for decades now that they can
Speaker 3: just keep on doing this trade. And then suddenly, out
Speaker 3: of nowhere, just in the past two days, we've seen
Speaker 3: this really violent shift in the way things have always
Speaker 3: been happening in Taiwan, and so we got to talk
Speaker 3: about it, and we definitely got to talk about it
Speaker 3: with Brad.
Speaker 4: We got to talk about it.
Speaker 2: Actually, I'm looking at this a three day chart. USD
Speaker 2: TWD down six point six percent since April thirtieth, crazy move.
Speaker 2: You're right, we got to talk to Brad Setzer. He's
Speaker 2: the one who's been on this story longer than anyone else.
Speaker 2: Brad Setser, Senior fellow at the Council on Foreign Relations,
Speaker 2: thank you so much for I don't know you're like
Speaker 2: coming back for like your like fifteenth odd lot's appearance.
Speaker 4: Not quite fifteen, but it's a lot.
Speaker 2: Okay, maybe I'm just exaggerating, but not by much. I
Speaker 2: don't think at this point. You know, it's interesting in
Speaker 2: the post April second environment. You know, a lot of markets,
Speaker 2: like treasuries or just the you know, treasuries and the
Speaker 2: stock market have stabilized quite a bit. Well, the currency
Speaker 2: does seem to be where the action is stepping back up.
Speaker 2: Before we get to the move that we've seen over
Speaker 2: the last few days, just for the sake of our listeners,
Speaker 2: give us the sort of top level description of the
Speaker 2: flows that we see out of Taiwan and the role
Speaker 2: of the central bank there in making that trade economical
Speaker 2: for the lifers.
Speaker 5: Well, Taiwan runs one of the biggest current account surpluses
Speaker 5: in the world. It's fluctuated between ten percent of Taiwan's
Speaker 5: GDP and fifteen percent of Taiwan's GDP is now on
Speaker 5: the high side, it's close to fifteen percent of Taiwan's
Speaker 5: GDP over.
Speaker 4: One hundred billion dollars a year.
Speaker 5: That is a big sum, and obviously a current account
Speaker 5: surplus means that someone in the economy has to on
Speaker 5: net be accumulating foreign assets, and over time that entity
Speaker 5: has shifted from you know, in the fifteen or the
Speaker 5: ten years after the Asian Financial Crisis, it was essentially
Speaker 5: the Central Bank of China a Taiwan's central bank accumulating
Speaker 5: foreign exchange reserves, mostly going into treasuries. At some point,
Speaker 5: the Central Bank of China said more or less, hey,
Speaker 5: we've got enough reserves, and maybe they were coming under
Speaker 5: a little bit of pressure from the US to manage
Speaker 5: their currency a little bit less. So the central bank
Speaker 5: and the insurance regulator in a sense worked together to
Speaker 5: make it possible for the life insurance industry, which in
Speaker 5: Taiwan is big, to add to the share of its
Speaker 5: assets which were in foreign currencies, and to increase the
Speaker 5: sales of insurance policies so that the insurance industry was
Speaker 5: growing relative to Taiwan's economy. Combine those two things, and
Speaker 5: the insurers basically from twenty ten to twenty twenty build
Speaker 5: up an enormous portfolio of foreign bonds. They put about
Speaker 5: two thirds of their total ass sets in foreign bonds,
Speaker 5: an enormous share. And as in our famous episode, there
Speaker 5: was a secret hedgebook that offset let's say a quarter
Speaker 5: of that exposure with a hedge with the central bank,
Speaker 5: which wasn't disclosed until twenty twenty. So our famous episode
Speaker 5: actually triggered a change in the central bank's policy. The
Speaker 5: central banks started disclosing that forward book in twenty twenty.
Speaker 5: After the pandemic, this flow has been more modest. It
Speaker 5: hasn't gone away, but the lifers aren't buying up the
Speaker 5: entire current account sturtplus, you're seeing a little bit more
Speaker 5: more purchases from the banking system which is now able
Speaker 5: to offer foreign currency policies. And then another favorite topic
Speaker 5: of odd lots the Taiwanese semiconductor manufacturer TSMC. When it
Speaker 5: started building chip factories fabs in Japan and in the US,
Speaker 5: that outward FDI became a big counterpart to the current
Speaker 5: accounts plus. But the effect is that, you know, Taiwan
Speaker 5: is just stuffed to the gills with unhedged holdings of
Speaker 5: dollars in dollar bonds.
Speaker 3: Never let it be said that odd lots is not
Speaker 3: an agent for change. So we actually affected the world
Speaker 3: through that episode, mostly Brad, but we gave you a platform.
Speaker 4: I guess you did very powerful one, all right.
Speaker 3: So I would definitely encourage anyone who's really interested in
Speaker 3: this topic to go back and listen to the whole
Speaker 3: thing because there's a lot of nuance in there. And
Speaker 3: you know, Joe mentioned in the intro that Taiwanese life
Speaker 3: insures buy a lot of US treasuries, but it's not
Speaker 3: just US treasuries, it's also things like US corporate bonds.
Speaker 3: And we're not going to rehash the whole thing here,
Speaker 3: but why don't we just dive into what's been happening today?
Speaker 3: So things had been changing recently, and I guess Taiwanese
Speaker 3: life insurres hadn't been buying as many US bonds as
Speaker 3: they once did, but they still have this huge enormous
Speaker 3: stack of dollar assets and they're still, you know, pretty
Speaker 3: underhedged relatively, And I think I saw some people talking
Speaker 3: that it seems like the life insurers weren't even very
Speaker 3: well hedged like comparatively. In recent months, they'd taken off
Speaker 3: some of the hedges since April. Second, do we have
Speaker 3: any indication why that was or why they wouldn't have
Speaker 3: been particularly hedged in this particular moment in time.
Speaker 5: Well, with Josh Younger, who formerly was the interest rates
Speaker 5: strategist at JP Morgan and one of the other people
Speaker 5: who had a little bit of an obsession with understanding
Speaker 5: the Taiwanese flow, we put out an estimate in January
Speaker 5: that the unhedged book of the life insurers was about
Speaker 5: two hundred billion, which is, you know, fifteen to twenty
Speaker 5: percent of their assets, a very big sum. Why is
Speaker 5: have they stayed on hedge maybe gotten a little bit
Speaker 5: more unhedged? Yeah, simple reason hedging was expensive. Hedging is
Speaker 5: essentially a function of the differential between Taiwanese short term
Speaker 5: rates and US dollars short term rates. So as the
Speaker 5: US hiked rates in twenty twenty two twenty three, they've
Speaker 5: come down a little, but they're still absolutely high. The
Speaker 5: cost of hedging went up, and I think what you
Speaker 5: see across Asia, not just in Taiwan, is that as
Speaker 5: the cost of hedging went up and as Asian currencies
Speaker 5: were basically trading on the weak side, so there was
Speaker 5: no financial penalty to being underhedged, institutions took advantage of
Speaker 5: those incentives and reduced their headge ratio. On top of that,
Speaker 5: the Taiwanese Insurance Regulator, under pressure from the life insurers,
Speaker 5: essentially allowed the lifers to substitute a foreign exchange volatility
Speaker 5: reserve for some hedging and let them go a little
Speaker 5: more unhedged going into this year.
Speaker 4: Classic kind of mistake.
Speaker 2: So it's not just a Taiwanese dollar story. Since April second,
Speaker 2: we've obviously seen this broad weakness in the US dollar.
Speaker 2: It's one of the few charts that you can find
Speaker 2: that really has not bounced at all or very little
Speaker 2: since that first week. The Bloomberg Dollar Index down broadly
Speaker 2: against everyone, but the Asian currencies, the East Asian ones
Speaker 2: have really flown. And you know what's funny is that
Speaker 2: a lot of people expected. They're like, oh, well, when
Speaker 2: tariffs come in place, then the dollar is going to
Speaker 2: strengthen and that's going to offset some of the tariffs.
Speaker 2: We've seen the exact opposite. Before we get to Taiwan specifically,
Speaker 2: what's the general story in your view for why the
Speaker 2: dollar has weakened as much as it has post April second.
Speaker 5: I think there's two general factors. The first factor is
Speaker 5: the dollar was just exceptionally strong against most Asian currencies,
Speaker 5: so the starting points do matter, and a yen at
Speaker 5: one forty five now it's not one fifty five, but
Speaker 5: one five is an incredibly weakend. Until very recently, the
Speaker 5: Taiwan dollar was on the weak side of its long
Speaker 5: term range. The Korean one was at fourteen fifty. Fourteen
Speaker 5: fifty is the level it reached during the Korean financial
Speaker 5: crisis and during the global financial crisis, and it's actually
Speaker 5: weaker than that in a real sense because of the
Speaker 5: inflation differentials. So I think it's the fundamental reason is
Speaker 5: that Asian currencies were very weak, the dollar was very strong.
Speaker 5: And then China made a policy choice not to respond
Speaker 5: to the draconian tariffs the one hundred and forty five
Speaker 5: percent tariff twenty percent from the legacy Fittinel case and
Speaker 5: one hundred and twenty five percent on the reciprocal tariff case.
Speaker 5: You know, like China is the only country that got
Speaker 5: really claberd with the reciprocal tariff. In the end, China
Speaker 5: chose not to respond by depreciating the yuan. And I
Speaker 5: think the fact that it China didn't respond that the
Speaker 5: yuan didn't depreciate, and that you know, in a sense,
Speaker 5: there was newsflow that is suggestive that there's at least
Speaker 5: some chance there'll be an agreement, or even in the
Speaker 5: absence of an agreement, a decision to pull back some
Speaker 5: of the US tariffs on China. All that laid the
Speaker 5: backdrop for this recent move.
Speaker 3: Okay, So getting back to Taiwan specifically, I'm not going
Speaker 3: to ask you if Taiwan's central bank when they would
Speaker 3: have to intervene, because I think that's kind of a
Speaker 3: boring question. But instead I'm going to ask you, what
Speaker 3: are the limitations on Taiwan's central bank in terms of intervention.
Speaker 4: That's a good question.
Speaker 5: The usual intervention limits on a central bank's intervention is
Speaker 5: in a sense that they run out of foreign exchange
Speaker 5: and they can't borrow more. But that's what the limits
Speaker 5: you face when you're trying to prevent your currency from falling,
Speaker 5: from depreciating, when you're trying to prevent your currency from
Speaker 5: appreciating arising. There's really no intrinsic limit to how much
Speaker 5: foreign exchange a central bank can accumulate. So in that sense,
Speaker 5: the Central Bank of China could at any point step
Speaker 5: in and buy up a lot, a lot of dollar dollars.
Speaker 5: The Central Bank of China has close to six hundred
Speaker 5: billion dollars already a little more when you count it's
Speaker 5: off balance sheet. It's already holding close to one hundred
Speaker 5: percent of Taiwan's GDP and foreign exchange reserves. But there's
Speaker 5: no intrinsic limit on how high that could go. I
Speaker 5: think the limits are in a sense twofold one is.
Speaker 5: And you know, we don't really know what motivated the
Speaker 5: Central Bank of China to stay relatively restrained. I mean,
Speaker 5: I think they were in the market to smooth some
Speaker 5: of the moves. They had more or less admitted that
Speaker 5: both Friday and Monday and today, but they weren't trying
Speaker 5: to stop the move. They were trying to smooth the move.
Speaker 5: And one reason why is maybe they thought the life
Speaker 5: insurance industry had gotten a little bit too aggressive, it
Speaker 5: was not paying enough attention to risk, and they were
Speaker 5: afraid that if the Central Bank of China came in
Speaker 5: too quickly stop the move too rapidly, in a sense,
Speaker 5: the lifers wouldn't learn a useful lesson in risk management.
Speaker 5: So you can call that thesis one the second thesis
Speaker 5: is that the central bank is feeling a little bit
Speaker 5: of heat from the United States, partially because the US
Speaker 5: Treasury is preparing it's next for an exchange report. That
Speaker 5: report may be out any day, Partially because Peter Navarro
Speaker 5: has long thought that the Taiwanese dollar was undervalued, Partially
Speaker 5: because currency has been a topic in the negotiations over
Speaker 5: these supposed deals with most Asian countries, and so the
Speaker 5: Central Bank of China may have been a little bit reluctant.
Speaker 5: Central Bank of China's Taiwan Central Bank may be a
Speaker 5: little bit reluctant to just put an absolute block on
Speaker 5: this move and in the process draw attention to the
Speaker 5: fact that Taiwan's currency is heavily managed, that Taiwan keeps
Speaker 5: his currency from appreciating when necessary, at least historically through
Speaker 5: actions of the central bank, which some people would call manipulation.
Speaker 2: So there's a few different ways this could go. And
Speaker 2: as you mentioned, perhaps one possibility is that Taiwan, along
Speaker 2: with Korea, maybe along with other East Asian countries, as
Speaker 2: part of a possible trade deal, if there is going
Speaker 2: to be one, maybe they're going to let their currencies
Speaker 2: strengthen and let that do some work in terms of
Speaker 2: balancing out trade. Another possibility, and I'm curious, you know,
Speaker 2: just sort of where this game's out. Could you see
Speaker 2: a scenario in which these countries reinvest more of their
Speaker 2: dollar inflows into like something that resembles consumer demand or
Speaker 2: domestic demand and produce the sort of global demand for goods,
Speaker 2: perhaps some from the United States or services from the
Speaker 2: United States. That leads to, you know, some sort of
Speaker 2: the type of desirable balance that the new administration would
Speaker 2: like to see.
Speaker 5: Well, I mean, I think those in a sense are
Speaker 5: part of the discussion. They aren't mutually exclusive. You can
Speaker 5: let your currency appreciate and then try to take steps
Speaker 5: using your domestic fiscal capacity or the government as opposed
Speaker 5: to the central banks balance sheet to support domestic demand.
Speaker 5: That would be a very sensible thing, frankly for Taiwan
Speaker 5: to do. Running a fifteen percent of GDP current accounts
Speaker 5: for plus in perpetuity effectively has meant that Taiwan has
Speaker 5: been overpaying for US dollar bonds for the past fifteen years,
Speaker 5: and it's accumulating an ever bigger forward looking financial loss
Speaker 5: from the inevitable currency move. Because the Taiwan dollar is
Speaker 5: by any measure, incredibly weak. Some part of the Taiwanese
Speaker 5: economy just has to overpay for US financial assets and
Speaker 5: build up a loss. You may say that doesn't make sense.
Speaker 5: We should be investing more in our own people, We
Speaker 5: should be building out our social welfare system. The same
Speaker 5: issues that China faces actually are relevant in Taiwan. The
Speaker 5: government doesn't run a much of a fiscal deficit. The
Speaker 5: government actually doesn't spend very much on defense either. So
Speaker 5: for Taiwan's case, there's a pretty clear and compelling case
Speaker 5: that they should have a more aggressive fiscal policy, more
Speaker 5: investment in their own defense, and a bigger and more
Speaker 5: generous social safety net. All that, though, takes time, and
Speaker 5: you're starting from a fifteen percent of GDP current account surplus.
Speaker 5: That surplus isn't going to go away. TSMC still has
Speaker 5: a very dominant position in logic chips, so their export
Speaker 5: position won't be enormously impacted by moves in the Taiwan dollar,
Speaker 5: at least not in my judgment. So I think there
Speaker 5: is a separate set of questions about how you manage
Speaker 5: the risk that has already been built up in the
Speaker 5: insurance sector, and what I would like to see the
Speaker 5: central bank do is set up a hedging program so
Speaker 5: that the lifers can hedge pretty much directly with the
Speaker 5: central bank and thereby reduce the financial stability risk. If
Speaker 5: the Taiwan dollar continues to appreciate, take away some of
Speaker 5: the pressure on the central bank to avoid appreciation. I
Speaker 5: think that would facilitate a broader move in Taiwan's currency.
Speaker 5: And no doubt you're right, Taiwan, Korea, Japan all prefer
Speaker 5: to appreciate when all their currencies are going up together,
Speaker 5: and I think that was some of the negotiations around
Speaker 5: China is at least potentially an opportunity to make some
Speaker 5: progress on the rebalancing front in a healthy way.
Speaker 3: Okay, so I'm going to ask, I guess just the
Speaker 3: really blunt question to this point, but is this basically
Speaker 3: a win for Trump? You know, if I think back
Speaker 3: US officials, perhaps even you have basically been complaining of
Speaker 3: if you're going to be diplomatic about it, under the
Speaker 3: radar currency intervention by Taiwan's central bank, and other people
Speaker 3: not being diplomatic would call it outright currency manipulation in
Speaker 3: Taiwan for years now, Suddenly the Taiwanese dollar has appreciated
Speaker 3: by six point six percent in the space of a
Speaker 3: few days. Is that a win?
Speaker 5: Not yet, We're still at around thirty. We've gone from
Speaker 5: whatever around thirty three to a round thirty. In the
Speaker 5: past the Taiwan dollar has gotten up to around twenty eight.
Speaker 5: I think in order for it to be a real win,
Speaker 5: we have to see evidence that Taiwan is allowing its
Speaker 5: currency to strengthen through the levels which the central bank
Speaker 5: has historically defended in the sense of defended against pressure
Speaker 5: from appreciation, not the usual sense of the word. So
Speaker 5: I mean there is a broader I guess irony, which
Speaker 5: is I don't think the administration was hoping for a
Speaker 5: dollar selloff. A lot of the talk around a mar
Speaker 5: Alago accord was trying to mitigate the risks that tariffs
Speaker 5: would lead to the dollar to appreciate and thereby undermine
Speaker 5: some of the expected benefits from the Trump administration's point.
Speaker 4: Of view of the tariffs.
Speaker 5: But it is certainly the case that the most effective
Speaker 5: way to bring the US trade deficit down is just
Speaker 5: to get the dollar weaken and so if one effect
Speaker 5: of Trump's policies is to reduce the appeal of the
Speaker 5: US as a destination for foreign investors, including some foreign
Speaker 5: investors who were maybe overly eager to buy US financial assets.
Speaker 5: That would prompt some adjustment. I think that adjustment what
Speaker 5: is going to happen to some degree independent of Trump.
Speaker 5: But you know, let's see. I mean, if Scott Besson
Speaker 5: can engineer a coordinated appreciation of all Asian currencies, and
Speaker 5: that the net result of all these trade deal negotiations,
Speaker 5: which are seeming to be a little broader than just
Speaker 5: trade negotiations, is a meaningful change in the level of
Speaker 5: all of the Asian foreign exchange complex against the dollar.
Speaker 4: That would be a win in my view.
Speaker 3: And then again, just on this point, you've set out
Speaker 3: very brilliantly already the impact that Taiwanese life insurers and
Speaker 3: some of the other big Taiwanese investors have on I guess,
Speaker 3: I guess I would say three buckets of assets slash
Speaker 3: financial markets, so US treasuries, corporate credit, and then the
Speaker 3: interest rates space, where we see them as big players
Speaker 3: in rate volatility in various ways. How would you expect
Speaker 3: those three buckets to be impacted by what we've just
Speaker 3: seen over the past few days.
Speaker 5: Well, I think there's already been some important shifts. Josh
Speaker 5: Hunger and I highlighted that the Taiwanese lifers have not
Speaker 5: been big buyers of so called callable bonds, bonds which
Speaker 5: can be called by the issuer if rates fall. They
Speaker 5: bought a lot of those before the covid as port
Speaker 5: of a yield pickup strategy, but that particular bid has
Speaker 5: sort of disappeared, and that had in turn had knocked
Speaker 5: on effects on the agency market. So there's already been
Speaker 5: some adjustments as a result of the slowdown in Taiwanese
Speaker 5: lifers purchases over the past few years. In the fact,
Speaker 5: they've gotten a little bit more conservative right now, where
Speaker 5: the lifers are particularly important is for long dated US
Speaker 5: corporate bonds twenty year plus, that kind of STAD investment
Speaker 5: grade corporates, and then a lot of dollar bonds issued
Speaker 5: by relatively high grade emerging markets and Asian issuers. The
Speaker 5: lifers themselves tend not to be super heavy and treasuries.
Speaker 5: I mean, they have some, but they're not the dominant
Speaker 5: buyer of treasuries out of Taiwan. The dominant buyer of
Speaker 5: treasuries out of Taiwan tends to be the Central Bank
Speaker 5: or the banking system. So what I think will happen
Speaker 5: if the lifers are no longer willing or trying to
Speaker 5: reduce their dollar book is they're going to see less
Speaker 5: demand for corporate bonds, including some in some particular corners
Speaker 5: of the market where they're very important. And then you're
Speaker 5: going to see if the Central Bank of China comes
Speaker 5: in and intervenes pretty either to smooth the move or
Speaker 5: to at some point cap the move, then you'll see
Speaker 5: a rotation and demand back towards treasuries. One of the
Speaker 5: ironies that I don't think a lot of people kind
Speaker 5: of have internalized is that central bank demand for treasuries
Speaker 5: tends to be very correlated with dollar weakness. Countries that
Speaker 5: don't want their currency to appreciate or don't want their
Speaker 5: currency to appreciate too quickly intervene in the market they
Speaker 5: buy dollars, and central banks tend to be the player
Speaker 5: that is least inclined to buy corporate debt to take
Speaker 5: credit risk, and most inclined just to plow that money
Speaker 5: into the treasury market and typically into the shorter end
Speaker 5: of the curve. So that's kind of the rotation that
Speaker 5: I would expect going forward. I don't think you're going
Speaker 5: to see big changes in the Treasury book because I
Speaker 5: think you're going to see this central bank bid. There's
Speaker 5: a small subtle question that comes up. If the Central
Speaker 5: Bank of China does what I suggested, which opens up
Speaker 5: a hedging facility with its banking system and ultimately with
Speaker 5: its insurers, that would take dollars. But I think one
Speaker 5: thing that the US has done over the past five
Speaker 5: years is that it's created a repo facility for foreign
Speaker 5: central banks, and that really is the kind of facility
Speaker 5: that would allow a central bank like Taiwan Central Bank
Speaker 5: that has a ton of dollar bonds to get dollar
Speaker 5: cash without selling its bonds. So I think you could
Speaker 5: have some sort of coordination there that could effectively help
Speaker 5: the lifers close.
Speaker 4: Some of the hedg you need.
Speaker 5: So that's one of the things I'd like to see happen,
Speaker 5: and I think that would facilitate an orderly appreciation of
Speaker 5: the Taiwan dollar, one that doesn't break the back of
Speaker 5: its insurance industry.
Speaker 2: Thank you so much, Brad Setzer at the Council on
Speaker 2: Foreign Relations. Thank you so much for coming back on
Speaker 2: odd lots. The only one who could have explained it
Speaker 2: as clearly as you do. Really appreciate it.
Speaker 4: Well, thanks for letting me talk about one of my great.
Speaker 2: Passions, love talking to Brad, Love the return of the
Speaker 2: relevance of this sort of what seemed like a niche thing.
Speaker 3: Joe, I'm just gonna say, you need to live your
Speaker 3: life every day like Taiwanese life insurers are the biggest
Speaker 3: story in the world. No, that's how to do it.
Speaker 2: You know what, all ironically that you're right that we
Speaker 2: should never do episodes period, that you and I don't
Speaker 2: consider the most important story of the day. Like that's
Speaker 2: just a good editorial dictum to live by.
Speaker 3: Isn't it excellent? Yes, I mean this is definitely the
Speaker 3: case at the moment. This is the story.
Speaker 4: It is the story.
Speaker 2: And like, you know what's interesting is okay, here you
Speaker 2: have this huge line on the screen and this big jump,
Speaker 2: and it intersects with the financial markets, and you know,
Speaker 2: looking at the stocks today, you know, it's not like
Speaker 2: we've seen some major spill over it in fact s
Speaker 2: and P five hundred is barely down right now. But
Speaker 2: still it's hard not to get anxious when you see
Speaker 2: like big ninety degree angles in a chart. You know,
Speaker 2: us TTWD.
Speaker 3: So I have two things to say about this. So
Speaker 3: number one, I don't think a lot of investors are
Speaker 3: very good at thinking about basically international financial flows. Yeah,
Speaker 3: and I would say that of financial media organizations as well.
Speaker 3: I have long said that every financial media organization that
Speaker 3: takes itself seriously should have a global flows correspondent, and
Speaker 3: to my knowledge, I don't think anyone does still. But
Speaker 3: then secondly, the other thing I would say is I
Speaker 3: mentioned that we're into May, and so everyone is looking
Speaker 3: past at the month that has been April, a wild April,
Speaker 3: and all the headlines are like, oh, it was a
Speaker 3: crazy thirty days. But look, the S and P five
Speaker 3: hundred is back to where it was before Liberation Day,
Speaker 3: and so everything's fine, It's all good now. But that
Speaker 3: doesn't really sit right if you start to look at
Speaker 3: places like the flows data or the currency data. Right
Speaker 3: the US dollar is still down quite a lot. You
Speaker 3: can find little examples of risk premiums in various markets
Speaker 3: still being higher than they were on April. Second, and
Speaker 3: a lot of those are in the currency space or
Speaker 3: the bond space, because this is where foreign investors are
Speaker 3: really thinking about. I guess the existential crisis or existential
Speaker 3: angst of investing with America. And again, like in my mind,
Speaker 3: if you're talking about a trade war and the impacts
Speaker 3: of a potential trade war, it would be in those
Speaker 3: global international flows, the way big pools of capital move
Speaker 3: around the world. And so I think it's really interesting
Speaker 3: to me that we are seeing those kind of breakages
Speaker 3: at least in the Taiwanese dollar and the US dollar
Speaker 3: at the moment. Like that is indicative of the idea
Speaker 3: that no, there is actually something really big and important
Speaker 3: happening in the world at the moment, and it's not
Speaker 3: just about the S and P five hundred.
Speaker 4: Right, because NS in P.
Speaker 2: Five hundred is a large part about big tech stocks
Speaker 2: and they're doing fine.
Speaker 4: It seems fine.
Speaker 2: You know, they're still like building big AI data centers
Speaker 2: and all that stuff. But to your point, there's other
Speaker 2: stuff going on in the world besides tech stocks still
Speaker 2: continuing to go up.
Speaker 3: Yes, indeed, shall we leave it there for now?
Speaker 4: Let's leave it there.
Speaker 3: This has been another episode of the add Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway
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