1 00:00:02,720 --> 00:00:15,880 Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. 2 00:00:18,120 --> 00:00:20,960 Speaker 2: Hello and welcome to another episode of the Authoughts podcast. 3 00:00:21,040 --> 00:00:22,320 Speaker 2: I'm Tracy Alloway. 4 00:00:22,120 --> 00:00:23,279 Speaker 3: And I'm Joe Wisenthal. 5 00:00:23,840 --> 00:00:26,720 Speaker 2: Joe, there are so many huge stories that you could 6 00:00:26,720 --> 00:00:29,040 Speaker 2: pull out of this year, but I mean, like some 7 00:00:29,200 --> 00:00:32,240 Speaker 2: actually really really big ones. So we had Liberation Day 8 00:00:32,360 --> 00:00:37,519 Speaker 2: and the market crash. We had the continued weakness in 9 00:00:37,560 --> 00:00:39,920 Speaker 2: the US dollar, which has been this sort of slow 10 00:00:40,000 --> 00:00:44,120 Speaker 2: burned crash across the year. And we're recording this. Let's 11 00:00:44,120 --> 00:00:48,480 Speaker 2: see October seventeenth, and you know, dollar down yet again. 12 00:00:48,720 --> 00:00:51,720 Speaker 3: Well it is down, but however there's been a little 13 00:00:51,760 --> 00:00:53,800 Speaker 3: you know, we hit hiss low in mid September. 14 00:00:53,920 --> 00:00:55,880 Speaker 2: Don't make apologies for the dollar, Joe. 15 00:00:56,200 --> 00:01:00,840 Speaker 3: You know, I just like keep going, all right, keep going. 16 00:01:00,880 --> 00:01:04,000 Speaker 3: Then I might add something fall in the dollar. The 17 00:01:04,040 --> 00:01:05,160 Speaker 3: fall in the doll is very big. 18 00:01:05,720 --> 00:01:06,000 Speaker 4: So far. 19 00:01:06,040 --> 00:01:08,560 Speaker 2: There's here but this huge ramp up in the price 20 00:01:08,560 --> 00:01:11,039 Speaker 2: of gold, which seems to hit a new record all 21 00:01:11,080 --> 00:01:15,520 Speaker 2: the time. And then we've had the continued strength slash resilience, 22 00:01:15,560 --> 00:01:18,720 Speaker 2: whatever you want to call it, enthusiasm about AI in 23 00:01:18,840 --> 00:01:21,000 Speaker 2: the stock market, and it really seems like there's this 24 00:01:21,120 --> 00:01:24,360 Speaker 2: division at the moment between how people feel about corporate 25 00:01:24,400 --> 00:01:28,480 Speaker 2: America and how people feel about sovereign America in the 26 00:01:28,520 --> 00:01:29,640 Speaker 2: form of its currency. 27 00:01:29,840 --> 00:01:34,080 Speaker 3: You know what I really regret doing tracing. I really regret. 28 00:01:34,160 --> 00:01:35,720 Speaker 2: Did you have like a horde of gold that you 29 00:01:35,720 --> 00:01:36,240 Speaker 2: got rid. 30 00:01:36,080 --> 00:01:38,959 Speaker 3: Of over I took out a gold denominated mortgage. You know, 31 00:01:39,000 --> 00:01:41,319 Speaker 3: I feel so stupid. I feel so stupid. Why did 32 00:01:41,360 --> 00:01:44,200 Speaker 3: I do that? I could get paid in dollars and 33 00:01:44,240 --> 00:01:46,760 Speaker 3: I took out a gold denominated mortgage. What was I thinking? 34 00:01:47,040 --> 00:01:47,120 Speaker 4: No? 35 00:01:47,200 --> 00:01:49,240 Speaker 3: I didn't, But had I done, that would have been 36 00:01:49,280 --> 00:01:50,400 Speaker 3: a very bad trade. 37 00:01:50,720 --> 00:01:52,520 Speaker 2: Yes, I remember those stories. 38 00:01:52,160 --> 00:01:55,520 Speaker 3: From like, you know, a little bit of a tangent, 39 00:01:55,560 --> 00:01:57,880 Speaker 3: remember all those stories from like the Hungarians they took 40 00:01:57,880 --> 00:02:02,400 Speaker 3: out those Swiss denominated mortgage back of the two thousands. 41 00:02:01,720 --> 00:02:03,920 Speaker 2: And that was very much a europe thing for a while. 42 00:02:04,120 --> 00:02:06,120 Speaker 3: Yeah, that was a really funny list. We don't have 43 00:02:06,160 --> 00:02:09,320 Speaker 3: to talk about that. But one thing, I was just 44 00:02:09,360 --> 00:02:12,440 Speaker 3: the only reason I caveated the dollar fall, which I 45 00:02:12,480 --> 00:02:15,640 Speaker 3: do think it has. It is quite a bit down 46 00:02:15,680 --> 00:02:18,160 Speaker 3: from the beginning of the year. All that being said, 47 00:02:18,800 --> 00:02:21,560 Speaker 3: it is striking in the last several weeks the degree 48 00:02:21,600 --> 00:02:25,400 Speaker 3: to which a few of the very popular consensus ideas 49 00:02:25,400 --> 00:02:27,560 Speaker 3: for this year are turning a little bit. And I 50 00:02:27,600 --> 00:02:30,360 Speaker 3: say that tenure treasury is the time we're recording this 51 00:02:30,440 --> 00:02:34,200 Speaker 3: October seventeenth has fallen below four percent. How many times 52 00:02:34,200 --> 00:02:36,960 Speaker 3: did you hear about the steepener trade this year? How 53 00:02:36,960 --> 00:02:40,200 Speaker 3: many times did you hear about fiscal dominance losing control? 54 00:02:40,240 --> 00:02:44,480 Speaker 3: At the long end the dollar it stabilized a little bit. 55 00:02:44,639 --> 00:02:47,960 Speaker 3: So it is a very interesting moment from markets in 56 00:02:48,040 --> 00:02:49,160 Speaker 3: many respects right now. 57 00:02:49,320 --> 00:02:52,560 Speaker 2: There's definitely a lot to talk about. Congrats on managing 58 00:02:52,600 --> 00:02:54,320 Speaker 2: your personal FX liability. 59 00:02:54,720 --> 00:02:55,920 Speaker 3: I'm doing a good job. 60 00:02:57,160 --> 00:02:59,679 Speaker 2: Getting paid in dollars and paying your mortgage dollars. Well 61 00:02:59,720 --> 00:03:02,520 Speaker 2: done show, All right, Well, you know, this is the 62 00:03:02,600 --> 00:03:04,440 Speaker 2: kind of thing that a lot of big investors are 63 00:03:04,440 --> 00:03:07,200 Speaker 2: thinking about at the moment, and we should definitely think 64 00:03:07,240 --> 00:03:10,280 Speaker 2: about it too. And who is the one person that 65 00:03:10,320 --> 00:03:13,560 Speaker 2: we really like to talk to when we talk about 66 00:03:13,560 --> 00:03:14,560 Speaker 2: these big trends, And. 67 00:03:14,520 --> 00:03:17,360 Speaker 3: Who is the one person that is always in town 68 00:03:17,400 --> 00:03:19,880 Speaker 3: Because we're in Washington, DC right now, when we go 69 00:03:19,919 --> 00:03:22,359 Speaker 3: to a new town, who is the other guy who 70 00:03:22,440 --> 00:03:23,960 Speaker 3: always is probably going to be there at the. 71 00:03:23,960 --> 00:03:26,480 Speaker 2: Same time, the person that we run into on the 72 00:03:26,560 --> 00:03:30,160 Speaker 2: street in various outfits, Although this time you're wearing a suit, 73 00:03:30,240 --> 00:03:32,560 Speaker 2: So there we go. The last time we run into randomly, 74 00:03:32,720 --> 00:03:35,960 Speaker 2: you were wearing hiking gear and so were we. Anyway, 75 00:03:36,040 --> 00:03:38,400 Speaker 2: we are here in DC. We have the perfect guest. 76 00:03:38,440 --> 00:03:42,040 Speaker 2: As always, We are speaking once again with Hun Sunction. 77 00:03:42,280 --> 00:03:45,440 Speaker 2: He is the economic Advisor and head of the Monetary 78 00:03:45,480 --> 00:03:49,480 Speaker 2: and Economic Department at the Bank for International Settlements the BIS. 79 00:03:49,720 --> 00:03:51,880 Speaker 2: We love talking to him and it's so great to 80 00:03:51,920 --> 00:03:54,280 Speaker 2: have him here to talk about something that's really been 81 00:03:54,280 --> 00:03:56,720 Speaker 2: on the minds of a lot of market participants, a 82 00:03:56,720 --> 00:03:59,160 Speaker 2: lot of policymakers right now. So Hun, thank you so 83 00:03:59,240 --> 00:04:00,680 Speaker 2: much for coming back on our thoughts. 84 00:04:00,880 --> 00:04:03,040 Speaker 4: Thank you Tracy, thank you Joe. It's great to be back. 85 00:04:03,440 --> 00:04:06,120 Speaker 2: Since Joe doubts my entire premise. 86 00:04:05,960 --> 00:04:08,240 Speaker 3: For this episode, the entire premise at all. 87 00:04:08,680 --> 00:04:13,200 Speaker 2: Now, let's just start with how unusual would you say 88 00:04:13,280 --> 00:04:15,880 Speaker 2: this year has been? And I feel like so much 89 00:04:15,920 --> 00:04:17,839 Speaker 2: has happened. We kind of have to cast our minds 90 00:04:17,880 --> 00:04:20,680 Speaker 2: back to April when we did have Liberation Day and 91 00:04:20,720 --> 00:04:24,000 Speaker 2: when we did see the dollar fall as the market 92 00:04:24,080 --> 00:04:27,720 Speaker 2: was selling off, which was something that's not really supposed 93 00:04:27,720 --> 00:04:30,080 Speaker 2: to happen. You're supposed to have investors reach for the 94 00:04:30,120 --> 00:04:33,440 Speaker 2: safe haven of the green back in times of turmoil 95 00:04:33,520 --> 00:04:36,080 Speaker 2: and stress. And now, you know, fast forward to October, 96 00:04:36,120 --> 00:04:37,800 Speaker 2: I think we've gotten a little bit more used to 97 00:04:37,880 --> 00:04:42,000 Speaker 2: that particular dynamic. But how surprised were you at that Well, it. 98 00:04:41,960 --> 00:04:47,200 Speaker 4: Was a very unusual combination of events in April. So 99 00:04:47,240 --> 00:04:50,839 Speaker 4: what we saw was the so called triple decline where 100 00:04:50,880 --> 00:04:55,600 Speaker 4: you had stocks, bonds, and the dollar, yeah, falling in unison. 101 00:04:55,640 --> 00:04:59,360 Speaker 4: And that's very unusual because in a risk off episode, 102 00:04:59,440 --> 00:05:03,640 Speaker 4: you know, which April was, typically the dollar would rally. 103 00:05:04,320 --> 00:05:06,120 Speaker 4: You know, there'll be a kind of safe have and flow. 104 00:05:07,040 --> 00:05:10,320 Speaker 4: And you know, back then, there was of course a 105 00:05:10,320 --> 00:05:13,960 Speaker 4: lot of news and you saw a lot of stories 106 00:05:14,480 --> 00:05:17,400 Speaker 4: back then about you know, possibly the dollar, you know, 107 00:05:17,480 --> 00:05:20,000 Speaker 4: losing its international status and so on. I think in 108 00:05:20,080 --> 00:05:24,120 Speaker 4: retrospect that was, you know, quite hasty, and I think 109 00:05:24,160 --> 00:05:27,040 Speaker 4: now that we have the data, we can piece together 110 00:05:27,920 --> 00:05:30,640 Speaker 4: in a more kind of coherent way what was going on. 111 00:05:31,800 --> 00:05:36,240 Speaker 4: And in short, I think it was a kind of 112 00:05:37,279 --> 00:05:43,039 Speaker 4: hedging story where investors who had lots of exposures to 113 00:05:43,120 --> 00:05:46,400 Speaker 4: the US dollar, we're trying to reduce some of those exposures. 114 00:05:46,440 --> 00:05:47,960 Speaker 4: And we can get into some of the details and 115 00:05:47,960 --> 00:05:51,799 Speaker 4: how you know, that kind of trade might transpire, and 116 00:05:52,640 --> 00:05:54,960 Speaker 4: it just so happens that this is also the year 117 00:05:55,000 --> 00:06:00,719 Speaker 4: that the BIS conducts its triannual survey of f X markets, 118 00:06:01,720 --> 00:06:04,000 Speaker 4: and we've just published the results, and I think we 119 00:06:04,040 --> 00:06:07,799 Speaker 4: can also shed some more light on the events in April. 120 00:06:08,240 --> 00:06:10,440 Speaker 3: Let's keep it big pictures still, and then we'll drive 121 00:06:10,520 --> 00:06:14,159 Speaker 3: down into specific months and weeks. What people work for 122 00:06:14,160 --> 00:06:17,920 Speaker 3: the BIS, they prey must take out mortgages and Swiss 123 00:06:17,920 --> 00:06:20,960 Speaker 3: Frank there living there in bars anyway, sidetrack, what are 124 00:06:21,000 --> 00:06:23,000 Speaker 3: some of the big takeaways from this year service? 125 00:06:23,040 --> 00:06:27,239 Speaker 4: Yeah, yeah, so I think well, actually before we go there, Joe, 126 00:06:28,600 --> 00:06:32,119 Speaker 4: I mean, it's worth you know, thinking about how FX 127 00:06:32,160 --> 00:06:35,039 Speaker 4: market is really a figure in the investment strategy. So 128 00:06:35,360 --> 00:06:37,440 Speaker 4: you know, if you're a long term investor, let's say 129 00:06:37,440 --> 00:06:40,360 Speaker 4: that you're a Euro area pension fund, what you have 130 00:06:40,560 --> 00:06:47,120 Speaker 4: are obligations to your you know, local euros beneficiaries in euros, 131 00:06:47,720 --> 00:06:49,840 Speaker 4: but you have a very large balance sheet and so 132 00:06:49,960 --> 00:06:54,080 Speaker 4: you need to have a very broad exposure to global assets, 133 00:06:54,160 --> 00:06:58,080 Speaker 4: you know, including those in non euro denominated assets. So 134 00:06:58,120 --> 00:07:01,720 Speaker 4: what tends to happen is some of the euros are 135 00:07:01,720 --> 00:07:06,839 Speaker 4: then converted into dollars to invest in in dollar assets. 136 00:07:07,600 --> 00:07:08,919 Speaker 4: But of course what you want to do is to 137 00:07:08,960 --> 00:07:12,640 Speaker 4: make sure that you hedge that currency risk. And this 138 00:07:12,800 --> 00:07:16,200 Speaker 4: is where this instrument called an FX swap really comes 139 00:07:16,200 --> 00:07:21,320 Speaker 4: into its own, and it's an operation where essentially the 140 00:07:21,480 --> 00:07:26,160 Speaker 4: Euro Area investor pledges some euros and then borrows dollars 141 00:07:27,000 --> 00:07:30,080 Speaker 4: and then with those dollars then go into dollar denominated assets. 142 00:07:30,720 --> 00:07:34,800 Speaker 4: And as you do that, you also promise to unwind 143 00:07:34,840 --> 00:07:38,080 Speaker 4: that transaction at a known exchange rate that affixed in 144 00:07:38,120 --> 00:07:41,160 Speaker 4: a moment in the future. So essentially, once you've gone 145 00:07:41,160 --> 00:07:47,160 Speaker 4: through that transaction, your currency risk is hedged. Now exactly 146 00:07:47,200 --> 00:07:50,360 Speaker 4: how much of your foreign portfolio you hedge in this 147 00:07:50,440 --> 00:07:54,120 Speaker 4: way that varies over time, I mean it depends, for example, 148 00:07:54,360 --> 00:07:59,160 Speaker 4: on you know, how high the hedging costs are. Because 149 00:07:59,200 --> 00:08:02,720 Speaker 4: you're typically doing this fairly short term and you're rolling 150 00:08:02,760 --> 00:08:06,480 Speaker 4: over these hedges. What's important is the short term dollar 151 00:08:06,760 --> 00:08:09,440 Speaker 4: interest rate, because you know, you're borrowing dollars in order 152 00:08:09,480 --> 00:08:13,640 Speaker 4: to invest in dollar assets. So when the short term 153 00:08:13,640 --> 00:08:16,320 Speaker 4: interest rate is very high, that's typically a time when 154 00:08:16,360 --> 00:08:19,320 Speaker 4: hedging costs are very high. And so what had happened 155 00:08:19,360 --> 00:08:22,040 Speaker 4: over the last few years was that these so called 156 00:08:22,080 --> 00:08:25,440 Speaker 4: hedge ratios. You know, the proportion of your assets that 157 00:08:25,520 --> 00:08:29,280 Speaker 4: you actually hedge had been really you know, trending down. 158 00:08:29,960 --> 00:08:33,040 Speaker 4: And you know to the extent that some investors you know, 159 00:08:33,120 --> 00:08:35,520 Speaker 4: didn't hedge at all, And why would you if the 160 00:08:35,559 --> 00:08:38,960 Speaker 4: dollar is surging and the hedging cost is so large. 161 00:08:38,960 --> 00:08:42,760 Speaker 4: And so when the turbulence broke earlier in the year, 162 00:08:43,240 --> 00:08:47,280 Speaker 4: a lot of investors were basically caught with very large 163 00:08:47,320 --> 00:08:53,040 Speaker 4: dollar exposures, you know, having not hedged. And I think 164 00:08:53,160 --> 00:08:56,400 Speaker 4: one piece of evidence that you know this was that 165 00:08:56,640 --> 00:08:59,960 Speaker 4: the events of April was very much an expost hedging story, 166 00:09:00,080 --> 00:09:02,720 Speaker 4: you know, hedging after the fact was that, you know, 167 00:09:02,760 --> 00:09:06,760 Speaker 4: we saw a lot of the telltale signs of swaps 168 00:09:06,800 --> 00:09:10,240 Speaker 4: being taken out and dollars being sold happening in the market. 169 00:09:10,400 --> 00:09:13,840 Speaker 4: So what would happen is, you know, if an investor 170 00:09:14,160 --> 00:09:17,960 Speaker 4: is holding dollar assets, you know, without a hedge, but 171 00:09:18,040 --> 00:09:21,040 Speaker 4: you're concerned about the dollar falling, then what you would 172 00:09:21,080 --> 00:09:23,560 Speaker 4: do is you would put on a hedge X post. 173 00:09:23,720 --> 00:09:26,240 Speaker 4: You would put on a hedge after the event. And 174 00:09:26,280 --> 00:09:29,679 Speaker 4: you could do that, for example, by actually then engaging 175 00:09:29,800 --> 00:09:33,760 Speaker 4: in an FX swap right there, but then selling the 176 00:09:33,800 --> 00:09:36,600 Speaker 4: dollars that you've acquired so rather than investing those dollars 177 00:09:36,600 --> 00:09:40,160 Speaker 4: into dollar assets, you simply sell it in the spot market. 178 00:09:40,679 --> 00:09:43,800 Speaker 4: What that kind of dynamics would would imply is that 179 00:09:43,800 --> 00:09:47,160 Speaker 4: there would be you know, lots of downward pressure in 180 00:09:47,200 --> 00:09:52,080 Speaker 4: those situations where institutional investors are trying to you know, 181 00:09:52,240 --> 00:09:57,240 Speaker 4: raise their head ratios. But expost So back to the triannual, 182 00:09:57,640 --> 00:10:00,920 Speaker 4: what do we see there that to you know, puts 183 00:10:00,920 --> 00:10:04,240 Speaker 4: additional light on this episode. By the way, on the triangle, 184 00:10:04,320 --> 00:10:08,120 Speaker 4: you know this, it's just so happens that the sampling 185 00:10:08,160 --> 00:10:11,760 Speaker 4: period was April this year, amazing, so you know, it 186 00:10:11,840 --> 00:10:15,680 Speaker 4: may be slightly distorted by the events of you know, 187 00:10:15,720 --> 00:10:18,480 Speaker 4: the April episode. On the other hand, the silver lining 188 00:10:18,559 --> 00:10:21,800 Speaker 4: is that we have some great data on really the 189 00:10:21,880 --> 00:10:24,640 Speaker 4: you know, the events of the of the April episode. 190 00:10:24,880 --> 00:10:28,040 Speaker 4: But the headline numbers are really quite you know, quite notable. 191 00:10:28,200 --> 00:10:33,200 Speaker 4: It's nine point six trillion dollars daily flow. This is 192 00:10:33,640 --> 00:10:36,720 Speaker 4: like something like almost thirty percent higher than the previous 193 00:10:36,760 --> 00:10:40,840 Speaker 4: survey in twenty two. The dollar is still very much 194 00:10:40,880 --> 00:10:44,440 Speaker 4: the dominant currency. It's ninety percent of all of the 195 00:10:44,520 --> 00:10:48,160 Speaker 4: transactions have the dollar on one side. It's even higher 196 00:10:48,200 --> 00:10:50,960 Speaker 4: than what we saw in twenty two so you know, 197 00:10:51,040 --> 00:10:56,520 Speaker 4: in spite of the survey being affected perhaps by these 198 00:10:57,400 --> 00:10:59,400 Speaker 4: you know, stress events in April, you know, we think 199 00:10:59,400 --> 00:11:01,160 Speaker 4: we've got a very very very good sort of take. 200 00:11:01,960 --> 00:11:04,040 Speaker 4: One of the things that we noticed this year is, 201 00:11:04,080 --> 00:11:06,160 Speaker 4: of course, you know, as well as the FFX swaps, 202 00:11:06,200 --> 00:11:09,680 Speaker 4: which is by far the largest segment of the of 203 00:11:09,720 --> 00:11:13,920 Speaker 4: the transactions, we also see a lot of a big 204 00:11:13,960 --> 00:11:19,400 Speaker 4: increase in the spot transactions and also outright forwards. So 205 00:11:19,520 --> 00:11:22,280 Speaker 4: let me just explain that for your listeners. You know, 206 00:11:22,320 --> 00:11:25,600 Speaker 4: when you engage in US in an effect swap, you know, 207 00:11:26,679 --> 00:11:31,600 Speaker 4: the investor with borrow dollars by pledging euros, and then 208 00:11:31,880 --> 00:11:35,640 Speaker 4: there's also a promise to reverse that. Now that promise 209 00:11:36,160 --> 00:11:39,559 Speaker 4: is called a forward, and of course you can get that, 210 00:11:39,920 --> 00:11:41,760 Speaker 4: you know, without going through the swap. You can just 211 00:11:41,800 --> 00:11:43,720 Speaker 4: go to a deal and say, look, you know, just 212 00:11:43,840 --> 00:11:46,640 Speaker 4: sell me a outright forward so called, and then I 213 00:11:46,679 --> 00:11:48,920 Speaker 4: would actually then have a dollar obligation. 214 00:11:50,360 --> 00:11:53,160 Speaker 3: A swap is like a spark trade plusure forward exactly. 215 00:11:53,200 --> 00:11:56,360 Speaker 4: Okay, it's that combination. And what we see is as 216 00:11:56,400 --> 00:11:59,560 Speaker 4: well as the swaps, we see the two components, the 217 00:11:59,600 --> 00:12:03,200 Speaker 4: spot and the forward being very very large this year. 218 00:12:04,480 --> 00:12:06,839 Speaker 4: And we think that the events of April must have 219 00:12:06,920 --> 00:12:10,920 Speaker 4: had a you know, had an impact because you know, 220 00:12:11,000 --> 00:12:14,760 Speaker 4: as well as getting a swap and selling the dollars 221 00:12:14,800 --> 00:12:17,080 Speaker 4: in the spot market, you can also just ask a 222 00:12:17,160 --> 00:12:20,040 Speaker 4: dealer for a forward contract, but then of course the 223 00:12:20,080 --> 00:12:23,080 Speaker 4: dealer has to hedge, so you know there's going to 224 00:12:23,080 --> 00:12:27,680 Speaker 4: be a spot sale anyway, and so that combination would 225 00:12:28,040 --> 00:12:30,920 Speaker 4: actually lead you to a situation where both the spot 226 00:12:31,360 --> 00:12:34,439 Speaker 4: and the forward transactions go up a lot. And that's 227 00:12:34,480 --> 00:12:35,320 Speaker 4: exactly what we see. 228 00:12:35,360 --> 00:12:35,760 Speaker 3: Interesting. 229 00:12:35,840 --> 00:12:38,520 Speaker 4: So this is another piece of the evidence that this 230 00:12:38,679 --> 00:12:41,520 Speaker 4: was very much exposed hedging. And let me mention just 231 00:12:41,520 --> 00:12:44,320 Speaker 4: two other things on this. We put out a bulletin 232 00:12:44,400 --> 00:12:47,240 Speaker 4: earlier in the summer we you know, lay out all 233 00:12:47,240 --> 00:12:50,480 Speaker 4: the other pieces of evidence that we could gather. But 234 00:12:50,640 --> 00:12:53,600 Speaker 4: it's also notable that if you look at the actual 235 00:12:53,640 --> 00:12:57,640 Speaker 4: portfolio flow numbers, the international portfolio flow numbers, there was 236 00:12:57,720 --> 00:13:00,920 Speaker 4: no real selling in April, so you know, there was 237 00:13:00,920 --> 00:13:04,000 Speaker 4: a very very small outflow, but on the scale of things, 238 00:13:04,040 --> 00:13:07,520 Speaker 4: it was really tiny. There was certainly no you know, 239 00:13:07,640 --> 00:13:11,679 Speaker 4: concerted portfolio outflows you know from the US. So that's 240 00:13:11,760 --> 00:13:15,040 Speaker 4: really the i think, perhaps the most you know, compelling 241 00:13:15,080 --> 00:13:18,080 Speaker 4: evidence that the so called sell America trade was not, 242 00:13:18,760 --> 00:13:23,160 Speaker 4: you know, was not the story behind the eight episode. 243 00:13:36,840 --> 00:13:41,160 Speaker 2: Why should we care, either qualitatively or quantitatively if this 244 00:13:41,360 --> 00:13:44,240 Speaker 2: was a hedge America story and not a sell America's 245 00:13:44,280 --> 00:13:45,439 Speaker 2: story outright. 246 00:13:45,200 --> 00:13:48,440 Speaker 4: Over the long term, it is possible that you know, 247 00:13:48,520 --> 00:13:53,040 Speaker 4: long term investors would then reassess their global exposures. And 248 00:13:53,080 --> 00:13:55,760 Speaker 4: you see and you hear a lot of anecdotal evidence 249 00:13:55,840 --> 00:13:58,720 Speaker 4: that you know, these conversations are going on, but so 250 00:13:58,800 --> 00:14:02,840 Speaker 4: far that hasn't really you know, translated into actions. But 251 00:14:02,920 --> 00:14:06,679 Speaker 4: I think what you know does flow very you know 252 00:14:06,760 --> 00:14:09,679 Speaker 4: clearly from you know, from the actions in the spring, 253 00:14:10,000 --> 00:14:12,800 Speaker 4: is that when we look at the various pieces of 254 00:14:12,840 --> 00:14:16,559 Speaker 4: the global financial system, every part depends on other parts, 255 00:14:17,200 --> 00:14:20,360 Speaker 4: and there is this network effect where provided that everyone 256 00:14:20,400 --> 00:14:23,920 Speaker 4: else is doing what they're doing around the US dollar, 257 00:14:24,680 --> 00:14:29,080 Speaker 4: then it's also in my interest. So actually, you know, 258 00:14:29,120 --> 00:14:33,320 Speaker 4: be part of that ecosystem. So if you have this 259 00:14:33,440 --> 00:14:36,520 Speaker 4: kind of need network effect, it's very difficult to have 260 00:14:36,600 --> 00:14:38,520 Speaker 4: this whole sale shift away. 261 00:14:38,840 --> 00:14:41,800 Speaker 3: One of the things that I think is unusual, and 262 00:14:41,880 --> 00:14:44,240 Speaker 3: I probably said this in a few other episodes, but 263 00:14:44,400 --> 00:14:47,640 Speaker 3: what I think is striking about this environment is that 264 00:14:47,760 --> 00:14:50,680 Speaker 3: if you look at the US it can come up 265 00:14:50,720 --> 00:14:53,120 Speaker 3: with a long list of reasons to be concerned, which 266 00:14:53,160 --> 00:14:58,280 Speaker 3: we don't need to come down recapitulate now. On the 267 00:14:58,320 --> 00:15:02,600 Speaker 3: other hand, the most affitable, impressive, cutting edge companies in 268 00:15:02,640 --> 00:15:05,360 Speaker 3: the world that everyone would love to have exposure to 269 00:15:05,480 --> 00:15:07,640 Speaker 3: in some way or in the US. And it strikes 270 00:15:07,680 --> 00:15:10,320 Speaker 3: me is that's the unusual situation, which is we don't 271 00:15:10,360 --> 00:15:15,520 Speaker 3: typically associate volatile sovereigns with being the home of the 272 00:15:15,560 --> 00:15:18,840 Speaker 3: most dynamic companies in the world. And so to my mind, 273 00:15:19,200 --> 00:15:21,680 Speaker 3: I would love to have exposed more exposure to in 274 00:15:21,800 --> 00:15:24,200 Speaker 3: Video and Microsoft and all of these companies that are 275 00:15:24,200 --> 00:15:27,920 Speaker 3: making money hand over fist without having exposure to the 276 00:15:28,000 --> 00:15:31,320 Speaker 3: US itself, And hence I might want to hedge. 277 00:15:32,320 --> 00:15:34,880 Speaker 4: I mean, certainly, you know the equity market story, I 278 00:15:34,880 --> 00:15:37,240 Speaker 4: mean that really isn't a class of its own, and 279 00:15:37,280 --> 00:15:39,760 Speaker 4: as you say, that's really been a very very strong theme. 280 00:15:40,440 --> 00:15:43,160 Speaker 4: But more broadly, you know, capital markets. If you think 281 00:15:43,160 --> 00:15:47,359 Speaker 4: about how capital markets operate, that there's a whole ecosystem 282 00:15:47,400 --> 00:15:51,280 Speaker 4: behind that, and you have the underlying securities obviously, but 283 00:15:51,360 --> 00:15:54,200 Speaker 4: then you have the hedging instruments, and then you have 284 00:15:54,440 --> 00:15:56,680 Speaker 4: a whole set of investors who are actually you know, 285 00:15:57,000 --> 00:16:01,800 Speaker 4: taking part and the banking system is absolutely crucial in 286 00:16:02,280 --> 00:16:06,040 Speaker 4: providing those hedging services. And I think when we last 287 00:16:06,040 --> 00:16:09,040 Speaker 4: discussed this back in Jackson Hole, you know, we talked 288 00:16:09,040 --> 00:16:13,280 Speaker 4: about how the FX swap market makes you know, money 289 00:16:13,280 --> 00:16:18,120 Speaker 4: fungible across currencies. And you know, money is ultimately something 290 00:16:18,240 --> 00:16:20,720 Speaker 4: to do with banks. So you know, the central bank, 291 00:16:20,920 --> 00:16:25,000 Speaker 4: you know, issues high powered money. Commercial banks are there 292 00:16:25,040 --> 00:16:28,520 Speaker 4: also to issue money that the other users will will 293 00:16:28,520 --> 00:16:32,400 Speaker 4: take advantage of. And FX swaps are there, you know, 294 00:16:32,480 --> 00:16:37,000 Speaker 4: basically providing this service of making money fungible across currencies. 295 00:16:37,520 --> 00:16:40,680 Speaker 4: So you know, every piece fits into every other piece 296 00:16:40,680 --> 00:16:42,480 Speaker 4: in that sense. And so you know, we should think 297 00:16:42,480 --> 00:16:47,960 Speaker 4: about this in terms of the mutually reinforcing pieces of 298 00:16:48,000 --> 00:16:49,440 Speaker 4: this you know, this network. 299 00:16:51,200 --> 00:16:53,880 Speaker 2: What have you observed in terms of the actual trends 300 00:16:53,920 --> 00:16:57,680 Speaker 2: in FX hedging costs, because, as you described it in April, 301 00:16:57,880 --> 00:17:01,480 Speaker 2: suddenly it all starts kicking off a lot of large 302 00:17:01,520 --> 00:17:04,280 Speaker 2: investors who are not that used perhaps to having to 303 00:17:04,320 --> 00:17:07,600 Speaker 2: hedge their dollar exposure suddenly scrambled to do it x 304 00:17:07,720 --> 00:17:11,320 Speaker 2: post as you described. Did that mean that the cost 305 00:17:11,400 --> 00:17:14,520 Speaker 2: of actually doing so actually increased or was it still 306 00:17:14,600 --> 00:17:15,400 Speaker 2: relatively cheap? 307 00:17:16,080 --> 00:17:19,960 Speaker 4: Well, actually, it's primarily about how high the short term 308 00:17:19,960 --> 00:17:23,800 Speaker 4: interest rates are actually, and in particular, if you're a 309 00:17:23,840 --> 00:17:27,520 Speaker 4: non US investor investing in dollar assets, it's really how 310 00:17:27,600 --> 00:17:30,360 Speaker 4: high the short term dollar interest rate is, because essentially 311 00:17:30,720 --> 00:17:33,760 Speaker 4: what we're doing is, you know, you're pledging euros, let's say, 312 00:17:34,119 --> 00:17:38,040 Speaker 4: and then borrowing dollars short term and then investing in 313 00:17:38,080 --> 00:17:40,720 Speaker 4: dollar assets. And so it's really about how high that 314 00:17:40,760 --> 00:17:43,000 Speaker 4: short term interest rate is relative to the yield you're 315 00:17:43,040 --> 00:17:46,639 Speaker 4: getting on the asset itself. And so if you have 316 00:17:46,680 --> 00:17:49,200 Speaker 4: a flat yield curve, you know, which is what we've had, 317 00:17:49,400 --> 00:17:53,400 Speaker 4: or even inverted yel curve, then hedging costs are very high. 318 00:17:53,440 --> 00:17:56,560 Speaker 4: And so in fact, you know, investors have typically hedged, 319 00:17:56,680 --> 00:18:00,600 Speaker 4: and hedge ratios have fluctuated. There's no system matter survey, 320 00:18:01,080 --> 00:18:04,040 Speaker 4: but it's fluctuated between forty and sixty percent. I mean, 321 00:18:04,040 --> 00:18:06,720 Speaker 4: there are some pockets of official data, like the Japanese 322 00:18:06,960 --> 00:18:09,960 Speaker 4: life insurance companies, but typically this is you know, really 323 00:18:10,040 --> 00:18:14,800 Speaker 4: quite quite anecdotal. But what had happened in the last 324 00:18:14,840 --> 00:18:19,560 Speaker 4: year or so was the hedge ratios had gone down gradually. 325 00:18:20,119 --> 00:18:22,560 Speaker 4: Some firms were not even hedging at all, you know, 326 00:18:22,600 --> 00:18:25,680 Speaker 4: they were trying to win both on the stronger dollar, 327 00:18:25,960 --> 00:18:29,480 Speaker 4: but also on the high yields. Yeah, actually they just 328 00:18:29,560 --> 00:18:34,280 Speaker 4: meant mentioned a very interesting point here. Actually, it's actually 329 00:18:35,280 --> 00:18:38,879 Speaker 4: worth thinking about the parallels between this story about you know, 330 00:18:38,920 --> 00:18:43,720 Speaker 4: advanced economy investors holding US DOT assets with the story 331 00:18:43,920 --> 00:18:47,600 Speaker 4: about local currency emerging market bonds. You know, that's actually 332 00:18:47,600 --> 00:18:50,920 Speaker 4: a very very you know, important asset class that really 333 00:18:50,960 --> 00:18:55,680 Speaker 4: grew up after the GFC. And that's typical asset class 334 00:18:55,720 --> 00:18:58,560 Speaker 4: where the investor would not hedge. So if you want 335 00:18:58,600 --> 00:19:03,600 Speaker 4: to enter in to a large emerging market sovereign BONDERNT trade, 336 00:19:03,640 --> 00:19:07,760 Speaker 4: you would actually buy the instrument on an unheedge basis. 337 00:19:08,560 --> 00:19:11,240 Speaker 4: And you do that because you know, you think the 338 00:19:11,280 --> 00:19:15,280 Speaker 4: emerging market currency will appreciate as well as the YEL 339 00:19:15,440 --> 00:19:18,160 Speaker 4: four and so you win twice. You know, you gain 340 00:19:18,280 --> 00:19:20,879 Speaker 4: both on the yield, you know, as well as on 341 00:19:20,960 --> 00:19:24,439 Speaker 4: the exchange rate. But of course when the tide turns, 342 00:19:24,480 --> 00:19:27,640 Speaker 4: that's when you know scramble to you know hedge ex 343 00:19:27,760 --> 00:19:30,879 Speaker 4: post and that's exactly you know the same type of 344 00:19:30,880 --> 00:19:34,439 Speaker 4: thing that we saw you know, in this in this episode. 345 00:19:34,520 --> 00:19:38,119 Speaker 4: And you know, and there were actually emerging market investors, 346 00:19:38,720 --> 00:19:42,159 Speaker 4: especially from Asia, who were you know, caught with a 347 00:19:42,320 --> 00:19:45,240 Speaker 4: very low hedge ratios and there was this ex post 348 00:19:45,280 --> 00:19:48,399 Speaker 4: hedging going on. So there's actually a very interesting parallel 349 00:19:48,640 --> 00:19:51,840 Speaker 4: between you know, what was you know going on this 350 00:19:51,960 --> 00:19:55,640 Speaker 4: April and the much older trade, which is the emerging 351 00:19:55,680 --> 00:19:56,480 Speaker 4: market trade. 352 00:19:56,640 --> 00:20:00,320 Speaker 2: So Joe, on the plus side, people aren't necessarily selling 353 00:20:00,359 --> 00:20:05,120 Speaker 2: dollar assets. On the downside, the negative side, we're basically 354 00:20:05,160 --> 00:20:08,240 Speaker 2: treating dollar assets the way we would allow emerging market. 355 00:20:08,280 --> 00:20:10,800 Speaker 5: Pond were like, I think I'm going to buy some 356 00:20:10,840 --> 00:20:16,760 Speaker 5: local currency US day. That's right, actually, but like, so 357 00:20:16,800 --> 00:20:19,119 Speaker 5: what was it about April then that caused the like 358 00:20:19,200 --> 00:20:22,120 Speaker 5: what I mean, we know there was yeah, the Launcher 359 00:20:22,200 --> 00:20:24,320 Speaker 5: trade war and there were like massive tariffs, et cetera. 360 00:20:24,320 --> 00:20:28,440 Speaker 5: But like, what was it about that such that people's 361 00:20:28,920 --> 00:20:33,000 Speaker 5: impulses to hedge more expost factor as you've described it. 362 00:20:33,359 --> 00:20:37,000 Speaker 5: What was the thing they said, Oh, we want to 363 00:20:37,080 --> 00:20:40,680 Speaker 5: change our the our sort of our exposure to US dollars, 364 00:20:40,680 --> 00:20:42,200 Speaker 5: even if we don't want to sell them. 365 00:20:42,520 --> 00:20:45,960 Speaker 4: I think it's probably a combination of several things. But 366 00:20:46,480 --> 00:20:49,560 Speaker 4: where the you know, where the investors found themselves in 367 00:20:49,680 --> 00:20:52,080 Speaker 4: terms of the hedge ratios had a lot to do 368 00:20:52,119 --> 00:20:55,520 Speaker 4: with this. Actually, if you look through your you know, 369 00:20:55,560 --> 00:20:59,399 Speaker 4: Bloomberg news database, you'll find plenty of stories from twenty 370 00:20:59,400 --> 00:21:05,879 Speaker 4: three for where let's say life insurance companies announce that 371 00:21:05,920 --> 00:21:08,960 Speaker 4: they will not be hedging, you know there, so you 372 00:21:08,960 --> 00:21:12,040 Speaker 4: know they would be holding let's say US dollar assets 373 00:21:12,040 --> 00:21:15,679 Speaker 4: but without a hedge. And as I said, you know, 374 00:21:15,720 --> 00:21:18,600 Speaker 4: there were some firms that didn't hedge at all. And 375 00:21:18,760 --> 00:21:22,119 Speaker 4: in a risk of environment, what typically happens that you 376 00:21:22,520 --> 00:21:25,400 Speaker 4: want to take some chips off the table, and that 377 00:21:25,520 --> 00:21:29,160 Speaker 4: just means reducing your exposure. Yeah, and if you're exposed, 378 00:21:29,320 --> 00:21:33,240 Speaker 4: you know, in this double whammy fashion, you know you 379 00:21:33,280 --> 00:21:36,800 Speaker 4: would actually try and you know, either hedge ex post 380 00:21:37,440 --> 00:21:40,680 Speaker 4: or reduce your exposure. It looks like from the evidence 381 00:21:40,680 --> 00:21:42,840 Speaker 4: that it was very much the expost hedging story. 382 00:21:43,840 --> 00:21:46,960 Speaker 2: So if people are hedging their dollar exposure more than 383 00:21:47,160 --> 00:21:50,639 Speaker 2: perhaps some of them at least used to do, we 384 00:21:50,680 --> 00:21:55,840 Speaker 2: have to worry about things like rollover risk or some 385 00:21:55,880 --> 00:21:59,320 Speaker 2: sort of I guess duration mismatched where you have a 386 00:21:59,400 --> 00:22:02,840 Speaker 2: short term hedge, whether it's a forward or a swap 387 00:22:02,960 --> 00:22:07,000 Speaker 2: or whatever, mismatch to a longer term asset. I mean, 388 00:22:07,040 --> 00:22:09,080 Speaker 2: this is this is what the BIS does on a 389 00:22:09,160 --> 00:22:12,520 Speaker 2: day to day basis, is worry about potential risks so 390 00:22:12,800 --> 00:22:13,720 Speaker 2: are you worried here? 391 00:22:14,560 --> 00:22:18,439 Speaker 4: That's a really great comment, Tracy, And I think this 392 00:22:18,640 --> 00:22:21,719 Speaker 4: was you know where I was going to go next. 393 00:22:22,520 --> 00:22:25,480 Speaker 4: Of course, you have this. You know, once you hedge, 394 00:22:25,520 --> 00:22:28,480 Speaker 4: you've hedged the currency risk at least until the maturity 395 00:22:28,520 --> 00:22:31,640 Speaker 4: of the swap, which is typically you know, one month 396 00:22:31,720 --> 00:22:36,399 Speaker 4: to three months. But it's a short term. It's a 397 00:22:36,440 --> 00:22:40,200 Speaker 4: short term liability that you need to roll over, and 398 00:22:40,280 --> 00:22:42,760 Speaker 4: from time to time you might get caught in a 399 00:22:43,520 --> 00:22:48,879 Speaker 4: liquidity you know, stress episode where it's difficult to source 400 00:22:48,920 --> 00:22:52,000 Speaker 4: the dollars to actually repay. And this was, for example, 401 00:22:52,000 --> 00:22:55,800 Speaker 4: what happened during the GFC. It's also what happened during 402 00:22:55,840 --> 00:23:00,000 Speaker 4: March twenty twenty when there was also a scramble for dollars. 403 00:23:00,880 --> 00:23:04,320 Speaker 4: And you know, when you're a long term investor, you've 404 00:23:04,359 --> 00:23:09,240 Speaker 4: hedged using a short term effect swap, but you're holding 405 00:23:09,480 --> 00:23:13,119 Speaker 4: you know, long term securities, you have a maturity mismatch. 406 00:23:13,280 --> 00:23:16,320 Speaker 4: So either you have to somehow, you know, sell your 407 00:23:16,320 --> 00:23:18,680 Speaker 4: long term assess which is going to be very difficult 408 00:23:18,720 --> 00:23:21,439 Speaker 4: at a fair price, or you have to join the 409 00:23:21,480 --> 00:23:24,760 Speaker 4: scramble for dollars with all the other borrowers of dollars 410 00:23:24,800 --> 00:23:27,320 Speaker 4: in the market and so this is the paradox where 411 00:23:27,480 --> 00:23:29,879 Speaker 4: you know you're a long term investor, but actually you 412 00:23:29,960 --> 00:23:33,840 Speaker 4: have this short term you know, dollar obligation. And so 413 00:23:33,960 --> 00:23:37,679 Speaker 4: you know we are swapping one well, we are actually 414 00:23:37,720 --> 00:23:40,720 Speaker 4: you know, exchanging one type of risk for another. We're 415 00:23:40,760 --> 00:23:47,400 Speaker 4: actually changing currency mismatch for maturity mismatch. And you know, empirically, 416 00:23:47,440 --> 00:23:49,720 Speaker 4: if you look at the evidence over the years, it's 417 00:23:49,800 --> 00:23:52,840 Speaker 4: when the dollar is falling for a long period of 418 00:23:52,880 --> 00:23:58,080 Speaker 4: time that these head ratios become very, very high. So 419 00:23:58,240 --> 00:24:00,119 Speaker 4: you know, a good example is the period before the 420 00:24:00,160 --> 00:24:04,920 Speaker 4: GFC when a dollar was you know, really falling, you know, 421 00:24:05,040 --> 00:24:08,560 Speaker 4: quite considerably. But then what happened at the GFC was 422 00:24:08,600 --> 00:24:11,080 Speaker 4: of course in a dollar really spiked because there was 423 00:24:11,080 --> 00:24:14,159 Speaker 4: a scramble for dollars. So you know, there's always this 424 00:24:14,240 --> 00:24:17,720 Speaker 4: trade off. You either have to beart some currency risk 425 00:24:18,520 --> 00:24:22,840 Speaker 4: or you bear this maturity risk, and then the bear 426 00:24:22,920 --> 00:24:26,240 Speaker 4: this maturity mismatch risk, I should say, and and so 427 00:24:26,640 --> 00:24:30,400 Speaker 4: we you know, it's really you know, changing one type 428 00:24:30,400 --> 00:24:31,159 Speaker 4: of risk or another. 429 00:24:47,160 --> 00:24:51,160 Speaker 3: Tracy really loves currency markets because she loves the fact 430 00:24:51,200 --> 00:24:53,960 Speaker 3: that when the line moves, it's you can never tell 431 00:24:54,000 --> 00:24:57,280 Speaker 3: whether it's the numerator or denominator that's at fault. 432 00:24:57,359 --> 00:25:00,200 Speaker 2: But this is sarcasm, by the way, for those who don't. 433 00:25:00,160 --> 00:25:03,120 Speaker 3: No, I hate you hate currency markets because you never 434 00:25:03,200 --> 00:25:05,760 Speaker 3: know whether we should be telling it's the numertor. 435 00:25:05,440 --> 00:25:07,320 Speaker 2: Do you say the dollar is going down. Someone's going 436 00:25:07,400 --> 00:25:09,119 Speaker 2: to be like, oh no, but it's up against like 437 00:25:09,320 --> 00:25:11,639 Speaker 2: some obscure currency that no one's ever heard of. 438 00:25:11,880 --> 00:25:16,960 Speaker 3: But EM and you mentioned EM and many EM bond 439 00:25:17,040 --> 00:25:20,400 Speaker 3: funds indices and in currency is doing very well. And 440 00:25:20,720 --> 00:25:23,400 Speaker 3: so this gets to the question, is this numerator story 441 00:25:23,440 --> 00:25:26,199 Speaker 3: is it about dollar weekening or is it about so 442 00:25:26,240 --> 00:25:29,159 Speaker 3: we've been talking a lot about financial flows. Has something 443 00:25:29,320 --> 00:25:33,280 Speaker 3: changed though in the sort of underlying economic fundamentals of 444 00:25:33,320 --> 00:25:35,679 Speaker 3: a lot of ems. I've heard some rumblings about this. 445 00:25:35,720 --> 00:25:38,160 Speaker 3: People excited about EMS in a way that I don't 446 00:25:38,160 --> 00:25:40,480 Speaker 3: think they were excited about to the same degree during 447 00:25:40,520 --> 00:25:42,800 Speaker 3: the twenty tens at all. And I just while we 448 00:25:42,800 --> 00:25:44,560 Speaker 3: were chatting, I pulled up a bunch of lines of 449 00:25:44,720 --> 00:25:48,800 Speaker 3: EM related funds currency all doing very well. In your research, 450 00:25:49,160 --> 00:25:53,120 Speaker 3: are there fundamental changes in the EM world that are 451 00:25:53,160 --> 00:25:56,159 Speaker 3: like people are excited about for reasons other than the 452 00:25:56,200 --> 00:25:58,760 Speaker 3: fact that the dollar is week. 453 00:25:59,280 --> 00:26:02,160 Speaker 4: So this is right timely Joe and as it happens. 454 00:26:02,200 --> 00:26:05,879 Speaker 4: On Monday, we published a bulletin exactly on this question. 455 00:26:07,960 --> 00:26:11,440 Speaker 4: Are the emerging markets doing well because of better policy, 456 00:26:11,440 --> 00:26:15,720 Speaker 4: better fundamentals or is it really about the global financial 457 00:26:15,760 --> 00:26:18,439 Speaker 4: market trends? And the short answer is it's a bit 458 00:26:18,480 --> 00:26:22,639 Speaker 4: of both. And you would and you would you know, 459 00:26:22,680 --> 00:26:27,280 Speaker 4: not think of otherwise. Why is it better fundamentals? Well, 460 00:26:27,320 --> 00:26:33,600 Speaker 4: I think it's certainly there's been much better policy, especially 461 00:26:34,240 --> 00:26:40,440 Speaker 4: monetary policy, and also the emerging markets have have really 462 00:26:40,480 --> 00:26:43,200 Speaker 4: been buoyed by actually, you know, the week of dollar, 463 00:26:43,520 --> 00:26:46,560 Speaker 4: the week ofd dollar has been a tailwind for much 464 00:26:46,600 --> 00:26:51,119 Speaker 4: of the year. This is why emerging market assets have really, 465 00:26:51,200 --> 00:26:55,399 Speaker 4: you know, rallied quite hard. And there's a parallel with 466 00:26:55,560 --> 00:26:58,639 Speaker 4: credit spreads as well, because you know, when credit is 467 00:26:58,680 --> 00:27:02,040 Speaker 4: doing well, we also tend to see emerging market as 468 00:27:02,080 --> 00:27:05,920 Speaker 4: it's also doing well. And if we break it down, 469 00:27:06,359 --> 00:27:10,320 Speaker 4: so why would a weakening dollar be a tailwind for 470 00:27:10,359 --> 00:27:13,040 Speaker 4: emerging markets? Well, you know, in the simplest possible case, 471 00:27:13,760 --> 00:27:17,600 Speaker 4: if a borrower has borrowed dollars but then has invested 472 00:27:17,640 --> 00:27:21,119 Speaker 4: in local currency assets, you know, there's this currenty mismatch. 473 00:27:21,280 --> 00:27:23,960 Speaker 4: But then there's a windfall when the when the dollar weekends. 474 00:27:24,000 --> 00:27:26,840 Speaker 4: That's a very simple story. It's probably not the most important. 475 00:27:27,400 --> 00:27:29,679 Speaker 4: But there's another very interesting element here, which has to 476 00:27:29,720 --> 00:27:33,240 Speaker 4: do with the so called risk taking channel. And the 477 00:27:33,280 --> 00:27:36,960 Speaker 4: idea here is if you have a very diversified, you know, 478 00:27:37,040 --> 00:27:41,560 Speaker 4: portfolio of these of the loans to all of these 479 00:27:41,880 --> 00:27:47,160 Speaker 4: current sy mismatch borrowers, the improved credit risk on these 480 00:27:47,200 --> 00:27:50,800 Speaker 4: borrowers really you know, shrinks the tail risk in the 481 00:27:50,840 --> 00:27:54,719 Speaker 4: credit for the you know, for the lender. So if 482 00:27:54,760 --> 00:27:57,440 Speaker 4: you like, the value at risk goes down, and that 483 00:27:57,560 --> 00:28:01,280 Speaker 4: really opens the door to two more credit. So this 484 00:28:01,400 --> 00:28:04,840 Speaker 4: is very very strong relationship between a week of dollar 485 00:28:05,400 --> 00:28:11,520 Speaker 4: and faster growth of dollar denominated credit. And because of 486 00:28:11,800 --> 00:28:16,280 Speaker 4: how important dollar credit is for supply chains, if there's 487 00:28:16,320 --> 00:28:19,399 Speaker 4: any product, if there's any good that out there that 488 00:28:19,480 --> 00:28:24,320 Speaker 4: relies on very complex supply chains, global value chains, those 489 00:28:24,800 --> 00:28:27,160 Speaker 4: products will tend to do very well. And what you've 490 00:28:27,160 --> 00:28:29,800 Speaker 4: seen is actually, in spite of the week of dollar, 491 00:28:29,920 --> 00:28:33,479 Speaker 4: exports have gone up in these very highly sophisticated goods, 492 00:28:34,040 --> 00:28:36,920 Speaker 4: and much more so than the goods that are much 493 00:28:36,920 --> 00:28:40,560 Speaker 4: more affected by just a simple the simple trade effect 494 00:28:40,560 --> 00:28:44,360 Speaker 4: and exchange rate. So semiconductor for example. I mean this 495 00:28:44,440 --> 00:28:47,760 Speaker 4: has been one of the surprises. Clearly there's the AI boom, 496 00:28:47,920 --> 00:28:50,640 Speaker 4: but it's not just that. If you look at semiconductor 497 00:28:51,000 --> 00:28:54,640 Speaker 4: trade exports from Asia that's really been very, very resilient 498 00:28:54,680 --> 00:28:59,240 Speaker 4: this year, and anything that has to do with global 499 00:28:59,240 --> 00:29:02,320 Speaker 4: supply chains you would also see. But there's a you know, 500 00:29:02,320 --> 00:29:04,960 Speaker 4: there's a sting in the tail here because, as we 501 00:29:05,640 --> 00:29:11,600 Speaker 4: talked about earlier, emerging markets increasingly are becoming net creditors 502 00:29:12,040 --> 00:29:16,120 Speaker 4: to the rest of the world, and there was very 503 00:29:16,120 --> 00:29:18,959 Speaker 4: little hedging going on, and so when you're caught in 504 00:29:18,960 --> 00:29:22,320 Speaker 4: one of these down drafts, you get hit both from 505 00:29:22,720 --> 00:29:25,360 Speaker 4: you know, the wiki dollar and also the and also 506 00:29:25,400 --> 00:29:27,040 Speaker 4: the high yields. And so we saw a lot of 507 00:29:27,080 --> 00:29:30,480 Speaker 4: this you know scrambling, you know, back in April. So 508 00:29:31,400 --> 00:29:34,600 Speaker 4: it's primarily a tailwind, and it has been a tailwind 509 00:29:35,080 --> 00:29:38,040 Speaker 4: for a long time. But there is this third element, 510 00:29:38,120 --> 00:29:40,160 Speaker 4: this new element, which I think we need to keep 511 00:29:40,160 --> 00:29:40,560 Speaker 4: an eye on. 512 00:29:41,360 --> 00:29:43,120 Speaker 2: What do you see when you look at the price 513 00:29:43,160 --> 00:29:47,240 Speaker 2: of gold. So we are recording this on October seventeenth. 514 00:29:47,320 --> 00:29:50,320 Speaker 2: It's coming down a tiny bit this morning, but still 515 00:29:50,400 --> 00:29:53,600 Speaker 2: above four thousand dollars an ounce. What is that telling 516 00:29:53,640 --> 00:29:56,920 Speaker 2: you about how investors are feeling about various global currencies 517 00:29:56,920 --> 00:29:57,400 Speaker 2: at the moment. 518 00:29:58,600 --> 00:30:01,480 Speaker 4: Well, Tracy, I mean, we we hear a lot about 519 00:30:01,520 --> 00:30:04,960 Speaker 4: the so called debasement trade, but I think that's probably 520 00:30:05,000 --> 00:30:09,760 Speaker 4: overdoing things. You know, Debasement is really about the value 521 00:30:09,760 --> 00:30:14,360 Speaker 4: of money relative to you know, goods and services. We 522 00:30:14,400 --> 00:30:18,040 Speaker 4: don't really see a surge in inflation. We don't see 523 00:30:18,400 --> 00:30:21,719 Speaker 4: surge in the price of you know, even commodities. I mean, 524 00:30:21,760 --> 00:30:24,320 Speaker 4: look at you know, look at oil, look at other commodities, 525 00:30:24,560 --> 00:30:27,120 Speaker 4: you know, everything other than gold. And so I think 526 00:30:27,200 --> 00:30:31,280 Speaker 4: we should probably look for a more tailored explanation for 527 00:30:31,320 --> 00:30:34,800 Speaker 4: gold other than simply the you know, this broader sort 528 00:30:34,800 --> 00:30:37,800 Speaker 4: of sense of you know, you a flight from you know, 529 00:30:37,840 --> 00:30:40,760 Speaker 4: fiard currencies, and you know, I think one thing which 530 00:30:40,840 --> 00:30:44,360 Speaker 4: goes back to our initial conversation on the role of 531 00:30:44,400 --> 00:30:47,280 Speaker 4: the dollar in the global financial system. Certainly central banks 532 00:30:47,280 --> 00:30:50,480 Speaker 4: have been big buyers of gold, and there has been 533 00:30:50,640 --> 00:30:52,120 Speaker 4: you know that sort of you know, set of very 534 00:30:52,760 --> 00:30:56,000 Speaker 4: sort of firm you know backdrop to you know, to 535 00:30:56,080 --> 00:30:58,720 Speaker 4: the market, and other people have jumped on the bandwagon 536 00:30:59,280 --> 00:31:01,680 Speaker 4: in a way it's actually behaving like a risk asset. 537 00:31:04,160 --> 00:31:06,800 Speaker 4: And the events today and you know, last week as well. 538 00:31:08,080 --> 00:31:12,000 Speaker 4: Rather than there being a flight to gold during stress times, 539 00:31:12,000 --> 00:31:14,760 Speaker 4: what we're seeing is it's behaving a bit like bitcoin 540 00:31:15,800 --> 00:31:19,040 Speaker 4: and the risk asset, So it sort of tells you 541 00:31:19,080 --> 00:31:22,160 Speaker 4: that there's been a little bit more of a speculative element, 542 00:31:22,880 --> 00:31:26,120 Speaker 4: you know, here, but it's certainly behaving in a way 543 00:31:26,200 --> 00:31:29,400 Speaker 4: that's very different from the historical norms. 544 00:31:29,520 --> 00:31:31,760 Speaker 3: You know, for a long time, Trace has talked about this. 545 00:31:32,520 --> 00:31:34,920 Speaker 3: For a long time. You could sort of model the 546 00:31:34,960 --> 00:31:38,360 Speaker 3: price of gold via real rates, and when they're very 547 00:31:38,440 --> 00:31:42,080 Speaker 3: low or suppressed or whatever, gold went up. It kind 548 00:31:42,080 --> 00:31:45,320 Speaker 3: of seemed like it changed not long after Putin had 549 00:31:45,360 --> 00:31:48,040 Speaker 3: a bunch of his money seized. And when you talk 550 00:31:48,080 --> 00:31:51,520 Speaker 3: about central banks accumulating gold, being woken up to the 551 00:31:51,600 --> 00:31:54,000 Speaker 3: fact that your money is never really your money if 552 00:31:54,040 --> 00:31:56,600 Speaker 3: it's in a bank, it seems like it could be 553 00:31:56,640 --> 00:31:57,040 Speaker 3: part of it. 554 00:31:57,160 --> 00:32:00,160 Speaker 4: Well, Joe, I mean, certainly, there are very few assets 555 00:32:00,280 --> 00:32:03,600 Speaker 4: which are not the liabilities of someone of someone, and 556 00:32:03,920 --> 00:32:07,320 Speaker 4: you know, typically whether it's a fixed income instrument or 557 00:32:07,360 --> 00:32:10,760 Speaker 4: an equity, it's someone's liability, so someone has the obligation 558 00:32:10,800 --> 00:32:13,200 Speaker 4: to pay you. And gold is one of those which 559 00:32:13,240 --> 00:32:16,840 Speaker 4: is not the liability of of of of any particular individual. 560 00:32:17,400 --> 00:32:20,320 Speaker 4: I think, you know, when we look back, we can 561 00:32:20,360 --> 00:32:22,520 Speaker 4: see these sort of broad, you know, swings in the 562 00:32:22,520 --> 00:32:25,040 Speaker 4: price of gold. After the breakdown of Bretton Woods in 563 00:32:25,080 --> 00:32:27,240 Speaker 4: the early seventies, you know, there was a brief spike, 564 00:32:27,280 --> 00:32:29,920 Speaker 4: but then we had a very very long period when 565 00:32:30,120 --> 00:32:34,120 Speaker 4: you know, gold wasn't doing very much. I think it's 566 00:32:34,240 --> 00:32:37,760 Speaker 4: probably something even before the Russian invasion of Ukraine, Joe. 567 00:32:38,320 --> 00:32:42,600 Speaker 4: So you know, we've seen the trend where something you know, 568 00:32:43,200 --> 00:32:46,560 Speaker 4: like this has also happened actually a few years back, 569 00:32:46,600 --> 00:32:50,960 Speaker 4: even even before the Russian invasion of Ukrainian twenty two. 570 00:32:51,920 --> 00:32:55,520 Speaker 4: But I think it's you know, this this element, this 571 00:32:55,520 --> 00:33:00,440 Speaker 4: this attribute where it's not the liability of any particular uh, 572 00:33:00,720 --> 00:33:04,120 Speaker 4: you know, legal entity or individual. I think you know 573 00:33:04,440 --> 00:33:07,880 Speaker 4: is giving this a particular Yeah. 574 00:33:07,920 --> 00:33:12,200 Speaker 2: So I'm looking at the top menu on Bloomberg right now, 575 00:33:12,360 --> 00:33:16,960 Speaker 2: and you know, it's feeling a little bit nervy at 576 00:33:16,960 --> 00:33:20,640 Speaker 2: the moment. So the number one story is banks trio 577 00:33:20,800 --> 00:33:24,160 Speaker 2: of alleged frauds, sparksphere of broader issues. So this is 578 00:33:24,200 --> 00:33:27,840 Speaker 2: the idea that this is Jamie Diamond's cockroach idea that 579 00:33:28,280 --> 00:33:31,880 Speaker 2: we're starting to see some losses emerge from either outright 580 00:33:31,920 --> 00:33:34,960 Speaker 2: frauds or just bad investments, and people are starting to 581 00:33:34,960 --> 00:33:37,720 Speaker 2: get a little bit nervous. Do you see any sorts 582 00:33:37,720 --> 00:33:42,360 Speaker 2: of I guess credit oriented concerns out there at the moment? 583 00:33:43,640 --> 00:33:46,440 Speaker 4: Well, Tracy, I mean, certainly this week is a very 584 00:33:47,560 --> 00:33:53,800 Speaker 4: news rich environment. We love you are you are you know, 585 00:33:53,880 --> 00:33:56,560 Speaker 4: contributing to that, and I think it's great. You know, 586 00:33:56,600 --> 00:34:00,200 Speaker 4: we we we hear a lot of these comments, uh, 587 00:34:00,560 --> 00:34:05,400 Speaker 4: you know, on credit. Certainly, credit standards have been eroding 588 00:34:05,480 --> 00:34:08,920 Speaker 4: for a long time, and we have been one of 589 00:34:08,920 --> 00:34:12,360 Speaker 4: the many voices, you know, even before this week, you know, 590 00:34:12,800 --> 00:34:18,640 Speaker 4: just pointing out that credit spreads have fallen to historical lows. 591 00:34:19,080 --> 00:34:22,840 Speaker 4: But if you look at the the trajectory of credit 592 00:34:22,920 --> 00:34:25,520 Speaker 4: to the private sector and compare that to what's been 593 00:34:25,560 --> 00:34:30,799 Speaker 4: happening to government debt there, that really isn't a comparison. 594 00:34:31,000 --> 00:34:35,080 Speaker 4: So it's certainly before the GFC, the big growth was 595 00:34:35,120 --> 00:34:37,600 Speaker 4: in the credit to the private sector, especially in the 596 00:34:37,640 --> 00:34:41,480 Speaker 4: form of mortgages. But after that, what we've seen is 597 00:34:41,640 --> 00:34:46,239 Speaker 4: credits the private sector has really been very subdued, and 598 00:34:46,280 --> 00:34:49,440 Speaker 4: instead it's really been the government in a bond market 599 00:34:49,440 --> 00:34:53,719 Speaker 4: which has grown tremendously now what we're seeing now is 600 00:34:54,719 --> 00:34:57,880 Speaker 4: you know, some signs of the erosion or credit standards, 601 00:34:57,920 --> 00:35:01,040 Speaker 4: you know, coming back to bite. But if you're worried 602 00:35:01,040 --> 00:35:05,040 Speaker 4: about something very systemic, if you're worried about systemic risk, 603 00:35:06,080 --> 00:35:08,480 Speaker 4: the first thing to ask is how fast has this 604 00:35:08,600 --> 00:35:12,320 Speaker 4: grown in the recent past. And typically something that's grown 605 00:35:12,560 --> 00:35:16,040 Speaker 4: very rapidly, will you know, give you some course for concern. 606 00:35:17,239 --> 00:35:21,000 Speaker 4: In this case, the really rapidly growing element has not 607 00:35:21,080 --> 00:35:23,920 Speaker 4: been credit to the private sector. It's been credit to 608 00:35:23,960 --> 00:35:27,400 Speaker 4: the government and in particular the government bond market. So 609 00:35:27,480 --> 00:35:29,120 Speaker 4: we should have you know, we should of course worry 610 00:35:29,120 --> 00:35:32,520 Speaker 4: about you know, these you know, these events, and of 611 00:35:32,520 --> 00:35:35,600 Speaker 4: course the headlines you know create you know, as I said, 612 00:35:35,600 --> 00:35:39,439 Speaker 4: it's a very news rich environment. We hear that, yeah, 613 00:35:39,680 --> 00:35:41,879 Speaker 4: and we hear the same stories in the panels. If 614 00:35:41,920 --> 00:35:45,319 Speaker 4: it's really a concern about, you know, is this the 615 00:35:45,520 --> 00:35:49,560 Speaker 4: precursor to the next you know, systemic crisis, it's probably 616 00:35:50,200 --> 00:35:50,840 Speaker 4: not the case. 617 00:35:51,880 --> 00:35:55,359 Speaker 3: Actually just brings a mind something that I don't think 618 00:35:55,360 --> 00:35:59,120 Speaker 3: I've really asked in such a way before. But another 619 00:35:59,160 --> 00:36:01,480 Speaker 3: thing that's grown a lot is the stock market or 620 00:36:01,520 --> 00:36:02,840 Speaker 3: equity equity markets. 621 00:36:03,000 --> 00:36:03,560 Speaker 4: There was actually a. 622 00:36:03,520 --> 00:36:06,239 Speaker 3: Really good article in the Wall Street Journal several days 623 00:36:06,280 --> 00:36:09,759 Speaker 3: ago about the degree to which equity exposure, at least 624 00:36:09,800 --> 00:36:12,359 Speaker 3: in the US has spread demographically, so a lot many 625 00:36:12,400 --> 00:36:16,239 Speaker 3: more like working class households own stocks than they used to. 626 00:36:16,760 --> 00:36:18,920 Speaker 3: When I think about people who are in the business 627 00:36:18,920 --> 00:36:23,680 Speaker 3: of being worried about financial stability, I don't think the 628 00:36:23,680 --> 00:36:27,000 Speaker 3: stocks are high on their radar. They're called risky assets. 629 00:36:27,000 --> 00:36:29,840 Speaker 3: We all know they're risky, and usually crises don't emerge 630 00:36:29,880 --> 00:36:33,720 Speaker 3: from assets that we all agree are risky. Crises emerge 631 00:36:33,760 --> 00:36:36,120 Speaker 3: from assets that we think are going to be redeemed 632 00:36:36,160 --> 00:36:38,640 Speaker 3: from a dollar's worth we're going to get a dollars 633 00:36:38,680 --> 00:36:41,560 Speaker 3: back or whatever, or worried about getting back at all. 634 00:36:41,760 --> 00:36:45,359 Speaker 3: But I'm curious, from the perspective of someone who professionally 635 00:36:45,400 --> 00:36:50,320 Speaker 3: maybe worries, how do you and your colleagues think about 636 00:36:50,440 --> 00:36:56,040 Speaker 3: equity exposure, especially given the widespread view that equity exposure 637 00:36:56,200 --> 00:36:59,040 Speaker 3: is fueling consumption in the United States, a driver of 638 00:36:59,080 --> 00:37:01,920 Speaker 3: the economy, that there's a lot of speculative acts, Like 639 00:37:02,200 --> 00:37:05,600 Speaker 3: is there much modeling work being done on equity and 640 00:37:05,719 --> 00:37:09,399 Speaker 3: risky assets specifically as a source of broader risk? 641 00:37:10,160 --> 00:37:12,839 Speaker 4: Absolutely, I think I think the you know, the main 642 00:37:12,920 --> 00:37:17,719 Speaker 4: channel would be through the real economy, through through real 643 00:37:17,800 --> 00:37:21,880 Speaker 4: economic activity, rather than through let's say a de leveraging 644 00:37:21,960 --> 00:37:25,200 Speaker 4: episode or an equidity episode. I think it's worth thinking 645 00:37:25,239 --> 00:37:29,360 Speaker 4: back to the dot com bubble of two thousand. You know, 646 00:37:29,400 --> 00:37:31,799 Speaker 4: that was a period, of course when the valuations were 647 00:37:31,840 --> 00:37:36,480 Speaker 4: even more extreme, and when the stock market fell in 648 00:37:36,560 --> 00:37:41,040 Speaker 4: two thousand, of course we did see some effect, and 649 00:37:41,120 --> 00:37:45,399 Speaker 4: of course a lot of investors lost money, but there 650 00:37:45,440 --> 00:37:47,799 Speaker 4: was nothing like the same kind of impact on the 651 00:37:47,840 --> 00:37:52,399 Speaker 4: real economy that we had with the GFC. And very 652 00:37:52,400 --> 00:37:55,760 Speaker 4: simplistic way of putting this is whenever you have debt 653 00:37:56,080 --> 00:37:59,640 Speaker 4: of various kinds, that's when you should be worried, because, 654 00:38:00,520 --> 00:38:03,880 Speaker 4: as you said, it's when you're promised one dollar but 655 00:38:03,920 --> 00:38:07,399 Speaker 4: then you don't deliver. That's when you know there are 656 00:38:07,600 --> 00:38:11,160 Speaker 4: sort of ripercussions throughout the economy. Now, clearly with the 657 00:38:11,200 --> 00:38:14,560 Speaker 4: equity markets, there are wealth effects. So you know, if 658 00:38:14,600 --> 00:38:17,680 Speaker 4: you have a very large portfolio, you feel richer and 659 00:38:17,719 --> 00:38:19,759 Speaker 4: then you spend more, and so there is a real 660 00:38:19,800 --> 00:38:23,640 Speaker 4: economy effect of the stock market. And so if we 661 00:38:23,680 --> 00:38:27,240 Speaker 4: see a pullback in the stock market, very sustained pullback, 662 00:38:27,480 --> 00:38:30,640 Speaker 4: we will see some effect like that. Now, the estimates 663 00:38:30,680 --> 00:38:33,400 Speaker 4: of the wealth effect on consumption, for example, has varied 664 00:38:33,560 --> 00:38:37,640 Speaker 4: over the years, but given the if you like, the 665 00:38:37,680 --> 00:38:42,680 Speaker 4: democratization of stocks, we could expect a slightly larger magnitudes. 666 00:38:42,719 --> 00:38:45,520 Speaker 4: But on the scale of things, that effect tends to 667 00:38:45,520 --> 00:38:49,040 Speaker 4: be very small compared to the kinds of effects that 668 00:38:49,120 --> 00:38:51,680 Speaker 4: are associated with de leveraging episodes. 669 00:38:52,239 --> 00:38:54,600 Speaker 2: Do you see any pockets of leverage out there that 670 00:38:54,640 --> 00:38:56,280 Speaker 2: aren't getting enough attention at the moment? 671 00:38:57,239 --> 00:38:59,480 Speaker 4: Well, I think you're very good at shining a light 672 00:38:59,520 --> 00:39:02,480 Speaker 4: on those all those pockets. Actually, I think probably, I 673 00:39:02,520 --> 00:39:05,400 Speaker 4: don't think I can really say anything here that you 674 00:39:05,480 --> 00:39:09,720 Speaker 4: haven't heard of, but I think it's certainly worth bearing 675 00:39:09,760 --> 00:39:12,840 Speaker 4: in mind the broad magnitudes. Yeah, in one of the 676 00:39:12,840 --> 00:39:15,680 Speaker 4: things that we've you know, we've talked about a lot 677 00:39:15,680 --> 00:39:20,280 Speaker 4: this year in our various official publications is the fact 678 00:39:20,360 --> 00:39:24,120 Speaker 4: that even you know, safe acets can be a source 679 00:39:24,200 --> 00:39:27,040 Speaker 4: of stress in the market, because it's not default that 680 00:39:27,960 --> 00:39:31,479 Speaker 4: you know, propagates stress. It's more than de leveraging. I think, 681 00:39:32,200 --> 00:39:36,200 Speaker 4: you know, if let's say, long rates were to you know, 682 00:39:36,280 --> 00:39:40,360 Speaker 4: shoot up, and therefore mortgage rates also shoot up, you know, 683 00:39:40,400 --> 00:39:42,640 Speaker 4: that would be a really big deal for the real economy, 684 00:39:42,880 --> 00:39:45,400 Speaker 4: and that would happen even without any defaults. 685 00:39:45,719 --> 00:39:47,760 Speaker 3: By the way, when we started this conversation, the tenure 686 00:39:47,920 --> 00:39:52,000 Speaker 3: was below four percent. It's above it now. So keeping 687 00:39:52,000 --> 00:39:53,960 Speaker 3: our listeners up to date on what's going on in 688 00:39:53,960 --> 00:39:56,920 Speaker 3: the treasury market. October seventeenth, twenty twenty. 689 00:39:56,719 --> 00:39:59,400 Speaker 2: Five, very good. I mean, the other interesting thing is 690 00:39:59,480 --> 00:40:02,120 Speaker 2: if all the acting like a speculative asset, Now, what 691 00:40:02,280 --> 00:40:04,920 Speaker 2: happens when all of that starts reversing and you know, 692 00:40:04,960 --> 00:40:07,200 Speaker 2: the thing that you thought was worth four thousand dollars 693 00:40:07,360 --> 00:40:09,600 Speaker 2: is no longer worth four thousand dollars, and gold is 694 00:40:09,640 --> 00:40:11,440 Speaker 2: typically used as collateral. 695 00:40:11,680 --> 00:40:13,960 Speaker 3: I always say, you know, it's really scary when you 696 00:40:14,000 --> 00:40:16,520 Speaker 3: see people like intensely buying gold because like what's up? 697 00:40:16,560 --> 00:40:16,719 Speaker 4: Like what? 698 00:40:17,080 --> 00:40:20,120 Speaker 3: But what's really scary is why they start selling, right, 699 00:40:20,239 --> 00:40:23,080 Speaker 3: Because again, no, you's true, right, because actually no one 700 00:40:23,120 --> 00:40:25,279 Speaker 3: has you have to be a real psychic have a 701 00:40:25,280 --> 00:40:28,840 Speaker 3: gold denominated mortgage, you have dollar denominated mortgages, et cetera. 702 00:40:29,160 --> 00:40:31,960 Speaker 3: And so when you see like usually one of those 703 00:40:31,960 --> 00:40:34,800 Speaker 3: things you notice is that in a real credit event, 704 00:40:34,840 --> 00:40:37,439 Speaker 3: when you really get that vic spike and people are 705 00:40:37,480 --> 00:40:40,360 Speaker 3: really worried about making that payment on their mortgage, and 706 00:40:40,400 --> 00:40:43,680 Speaker 3: they're really worried about paying their monthly subscription to their 707 00:40:43,680 --> 00:40:46,919 Speaker 3: Bloomberg terminal. They need dollars and then they sell gold 708 00:40:46,920 --> 00:40:48,279 Speaker 3: and you're like, oh, things are getting really. 709 00:40:48,239 --> 00:40:49,920 Speaker 2: Rough, all right. 710 00:40:49,960 --> 00:40:54,080 Speaker 3: I think that was a comment, that question comment not 711 00:40:54,120 --> 00:40:54,800 Speaker 3: even a question. 712 00:40:55,400 --> 00:40:58,640 Speaker 2: Thank you Joe for your comment. And it's always lovely 713 00:40:58,719 --> 00:41:01,319 Speaker 2: catching up. This is been fantastic. Thank you so much 714 00:41:01,360 --> 00:41:02,439 Speaker 2: for coming back on the show. 715 00:41:02,600 --> 00:41:04,680 Speaker 4: Thank you very much, tra Sick, and thank you Jeff, 716 00:41:04,719 --> 00:41:05,359 Speaker 4: Thank you so much. 717 00:41:05,360 --> 00:41:05,919 Speaker 3: As us. 718 00:41:18,640 --> 00:41:20,759 Speaker 2: Joe, I always enjoy catching up with him. He has 719 00:41:20,800 --> 00:41:23,240 Speaker 2: a fantastic way of explaining things in a very soothing, 720 00:41:23,440 --> 00:41:29,080 Speaker 2: calming manner. I do think so. Nuance is important, absolutely, 721 00:41:29,120 --> 00:41:32,520 Speaker 2: and technicalities in the market are important. So if the 722 00:41:32,680 --> 00:41:36,800 Speaker 2: dollar going down is being exacerbated by hedging versus people 723 00:41:36,840 --> 00:41:40,399 Speaker 2: selling dollars outright, that is an important thing to talk 724 00:41:40,400 --> 00:41:44,600 Speaker 2: about and to capture. However, I still feel like the 725 00:41:44,640 --> 00:41:48,720 Speaker 2: direction of travel is not fantastic for the dollar itself. 726 00:41:48,760 --> 00:41:51,439 Speaker 2: If people are treating dollar assets the way they used 727 00:41:51,440 --> 00:41:55,480 Speaker 2: to treat local em bonds in terms of hedging, that exposure, Yeah, 728 00:41:55,520 --> 00:41:58,200 Speaker 2: that doesn't seem great necessarily for the US. 729 00:41:58,280 --> 00:42:01,120 Speaker 3: I mean no, I mean, look, it's sort of you know, 730 00:42:01,160 --> 00:42:03,239 Speaker 3: I think of a currency as sort of like being 731 00:42:03,239 --> 00:42:06,520 Speaker 3: the token at Chuck E Cheese, you know, and you 732 00:42:06,560 --> 00:42:08,640 Speaker 3: want to play the games. But it was really nice 733 00:42:08,680 --> 00:42:10,680 Speaker 3: of like the token is going up and you can 734 00:42:10,719 --> 00:42:12,040 Speaker 3: play the games at. 735 00:42:12,320 --> 00:42:14,440 Speaker 2: Play more games, or eat more pizza. 736 00:42:14,200 --> 00:42:16,719 Speaker 3: Or or eat more pizza. But I think we're in 737 00:42:16,719 --> 00:42:20,160 Speaker 3: this situation where people want to keep playing the games, 738 00:42:20,560 --> 00:42:22,680 Speaker 3: they just don't really like the whole arcade. 739 00:42:23,280 --> 00:42:25,360 Speaker 2: And yeah, yeah, this. 740 00:42:25,280 --> 00:42:27,160 Speaker 3: Is this is the way I think about it. The 741 00:42:27,200 --> 00:42:30,040 Speaker 3: games are still fun, it's just that you're worried about 742 00:42:30,080 --> 00:42:31,200 Speaker 3: the direction of the arcade. 743 00:42:31,320 --> 00:42:31,600 Speaker 4: Yeah. 744 00:42:31,920 --> 00:42:35,680 Speaker 3: And so I think, because this is why, you know, 745 00:42:35,840 --> 00:42:37,840 Speaker 3: like how are you getting You're not going to like 746 00:42:37,880 --> 00:42:39,960 Speaker 3: do business in the United States, give me a break. 747 00:42:40,000 --> 00:42:43,080 Speaker 3: That's completely unrealistic, even if you don't like if you 748 00:42:43,120 --> 00:42:45,759 Speaker 3: put it the direction of travel. And so I think 749 00:42:45,800 --> 00:42:48,600 Speaker 3: sort of intuitively you could sort of understand why I 750 00:42:48,600 --> 00:42:50,400 Speaker 3: don't want to leave town. I just don't want to 751 00:42:50,440 --> 00:42:51,719 Speaker 3: have arcade exposure. 752 00:42:52,040 --> 00:42:55,520 Speaker 2: Absolutely. I guess what we kind of need. We need 753 00:42:55,560 --> 00:42:57,919 Speaker 2: another big crisis so that we can observe what gold 754 00:42:58,040 --> 00:43:00,520 Speaker 2: does during that time. Yeah, and also what the dollar 755 00:43:00,600 --> 00:43:01,640 Speaker 2: does during that time. 756 00:43:01,719 --> 00:43:03,879 Speaker 3: I think I'm gonna run with this our actually I'm 757 00:43:03,880 --> 00:43:04,200 Speaker 3: gonna win. 758 00:43:04,280 --> 00:43:06,400 Speaker 2: It's a really good analogy because like, if. 759 00:43:06,239 --> 00:43:08,440 Speaker 3: You think like or you know, Chuck E Cheese has 760 00:43:08,480 --> 00:43:10,560 Speaker 3: a lot of fun games. But also I don't really 761 00:43:10,600 --> 00:43:12,799 Speaker 3: think the business swallow Chuck E Cheese. It's like that 762 00:43:12,960 --> 00:43:14,680 Speaker 3: good like how dare you? 763 00:43:15,000 --> 00:43:15,160 Speaker 4: Well? 764 00:43:15,200 --> 00:43:17,400 Speaker 3: A lot of them have closed out, but it doesn't 765 00:43:17,400 --> 00:43:19,120 Speaker 3: mean the games inside were less fun. So I don't 766 00:43:19,120 --> 00:43:21,239 Speaker 3: want to hold those tokens in my pocket forever. I 767 00:43:21,280 --> 00:43:23,319 Speaker 3: want to have exposure in case they go they go 768 00:43:23,440 --> 00:43:25,759 Speaker 3: to business or something like. That doesn't make the games 769 00:43:25,840 --> 00:43:29,520 Speaker 3: less fun in the meantime. And you've solved this problem 770 00:43:29,560 --> 00:43:31,560 Speaker 3: of wanting to play the games but being worried about 771 00:43:31,600 --> 00:43:33,319 Speaker 3: the future of Chuck E Cheese by hedging them. 772 00:43:33,800 --> 00:43:36,520 Speaker 2: I'm going to restart Chuck E Cheese and roll it 773 00:43:36,560 --> 00:43:39,560 Speaker 2: out across the country, just to ruin your analogy, your 774 00:43:39,800 --> 00:43:42,200 Speaker 2: preferred market analogy. No, I think it's a good one. 775 00:43:42,480 --> 00:43:45,840 Speaker 3: Thank you. Finally all right, but I will not be 776 00:43:45,920 --> 00:43:48,560 Speaker 3: taking out Chuck E Cheese denominated well, no, so that 777 00:43:48,600 --> 00:43:50,439 Speaker 3: would be the great thing. If you could imagine getting 778 00:43:50,440 --> 00:43:53,160 Speaker 3: a Chuck E Cheese token denominated mortgage and then it 779 00:43:53,160 --> 00:43:55,000 Speaker 3: goes out of business. You don't even have to pay back. 780 00:43:55,160 --> 00:43:55,319 Speaker 1: You know. 781 00:43:55,360 --> 00:43:58,160 Speaker 2: I'm pretty sure somewhere in like a box somewhere I 782 00:43:58,200 --> 00:44:00,200 Speaker 2: still have a bunch of like Chuck E Cheese, these 783 00:44:00,280 --> 00:44:03,120 Speaker 2: tickets or something like that. Maybe I should take them 784 00:44:03,120 --> 00:44:04,440 Speaker 2: out anyway. 785 00:44:04,719 --> 00:44:07,960 Speaker 3: So this is another interesting question because what is the 786 00:44:08,000 --> 00:44:10,320 Speaker 3: exchange ratio between a token and a ticket? 787 00:44:10,520 --> 00:44:11,279 Speaker 4: Right? Yeah? 788 00:44:11,680 --> 00:44:12,520 Speaker 2: And I don't know. 789 00:44:12,600 --> 00:44:15,440 Speaker 3: This is sort of like one of those communist countries, Chucky. 790 00:44:16,120 --> 00:44:18,799 Speaker 3: This is a paper that someone write, Chuck E che 791 00:44:19,320 --> 00:44:23,480 Speaker 3: is the dual circulation economy in which they have tokens 792 00:44:23,520 --> 00:44:26,600 Speaker 3: for the games and tickets for the prizes, and how 793 00:44:26,640 --> 00:44:29,640 Speaker 3: they manage that exchange ratio is very similar to us 794 00:44:29,640 --> 00:44:30,560 Speaker 3: a planned economy. 795 00:44:30,800 --> 00:44:32,680 Speaker 2: Do you think I can find someone to provide like 796 00:44:32,719 --> 00:44:36,560 Speaker 2: a swap on a token versus a ticket or something. 797 00:44:36,640 --> 00:44:38,120 Speaker 3: I think there's something here. I think we're I think 798 00:44:38,120 --> 00:44:39,760 Speaker 3: we're hitting on something important. 799 00:44:39,920 --> 00:44:42,120 Speaker 2: Okay, I think we should end. We should leave it there, 800 00:44:42,760 --> 00:44:45,640 Speaker 2: all right. This has been another episode of the Authoughts podcast. 801 00:44:45,719 --> 00:44:48,440 Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway. 802 00:44:48,640 --> 00:44:51,240 Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart. 803 00:44:51,400 --> 00:44:54,799 Speaker 3: Follow our producers Carmen Rodriguez at Carman armand dash Ol 804 00:44:54,800 --> 00:44:58,399 Speaker 3: Bennett at dashbot and Kelbrooks at Kelbrooks. 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