1 00:00:11,080 --> 00:00:14,240 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast. 2 00:00:14,320 --> 00:00:18,360 Speaker 1: I'm Tracy Alloway. My co host Joe Wisenthal is away, 3 00:00:18,640 --> 00:00:20,680 Speaker 1: and if I could just begin the show with a 4 00:00:20,720 --> 00:00:24,400 Speaker 1: small disclaimer, which is that apparently I have broken my 5 00:00:24,440 --> 00:00:27,159 Speaker 1: foot in three different places. So if I sound a 6 00:00:27,160 --> 00:00:31,000 Speaker 1: little bit distracted today, that is why. Um Now, speaking 7 00:00:31,080 --> 00:00:34,920 Speaker 1: of difficult situations, you all know are all Thoughts listeners 8 00:00:35,000 --> 00:00:39,280 Speaker 1: are aware that the debt ceiling drama continues in the States. 9 00:00:39,920 --> 00:00:42,960 Speaker 1: Joe and I just recorded an episode on the Mint 10 00:00:43,040 --> 00:00:45,760 Speaker 1: the coin debate, which is one idea of how to 11 00:00:45,960 --> 00:00:49,280 Speaker 1: bypass the debt limit on a temporary basis at least. 12 00:00:49,720 --> 00:00:53,160 Speaker 1: But I think it's fair to say that there are 13 00:00:53,280 --> 00:00:56,760 Speaker 1: a lot of challenges out there at the moment, especially 14 00:00:57,120 --> 00:01:00,800 Speaker 1: for the Federal Reserve the Central Bank. So not only 15 00:01:00,840 --> 00:01:05,040 Speaker 1: are they still trying to navigate an unprecedented economic cycle 16 00:01:05,240 --> 00:01:09,240 Speaker 1: in the wake of the global pandemic, but they're also 17 00:01:09,360 --> 00:01:13,160 Speaker 1: now having to deal with higher inflation to decide whether 18 00:01:13,240 --> 00:01:16,400 Speaker 1: or not it is indeed transitory. And meanwhile they are 19 00:01:16,440 --> 00:01:20,960 Speaker 1: also facing the fallout from what's going on in d C. 20 00:01:21,280 --> 00:01:24,959 Speaker 1: So every time there is the sort of debt ceiling brinkmanship, 21 00:01:25,400 --> 00:01:29,559 Speaker 1: we generally see some feed through into the treasury market, 22 00:01:29,680 --> 00:01:33,000 Speaker 1: you know, money market funds stop buying up short term 23 00:01:33,120 --> 00:01:36,600 Speaker 1: bills around the date, the so called drop dead date 24 00:01:37,040 --> 00:01:39,520 Speaker 1: that the US is actually supposed to run out of money, 25 00:01:39,520 --> 00:01:41,560 Speaker 1: and the FED has to figure out all these different 26 00:01:41,600 --> 00:01:44,720 Speaker 1: ways to try to keep things going along with the 27 00:01:44,760 --> 00:01:48,320 Speaker 1: treasury while the politicians do get out. Um, so there 28 00:01:48,360 --> 00:01:50,280 Speaker 1: was a lot going on in the FED. I haven't 29 00:01:50,320 --> 00:01:53,559 Speaker 1: even mentioned the insider trading scandal, but that of course 30 00:01:53,640 --> 00:01:55,960 Speaker 1: is an issue as well. Suffice it to say, the 31 00:01:56,000 --> 00:01:59,760 Speaker 1: Central Bank faces many, many challenges, and today I am 32 00:02:00,120 --> 00:02:01,840 Speaker 1: very happy to say we are going to be speaking 33 00:02:01,880 --> 00:02:05,640 Speaker 1: with the perfect person to discuss some of those issues. 34 00:02:05,720 --> 00:02:08,360 Speaker 1: It's someone who actually used to work at the FED 35 00:02:08,480 --> 00:02:11,959 Speaker 1: as a trader, and he runs a blog right now 36 00:02:12,160 --> 00:02:15,400 Speaker 1: called fed Guy, and it's one of my favorite reads. 37 00:02:15,440 --> 00:02:17,520 Speaker 1: I highly suggest you check it out if you haven't 38 00:02:17,560 --> 00:02:22,200 Speaker 1: been reading it already. Joseph Wang, Welcome to the show. Hi, Tracy, 39 00:02:22,360 --> 00:02:23,840 Speaker 1: thanks so much for in biding me. I'm through it 40 00:02:23,919 --> 00:02:26,560 Speaker 1: to be here. Oh, thank you so much for coming on. Um, 41 00:02:26,639 --> 00:02:28,399 Speaker 1: Joe and I have wanted to get you on for 42 00:02:28,440 --> 00:02:30,919 Speaker 1: a long time, so I'm happy you could make it 43 00:02:31,840 --> 00:02:36,080 Speaker 1: maybe just to begin with, could you describe your background 44 00:02:36,160 --> 00:02:39,120 Speaker 1: at the FED? What exactly where are you doing there? Sure, 45 00:02:39,160 --> 00:02:41,240 Speaker 1: I worked on the Open Markets desk at the New 46 00:02:41,280 --> 00:02:44,399 Speaker 1: York FED, and so what the open market that's does. 47 00:02:44,440 --> 00:02:48,480 Speaker 1: It's basically the FEDS trading desks, so we conduct operations UM. 48 00:02:48,600 --> 00:02:50,919 Speaker 1: So all the QUI O, the REPO operations are done 49 00:02:50,960 --> 00:02:53,960 Speaker 1: by the desk. I focus on money markets, so I 50 00:02:54,040 --> 00:02:57,120 Speaker 1: run the repo operations, and I studied the banking system. 51 00:02:57,560 --> 00:02:59,160 Speaker 1: A lot of my work has to do with setting 52 00:02:59,200 --> 00:03:02,560 Speaker 1: how the financial system works, money market funds, just the 53 00:03:02,560 --> 00:03:05,840 Speaker 1: plumbing of the system basically. So when we have something 54 00:03:05,880 --> 00:03:09,880 Speaker 1: like a debt ceiling crisis, do you start getting flashbacks 55 00:03:09,880 --> 00:03:13,359 Speaker 1: to previous episodes. Well, I think one of the main 56 00:03:13,400 --> 00:03:15,959 Speaker 1: mechanisms of the dead ceiling does impact the markets is 57 00:03:16,000 --> 00:03:19,240 Speaker 1: through the money markets. So yes, that's probably the direct 58 00:03:19,240 --> 00:03:21,920 Speaker 1: way that the death ceiling impacts UM. And you can 59 00:03:21,960 --> 00:03:23,720 Speaker 1: see it right now. Actually, if you look at the 60 00:03:23,800 --> 00:03:26,239 Speaker 1: short term builder, if you can already see bills that 61 00:03:26,360 --> 00:03:29,720 Speaker 1: mature around the job dead date are selling off quite 62 00:03:29,720 --> 00:03:32,600 Speaker 1: a bit. So usually you see market impacts first the 63 00:03:32,639 --> 00:03:34,840 Speaker 1: money market sector when it comes to the debt ceiling. 64 00:03:35,760 --> 00:03:38,680 Speaker 1: So how do you think money markets and I guess 65 00:03:38,720 --> 00:03:43,320 Speaker 1: the wider treasury market should feel about debt ceilings and 66 00:03:43,400 --> 00:03:47,080 Speaker 1: this kind of political brinkmanship. And the reason I asked 67 00:03:47,120 --> 00:03:49,440 Speaker 1: that is because you know, we we do tend to 68 00:03:49,480 --> 00:03:53,360 Speaker 1: see these bouts of debt ceiling drama every once in 69 00:03:53,400 --> 00:03:55,680 Speaker 1: a while, or at least you know, in recent years, 70 00:03:55,720 --> 00:03:58,640 Speaker 1: we've seen them every once in a while. But on 71 00:03:58,680 --> 00:04:01,040 Speaker 1: the other hand, you know, when it gets really bad, 72 00:04:01,120 --> 00:04:04,640 Speaker 1: we tend to see treasuries rally because people go into 73 00:04:05,040 --> 00:04:07,960 Speaker 1: safe haven assets, and treasuries are still considered that even 74 00:04:08,000 --> 00:04:11,120 Speaker 1: if the cause of market turmoil is because of the 75 00:04:11,200 --> 00:04:14,080 Speaker 1: US itself, which is kind of ironic, But how do 76 00:04:14,120 --> 00:04:17,599 Speaker 1: you think treasuries feel about these sorts of issues and 77 00:04:17,760 --> 00:04:22,880 Speaker 1: has it evolved in recent years? So you're exactly right, 78 00:04:23,200 --> 00:04:25,720 Speaker 1: And I think that the way that I would think 79 00:04:25,760 --> 00:04:28,120 Speaker 1: about this is that I think overall, of course, the 80 00:04:28,160 --> 00:04:31,760 Speaker 1: investment community understands that this is a passing thing. The U. S. 81 00:04:31,800 --> 00:04:33,919 Speaker 1: Treasury has a printing press, right, so they can always 82 00:04:34,000 --> 00:04:37,479 Speaker 1: make their obligations. But on a more nuts on both sides, 83 00:04:37,680 --> 00:04:40,520 Speaker 1: there are classes of investors that are not able or 84 00:04:40,640 --> 00:04:44,120 Speaker 1: constrained in their holdings of things that are defaulted, most 85 00:04:44,160 --> 00:04:46,559 Speaker 1: notably the four point five true and dollar money market 86 00:04:46,600 --> 00:04:50,640 Speaker 1: fund complex. So under the regulations, they are highly constrained 87 00:04:50,720 --> 00:04:53,840 Speaker 1: in holding defaulted securities, and they also don't want they 88 00:04:54,320 --> 00:04:55,640 Speaker 1: don't want to be able to They want to be 89 00:04:55,680 --> 00:04:58,200 Speaker 1: able to tell their clients when they clients read about 90 00:04:58,200 --> 00:05:01,000 Speaker 1: the dead selling on the US that you know, we're 91 00:05:01,040 --> 00:05:03,320 Speaker 1: not exposed to this at all. So even though I 92 00:05:03,320 --> 00:05:06,080 Speaker 1: think the investment community understands that this is the passing thing, 93 00:05:06,400 --> 00:05:08,760 Speaker 1: there are mandate constraints that come into play, and that's 94 00:05:08,760 --> 00:05:11,000 Speaker 1: why you still actually see sell offs in the in 95 00:05:11,040 --> 00:05:15,040 Speaker 1: the short term turchy markets. Addition, I think that we've 96 00:05:15,080 --> 00:05:16,960 Speaker 1: been through the death seeing a few times over the 97 00:05:17,000 --> 00:05:20,040 Speaker 1: past decade, and what we can learn from a lot 98 00:05:20,080 --> 00:05:23,400 Speaker 1: of public documents that were either disclosed by the FED 99 00:05:23,560 --> 00:05:26,720 Speaker 1: or through subpoenas that the official sector actually has a 100 00:05:27,080 --> 00:05:29,640 Speaker 1: lot of plans just just to avoid and you fall 101 00:05:29,680 --> 00:05:32,800 Speaker 1: out in the trojan market. So it would be I 102 00:05:32,839 --> 00:05:35,440 Speaker 1: think reasonable to not for the trogury market to not 103 00:05:35,520 --> 00:05:37,760 Speaker 1: be too much afraid of the dead sailing um. But 104 00:05:37,880 --> 00:05:41,760 Speaker 1: a lot of these backup plans do have economic impacts, 105 00:05:41,880 --> 00:05:43,760 Speaker 1: and so it's not in reasonable for the troges to 106 00:05:43,760 --> 00:05:47,000 Speaker 1: actually rally in that context. Well, so one of the 107 00:05:47,080 --> 00:05:50,359 Speaker 1: things I want to ask you is how much the 108 00:05:50,560 --> 00:05:53,680 Speaker 1: r r P, the reverse repot program might make a 109 00:05:53,720 --> 00:05:56,880 Speaker 1: difference this time around. So you know, we know that 110 00:05:56,960 --> 00:06:00,320 Speaker 1: the Fed has been running this UM. Recently, they they 111 00:06:00,480 --> 00:06:03,839 Speaker 1: upped the amount that they could take. I can't remember 112 00:06:03,880 --> 00:06:08,000 Speaker 1: what it was. What the cap is now, do you remember? Yeah, 113 00:06:08,000 --> 00:06:11,080 Speaker 1: it's a hun sixty billion per counterparty. So earlier in 114 00:06:11,120 --> 00:06:12,760 Speaker 1: the year it was thirty billion, and then was up 115 00:06:12,760 --> 00:06:15,239 Speaker 1: to eighty and now it's too un sixty But in practice, though, 116 00:06:15,400 --> 00:06:17,920 Speaker 1: I would just think a bit as a full lotment facility, 117 00:06:17,960 --> 00:06:21,039 Speaker 1: So there really is no limit. So one of the 118 00:06:21,080 --> 00:06:25,960 Speaker 1: reasons they've raised it is in preparation, presumably for money 119 00:06:25,960 --> 00:06:28,600 Speaker 1: market funds having to move into this thing because they 120 00:06:28,640 --> 00:06:31,640 Speaker 1: have to avoid bills or they're unable to buy bills 121 00:06:31,680 --> 00:06:34,680 Speaker 1: because Treasury can't issue them. UM. So how much does 122 00:06:34,720 --> 00:06:37,520 Speaker 1: that help in a scenario like this? I think it 123 00:06:37,560 --> 00:06:41,400 Speaker 1: helps tremendously in terms of rate control. So heading into 124 00:06:41,400 --> 00:06:43,120 Speaker 1: the debt seling, one of the ways that the US 125 00:06:43,160 --> 00:06:47,080 Speaker 1: Treasure prepares is by paying down bills. The way they 126 00:06:47,120 --> 00:06:49,680 Speaker 1: manage your debt is they have they manage under a 127 00:06:49,760 --> 00:06:53,040 Speaker 1: regular and predictable issue and schedule, and in practice that 128 00:06:53,080 --> 00:06:57,039 Speaker 1: means maintaining coupon issuants as much as they can and 129 00:06:57,120 --> 00:06:59,920 Speaker 1: meeting short term cash flows through bill issuants. If you 130 00:07:00,120 --> 00:07:02,880 Speaker 1: think back last March when we suddenly had a lot 131 00:07:02,960 --> 00:07:06,240 Speaker 1: of emergency COVID expenditures, what happened is that they met 132 00:07:06,240 --> 00:07:10,880 Speaker 1: those expenditures issuing two trillion dollars in bills. Now in 133 00:07:10,920 --> 00:07:13,240 Speaker 1: the same way as we're heading into dead selling and 134 00:07:13,280 --> 00:07:15,880 Speaker 1: they're trying to maintain space on the dead selling, what 135 00:07:15,920 --> 00:07:18,160 Speaker 1: they're doing is the reducing the amount of bill issuance 136 00:07:18,280 --> 00:07:21,520 Speaker 1: to reduce the amount of dead outstanding. The main investors 137 00:07:21,600 --> 00:07:24,400 Speaker 1: in the bill markets are the money market funds, and 138 00:07:24,480 --> 00:07:27,280 Speaker 1: now that money market funds don't have as many bills 139 00:07:27,280 --> 00:07:29,560 Speaker 1: to invest in, there's a buffer there where they can 140 00:07:29,640 --> 00:07:34,080 Speaker 1: invest in the overnight reverse reple operation that helps us 141 00:07:34,080 --> 00:07:38,120 Speaker 1: that maintain rates even as the amount investments available in 142 00:07:38,120 --> 00:07:41,760 Speaker 1: the money market space decreases. Without the overnight report facility, 143 00:07:42,240 --> 00:07:45,400 Speaker 1: I think short term rates would definitely be below zero. 144 00:07:46,360 --> 00:07:48,920 Speaker 1: How much does it matter that the Fed now pays 145 00:07:49,040 --> 00:07:51,760 Speaker 1: interest on our rps, because I remember that was a 146 00:07:51,800 --> 00:07:54,680 Speaker 1: big deal in the summer when they started to do that, 147 00:07:54,720 --> 00:07:58,360 Speaker 1: I think it was an extra five basis points UM 148 00:07:58,480 --> 00:08:01,600 Speaker 1: something like that. Five base points, whereas previously they had 149 00:08:01,640 --> 00:08:04,960 Speaker 1: been paying almost nothing. But why the need to do 150 00:08:05,000 --> 00:08:08,400 Speaker 1: that and how much UM? Did that sort of change 151 00:08:08,440 --> 00:08:12,080 Speaker 1: things for money market funds? So the reverse report facility 152 00:08:12,160 --> 00:08:14,280 Speaker 1: is one of the fed's key tools for short term 153 00:08:14,320 --> 00:08:17,360 Speaker 1: rate control. One of the Fed's goals or any center 154 00:08:17,440 --> 00:08:20,040 Speaker 1: being skills, is to control rates. In the US, we 155 00:08:20,200 --> 00:08:24,640 Speaker 1: choose the overnight rate. Before the crisis, it was primarily 156 00:08:24,680 --> 00:08:28,520 Speaker 1: controlled by adjusting reserve balances within the banking system. After 157 00:08:28,560 --> 00:08:30,880 Speaker 1: the crisis, now that we have so many more reserves, 158 00:08:30,960 --> 00:08:33,760 Speaker 1: that's just not a feasible way. So in practice, the 159 00:08:33,800 --> 00:08:38,120 Speaker 1: FED controls overnight rates by paying interest on the reverse 160 00:08:38,160 --> 00:08:42,920 Speaker 1: report facility as basically boundary lower bound rate. That means 161 00:08:42,960 --> 00:08:45,280 Speaker 1: that if you're an investor with sir M funds and 162 00:08:45,360 --> 00:08:47,920 Speaker 1: you can always invest in the FED risk free at 163 00:08:47,920 --> 00:08:50,800 Speaker 1: the RP rate, that puts a lower boundary of what's 164 00:08:50,800 --> 00:08:53,480 Speaker 1: you're willing to accept in other investments. So if you 165 00:08:53,480 --> 00:08:56,000 Speaker 1: can invest in the FED at five basis points, there's 166 00:08:56,040 --> 00:08:58,360 Speaker 1: never a reason for you to buy to invest in 167 00:08:58,360 --> 00:09:01,400 Speaker 1: any lower rates. And that's how that's basically a crucial 168 00:09:01,400 --> 00:09:05,960 Speaker 1: tool to FED now uses to control interest rates. So 169 00:09:06,160 --> 00:09:08,400 Speaker 1: let's say we get to I mean, I think the 170 00:09:08,400 --> 00:09:12,120 Speaker 1: consensus right now is that the US um Treasury could 171 00:09:12,160 --> 00:09:15,920 Speaker 1: run out of money sometime around mid October. I think 172 00:09:15,920 --> 00:09:19,120 Speaker 1: the one day I've seen consistently come up as October eighteen. 173 00:09:19,800 --> 00:09:21,760 Speaker 1: I should just say that we are recording this on 174 00:09:22,000 --> 00:09:25,520 Speaker 1: October five. So maybe something changes between now and then. 175 00:09:25,640 --> 00:09:30,000 Speaker 1: But if we get to October eighteenth and treasury runs 176 00:09:30,000 --> 00:09:33,320 Speaker 1: out of money, the debt limit isn't raised, what would 177 00:09:33,360 --> 00:09:37,200 Speaker 1: you expect to actually happen in the treasury market, in 178 00:09:37,320 --> 00:09:41,920 Speaker 1: money markets, and how would the FED respond? So this 179 00:09:42,040 --> 00:09:45,280 Speaker 1: scenario has happened quite a few times in the past decade, 180 00:09:45,640 --> 00:09:48,880 Speaker 1: and from public documents have been disclosed, you can kind 181 00:09:48,880 --> 00:09:51,360 Speaker 1: of see that the FED and Treasury have basically been 182 00:09:51,400 --> 00:09:54,440 Speaker 1: wargaming this for for the past ten years. So the 183 00:09:54,480 --> 00:10:00,559 Speaker 1: path forward is basically prioritization. But before before they actually 184 00:10:00,640 --> 00:10:05,040 Speaker 1: drop that date, there's this is basically a political political process, 185 00:10:05,160 --> 00:10:08,360 Speaker 1: right It's in negotiation within Congress, So the FED doesn't 186 00:10:08,360 --> 00:10:11,160 Speaker 1: really want to step in or say anything, and administration 187 00:10:11,240 --> 00:10:15,679 Speaker 1: has an incentive to maximize I guess fear to encourage 188 00:10:15,679 --> 00:10:19,160 Speaker 1: a compromise, but when the drop dad it actually happens. 189 00:10:19,800 --> 00:10:23,680 Speaker 1: What was discussed during was that the FED and what 190 00:10:23,760 --> 00:10:27,120 Speaker 1: that was that the treasure would actually prioritize principal interest 191 00:10:27,160 --> 00:10:30,280 Speaker 1: payments to U S tursury holders as well as Social Security. 192 00:10:30,840 --> 00:10:33,800 Speaker 1: The thing is, when the trishy runs out of space 193 00:10:33,880 --> 00:10:36,000 Speaker 1: under the debt limit, it still has a lot of 194 00:10:36,000 --> 00:10:39,240 Speaker 1: cash receipts. If you look at data from the past 195 00:10:39,280 --> 00:10:42,520 Speaker 1: five years, the US Treasure usually has cash receipts so 196 00:10:42,559 --> 00:10:45,800 Speaker 1: about let's say eight hundred to nine hundred billion during 197 00:10:45,840 --> 00:10:49,280 Speaker 1: the fourth quarter, so that's pretty steady. So they have 198 00:10:49,320 --> 00:10:51,600 Speaker 1: a lot of money coming in, but they don't have 199 00:10:52,320 --> 00:10:55,800 Speaker 1: enough money to pay everything that that's that's due. But 200 00:10:55,880 --> 00:10:58,959 Speaker 1: if they only focus on paying principle and interest, that's 201 00:10:58,960 --> 00:11:02,280 Speaker 1: about two in over a quarter four If they only 202 00:11:02,320 --> 00:11:05,880 Speaker 1: paid social Security, that's probably three billion. So they have 203 00:11:06,120 --> 00:11:08,839 Speaker 1: enough money to pay some bills but not everything. And 204 00:11:09,160 --> 00:11:12,880 Speaker 1: was discussed in the past was just prioritization, So the 205 00:11:12,920 --> 00:11:16,120 Speaker 1: trophy market will actually be fine. There will not be 206 00:11:16,160 --> 00:11:18,800 Speaker 1: a default. And what would happen, I think is that 207 00:11:18,880 --> 00:11:21,800 Speaker 1: once they hit the dead scene, sitting the absolute drop 208 00:11:21,840 --> 00:11:24,760 Speaker 1: dead date in order to calm the markets. They will 209 00:11:24,800 --> 00:11:28,480 Speaker 1: announce their plan to prioritize surgery payments and others, more 210 00:11:28,559 --> 00:11:33,680 Speaker 1: humanitarian payments, social security, veterans benefits, food stamps, and so forth, 211 00:11:34,559 --> 00:11:37,880 Speaker 1: and that should actually immediately calm the trgury market down 212 00:11:38,360 --> 00:11:40,280 Speaker 1: because they know that to fault us off the table 213 00:11:40,559 --> 00:11:43,400 Speaker 1: heading into it. You can already see the disruptions. Some 214 00:11:43,440 --> 00:11:46,160 Speaker 1: short term bills are selling off. But I think once 215 00:11:46,200 --> 00:11:49,640 Speaker 1: we red reach the drop dead date oddly enough, I 216 00:11:49,679 --> 00:11:53,920 Speaker 1: think that prioritization announcement will solve everything. Of course, there 217 00:11:53,920 --> 00:11:57,600 Speaker 1: would be some economic impact from this, because trojury does 218 00:11:57,640 --> 00:12:00,280 Speaker 1: a lot of things. They also have pay it's to 219 00:12:00,520 --> 00:12:04,600 Speaker 1: let's say, doctors, hospitals, farm studo comple companies, defense companies, 220 00:12:04,600 --> 00:12:08,440 Speaker 1: and those companies will have some liquidity problems. But the 221 00:12:08,480 --> 00:12:11,640 Speaker 1: trugy market I think will be fine, and maybe they 222 00:12:11,840 --> 00:12:16,320 Speaker 1: rally as you mentioned before, understanding that when there's a 223 00:12:16,360 --> 00:12:19,480 Speaker 1: liquidity crisis in the non financial sector, maybe if they're 224 00:12:19,480 --> 00:12:22,080 Speaker 1: liquidity to get squeezed a bit, that affects the economy. 225 00:12:22,320 --> 00:12:25,120 Speaker 1: Even if Turgury doesn't prioritize or they decide not to. 226 00:12:25,320 --> 00:12:29,120 Speaker 1: Ultimately it's a political decision by by the Treasury and 227 00:12:29,200 --> 00:12:31,160 Speaker 1: it's the one that makes a lot of sense. The 228 00:12:31,200 --> 00:12:33,480 Speaker 1: FED also has a plan just to step in in 229 00:12:33,480 --> 00:12:36,640 Speaker 1: case anything bad happens, just just as I mentioned a 230 00:12:36,720 --> 00:12:40,240 Speaker 1: bit earlier. So a lot of investors have mandate restrictions 231 00:12:40,240 --> 00:12:43,960 Speaker 1: where they can't hold treasures that defaulted. The biggest investor 232 00:12:44,120 --> 00:12:46,680 Speaker 1: that has these meant these mended restrictions, these are legal, 233 00:12:46,720 --> 00:12:50,120 Speaker 1: are the money market fund industry. So if by any 234 00:12:50,200 --> 00:12:53,280 Speaker 1: chance there was like a technical default, a lot of 235 00:12:53,320 --> 00:12:55,680 Speaker 1: the money market fund industries will not be able to 236 00:12:55,679 --> 00:12:59,640 Speaker 1: hold treasuries. And that's a huge problem because they don't 237 00:12:59,679 --> 00:13:03,040 Speaker 1: just church of those, but they are also enormous investors 238 00:13:03,080 --> 00:13:06,360 Speaker 1: in the report market. The report market is a multi 239 00:13:06,400 --> 00:13:10,840 Speaker 1: trillion dollar market for basically overnight secured loans, and a 240 00:13:10,880 --> 00:13:14,280 Speaker 1: lot of those loans are in treasuries with tregary crap Claro. 241 00:13:14,440 --> 00:13:17,959 Speaker 1: So if you're a money market fund based on sec data, 242 00:13:18,679 --> 00:13:22,800 Speaker 1: probably investing a trillion dollars in turgy backed repot every 243 00:13:22,880 --> 00:13:27,000 Speaker 1: day to the private sector, excluding FED, and because of 244 00:13:27,040 --> 00:13:30,880 Speaker 1: your mandates, you're not able to accept or unwilling to 245 00:13:30,920 --> 00:13:34,920 Speaker 1: accept without a waiver from your board of directors, default 246 00:13:34,960 --> 00:13:38,280 Speaker 1: to Claro. So a lot of people who are getting 247 00:13:38,280 --> 00:13:41,439 Speaker 1: funding in the report market using treasuries may lose access 248 00:13:41,440 --> 00:13:45,120 Speaker 1: to that funding. And you know, that's classic bank one 249 00:13:45,160 --> 00:13:48,680 Speaker 1: lefe scenario because if you're buying turguries on leverage using 250 00:13:48,720 --> 00:13:51,600 Speaker 1: overnight money and suddenly you lose access to that financing, 251 00:13:52,000 --> 00:13:55,280 Speaker 1: and that could be very disruptive um effectively, I think 252 00:13:55,559 --> 00:13:58,920 Speaker 1: in practice of default and technical default would probably buy 253 00:13:59,000 --> 00:14:01,440 Speaker 1: furycate the turgy mark between those that are at risk 254 00:14:01,640 --> 00:14:05,360 Speaker 1: of not receiving principle and interest in the coming months 255 00:14:05,400 --> 00:14:08,320 Speaker 1: and those that are safe let's say they're interest due 256 00:14:08,360 --> 00:14:10,760 Speaker 1: dates are next year. If you do the math, the 257 00:14:10,800 --> 00:14:14,720 Speaker 1: amount of treasuries outstanding that have principal and interest payments 258 00:14:14,760 --> 00:14:17,760 Speaker 1: during the this quarter about a bit over a trillion. 259 00:14:18,200 --> 00:14:21,920 Speaker 1: So there's potential for enormous disruption when let's say investors 260 00:14:21,960 --> 00:14:24,840 Speaker 1: have to shuffle out of at risk treasuries into treasuries 261 00:14:24,880 --> 00:14:28,320 Speaker 1: that are not at risk because this has never happened before. 262 00:14:28,680 --> 00:14:31,920 Speaker 1: Oh in addition to that, once there's a technical to thought, 263 00:14:31,920 --> 00:14:34,400 Speaker 1: I imagine the ratings agencies would have to follow up 264 00:14:34,840 --> 00:14:37,400 Speaker 1: and to downgrade the US. And in addition to the 265 00:14:37,400 --> 00:14:40,760 Speaker 1: money market events, there are also many classes of investors 266 00:14:40,800 --> 00:14:44,160 Speaker 1: that have trouble holding securities that are not let's say 267 00:14:44,240 --> 00:14:47,360 Speaker 1: rated triple A by two or more end agencies that 268 00:14:47,680 --> 00:14:50,120 Speaker 1: maybe they have trouble holding U S reasuries. There's some 269 00:14:50,160 --> 00:14:53,200 Speaker 1: discretion there depending on how their mandates are written. Um, 270 00:14:53,360 --> 00:14:55,800 Speaker 1: so it could be a very destructive event. And that 271 00:14:56,040 --> 00:14:58,880 Speaker 1: is something that has never happened before, and no one 272 00:14:58,920 --> 00:15:01,240 Speaker 1: really knows how it will happen, but which is kind 273 00:15:01,240 --> 00:15:03,800 Speaker 1: of why no one will allow it to happen. You 274 00:15:03,840 --> 00:15:07,560 Speaker 1: have the Treasury prioritizing and if for whatever political reason, 275 00:15:07,600 --> 00:15:11,000 Speaker 1: they don't prioritize P and I payments, The FED has 276 00:15:11,040 --> 00:15:15,080 Speaker 1: discussed in October of what their game palent plan would be, 277 00:15:15,440 --> 00:15:19,040 Speaker 1: and it's uh, they have the tools and the motivation 278 00:15:19,240 --> 00:15:22,080 Speaker 1: to be able to fix everything. So but they would 279 00:15:22,080 --> 00:15:24,880 Speaker 1: do is they would still accept the defaulted Collardo in 280 00:15:24,880 --> 00:15:27,160 Speaker 1: their repo market operations, so they would be able to 281 00:15:27,160 --> 00:15:30,080 Speaker 1: provide liquidity against that, even if the money market funds 282 00:15:30,160 --> 00:15:32,920 Speaker 1: cannot or do not want to. They would be able 283 00:15:32,960 --> 00:15:36,600 Speaker 1: to accept defaulted Collardo and their securities lending operations. So 284 00:15:36,960 --> 00:15:39,560 Speaker 1: if you had let's say ann at risk treasury, you 285 00:15:39,600 --> 00:15:42,080 Speaker 1: could stop it out with the FED. Or, of course, 286 00:15:42,160 --> 00:15:44,680 Speaker 1: if that's not enough, they could just do outright purchase 287 00:15:45,320 --> 00:15:48,760 Speaker 1: QWI style to purchase at risk Collardo. So you have 288 00:15:48,920 --> 00:15:51,200 Speaker 1: these two tiers of plants from the triedurgy and from 289 00:15:51,200 --> 00:15:53,920 Speaker 1: the FED to make sure basically the trigy market will 290 00:15:53,960 --> 00:15:58,320 Speaker 1: be protected. And so going forward to Dassling, I don't 291 00:15:58,320 --> 00:16:01,480 Speaker 1: really worry about anything because there's just this is something 292 00:16:01,520 --> 00:16:03,880 Speaker 1: that happens so many times. And if you're in the market, 293 00:16:03,880 --> 00:16:06,720 Speaker 1: you know that something that people wanticipate, risk that people 294 00:16:06,760 --> 00:16:09,520 Speaker 1: anticipate usually don't materialize because they prepare for them. And 295 00:16:09,680 --> 00:16:27,440 Speaker 1: I think this is one of those cases. So I 296 00:16:27,480 --> 00:16:29,440 Speaker 1: mean I get the point that the FED is sort 297 00:16:29,480 --> 00:16:33,040 Speaker 1: of prepared to step in as lender of last resort um, 298 00:16:33,080 --> 00:16:35,200 Speaker 1: you know, if it really has to. And I get 299 00:16:35,240 --> 00:16:39,440 Speaker 1: that it also attempts to be politically neutral, um, you 300 00:16:39,440 --> 00:16:42,680 Speaker 1: know when these types of situations come up. But I'm wondering, like, 301 00:16:43,800 --> 00:16:46,920 Speaker 1: what do people at the Central Bank actually think when 302 00:16:47,680 --> 00:16:50,160 Speaker 1: politicians are arguing with each other And we sort of 303 00:16:50,280 --> 00:16:52,840 Speaker 1: get to this point like you know, again, you were 304 00:16:52,880 --> 00:16:55,320 Speaker 1: on the open markets desk, you were a trade or 305 00:16:55,440 --> 00:16:57,840 Speaker 1: does everyone they're kind of like roll their eyes and 306 00:16:57,880 --> 00:17:00,040 Speaker 1: go like, oh no, now we have to work on 307 00:17:00,040 --> 00:17:03,080 Speaker 1: on a and plan B and how is this going 308 00:17:03,120 --> 00:17:05,000 Speaker 1: to affect the market and do we have to factor 309 00:17:05,040 --> 00:17:08,880 Speaker 1: this into our economic predictions and things like that, Like 310 00:17:09,640 --> 00:17:13,919 Speaker 1: I guess, how do people actually think about it? So 311 00:17:14,000 --> 00:17:17,919 Speaker 1: the Central Bank is a very conservative and organization. It's 312 00:17:17,960 --> 00:17:20,400 Speaker 1: I think even more as a utility, so it wants 313 00:17:20,400 --> 00:17:22,560 Speaker 1: to make sure the basic plumbing of the system works, 314 00:17:22,560 --> 00:17:25,159 Speaker 1: and that includes the trojan market. Trades are basically a 315 00:17:25,200 --> 00:17:27,520 Speaker 1: full of money or financial system. If you look at 316 00:17:27,560 --> 00:17:32,160 Speaker 1: class de classified documents, this scenario of payment prioritization. There 317 00:17:32,160 --> 00:17:36,760 Speaker 1: were simulations of this run in eleven and again, and 318 00:17:36,840 --> 00:17:39,920 Speaker 1: I'm not I'm absolutely sure that it's being run right now. 319 00:17:40,440 --> 00:17:43,879 Speaker 1: So people there, I think don't think they worry about 320 00:17:44,600 --> 00:17:46,920 Speaker 1: the market impact, but it does create an enormous amount 321 00:17:46,920 --> 00:17:48,680 Speaker 1: of work for them and so they don't like that. 322 00:17:49,400 --> 00:17:52,000 Speaker 1: And I think that they understand that this is part 323 00:17:52,000 --> 00:17:56,760 Speaker 1: of the political process. Though another declassified memo that features 324 00:17:57,040 --> 00:18:00,520 Speaker 1: let's say someone speaking with chir Paul basically inside the 325 00:18:00,520 --> 00:18:03,080 Speaker 1: fact that they understand that part of this is the 326 00:18:03,080 --> 00:18:06,640 Speaker 1: political process, and it's also partly trying to put pressure 327 00:18:06,680 --> 00:18:09,720 Speaker 1: on Congress to do something. So even though this probably 328 00:18:09,760 --> 00:18:13,040 Speaker 1: won't happen, having this in the news. Talking about very 329 00:18:13,040 --> 00:18:18,520 Speaker 1: bad scenarios is something that serves a purpose. So let's 330 00:18:18,600 --> 00:18:22,400 Speaker 1: let's shift gears um slightly and talk about some other 331 00:18:23,000 --> 00:18:26,080 Speaker 1: challenges that the Central Bank faces at the moment. And 332 00:18:26,160 --> 00:18:30,120 Speaker 1: you know, there isn't a shortage of new things, new 333 00:18:30,119 --> 00:18:34,040 Speaker 1: developments to actually wrap their heads around and address. But 334 00:18:34,280 --> 00:18:37,479 Speaker 1: one of the interesting things that you brought up in 335 00:18:37,520 --> 00:18:40,959 Speaker 1: a recent post on your blog was this notion of 336 00:18:41,280 --> 00:18:45,240 Speaker 1: um wealth effects and maybe wealth effects that haven't necessarily 337 00:18:45,280 --> 00:18:48,560 Speaker 1: been understood or taken into account by the Fed. Could 338 00:18:48,600 --> 00:18:52,080 Speaker 1: you walk us through your thesis there. And you know, 339 00:18:52,119 --> 00:18:55,359 Speaker 1: a lot of people tend to complain, well, some people 340 00:18:55,400 --> 00:19:01,679 Speaker 1: complain about the fed's emergency liquidity feeding into risk assets 341 00:19:01,760 --> 00:19:05,200 Speaker 1: like or financial assets like stocks and bonds, and making 342 00:19:05,359 --> 00:19:08,720 Speaker 1: people who are already wealthy even richer. But you point 343 00:19:08,720 --> 00:19:12,040 Speaker 1: out that not only is that happening, but there's also 344 00:19:12,080 --> 00:19:16,480 Speaker 1: a sort of unaccounted for wealth effect through cryptocurrency. So 345 00:19:16,560 --> 00:19:20,840 Speaker 1: could you maybe describe that? Sure? So, so, I think 346 00:19:20,880 --> 00:19:24,360 Speaker 1: the labor market is a very confusing market to analyze 347 00:19:24,440 --> 00:19:27,280 Speaker 1: right now, because you have lots of indications of tight 348 00:19:27,359 --> 00:19:30,760 Speaker 1: labor market with you have help wanted signs everywhere. We're 349 00:19:30,840 --> 00:19:33,840 Speaker 1: just going higher, and at the same time, the unemployment 350 00:19:33,920 --> 00:19:36,919 Speaker 1: rate is still pretty elevated. So I think one of 351 00:19:36,920 --> 00:19:40,320 Speaker 1: the reasons just thinking about this has to do with 352 00:19:40,359 --> 00:19:43,520 Speaker 1: the wealth effect, and there are actually academic papers finding 353 00:19:43,560 --> 00:19:46,399 Speaker 1: something similar and common sense, and I think you should 354 00:19:46,480 --> 00:19:49,480 Speaker 1: understand that the more money you have, the less you 355 00:19:49,520 --> 00:19:52,119 Speaker 1: need to work, the less you're motivated to search that 356 00:19:52,200 --> 00:19:55,040 Speaker 1: you won't you're less willing to set uluer wages. And 357 00:19:55,119 --> 00:19:56,920 Speaker 1: one of the things that has happened over these two 358 00:19:56,960 --> 00:20:00,440 Speaker 1: years is that the wealth effect, basically the wealth people 359 00:20:00,520 --> 00:20:03,480 Speaker 1: hold it has been supercharged. If you just look at 360 00:20:03,480 --> 00:20:07,119 Speaker 1: residential real estate, it's up over the past two years, 361 00:20:07,280 --> 00:20:10,400 Speaker 1: and a little bit over six of the Americans own 362 00:20:10,400 --> 00:20:13,200 Speaker 1: a home, and that's your largest asset, so a lot 363 00:20:13,240 --> 00:20:15,600 Speaker 1: of people have a lot more equity in their in 364 00:20:15,640 --> 00:20:18,920 Speaker 1: their homes. If you own stocks, um, you know that's 365 00:20:18,960 --> 00:20:23,000 Speaker 1: uh SMP is up over the past two years. When 366 00:20:23,000 --> 00:20:25,359 Speaker 1: you look at FED data and you break it down, 367 00:20:25,960 --> 00:20:27,760 Speaker 1: one of the things you notice is that you know 368 00:20:27,800 --> 00:20:30,600 Speaker 1: what everyone says, it's true, it's really the rich people 369 00:20:30,640 --> 00:20:34,800 Speaker 1: getting much much richer. However, because the wealth effect, the 370 00:20:35,080 --> 00:20:37,760 Speaker 1: growth and asset value is so extreme this time around, 371 00:20:38,160 --> 00:20:41,120 Speaker 1: if you were actually just top halfen wealth. You saw 372 00:20:41,280 --> 00:20:45,200 Speaker 1: significant gains in your in your paper wealth, So that 373 00:20:45,280 --> 00:20:47,440 Speaker 1: has to have an effect on whether or not you're 374 00:20:47,440 --> 00:20:49,760 Speaker 1: willing to work and what wages you're willing to accept. 375 00:20:50,000 --> 00:20:52,480 Speaker 1: And that's just what's what you see in official data. 376 00:20:53,040 --> 00:20:56,520 Speaker 1: There is also an enormous wealth boom that you don't see, 377 00:20:56,680 --> 00:20:59,040 Speaker 1: and that's in the cryptocurrency. Is you alluded to the 378 00:20:59,200 --> 00:21:03,240 Speaker 1: cryptocurrency that they are, they exist on decentralized letters, so 379 00:21:03,280 --> 00:21:06,199 Speaker 1: they don't show up anywhere in official data. But we 380 00:21:06,800 --> 00:21:10,320 Speaker 1: see just from public data sources of where cryptocurrencies are 381 00:21:10,359 --> 00:21:14,000 Speaker 1: treating and no. Cryptocurrencies have gone from basically nothing that 382 00:21:14,080 --> 00:21:16,560 Speaker 1: a couple of years ago to two trillion dollars in 383 00:21:16,800 --> 00:21:21,880 Speaker 1: total assets size. And we know Bitcoin and Ethereum are 384 00:21:22,119 --> 00:21:24,199 Speaker 1: the most well known ones, but just behind them there 385 00:21:24,240 --> 00:21:27,440 Speaker 1: are hundreds of these all coins that have also grown 386 00:21:27,440 --> 00:21:30,680 Speaker 1: to billion dollar market caps, and none of this shows 387 00:21:30,720 --> 00:21:34,160 Speaker 1: up an official data, but it's it's being held by 388 00:21:34,200 --> 00:21:38,879 Speaker 1: by the general public, likely younger people. Enthusiasm for cryptocurrencies 389 00:21:39,000 --> 00:21:41,960 Speaker 1: is palpable. If you look at coin based user data, 390 00:21:42,000 --> 00:21:44,879 Speaker 1: it's just surging, and so that has to have an 391 00:21:44,920 --> 00:21:48,240 Speaker 1: impact on the motivation of young people to work as well. 392 00:21:48,280 --> 00:21:51,080 Speaker 1: If you can just stay at home and trade cryptocurrencies, 393 00:21:51,160 --> 00:21:53,240 Speaker 1: or if you held a little bit of crypto um, 394 00:21:53,280 --> 00:21:56,200 Speaker 1: then you you are a bit bothier than you were before. 395 00:21:56,280 --> 00:21:59,119 Speaker 1: Maybe you're not as desperate for a job. Just anecdotally, 396 00:22:00,119 --> 00:22:02,399 Speaker 1: I remember that I took a cab from l a 397 00:22:02,400 --> 00:22:05,120 Speaker 1: airport from lax in my uper driver at the time. 398 00:22:05,160 --> 00:22:08,600 Speaker 1: He was driving a ten year old camera and he 399 00:22:08,840 --> 00:22:13,560 Speaker 1: was telling me that he put thirty dollars into bitcoin 400 00:22:13,880 --> 00:22:16,760 Speaker 1: because bitcoin only goes off, and you know, he did 401 00:22:16,800 --> 00:22:20,240 Speaker 1: not seem to look like a wealthy person, so actually 402 00:22:20,280 --> 00:22:22,800 Speaker 1: encouraged him to diversify a bit. And he also told 403 00:22:22,840 --> 00:22:27,520 Speaker 1: me he bought them dodge coin. So this is this phenomenon. 404 00:22:30,640 --> 00:22:33,639 Speaker 1: So the phenomena I think is real and it's something 405 00:22:33,680 --> 00:22:37,600 Speaker 1: that that it's not captured in official data. This wealth effect, 406 00:22:37,640 --> 00:22:40,920 Speaker 1: I think fundamentally changes the dynamics of labor market. And 407 00:22:41,000 --> 00:22:43,840 Speaker 1: if that's true, though, then you know, maybe maybe the 408 00:22:43,880 --> 00:22:46,879 Speaker 1: FED is actually a bit behind in raising rates and 409 00:22:46,960 --> 00:22:51,040 Speaker 1: so far as raising rates close it down inflation. Yeah, 410 00:22:51,119 --> 00:22:54,080 Speaker 1: there's I mean, there's a ton of irony um in 411 00:22:54,280 --> 00:22:57,360 Speaker 1: thinking that cryptocurrency might be the reason that the FED 412 00:22:57,480 --> 00:23:00,960 Speaker 1: ends up overheating um the economy me but or letting 413 00:23:01,000 --> 00:23:04,080 Speaker 1: the economy run too hot. But do you think the Fed? 414 00:23:04,600 --> 00:23:07,120 Speaker 1: This is kind of an unfair question because I don't 415 00:23:07,119 --> 00:23:09,679 Speaker 1: think anyone really understands crypto. But do you think the 416 00:23:09,720 --> 00:23:13,159 Speaker 1: FED understands crypto? Or is it making a good faith 417 00:23:13,200 --> 00:23:16,320 Speaker 1: effort to understand the market? I don't think the FED 418 00:23:16,400 --> 00:23:19,000 Speaker 1: understands crypto. I think one of the things that I 419 00:23:19,000 --> 00:23:21,000 Speaker 1: would take away from my time and the FED is, 420 00:23:21,560 --> 00:23:26,920 Speaker 1: I guess how surprising how few things said management understands. 421 00:23:27,080 --> 00:23:29,840 Speaker 1: And I think that it's kind of apparent from even 422 00:23:29,880 --> 00:23:32,480 Speaker 1: if you look back, let's say twenty years ago during 423 00:23:32,520 --> 00:23:35,080 Speaker 1: the financial crisis, the FED was not really aware of 424 00:23:35,080 --> 00:23:38,400 Speaker 1: what was happening in shadow banking either. Now I only 425 00:23:38,400 --> 00:23:41,160 Speaker 1: speak from my experience at the New York FED, but 426 00:23:41,240 --> 00:23:43,399 Speaker 1: if you really think about it, New York FED is 427 00:23:43,400 --> 00:23:47,800 Speaker 1: basically a government agency with unlimited money and no government oversight. 428 00:23:47,880 --> 00:23:50,120 Speaker 1: So I think a lot of strange things happening there. 429 00:23:50,160 --> 00:23:53,440 Speaker 1: And in my own experience, let's say, the person who 430 00:23:53,480 --> 00:23:55,400 Speaker 1: ran the money markets as at the New York FED 431 00:23:55,640 --> 00:23:58,320 Speaker 1: didn't have any experience or expertise in money market at all, 432 00:23:58,680 --> 00:24:01,720 Speaker 1: and that was very common throughout the open market desk, 433 00:24:02,320 --> 00:24:05,400 Speaker 1: because you know, you don't really have any external pressure 434 00:24:05,440 --> 00:24:08,280 Speaker 1: to to know or do anything. So I don't think 435 00:24:08,320 --> 00:24:10,639 Speaker 1: the FED is very much in tune with what's happening 436 00:24:10,640 --> 00:24:15,160 Speaker 1: in cryptocurrencies. So speaking of the FED, UH not necessarily 437 00:24:15,280 --> 00:24:17,639 Speaker 1: being in tune with the economy right now. UM. I 438 00:24:17,680 --> 00:24:21,919 Speaker 1: wanted to ask you also about inflation. So this is 439 00:24:22,000 --> 00:24:27,480 Speaker 1: probably the biggest question currently facing central banks and investors 440 00:24:27,600 --> 00:24:30,640 Speaker 1: at the moment. Uh, To what degree are these inflationary 441 00:24:30,640 --> 00:24:33,320 Speaker 1: pressures that we've been seeing some of the gridlock in 442 00:24:33,400 --> 00:24:36,679 Speaker 1: supply chains and supply shortages and things like that, To 443 00:24:37,160 --> 00:24:41,440 Speaker 1: what degree are they transitory? And to what degree should 444 00:24:41,440 --> 00:24:44,399 Speaker 1: central banks actually be worried about them? Should central banks 445 00:24:44,400 --> 00:24:47,560 Speaker 1: be responding to them? Is an interest rate hike the 446 00:24:47,640 --> 00:24:51,639 Speaker 1: appropriate way to fix? Um? You know the problem of 447 00:24:51,680 --> 00:24:56,199 Speaker 1: not enough shipping births in Los Angeles and things like that. Um. So, 448 00:24:56,240 --> 00:24:59,879 Speaker 1: I guess my question is, like, number one, how do 449 00:25:00,000 --> 00:25:03,320 Speaker 1: you think the FED is thinking of inflation at the moment? 450 00:25:03,560 --> 00:25:09,080 Speaker 1: A number two, to what extent is the flexible average 451 00:25:09,359 --> 00:25:13,560 Speaker 1: inflation target still in play? I think the FED is 452 00:25:13,640 --> 00:25:17,480 Speaker 1: really worried about inflation. After telling everyone was transitory, you 453 00:25:17,640 --> 00:25:20,880 Speaker 1: no longer share that word anymore. And I think that's 454 00:25:20,920 --> 00:25:23,119 Speaker 1: it's a really hard it's a really hard question for 455 00:25:23,119 --> 00:25:25,439 Speaker 1: the FED right now because you know, a lot of 456 00:25:25,480 --> 00:25:29,199 Speaker 1: this inflation, it's it appears to be driven by supply 457 00:25:29,280 --> 00:25:31,840 Speaker 1: side effects that you have. You know, we read about 458 00:25:31,880 --> 00:25:36,040 Speaker 1: the energy crunch, we have, you know, congestion at ports 459 00:25:36,040 --> 00:25:40,520 Speaker 1: says this hasn't been discussed at this on the podcast. Um, 460 00:25:40,600 --> 00:25:43,760 Speaker 1: there is also a big demand first as well. You know, 461 00:25:43,880 --> 00:25:45,960 Speaker 1: we kind of printed and spent a lot of money 462 00:25:45,960 --> 00:25:49,879 Speaker 1: and that increases demand. A lot of the supply constraints 463 00:25:50,040 --> 00:25:53,760 Speaker 1: will be changed by interest rate hikes, but interest rate 464 00:25:53,840 --> 00:25:57,160 Speaker 1: hikes do damp in demand. So if you high rates, 465 00:25:57,280 --> 00:25:59,959 Speaker 1: you can really hurt demand. And so you know, reducing 466 00:26:00,040 --> 00:26:04,359 Speaker 1: demand that you know, lowers inflation. However, it costs your 467 00:26:04,400 --> 00:26:07,960 Speaker 1: other mandate, which is unemployment. So it's a very very 468 00:26:07,960 --> 00:26:10,480 Speaker 1: difficult time for the Fit to choose right now. And 469 00:26:10,560 --> 00:26:13,760 Speaker 1: I would also that though that just mechanically speaking, looking 470 00:26:13,800 --> 00:26:16,760 Speaker 1: at the financial system, it's really hard for the FED 471 00:26:17,160 --> 00:26:21,840 Speaker 1: high rates without having a tremendous financial impact. And the 472 00:26:21,880 --> 00:26:23,960 Speaker 1: reason for that is when you have a very high 473 00:26:24,040 --> 00:26:26,960 Speaker 1: level of debt in the system, your interest rate hikes 474 00:26:27,000 --> 00:26:31,040 Speaker 1: are magnified in their effect. So there's interest rate risks 475 00:26:31,200 --> 00:26:34,320 Speaker 1: not in let's say fixed income debt, and when you 476 00:26:34,400 --> 00:26:37,679 Speaker 1: hike rates, you kind of basically destroy some of that value. 477 00:26:38,000 --> 00:26:40,480 Speaker 1: And when you're thinking about tresuries, you're basically kind of 478 00:26:41,240 --> 00:26:44,040 Speaker 1: pulling away money out of the system. If you think 479 00:26:44,080 --> 00:26:47,480 Speaker 1: about tresuries as a form of money, then what we've 480 00:26:47,480 --> 00:26:50,240 Speaker 1: been doing in the past, let's say decade, when we 481 00:26:50,400 --> 00:26:55,480 Speaker 1: reduced rates, all those hyderation assets, they become their market 482 00:26:55,480 --> 00:26:59,080 Speaker 1: price arises, they become enriched. People have more money through 483 00:26:59,119 --> 00:27:01,600 Speaker 1: that which they can repo or sell and then they can, 484 00:27:01,720 --> 00:27:04,680 Speaker 1: you know, buy the stuff. Or if you're let's say, 485 00:27:05,080 --> 00:27:07,760 Speaker 1: let's say a sixty proo, the manager of your bonds 486 00:27:07,800 --> 00:27:11,040 Speaker 1: appreciate you have to buy more equities to balance, then 487 00:27:11,320 --> 00:27:14,240 Speaker 1: that makes equity markets go higher. But when you're hiking rates, 488 00:27:14,280 --> 00:27:16,440 Speaker 1: you're doing the reverse. And because the level of debt 489 00:27:16,480 --> 00:27:19,080 Speaker 1: is so much higher, then I think there's some very long, 490 00:27:19,280 --> 00:27:22,720 Speaker 1: nonlinear impact, so that Collado channel from thro wish money 491 00:27:22,840 --> 00:27:26,480 Speaker 1: monetary policy is transmitted that I think it really sets 492 00:27:26,520 --> 00:27:28,760 Speaker 1: a constraint as on the fattest whether or not they 493 00:27:28,760 --> 00:27:31,080 Speaker 1: could just high rates like they did in the seventies 494 00:27:31,119 --> 00:27:34,560 Speaker 1: because you could have very, very large impacts on the 495 00:27:34,560 --> 00:27:37,880 Speaker 1: financial markets, so I don't think they're in a position 496 00:27:37,920 --> 00:27:41,840 Speaker 1: to do much. If there is a solution to inflation, 497 00:27:42,359 --> 00:27:45,359 Speaker 1: I think it probably has to come from the fiscal side, 498 00:27:45,440 --> 00:27:50,200 Speaker 1: maybe through taxation by let's say, more progressive income taxes 499 00:27:50,200 --> 00:27:53,280 Speaker 1: for example. So when you have when it seems like 500 00:27:53,280 --> 00:27:56,280 Speaker 1: we're moving towards the world where the fiscal authorities play 501 00:27:56,400 --> 00:28:00,000 Speaker 1: much greater role in demand right there spending trillions of dollars, 502 00:28:00,440 --> 00:28:03,800 Speaker 1: and when you have a large market constraining the central bank, 503 00:28:04,280 --> 00:28:06,160 Speaker 1: I think one of the ways that you could solve 504 00:28:06,200 --> 00:28:10,240 Speaker 1: inflation is just through taxation, basically draining away money selectively 505 00:28:10,359 --> 00:28:13,000 Speaker 1: out of the financial system, instead of something blunt like 506 00:28:13,040 --> 00:28:17,639 Speaker 1: an interest rate increased wholesale lopping of market value of 507 00:28:18,440 --> 00:28:21,720 Speaker 1: fixed income debt. That's really interesting because I always thought 508 00:28:21,760 --> 00:28:26,880 Speaker 1: of fiscal as you know, one way to boost demand. Obviously, 509 00:28:27,000 --> 00:28:30,480 Speaker 1: you know, the government announces some big infrastructure spending program 510 00:28:30,560 --> 00:28:34,840 Speaker 1: and hopefully Congress passes it instead of arguing about it 511 00:28:34,880 --> 00:28:37,600 Speaker 1: for a long time, and voila, you know, the economy 512 00:28:37,640 --> 00:28:40,840 Speaker 1: gets a demand boost. But I hadn't actually considered that 513 00:28:41,400 --> 00:28:44,840 Speaker 1: the reverse could also be true. That fiscal could act 514 00:28:44,920 --> 00:28:48,720 Speaker 1: as a sort of demand constraint if it has to. Yes, 515 00:28:48,920 --> 00:28:51,640 Speaker 1: we can, and I think but the problem of course 516 00:28:51,760 --> 00:28:53,960 Speaker 1: is that the fiscal, the Congress, who you know, the 517 00:28:54,000 --> 00:28:57,000 Speaker 1: sets of fax laws is, can't act as quickly as 518 00:28:57,040 --> 00:28:59,360 Speaker 1: the feed and the fat can. You know, Luck last March, 519 00:28:59,520 --> 00:29:02,920 Speaker 1: instantly you rolled out liqudity facilities and cut rates. It's 520 00:29:03,600 --> 00:29:06,840 Speaker 1: very difficult for for the legislature to to be able 521 00:29:06,880 --> 00:29:11,640 Speaker 1: to act as quickly. So what is decision making actually 522 00:29:11,720 --> 00:29:14,760 Speaker 1: like at the FED? Because I mean, on the one hand, 523 00:29:15,080 --> 00:29:18,880 Speaker 1: we have seen the Central Bank praised in recent years 524 00:29:19,000 --> 00:29:22,600 Speaker 1: for putting together a very very quick response to the 525 00:29:22,680 --> 00:29:26,200 Speaker 1: market crash that we saw in and you know, the 526 00:29:26,400 --> 00:29:30,000 Speaker 1: turmoil in the treasury market specifically. But on the other hand, 527 00:29:30,120 --> 00:29:34,480 Speaker 1: it does get a lot of criticism for basically being outside, 528 00:29:34,720 --> 00:29:37,160 Speaker 1: um the sort of democratic process. You know, it's it 529 00:29:37,320 --> 00:29:41,960 Speaker 1: operates without political oversight, I guess, and you know, there's 530 00:29:41,960 --> 00:29:45,800 Speaker 1: a perception that it's just a bunch of economists doing 531 00:29:46,520 --> 00:29:50,520 Speaker 1: their own things. So I'm curious what internal decision making 532 00:29:50,640 --> 00:29:53,120 Speaker 1: actually looks like at the FED. Is it really just 533 00:29:53,360 --> 00:29:55,600 Speaker 1: you know, one or two senior people making decisions or 534 00:29:55,720 --> 00:29:59,560 Speaker 1: is there some sort of um committee like process in 535 00:29:59,680 --> 00:30:04,440 Speaker 1: doing these things. So the FED is very very consensus driven, 536 00:30:04,960 --> 00:30:09,160 Speaker 1: so everything is done by community committee. Uh, it's just 537 00:30:09,440 --> 00:30:12,680 Speaker 1: that what happens in practice is the most senior person 538 00:30:12,720 --> 00:30:16,560 Speaker 1: says something and everyone just nods. So it's it is 539 00:30:16,760 --> 00:30:18,680 Speaker 1: it is by consensus. And you can kind of see 540 00:30:18,720 --> 00:30:20,640 Speaker 1: this in at the highest levels, at the level in 541 00:30:20,680 --> 00:30:22,840 Speaker 1: the sea, for example, you have a FED chair who 542 00:30:22,920 --> 00:30:26,920 Speaker 1: basically you know, says something and everyone agrees, and what's 543 00:30:26,920 --> 00:30:29,080 Speaker 1: happening is behind the scenes, just lots of evolving so 544 00:30:29,240 --> 00:30:31,560 Speaker 1: that when we actually make it to the decision, everyone 545 00:30:31,680 --> 00:30:34,640 Speaker 1: is on the same page. Um. But I think well 546 00:30:34,680 --> 00:30:37,680 Speaker 1: when in practice also, I mean, the power is heavily 547 00:30:38,080 --> 00:30:40,920 Speaker 1: tilted towards let's say the FED chair and the two 548 00:30:40,960 --> 00:30:44,800 Speaker 1: wise chairs, so in practice those people have a disproportionate 549 00:30:44,800 --> 00:30:48,680 Speaker 1: amounts of power. But I think you're concerned about FED 550 00:30:48,800 --> 00:30:52,600 Speaker 1: governments and lack of oversight is valid, especially since the 551 00:30:52,680 --> 00:30:56,840 Speaker 1: FED seems to be becoming more powerful that has over time, 552 00:30:57,240 --> 00:30:59,680 Speaker 1: and you can see this I think in their reaches 553 00:30:59,760 --> 00:31:03,080 Speaker 1: to or it's expanding their mandate to say the climate 554 00:31:03,200 --> 00:31:06,400 Speaker 1: change impacts on the financial system, because when you can 555 00:31:06,560 --> 00:31:09,960 Speaker 1: make it that argument because climate change affects the financial system, 556 00:31:10,000 --> 00:31:12,600 Speaker 1: therefore we must have oversight of it. Then there's no 557 00:31:12,760 --> 00:31:16,479 Speaker 1: limiting principle there. Then, right, everything affects the financial system, 558 00:31:17,000 --> 00:31:20,080 Speaker 1: doesn't that mean that the FED could have its influence 559 00:31:20,160 --> 00:31:23,240 Speaker 1: on anything. It reminds me to let's say, the early 560 00:31:23,360 --> 00:31:26,880 Speaker 1: days of our country, when the federal government was very limited, 561 00:31:27,200 --> 00:31:30,680 Speaker 1: but then through the Commerce Clause, they vastly expanded their 562 00:31:30,720 --> 00:31:35,560 Speaker 1: power because basically everything is affected interest comments. Even if 563 00:31:35,640 --> 00:31:37,440 Speaker 1: you were growing wheat in your own backyard for your 564 00:31:37,480 --> 00:31:40,560 Speaker 1: own consumption, that meant that you weren't buying wheat in 565 00:31:40,640 --> 00:31:44,000 Speaker 1: the interesting markets, so that affected interstate commers. So this 566 00:31:44,840 --> 00:31:47,680 Speaker 1: expansion of part that the FED is doing through through 567 00:31:47,840 --> 00:31:51,080 Speaker 1: basically being able to touch everything that affects the financial system, 568 00:31:51,160 --> 00:31:53,760 Speaker 1: has no limiting principle. And if that's the way that 569 00:31:53,840 --> 00:31:55,640 Speaker 1: they are going to go, then I think they do 570 00:31:55,760 --> 00:32:17,960 Speaker 1: need more oversight. Just going back to the inflation discussion, 571 00:32:18,000 --> 00:32:19,600 Speaker 1: there was one more thing that I want to ask you, 572 00:32:19,880 --> 00:32:23,800 Speaker 1: which is another big mystery that is sort of bedeviling 573 00:32:23,840 --> 00:32:26,080 Speaker 1: markets at the moment, is the fact that we still 574 00:32:26,120 --> 00:32:30,560 Speaker 1: have relatively low bond yields and specifically nominal yields, but 575 00:32:30,800 --> 00:32:34,120 Speaker 1: we also have higher levels of inflation, even though it 576 00:32:34,120 --> 00:32:37,880 Speaker 1: looks like inflation expectations haven't moved that much recently. I'm 577 00:32:37,920 --> 00:32:42,160 Speaker 1: looking at tips, they've been pretty flat. I think, how 578 00:32:42,240 --> 00:32:46,040 Speaker 1: do you think about this, this puzzle of low yields. 579 00:32:47,120 --> 00:32:50,400 Speaker 1: I think that's a puzzle if you assume that bond 580 00:32:50,480 --> 00:32:55,240 Speaker 1: yields are basically a reflection of economic conditions and inflation expectations, 581 00:32:55,880 --> 00:32:59,400 Speaker 1: and there are definitely people who buy bonds with that framework, 582 00:33:00,240 --> 00:33:02,680 Speaker 1: but there are also many people who buy bonds without 583 00:33:02,760 --> 00:33:05,720 Speaker 1: that framework. And um for example, a view are a 584 00:33:05,760 --> 00:33:09,680 Speaker 1: commercial bank to receiving io R and new reserves fifteen 585 00:33:09,680 --> 00:33:14,640 Speaker 1: basis points. Under the regulations, surgeries and reserves are considered equivalent. 586 00:33:14,760 --> 00:33:17,360 Speaker 1: So what do you do, well, I I just sapp 587 00:33:17,400 --> 00:33:19,200 Speaker 1: out my reserves and buy a whole bunch of sruguries. 588 00:33:19,440 --> 00:33:21,520 Speaker 1: And you see commercial banks doing that to the tunes 589 00:33:21,560 --> 00:33:24,240 Speaker 1: of hundreds of billions at a time. So it's not 590 00:33:24,400 --> 00:33:27,760 Speaker 1: because of any fundamental view and growth and inflation. It's 591 00:33:27,800 --> 00:33:31,640 Speaker 1: just that under their constraints, you know, treuguries are better 592 00:33:31,680 --> 00:33:33,520 Speaker 1: than reserves that will by struguries and will hedge the 593 00:33:33,520 --> 00:33:36,520 Speaker 1: interest rate risk. Um. You also have a lot of 594 00:33:36,560 --> 00:33:39,520 Speaker 1: actors let's say the FED buying eighty billion a month. 595 00:33:39,880 --> 00:33:42,800 Speaker 1: If that does not care about growth of inflation. They're 596 00:33:42,840 --> 00:33:45,120 Speaker 1: buying it because it's their mandate to do so. And 597 00:33:45,200 --> 00:33:47,800 Speaker 1: you have also many other I would say foreign central banks. 598 00:33:47,840 --> 00:33:51,560 Speaker 1: You're very conservative Investment managers who were buying trujuries because 599 00:33:51,760 --> 00:33:54,800 Speaker 1: they need to save the assets are maybe they're regulatorily 600 00:33:55,080 --> 00:33:58,480 Speaker 1: bound by their regulations to do that. So I think 601 00:33:58,560 --> 00:34:01,720 Speaker 1: that tugs are just the financial asset. They go higher 602 00:34:02,480 --> 00:34:04,560 Speaker 1: because there are a lot of people buying it, and 603 00:34:04,640 --> 00:34:07,479 Speaker 1: I think it's a mistake to infer economic conditions from them. 604 00:34:08,120 --> 00:34:10,960 Speaker 1: The analogy I would use this I let's say you're 605 00:34:10,960 --> 00:34:14,120 Speaker 1: looking at Tesla stock. Let's say you can forecast earnings 606 00:34:14,160 --> 00:34:16,400 Speaker 1: and you can put that into a dividend discount model. 607 00:34:16,880 --> 00:34:20,040 Speaker 1: You can come up with a fundamental value of Tesla. Right, 608 00:34:20,080 --> 00:34:23,920 Speaker 1: that's your framework. You forecast earnings, you value based on 609 00:34:24,000 --> 00:34:26,560 Speaker 1: the fundamental way. But you can't really take the price 610 00:34:26,640 --> 00:34:29,400 Speaker 1: of Tesla into as an input in your model and 611 00:34:29,520 --> 00:34:33,719 Speaker 1: back out supposedly market expectations for revenue growth because people 612 00:34:33,760 --> 00:34:36,239 Speaker 1: are buying tests up for momentum, or maybe you're an 613 00:34:36,280 --> 00:34:38,799 Speaker 1: options dealer, you got to buy Testla to head your 614 00:34:38,840 --> 00:34:41,879 Speaker 1: options right, and in the same way, you really can't 615 00:34:41,920 --> 00:34:45,400 Speaker 1: take price as an input for let's say treasuries and 616 00:34:45,440 --> 00:34:47,879 Speaker 1: try to back out what the treasury market is saying 617 00:34:47,920 --> 00:34:52,480 Speaker 1: about economic conditions because not everyone approaches treasuries as an 618 00:34:52,520 --> 00:34:56,120 Speaker 1: investment on that basis. So this is one of the 619 00:34:56,200 --> 00:34:59,560 Speaker 1: areas where I kind of see overlap between some of 620 00:34:59,600 --> 00:35:02,440 Speaker 1: the research you do and some of the research one 621 00:35:02,520 --> 00:35:06,000 Speaker 1: of our other, uh, you know, recurrent money market guests, 622 00:35:06,040 --> 00:35:09,919 Speaker 1: Saltan Posar, actually does where you know, he's well known 623 00:35:10,120 --> 00:35:14,360 Speaker 1: for calling up banks and you know, speaking to people 624 00:35:14,480 --> 00:35:16,680 Speaker 1: in the money markets and trying to gather color on 625 00:35:16,800 --> 00:35:19,600 Speaker 1: what exactly they are doing. And I see a lot 626 00:35:19,680 --> 00:35:21,440 Speaker 1: of that in the post that you do on your 627 00:35:21,480 --> 00:35:23,960 Speaker 1: blog as well, like actually digging into the numbers to 628 00:35:24,040 --> 00:35:28,719 Speaker 1: see what treasuries at large banks have been buying, and 629 00:35:28,800 --> 00:35:31,160 Speaker 1: then you know, charting the fact that they've been buying 630 00:35:31,160 --> 00:35:33,120 Speaker 1: a lot more bonds over the past year or so. 631 00:35:33,760 --> 00:35:36,719 Speaker 1: How much does that sort of inform your thinking? Do 632 00:35:36,800 --> 00:35:39,080 Speaker 1: you still keep in contact with a lot of people 633 00:35:39,280 --> 00:35:41,800 Speaker 1: in the market and try to get as much information 634 00:35:41,920 --> 00:35:44,759 Speaker 1: as you can from them. You're right that a lot 635 00:35:44,800 --> 00:35:46,200 Speaker 1: of the work that I did at the FED was 636 00:35:46,440 --> 00:35:48,719 Speaker 1: basically the same as what Salton did, And I have 637 00:35:48,800 --> 00:35:51,400 Speaker 1: great respect result and I read everything he writes. It's 638 00:35:51,440 --> 00:35:53,600 Speaker 1: great and I'm glad you have them on your show. 639 00:35:53,680 --> 00:35:56,360 Speaker 1: Sometimes I think a lot of my information I actually 640 00:35:56,360 --> 00:35:58,760 Speaker 1: I get through Twitter these days, and what I've realized 641 00:35:58,800 --> 00:36:02,440 Speaker 1: is set fin Twitter. It's just test amazing resource. You 642 00:36:02,520 --> 00:36:05,120 Speaker 1: can access the thoughts of some of the I think 643 00:36:05,560 --> 00:36:09,160 Speaker 1: best managers, expert subject matter experts in the world, and 644 00:36:09,200 --> 00:36:11,920 Speaker 1: it's all an available on Twitter. And you don't get 645 00:36:11,960 --> 00:36:13,840 Speaker 1: certain things that you could get, let's say, if you 646 00:36:13,920 --> 00:36:18,160 Speaker 1: had relationships with your Treasury desk. But I think once 647 00:36:18,200 --> 00:36:21,160 Speaker 1: you understand how the system actually works, there's just enough 648 00:36:21,440 --> 00:36:25,000 Speaker 1: from public data and from let's say, anecdotal reports through 649 00:36:25,160 --> 00:36:27,680 Speaker 1: outlets like Bloomberg or fin twit that you can actually 650 00:36:27,719 --> 00:36:31,520 Speaker 1: have a very good picture as to what's happening. There's 651 00:36:31,560 --> 00:36:33,399 Speaker 1: one more question that I want to ask you, which 652 00:36:33,520 --> 00:36:36,200 Speaker 1: is maybe it's a sensitive one. I don't know, but 653 00:36:36,560 --> 00:36:38,960 Speaker 1: let me know if it is. But why did you 654 00:36:39,200 --> 00:36:42,960 Speaker 1: ultimately decide to leave the fund? I think it goes 655 00:36:43,000 --> 00:36:45,879 Speaker 1: back to what I was mentioning about the open market sex. 656 00:36:45,960 --> 00:36:48,840 Speaker 1: The FED is a phenomenal place to work on the 657 00:36:48,960 --> 00:36:52,239 Speaker 1: open Market's desk. You have access to tremendous amounts of 658 00:36:52,280 --> 00:36:55,600 Speaker 1: confidential data. You can call up big banks or dealers 659 00:36:55,800 --> 00:36:58,560 Speaker 1: or just hitch funds or money market funds and they'll 660 00:36:58,560 --> 00:37:01,239 Speaker 1: speak to you and you get to understand. But it's 661 00:37:01,280 --> 00:37:02,960 Speaker 1: a really good place to learn, but it's not a 662 00:37:03,040 --> 00:37:05,759 Speaker 1: really good place to work. It's not a good place 663 00:37:05,840 --> 00:37:10,640 Speaker 1: to work because well, just looking in the money market, says, 664 00:37:11,360 --> 00:37:13,200 Speaker 1: no one on the management, almost no one on the 665 00:37:13,239 --> 00:37:17,359 Speaker 1: management has any expertise or experience in money markets. It's 666 00:37:17,520 --> 00:37:20,839 Speaker 1: kind of basically purely based on your seniority, so it's 667 00:37:20,840 --> 00:37:24,399 Speaker 1: impossible to grow. It's kind of just like a I guess, 668 00:37:24,440 --> 00:37:26,479 Speaker 1: the big piggy bank for the people who got there first. 669 00:37:26,840 --> 00:37:29,040 Speaker 1: And so it's a good place to grow, but it's 670 00:37:29,080 --> 00:37:31,320 Speaker 1: not a good place to learn. And we have tremendous turnover. 671 00:37:31,960 --> 00:37:35,400 Speaker 1: I can tell you from just this past year on 672 00:37:35,480 --> 00:37:39,600 Speaker 1: the money market. Says turnover was like some of them 673 00:37:39,680 --> 00:37:41,279 Speaker 1: go to other divisions and the fed, some of them 674 00:37:41,360 --> 00:37:44,000 Speaker 1: go to the street. So I felt that I had 675 00:37:44,080 --> 00:37:45,799 Speaker 1: learned all there is to learn, and there is really 676 00:37:45,840 --> 00:37:49,480 Speaker 1: no point of being there anymore. Mh um. One more 677 00:37:49,600 --> 00:37:51,560 Speaker 1: question for you, and then we're going to have to 678 00:37:51,880 --> 00:37:55,160 Speaker 1: wrap up. But what do you think the biggest challenge 679 00:37:55,280 --> 00:37:59,080 Speaker 1: is that the FED is facing at the moment. I 680 00:37:59,160 --> 00:38:01,960 Speaker 1: think the FED is seen a moment where they have 681 00:38:02,040 --> 00:38:05,759 Speaker 1: to choose between their two mandates, employment or inflation, and 682 00:38:05,880 --> 00:38:08,480 Speaker 1: that's a very difficult choice, and it's going to be 683 00:38:08,560 --> 00:38:11,239 Speaker 1: a political choice depending on the composition of who's on 684 00:38:11,320 --> 00:38:14,880 Speaker 1: the m C. You have inflation that you can control 685 00:38:14,920 --> 00:38:17,000 Speaker 1: and a few raised rates or try to tamp down 686 00:38:17,000 --> 00:38:19,759 Speaker 1: and demand, you're going to have higher unemployment. That's a 687 00:38:19,880 --> 00:38:22,799 Speaker 1: very very difficult choice and there's just no good way 688 00:38:22,840 --> 00:38:25,080 Speaker 1: to do it. So they're going to have to Basically, 689 00:38:25,080 --> 00:38:26,960 Speaker 1: it's going to be a political thing, and it's going 690 00:38:27,040 --> 00:38:29,239 Speaker 1: to be based on their values. What are they value 691 00:38:29,280 --> 00:38:33,040 Speaker 1: more employment or inflation? And we'll have to see the 692 00:38:33,120 --> 00:38:36,600 Speaker 1: composition of the FMC. Looks like it's changing with all 693 00:38:36,640 --> 00:38:39,360 Speaker 1: these revelations and resignations, So we're going to see how 694 00:38:39,400 --> 00:38:42,320 Speaker 1: the composition of the flom SE is next year to 695 00:38:42,680 --> 00:38:45,920 Speaker 1: see how they might rule. Yeah, certainly a lot going 696 00:38:45,960 --> 00:38:49,239 Speaker 1: on in interesting times. UM for the FED. Well, Um, 697 00:38:50,280 --> 00:38:54,520 Speaker 1: Joseph wag uh The the writer at the Fed Guy blog, 698 00:38:54,960 --> 00:38:57,080 Speaker 1: thank you so much for coming on and just for 699 00:38:57,160 --> 00:39:00,359 Speaker 1: our listeners, if you haven't checked out that guy yet, 700 00:39:00,719 --> 00:39:04,120 Speaker 1: I highly recommend that you do. It's fed got dot com. Joseph, 701 00:39:04,160 --> 00:39:06,560 Speaker 1: thanks so much, Thank you so much to happen you, Tracy. 702 00:39:19,680 --> 00:39:23,040 Speaker 1: So here's the part where I talked to myself because 703 00:39:23,120 --> 00:39:25,799 Speaker 1: Joe isn't here. But um, I'm trying to think how 704 00:39:25,920 --> 00:39:29,239 Speaker 1: to sort of synthesize that conversation. I mean, part of 705 00:39:29,320 --> 00:39:32,680 Speaker 1: me is just relieved that I don't actually work at 706 00:39:32,680 --> 00:39:35,239 Speaker 1: a central bank and have to be on the hook 707 00:39:35,400 --> 00:39:37,479 Speaker 1: for solving a lot of these problems at the moment. 708 00:39:37,560 --> 00:39:40,520 Speaker 1: And you know, I obviously don't think the FED is 709 00:39:40,600 --> 00:39:46,240 Speaker 1: a perfect institution, um, and certainly we're seeing that recently 710 00:39:46,320 --> 00:39:49,640 Speaker 1: with the news about the insider training scandal. But it 711 00:39:49,880 --> 00:39:53,560 Speaker 1: is clear that they are facing a number of new 712 00:39:54,560 --> 00:39:58,800 Speaker 1: situations that they've been thrust into after COVID and after 713 00:39:59,320 --> 00:40:02,839 Speaker 1: the big market crash, and I don't necessarily envy them 714 00:40:02,920 --> 00:40:07,360 Speaker 1: having to figure out how the world works in current conditions, 715 00:40:07,480 --> 00:40:09,960 Speaker 1: you know, trying to figure out whether or not hiking 716 00:40:10,040 --> 00:40:14,800 Speaker 1: interest rates would actually do anything to damp down supply 717 00:40:15,239 --> 00:40:19,400 Speaker 1: pressures um that are caused by transportation gridlock and supply 718 00:40:19,520 --> 00:40:22,680 Speaker 1: chain issues that just seems really difficult to me. And 719 00:40:22,840 --> 00:40:27,480 Speaker 1: also Joseph some idea of bitcoin and a sort of 720 00:40:27,560 --> 00:40:30,880 Speaker 1: unaccounted for wealth effect maybe changing the composition of the 721 00:40:30,960 --> 00:40:34,160 Speaker 1: labor market. That again is something brand new, and I 722 00:40:34,280 --> 00:40:37,360 Speaker 1: doubt that the vast majority of central bankers, you know, 723 00:40:37,640 --> 00:40:40,440 Speaker 1: many of whom are quite old at the moment and 724 00:40:40,520 --> 00:40:45,640 Speaker 1: probably haven't been following bitcoin for that long or that much. 725 00:40:46,160 --> 00:40:49,160 Speaker 1: I doubt that they've really wrapped their heads around that phenomenon. 726 00:40:49,400 --> 00:40:53,200 Speaker 1: So yeah, I guess the message is, uh, don't envy 727 00:40:53,480 --> 00:40:55,560 Speaker 1: the people at the FED, and there's a lot going 728 00:40:55,600 --> 00:40:58,440 Speaker 1: on and a lot of new challenges that they are facing, 729 00:40:59,440 --> 00:41:02,520 Speaker 1: and that I am going to leave it there. One 730 00:41:02,560 --> 00:41:06,040 Speaker 1: thing I would say is, if you are enjoying odd Thoughts, 731 00:41:06,120 --> 00:41:08,080 Speaker 1: if you do appreciate the work that Joe and I 732 00:41:08,719 --> 00:41:10,759 Speaker 1: put into the show, and here I will just go 733 00:41:10,800 --> 00:41:13,480 Speaker 1: ahead and mention that I am recording this with a 734 00:41:13,640 --> 00:41:17,000 Speaker 1: triple fracture in my left foot. If you appreciate all thoughts, 735 00:41:17,160 --> 00:41:20,720 Speaker 1: please go over to Apple Podcasts and give us a review, 736 00:41:20,920 --> 00:41:23,160 Speaker 1: hopefully you know, a five star one. It would be 737 00:41:23,440 --> 00:41:27,080 Speaker 1: much appreciated, and Joe and I enjoy seeing that kind 738 00:41:27,120 --> 00:41:30,239 Speaker 1: of feedback, So thank you so much and I will 739 00:41:30,520 --> 00:41:34,120 Speaker 1: leave it there. So this has been another episode of 740 00:41:34,320 --> 00:41:36,719 Speaker 1: add Thoughts. I'm Tracy Alloway. You can follow me on 741 00:41:36,880 --> 00:41:40,120 Speaker 1: Twitter at Tracy Alloway. You can follow my co host 742 00:41:40,520 --> 00:41:45,400 Speaker 1: Joe Wisenthal at The Stalwart, and you can follow Joseph 743 00:41:45,440 --> 00:41:49,320 Speaker 1: Wang at fed Guy twelve. Can also check out his 744 00:41:49,400 --> 00:41:52,959 Speaker 1: blog at fed guy dot com. And you should follow 745 00:41:53,040 --> 00:41:56,719 Speaker 1: our producer Laura Carlson. She is at Laura M. Carlson. 746 00:41:57,239 --> 00:42:02,040 Speaker 1: And you can follow Bloomberg Podcasts at podcast Thanks for listening.