Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Authoughts podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, how about them JGB yields?
Speaker 3: So this is the thing, which is that in some
Speaker 3: sense the markets have quieted down certainly compared to early
Speaker 3: April or mid April, but there are some major moves
Speaker 3: still happening, particularly in rates, some currency stuff. If you
Speaker 3: know where to look, these markets are not boring at all.
Speaker 2: I don't even think you have to like actively go
Speaker 2: looking for interesting moves. So we're recording this on May twentieth,
Speaker 2: and the twenty year JGB yield was up something like
Speaker 2: fifteen basis points to about two point five percent. That's
Speaker 2: the highest since two thousand. So basically, back when I
Speaker 2: was living in Tokyo going to high school.
Speaker 3: Were telling how I measure everything, Well, what were you
Speaker 3: borrowing from local Japanese banks or were you buying when
Speaker 3: you were in high school?
Speaker 2: Sadly, sadly not, although well they wouldn't have been a
Speaker 2: great investment.
Speaker 3: Well you should have watch of jgb's back. Then you
Speaker 3: get great price appreciation, you get great yields. But yes,
Speaker 3: there's a lot going on. It's a global thing. So
Speaker 3: in the US we're also seeing fairly elevated rates lately,
Speaker 3: and to some extent that might be a story of
Speaker 3: expectations that the current budget negotiations are going to continue
Speaker 3: widening the deficit, you know, the sort of moody story.
Speaker 3: But there's clearly global factor here that cannot simply be
Speaker 3: explained by, say, like the willingness or unwillingness of members
Speaker 3: of Congress to like expand the salt deduction. There is
Speaker 3: a bigger macro story unfolding that I don't think I
Speaker 3: have my head fully wrapped around. Right.
Speaker 2: So, as we're recording this, the year is back at
Speaker 2: four point four eight percent, and perhaps more importantly, the
Speaker 2: thirty year is creeping back towards five percent. The dollar
Speaker 2: is falling again, so the Cell America theme is kind
Speaker 2: of getting another airing. There are concerns over the fiscal
Speaker 2: trajectory and the big beautiful bill that you know, you
Speaker 2: just kind.
Speaker 3: Of call is. I know it's a liter called beautiful, but.
Speaker 2: I love that, And so the worry is that that
Speaker 2: will push up the deficit and possibly inflation. Plus, of course,
Speaker 2: we have tariffs Meanwhile, as rates appear to be going up,
Speaker 2: there are plenty of people still out there who are
Speaker 2: talking about the prospect of the economy, the US economy
Speaker 2: actually slowing down and getting rate cuts later this year,
Speaker 2: and the market is still pricing those in. So we're
Speaker 2: at this really interesting juncture in the bond market where
Speaker 2: we're getting a lot of conflicting signals, a lot of
Speaker 2: confusing signals, as you mentioned, and it seems like maintaining
Speaker 2: stable prices, low inflation, and trying to fight all these
Speaker 2: different cross currents is going to fall almost entirely on
Speaker 2: the FED. I think we should talk about all.
Speaker 3: Of this absolutely. Let's jump right into it. We have
Speaker 3: a great guest today.
Speaker 2: We have the perfect guest, you might say. We're going
Speaker 2: to be speaking with Steven Englander, the global head of
Speaker 2: G ten FX Strategy at Standard Chartered, And to be honest, Joe,
Speaker 2: I cannot believe we haven't had Stephen on the podcast before.
Speaker 3: I've been reading Steven's notes for years and years and years.
Speaker 3: I was actually really surprised to realize he's never been
Speaker 3: on before. I know, our oversight, major our oversight. Lately,
Speaker 3: his emails have become a must click for me, I
Speaker 3: always open them and so yes, he's here with us
Speaker 3: in studio.
Speaker 2: Steven, welcome to the show.
Speaker 4: Thank you very much. I'm honored to be here with
Speaker 4: the best interviewers in the world.
Speaker 3: That's right. We are going to clip that and save
Speaker 3: it for our highlight reel.
Speaker 2: That's very kind. So why don't we start with jgb's
Speaker 2: and also UST's. Is there a common theme running through
Speaker 2: that sell off or are they being driven by entirely
Speaker 2: different things.
Speaker 4: I think it's mostly different. There is a common element
Speaker 4: in that if US yields are going up, everybody's yelds
Speaker 4: are going to be going up. But I think in
Speaker 4: the case of jgb's there's, you know, particular dynamics. There's
Speaker 4: uncertainty about what they're going to do. On the QT side,
Speaker 4: they had this very kind of painful twenty year auction
Speaker 4: which was pretty close to failing. The BOJ published that
Speaker 4: there was some debate as to what pace of quantitative
Speaker 4: tightening they should be going at, if any, and I
Speaker 4: think there's a general view in the world that yields
Speaker 4: are too low and they're going to be going up. However,
Speaker 4: it's puzzling because the market seems to like the end
Speaker 4: and normally that would be associated with the lower yields.
Speaker 3: Well, you're getting paid a lot to buy you and
Speaker 3: I can I mean, right, isn't that part of the story,
Speaker 3: Like yields are going up, so it's like I'll buy
Speaker 3: some yen because at least they're paying me a lot
Speaker 3: more yen to hold them.
Speaker 4: Well, remarkably, today there have been times when the end
Speaker 4: thirty year yield has been higher than the German thirty
Speaker 4: year yield.
Speaker 3: So just on this point, I'm looking so anticipated. I
Speaker 3: literally on my terminal had just pulled up a chart
Speaker 3: of German thirty year yields as well, which are above
Speaker 3: three percent. That's crazy. They were at zero at the
Speaker 3: start of twenty twenty two, and that's the thirty year
Speaker 3: they're over three percent. There must be a global factor.
Speaker 4: Well, some of it is fiscal, especially in Europe and
Speaker 4: the US. The Europe had like ten twelve years of
Speaker 4: debt crisis in which they didn't want to expand fiscal deficits.
Speaker 4: The pressure was to do the opposite, and now they've
Speaker 4: discovered that defense spending is the key to economic growth.
Speaker 4: But the market, I think is looking at it, and
Speaker 4: they're looking at the fiscal prospects in the US and
Speaker 4: kind of guessing that we're not going to see zero
Speaker 4: in German yields.
Speaker 2: Again, just going back to the yen and people buying it.
Speaker 2: How much of that is a strong yen story versus
Speaker 2: a week dollar story. This is why I hate currencies.
Speaker 4: By the way, well, they're good because you have two
Speaker 4: chances to be wrong. I think that much of it
Speaker 4: is a week dollar story. And looking to see in
Speaker 4: terms of the negotiations on tariffs and in terms of
Speaker 4: how kind of off base the currency is, which currencies
Speaker 4: are most likely to move, which ones will face the
Speaker 4: least resistance in appreciating against the dollar, and I think
Speaker 4: Japan wins on several counts that the tariff negotiations will
Speaker 4: be tough because they still have a very big trade
Speaker 4: deficit with the US. Trade surplus, yes, trade surplus with
Speaker 4: the US. The non tariff barriers, even if you really
Speaker 4: can't quantify them, they're pretty significant, and you know, the
Speaker 4: US has a point in complaining about some of them,
Speaker 4: and there's a sense in the market, and I think
Speaker 4: correctly that once you get past the ten percent baseline
Speaker 4: tariff that the US needs for fiscal purposes that they
Speaker 4: may be will link to trade, some of the reciprocal tariffs,
Speaker 4: the you know, the beyond that ten percent for currency appreciation.
Speaker 4: And there's been a number of currencies under discussion, but
Speaker 4: you know, the end is one of the prime currencies,
Speaker 4: given that it's so weak relative to any kind of
Speaker 4: PPP type of basis.
Speaker 3: Right, this is sort of a general East Asian story.
Speaker 4: You know.
Speaker 3: Obviously we talked about the Taiwanies dollar and the South
Speaker 3: Korean one and so forth, and there is this view
Speaker 3: that maybe some sort of different in currency policy could
Speaker 3: be part of the packages here. Before we get more
Speaker 3: to that, you know, one of the things that you
Speaker 3: heard maybe six months ago or a year or even
Speaker 3: a few months ago, they're like, oh, if we impose tariffs,
Speaker 3: it will be offset because that will be a strengthening
Speaker 3: of the US dollar. And we've seen literally the opposite.
Speaker 3: But that was a common meme, a common conventional wisdom
Speaker 3: among a lot of economists both Wall Street academia are
Speaker 3: the ones who appear on TV et cetera. What is
Speaker 3: this simple story for why the dollar has been so
Speaker 3: weak since April second, even at a time when stop
Speaker 3: rebounded interest rates have stabilized a little bit. The one
Speaker 3: major move that hasn't really reversed is the dollar. What's
Speaker 3: this simple story there.
Speaker 5: Well for the complex story, well, it's a medium story,
Speaker 5: but it basically goes something like this said, you know,
Speaker 5: I might choose to pick your pocket if I thought
Speaker 5: you wouldn't respond, but if you did respond, you know,
Speaker 5: the consequences might not be as much fun for me.
Speaker 4: And I think that if you start with the assumption
Speaker 4: that the US can tariff everybody, yeah, and you know,
Speaker 4: the market is not going to say, well, wait a second,
Speaker 4: if they do tariffs, what about that Mara Lago stuff,
Speaker 4: what about foreign policy? You know what, what is the
Speaker 4: limit to which they can expand that policy envelope? You
Speaker 4: had to risk premium to US assets. So the offset
Speaker 4: to that is that the market is looking at US
Speaker 4: assets and kind of saying, well, safe haven, maybe not
Speaker 4: so much reliability, maybe not so much as it used
Speaker 4: to be.
Speaker 2: Is there good dollar depreciation and bad dollar depreciation? And
Speaker 2: I remember one of your notes you talked about this
Speaker 2: idea that you could get a weaker dollar that supports competitiveness,
Speaker 2: but you could also get a weaker dollar that reduces
Speaker 2: the amount of capital coming into the US. How would
Speaker 2: you measure those two things?
Speaker 4: Well, in a sense, we're getting some of that measurement
Speaker 4: now when we look at the dollar weakening and interest
Speaker 4: rates going up. I think it's a pretty good sign that,
Speaker 4: notwithstanding the greater competitiveness on paper, at least of the US,
Speaker 4: that investors aren't that enthusiastic about holding US assets. So
Speaker 4: I think that's one real signal that the market's not
Speaker 4: thinking that it's an unalloyed plus. But I'd say that
Speaker 4: most of the time if the dollar goes down is
Speaker 4: for bad reasons. The basic good story would be something
Speaker 4: like this that the rest of the world, for whatever reason,
Speaker 4: does fiscal policy and kind of expands consumption and they
Speaker 4: start buying US assets. US foreign yields go up relative
Speaker 4: to the US. Never mind what they're do. That picture
Speaker 4: is over, you know, five, ten, fifteen years, and they say, okay,
Speaker 4: you know, instead of buying US treasuries, we're going to
Speaker 4: buy you know, German and European and Asian because they're
Speaker 4: all expanding their fiscal deficits and their rates are going up.
Speaker 4: The return is higher, and you can start say, yeah,
Speaker 4: the dollar's weaker, but it's it's okay for the US,
Speaker 4: they can do their own thing. I'd say that if
Speaker 4: you're focused on the US, and this is something I
Speaker 4: can't emphasize enough that just about for every major, even
Speaker 4: medium sized country, ninety percent of the policy solution is
Speaker 4: going to be domestic. The idea that you can fix
Speaker 4: your economic problems by doing something on the international side,
Speaker 4: I think is an illusion. If you did the right
Speaker 4: thing on the domestic side, you might get good stuff
Speaker 4: happening on the international side. But it's really really hard
Speaker 4: to get around domestic issues by saying, oh, well, well,
Speaker 4: just appreciate ten or fifteen percent. Most of the time
Speaker 4: when you'd appreciate that way, something's going wrong. Either the
Speaker 4: market says, hey, their real interest rates are too low
Speaker 4: and they're not going to be able to push them up,
Speaker 4: so there's no point to holding their paper, or they
Speaker 4: say brisk premium should be higher, or something not going great.
Speaker 4: So I'd say that even though there's a route by
Speaker 4: which you can say that a week or dollar reflects
Speaker 4: good stuff, that's not the most common rute. Most of
Speaker 4: the time, a weaker currency reflects bad stuff happening on
Speaker 4: the domestic side.
Speaker 3: No, I think this is a really good point. I
Speaker 3: wrote a thing in the newsletter. I call it like
Speaker 3: one weird triconomics, because we have all of these things
Speaker 3: that we can all talk about and sort of al
Speaker 3: or plague the US economy. It's difficult to build here.
Speaker 3: We seem to have lost our capacity to so.
Speaker 2: If you do the whole list, we're going to be
Speaker 2: here for like twenty minutes.
Speaker 3: Right. We seem to have gotten worse at building airplanes,
Speaker 3: which is one of the things that we actually still
Speaker 3: do export to the world. In much of the ways,
Speaker 3: these are really tough problems to solve, and it strikes
Speaker 3: me as sort of fantasy that suddenly we can revive
Speaker 3: all of these things just by coming to an agreement
Speaker 3: with our foreign partners about some difference in currency or
Speaker 3: a trade policy.
Speaker 4: I completely agree. And the other fantasy I would add
Speaker 4: to that is the implication all we got to do
Speaker 4: is depreciate five or ten percent and that's going to
Speaker 4: be enough. If you take a look at the way
Speaker 4: the dollar has moved against the euros the end, you know,
Speaker 4: the range over the last ten years for the euro
Speaker 4: I think is ninety five to one twenty five, and
Speaker 4: the US has run a trade deficit, significant trade against Europe. Yeah,
Speaker 4: both at ninety five and at one twenty five. I
Speaker 4: think there's too much faith that a weak currency is
Speaker 4: is going to bail you out of your problems. But
Speaker 4: it's the easy thing to do, and it kind of
Speaker 4: sounds nice in principle.
Speaker 3: Was there ever in Urine economic history in which economies
Speaker 3: did stabilize more directly and more linear fashion? You know now?
Speaker 3: And I think of like, okay specialization Tawan makes the chips,
Speaker 3: Europe makes the engines, the US makes soybeans and complex
Speaker 3: financial products. I get why currency adjustments don't have this
Speaker 3: stabilizing effect. Was there a period when economic specialty was
Speaker 3: more distributed, that there was a more clear link between
Speaker 3: exchange rate fluctuations and trade balancing.
Speaker 4: The simple answer I think is no. I think that
Speaker 4: there was a time maybe when you had the gold standard. Yeah,
Speaker 4: but there's also an issue that the movements of gold
Speaker 4: reflected the confidence of markets that the economy was sustainable.
Speaker 4: There were no imbalances. So if he ran a trade
Speaker 4: deficit in the nineteenth century, yes, you know, we have
Speaker 4: to be settled in gold eventually, but it wasn't a
Speaker 4: problem until everyone decided that maybe you wouldn't be able
Speaker 4: to do it, and then you would have these kinds
Speaker 4: of crunches most of my careers. It's so funny because
Speaker 4: when you go to school, all you learn is PPP
Speaker 4: and trade balances and sort of adjustment of exchange rates
Speaker 4: and so on to get trade into equilibrium. Once you're
Speaker 4: sitting at a trading desk, all you see our capital
Speaker 4: flows and that's kind of the driver. And the issue
Speaker 4: is does the market have enough confidence to keep lending
Speaker 4: you the money? And if you look at the US,
Speaker 4: say for you know, the last twenty years or so,
Speaker 4: through thick and thin till recently, the market was pretty
Speaker 4: confident that the risk adju just returns into US would
Speaker 4: be positive. And yeah, the US ran a trade deficit,
Speaker 4: but it didn't seem to harm US welfare.
Speaker 2: What do you see in the capitol flows now? Because
Speaker 2: this seems to be one of the difficulties of the
Speaker 2: current moment, which which is there are a lot of
Speaker 2: people talking about the sell America idea, but if you
Speaker 2: look at some of the data, and a lot of
Speaker 2: it comes out on a lag, you don't really see
Speaker 2: a lot of selling. For instance, foreign account selling, a
Speaker 2: lot of US treasuries. Are you seeing any evidence of
Speaker 2: the sell America theme emerging?
Speaker 4: Well, I think you see it in the weaker dollar.
Speaker 4: And you know, my best friend is the balance of
Speaker 4: payments identity, and I might talk to it every day.
Speaker 3: And this little sad but charming.
Speaker 4: The thing is that when the market decides that it's
Speaker 4: not going to lend you money at yesterday's interest rates
Speaker 4: and exchange rates, there are two ways of getting that adjustment.
Speaker 4: Either your demand for credit can go down, which we
Speaker 4: sometimes see with emerging markets when they hit the wall
Speaker 4: with respect to foreign funding, and the economy crashes because
Speaker 4: basically they have to get into trade balance or surplus
Speaker 4: even in order to meet their obligations. In G ten,
Speaker 4: mostly and historically with the US, the adjustment has been
Speaker 4: via the currency occasionally, like in seventy eight in April,
Speaker 4: with the currency and interest rates, but there's no big
Speaker 4: demand shock, there's no big shock to output because the
Speaker 4: money's not there. The money's there, but it's at a
Speaker 4: different price than you expect it to pay. So I
Speaker 4: think you have to look at the path that's traced
Speaker 4: by US interest rates in the exchange rates, you know,
Speaker 4: as well as sentiment and seeing what people are saying
Speaker 4: to understand whether the financing is coming easily or with difficulty.
Speaker 3: Going back to Europe for a second, so Germany has suddenly,
Speaker 3: maybe briefly, but suddenly found this willingness to spend more
Speaker 3: money and that's going to benefit German defense companies. We
Speaker 3: see higher rates, so maybe a longer term more inflationary
Speaker 3: temperature in the European economy. Is Europe actually a desirable
Speaker 3: destination though? For global capital? I mean it doesn't have
Speaker 3: really an alternative to US treasuries. The fundamental growth prospects
Speaker 3: still don't look great. Do you see any changing perspective?
Speaker 3: And like the pure desirability of capital to enter Europe?
Speaker 4: Some but I'd say most of what we're seeing is
Speaker 4: the market beginning to debate whether the US is going
Speaker 4: to fall back into the pack in terms of being attractive.
Speaker 4: I don't think it's really that is Europe pulling away
Speaker 4: from the pack in terms of attractiveness. And going back
Speaker 4: to the first principle that I mentioned, when you list
Speaker 4: the issues limiting growth in Europe, you know there's been there.
Speaker 4: You know, energy policy which hasn't worked out, there's the
Speaker 4: over regulation, there's taxation, lack of incentives, the labor market,
Speaker 4: the inflexibility, all the issues that we've discussed for twenty
Speaker 4: or thirty years. It would be remarkable if defense spending
Speaker 4: was the answer to all of those. And you know,
Speaker 4: I'm a bit skeptical in the short term it might
Speaker 4: make a difference in the long term. You know, it's
Speaker 4: not as if we study Attila the Hunts Textbook of
Speaker 4: economics to see how, you know, preparing for war is
Speaker 4: going to give you a better economy.
Speaker 2: Yeah, that's another one weird triconomics thing. Yeah, the belief
Speaker 2: that defense spending is going to change everything. I mean,
Speaker 2: it is a big it is a big change, but
Speaker 2: the idea that it's going to really reverberate across the
Speaker 2: European Union. Going back to US problems for a second,
Speaker 2: So if we can't count on a weaker dollar to
Speaker 2: save us, and meanwhile it seems like we're going to
Speaker 2: get probably more fiscal spending, a bigger deficit. Does the
Speaker 2: job of reining in inflation now fall entirely to the
Speaker 2: Fed pretty much.
Speaker 4: Yeah, there's a hope that some spending can be reduced
Speaker 4: because if you look at the share of government spending
Speaker 4: and GDP. It's way higher than it was twenty eighteen,
Speaker 4: twenty nineteen, you know, for the decade before we hit COVID,
Speaker 4: and you know, the Republicans kind of got snookered by
Speaker 4: Biden when they did the debt deal in that they
Speaker 4: accepted a higher baseline level of spending that was way
Speaker 4: above the historical norm for the US. So the question
Speaker 4: is can they get that back down, and can they
Speaker 4: do that in a way that's you know, fair equitable,
Speaker 4: that's not really going to be on the backs of
Speaker 4: you know, one segment of the population or you know,
Speaker 4: the forest or the weakest or whatever. If they can,
Speaker 4: it would be remarkable if dose can get rid of
Speaker 4: wasteful spending. You know, if they can actually find waste,
Speaker 4: fraud and abuse, that would be terrific. But if they can't,
Speaker 4: and we know the history of these fiscal bills, which
Speaker 4: is that the easiest thing to do is to kind
Speaker 4: of say, well, we'll have a lot of supply side
Speaker 4: effects or we're counting on this revenue or that revenue
Speaker 4: which may or may not come. If it turns out
Speaker 4: that it's kind of steepening the the deficit path in
Speaker 4: the path of death accumulation, the FED may be the
Speaker 4: only story in town.
Speaker 3: You wrote an interesting piece earlier this week talking about
Speaker 3: the sort of short to medium term outlook for the FED,
Speaker 3: and it sounded like, you see the window for rate
Speaker 3: cuts is being sort of narrow and shallow that basically
Speaker 3: in twenty six, twenty twenty seven, we're going to be
Speaker 3: getting a stimulative impact assuming this tax bill goes through,
Speaker 3: and something that it looks like talk to us about like,
Speaker 3: you know, what the market is pricing in for rate
Speaker 3: cuts versus what realistically the FED might be able to
Speaker 3: do here.
Speaker 4: Yeah, I guess I'm kind of at odds with the market,
Speaker 4: both in the short term and and the longer.
Speaker 3: Love media, this is what makes an interesting conversation.
Speaker 4: And in the short term I kind of think, Look,
Speaker 4: every survey you get tells you that everybody's concerned about growth,
Speaker 4: they expect growth to slow down. How many weak payroll
Speaker 4: numbers do you need to say, Oh, wait a second,
Speaker 4: the people have been telling us that nothing's happening, that
Speaker 4: things are slowing down. Now we get evidence. Do you
Speaker 4: need three, do you need six? Or do you just say, well, yeah,
Speaker 4: that just confirms what everybody's been saying. So I actually
Speaker 4: think that they will do the right thing, which would
Speaker 4: be to ease in response to incoming economic data. Having
Speaker 4: said that, I would see that as an insurance policy.
Speaker 4: Because the fiscal bill is likely to introduce net stimulus,
Speaker 4: We're going to get something uncertain inflation. We'll get certain
Speaker 4: inflation effects from the tariffs. What's uncertain is whether they're
Speaker 4: one off or persistent. So between the combination of tariff
Speaker 4: and used inflation and fiscal stimulus, it's not clear to
Speaker 4: me how they're going to cut. I think that the
Speaker 4: FED might see themselves as having an issue and sitting
Speaker 4: in terms of saying, well, if we cut in Q
Speaker 4: two or Q three, can we take it back in
Speaker 4: Q four and Q one, with you know, the president
Speaker 4: over our shoulders saying, you know, don't do that. But
Speaker 4: if you're running a model, you'd probably say, given all
Speaker 4: the data that have come in, if you get confirmation
Speaker 4: that the economy is blowing, you should cut, and then
Speaker 4: you should keep your eyes open to see what's happening,
Speaker 4: you know, at the end of the year, to turn
Speaker 4: into twenty twenty six and see if you have to
Speaker 4: take it back. Because the inflation picture has deteriorated.
Speaker 2: Can I ask a basic question which I've kind of
Speaker 2: always wanted to ask someone, and given your experience in
Speaker 2: the market, I think I should ask you, what is
Speaker 2: the central bank playbook for stagflation?
Speaker 4: Pray look in some ways when you look at the history,
Speaker 4: Arthur Burns got out a very bad deck and he
Speaker 4: probably didn't play it well, but he didn't have a
Speaker 4: good deck to play with green Span, Burnank, even yelling
Speaker 4: to some degree, Greensprand and BERNANKI actually had pretty strong
Speaker 4: product deep growth when they were there, so unit labor
Speaker 4: costs were soft. Yellen had low inflation, so she could
Speaker 4: be everybody's friend because they were trying to get to
Speaker 4: their targets, you know, and even Powell in his first
Speaker 4: term was faced with that issue. But do you think
Speaker 4: with stagflation? Is really tough and there's no good answer
Speaker 4: because you know in the longer term that you can't
Speaker 4: accommodate the negative productivity shock or negative output shock because
Speaker 4: you'll just have persistent inflation. The only question is how
Speaker 4: quickly do you try and ring it out of the system,
Speaker 4: And that's you know, that's a very hard decision to make.
Speaker 3: Speaking of having views that are out of consensus. You
Speaker 3: wrote an interesting note a couple of weeks ago. I
Speaker 3: think it was before the quote did haunt with China,
Speaker 3: but actually you were of the view, Yeah, and you've
Speaker 3: been talking about this tariff. We'll have an inflationary impulse.
Speaker 3: We'll see how far it goes. But that actually the
Speaker 3: sort of short term disruption from the terriff you sort
Speaker 3: of thought have been overstated, and I think the markets
Speaker 3: increasingly come around to this view. I mean, if we
Speaker 3: were trying to you in April early April, people were,
Speaker 3: you know, sudden to stop to the economy. They pulled
Speaker 3: the plug on the economy, so to speak. But at
Speaker 3: least in the short term, your view is that it's
Speaker 3: not quite as big of a deal from a sheer
Speaker 3: like economic activity standpoint.
Speaker 4: Yeah, Look, ten percent shocks the competitiveness. We get those
Speaker 4: all the time via exchange rates, and life goes on.
Speaker 4: You know, in the last ten years, the euro dollars
Speaker 4: moved ten percent in a relatively short period of time,
Speaker 4: three or four times. It's not it's not fun for
Speaker 4: the business people on the wrong side of that move,
Speaker 4: but they managed to deal with it. And China was different.
Speaker 4: But you know, the imports from China in twenty twenty
Speaker 4: four were like one point six percent of GDP at
Speaker 4: the US GDP of US GDP correct and even at
Speaker 4: the worst of the sort of you know when we
Speaker 4: saw no boats there. Yeah, we're probably running at about
Speaker 4: fifty sixty percent of normal. So you talk about one
Speaker 4: point eight percent shock, and you start to say, okay,
Speaker 4: you know, you look at other shocks that the US gets,
Speaker 4: you know, either via the exchange rate when you have
Speaker 4: a big move, or via energy prices, you know, which
Speaker 4: is like seven or eight percent of the CPI. They
Speaker 4: can easily move twenty or thirty percent. That's something that
Speaker 4: everybody has to deal with. It's never comfortable, but the
Speaker 4: economy can deal with it. Where I did see a
Speaker 4: potential issue which I think is really important, is that
Speaker 4: if we move from tariffs, which is a way of
Speaker 4: adjusting relative prices, to start saying now we just don't
Speaker 4: want x, y or Z from China, or we're going
Speaker 4: to limit imports of stuff, using quantities to regulate trade
Speaker 4: rather than prices potentially has a much deeper effect because
Speaker 4: you really don't know how our prices will have to
Speaker 4: move in the event of a shortage to clear the market,
Speaker 4: so with that, you'd be playing with fire. But percent tariffs.
Speaker 4: It's not that I'm endorsing it, I just don't. I
Speaker 4: don't think that they are as big a deal as
Speaker 4: they were made out to be.
Speaker 2: It does feel to me like one of the complications
Speaker 2: of the current environment other than uncertainty, which you know,
Speaker 2: we've been joking on the podcast that we cannot get
Speaker 2: through a single interview at the moment without mentioning the
Speaker 2: word uncertainty. But one of the complications is you potentially
Speaker 2: have the economy sort of moving in different directions, or
Speaker 2: maybe the impacts of the tariffs are moving at different speeds,
Speaker 2: So you could have an impact on inflation, you know,
Speaker 2: relatively soon as prices start going up, but you could
Speaker 2: have an impact on the labor market later on, because
Speaker 2: it takes a while for you know, reduce demand to
Speaker 2: work its way through the economy, and that strikes me
Speaker 2: as something that's difficult to deal with for the FED
Speaker 2: and also means they have a sort of limited window
Speaker 2: to operate. And how realistic do you think that timing
Speaker 2: scenario is.
Speaker 4: It's pretty realistic, although I think that the effects on
Speaker 4: labors show up sooner oh, okay, because the say import
Speaker 4: from China crash, Are we going to build stuff in
Speaker 4: the US, And the answer is probably not. The US
Speaker 4: is probably not even with ten percent tariffs on a
Speaker 4: bunch of countries. The US is probably not the second
Speaker 4: lowest cost producer for most of the stuff that China
Speaker 4: was producing. So you know, we would get the price
Speaker 4: effects from China. I don't see that there would be
Speaker 4: any significant increase in employment, So I think we'd get
Speaker 4: them both at about the same time that demand was
Speaker 4: getting squeezed because this is a decline in real wages
Speaker 4: because of the price effects. But I think that they
Speaker 4: are very hopeful in terms of the quantity effects the
Speaker 4: output benefits that they expect to get in the short
Speaker 4: term from the tariffs, and I suspect we're going to
Speaker 4: see the downside of that quicker than any kind of
Speaker 4: upside is likely to emerge.
Speaker 3: Before I forget you said something at the beginning, there
Speaker 3: actually are real non tear iff trade barriers employed by Japan.
Speaker 3: Apparently it's not true that they have a bowling ball
Speaker 3: test where they drop a bowling ball on a car
Speaker 3: and if it dents, you're not allowed to sell the car.
Speaker 3: There apparently that is something of an urban legend. But
Speaker 3: whether it's Japan or anywhere else, what substantive non tear
Speaker 3: iff trade barriers do you see out there that the
Speaker 3: administration has a legitimate case should be modified in some way.
Speaker 4: What trade in agriculture is very limited in most countries.
Speaker 4: You know, there's certain health you know, with more processed food,
Speaker 4: there are health regulations which may or may not be
Speaker 4: completely justified. And there are sort of barriers that you've
Speaker 4: seen documented over time. It's not that they're wrong. I mean,
Speaker 4: the US put out this very thick book documenting non
Speaker 4: tariff barriers, but I think the importance is probably overstated.
Speaker 4: They should be gotten rid of. But it's not like
Speaker 4: cataclysmic type of thing. I mean, look, I think US
Speaker 4: demand has been stronger than that in the rest of
Speaker 4: the world, so we've imported more and that's most of
Speaker 4: the trade story.
Speaker 2: I got distracted looking up the bowling ball test Joe.
Speaker 3: Interesting.
Speaker 2: It seems to be something that Donald Trump talked to
Speaker 2: is probably not true by the way.
Speaker 3: I know, we already had that agreement with the UK,
Speaker 3: but I think they should let cars drive on the
Speaker 3: right side of the road and would probably make it
Speaker 3: a lot easier for Americans to you know, sell into
Speaker 3: that market.
Speaker 2: Joe, why do you feel the need to say these
Speaker 2: things keep going?
Speaker 4: All right?
Speaker 2: Steven, I'm going to ask a very basic question, you know,
Speaker 2: typical question for you, I imagine, But what are your
Speaker 2: clients asking you about at the moment? What concerns are
Speaker 2: you seeing out there? What are the questions that you're
Speaker 2: getting repeatedly?
Speaker 4: I think corporate clients, you know, people who are in
Speaker 4: real businesses make things, sell things. I hate to use
Speaker 4: the word uncertainty as much as you do.
Speaker 2: It's okay, it is allowed, Okay.
Speaker 1: You know.
Speaker 4: The question for them is, you know, if I want
Speaker 4: to increase capacity, where should I do it? Should I
Speaker 4: do it in the US? Should I do it elsewhere?
Speaker 4: How is this going to play out? Is it going
Speaker 4: to play out for four years? Or is it going
Speaker 4: to play out for eternity? And I think that they're
Speaker 4: having a very hard time getting their hands around it,
Speaker 4: and to them, that's the biggest issue. I think if
Speaker 4: you're investors, people who manage portfolios, are you know, trying
Speaker 4: to eke out gains in the market. The question about
Speaker 4: where the dollar is going, where rates are going, how
Speaker 4: fast they're going, and especially nobody wants to be the
Speaker 4: sixth person on a trade because that makes you vulnerable.
Speaker 4: So they're very obsessed with kind of understanding whether any
Speaker 4: trade that they want to do is like I say,
Speaker 4: a steepener trade in the rates market, has everybody else
Speaker 4: done it already, or is there's still a room to
Speaker 4: get in and be able to do well on that trade.
Speaker 3: Yeah.
Speaker 2: On this note, I was out last night. I was
Speaker 2: talking to a couple investors, one of whom is involved
Speaker 2: in a very large family office, but he was saying
Speaker 2: that it feels like everyone is basically fully allocated at
Speaker 2: this point, and like there's a lot of nervousness about
Speaker 2: putting on new trades, and there's not a lot of
Speaker 2: cash actually sitting on the sidelines anymore.
Speaker 4: You know, I think we would welcome some of that
Speaker 4: cash in the FX market because I don't think that
Speaker 4: positions are very heavy one way or another, given the
Speaker 4: moves that we've seen, say in the dollar the end
Speaker 4: of last year, than the beginning the Liberation Day, then
Speaker 4: post Liberation Day, and you know, after the semi accord
Speaker 4: with China, I think a lot of people have actually
Speaker 4: headed to the sidelines. As far as the FX goes,
Speaker 4: I may be more positioning inequity is given the way
Speaker 4: it's moved the last month or so, and on fixed
Speaker 4: income as well. I mean, our view that rates will
Speaker 4: probably be higher at the end of the year is
Speaker 4: shared by a lot of people. Yeah, you know, it
Speaker 4: doesn't mean it's wrong, but yeah, I think that the
Speaker 4: caution about, say, buying bonds right now is very widespread.
Speaker 2: What is your end of your target for the tenure.
Speaker 4: I believe we're just under five percent, so we'll be
Speaker 4: closer to five than to four and a half by
Speaker 4: the end of the year.
Speaker 3: You know. I want to go back actually to something
Speaker 3: you said, which is that when you're in school, you're
Speaker 3: sort of taught that purchasing power parody. These are the
Speaker 3: things that help determine the fair value of currencies, and
Speaker 3: then once you want it became on Wall Street areas.
Speaker 3: It's all about capital flows and investment and things like that.
Speaker 3: What else have you talked to us a little bit
Speaker 3: more about the gap between academic economics. You have a
Speaker 3: PhD in economics from Yale academic economics, and then the
Speaker 3: type of economics that's actually useful and that people pay
Speaker 3: money for on wallstream And what did you learn or
Speaker 3: what did you have to unlearn?
Speaker 4: Oh, that's a hard one. I think that you have
Speaker 4: to learn to question things and you know the assumptions
Speaker 4: that everyone makes. Yeah, and you mentioned one of the
Speaker 4: pieces we did on how exposed is the US? Actually?
Speaker 4: You know, you sort of look at what everyone's saying
Speaker 4: and saying, can I find some data that well either
Speaker 4: support it or oppose it? So the questioning of the data,
Speaker 4: being willing to question central banks and their policies and
Speaker 4: even their policy framework. I think that that's something that
Speaker 4: that's really important, and it's something that is respected in
Speaker 4: the market. I mean, you don't have to be right
Speaker 4: all the time, but your arguments have to be well crafted.
Speaker 4: And being able to formulate those arguments I think is
Speaker 4: very important.
Speaker 3: What was your PhD thesis about?
Speaker 4: Oh? My goodness, it was about agricultural development, how transferable
Speaker 4: technology was from one country to another.
Speaker 3: And when you think about, like when you look at
Speaker 3: your career in finance, like how helpful is this sort
Speaker 3: of like core academic macro that you know all those
Speaker 3: equations and all that stuff.
Speaker 4: If it gives you the confidence to question what people
Speaker 4: are saying is enormously helpful. If you're just another brick
Speaker 4: on the wall sort of repeating with you know the
Speaker 4: models that you got taught in graduate school and thinking
Speaker 4: that they're right. I think you're going to have a
Speaker 4: tough time. And I still use some of the techniques
Speaker 4: that I used in my dissertation. But I think the
Speaker 4: key thing is to walk away from this and being
Speaker 4: able to say, Okay, I know the model says, this
Speaker 4: is the model robust enough to actually capture what's essential
Speaker 4: in the real world, and if not, how can I
Speaker 4: do better? And that's the value I think of the PhD.
Speaker 4: It enables you to question what everybody else is saying.
Speaker 3: It's like an arms race, right. The PhD doesn't necessarily help,
Speaker 3: But without the PhD, you don't have the confidence to
Speaker 3: question the PhD. Everybody just needs to unilaterally agree no
Speaker 3: more PhDs.
Speaker 2: That's right, and everyone will.
Speaker 4: That works for me, But I know a lot of
Speaker 4: people without PhDs who are very very sharp. Okay, and
Speaker 4: you know, even Powell, whom I respect for, Yeah, you know,
Speaker 4: no PhD, but he gauges the weaknesses are star what's
Speaker 4: the standard air or maybe plus or minus twenty You know,
Speaker 4: that sort of understanding that having the intuition to sort
Speaker 4: of know when something is really well founded versus something
Speaker 4: that's you know, sounds nice, but it's all over the places.
Speaker 4: You know, only works on a blackboard. That's really important.
Speaker 2: I know we touched on a few areas where your
Speaker 2: theories differ from the market stance at the moment. But
Speaker 2: just on the note of, you know, the usefulness of
Speaker 2: theoretical academic economics versus real world what's the biggest assumption
Speaker 2: that the market or policy makers or investors are getting
Speaker 2: wrong at the moment.
Speaker 4: I think policy makers everywhere should pay a lot of
Speaker 4: attention to the risk premium of having erratic policy and
Speaker 4: policy uncertainty. And you read some of the stuff that's written,
Speaker 4: and it's sometimes it's written almost as if it's in
Speaker 4: a vacuum. I can do this and it will affect
Speaker 4: this market, which is the one I'm trying to affect,
Speaker 4: but kind of nobody else is going to pay attention
Speaker 4: to it. You know, in the real world, everybody else
Speaker 4: pays attention to it, and so I think that that's
Speaker 4: sort of an issue that you want to take into account,
Speaker 4: you know, I think more generally, especially central bank policy makers.
Speaker 4: They're sometimes wedded to academic models, and if they don't
Speaker 4: have an alternative model that's viewed as respectable in academics,
Speaker 4: it's hard for them to say, well, doesn't matter that
Speaker 4: it's not respectable, that it works, whereas the one that
Speaker 4: is respectable doesn't work.
Speaker 3: It strikes me that part of the reason that there's
Speaker 3: so much uncertainty or confusion is that a lot of
Speaker 3: the big topics being discussed right now to some extent,
Speaker 3: precede economics because they're really about, like, you know, we're
Speaker 3: getting to sort of like core questions about institutional structure
Speaker 3: and politics, the quality of our political discourse, et cetera,
Speaker 3: and like the quality of elected leaders all around the
Speaker 3: world and so forth. And as such, it seems like
Speaker 3: you sort of like run into a hard limit of
Speaker 3: like how far you can go in understanding anything simply
Speaker 3: by looking at the economic lens, which is no not
Speaker 3: to economics. I love talking to economists such as yourself,
Speaker 3: but at some level, the tools and the economists toolkit
Speaker 3: are just not going to get you very far in
Speaker 3: sort of like discerning which way some of these questions
Speaker 3: are going to go.
Speaker 4: Well. I think at a significant level. You don't need
Speaker 4: a high school degree to understand the issues. If you
Speaker 4: don't trust your trading partners to be reliable suppliers so
Speaker 4: much so that you you're willing to forego the benefits
Speaker 4: of trade, the benefits of economies of scale and efficiency,
Speaker 4: that's a real pity. And then there's a real cost
Speaker 4: to it. And if you know, we have to make
Speaker 4: all the stuff that is made elsewhere, there's a cost.
Speaker 4: And a bit of my own background, I come from Canada.
Speaker 4: There are parts of Canada that make very good wine,
Speaker 4: and there are parts of Canada that make very bad wine.
Speaker 4: If you've ever had the bad wine, you're a free
Speaker 4: trader and wine for the rest of your life.
Speaker 3: Where's the bad wine?
Speaker 4: Reader? I will not I will not denounce the country
Speaker 4: of my birth.
Speaker 3: I have a guess. Actually, oh, what do you think?
Speaker 4: Well?
Speaker 3: I was reading so I was recently talking to someone
Speaker 3: actually while we were in Atlanta, and I randomly heard
Speaker 3: someone talking about how there are some really good wine
Speaker 3: tours that you can take in the sort of Finger
Speaker 3: Lakes region of New York with the only caveat It's
Speaker 3: very beautiful and you can take boats around from one
Speaker 3: winery to another. The only caveat is that the wine
Speaker 3: isn't very good, and so my guess is that it
Speaker 3: would be somewhere on the other side of that New
Speaker 3: York Canada border around there where the wine is not good.
Speaker 3: But that's just my that's my hunt.
Speaker 4: You can get a lot worse wine than the finger legs.
Speaker 2: All right, we'll have to do a wine episode with Steven,
Speaker 2: but for now we have to leave it there. Steven,
Speaker 2: thank you so much for coming on the show. I'm
Speaker 2: so glad we finally got a chance to talk with you.
Speaker 4: Thank you both. It's a great pleasure, and you lived
Speaker 4: up to your awesome reputation.
Speaker 3: Thank you so much.
Speaker 4: Joe, that was great.
Speaker 2: I'm so glad we finally had Stephen on.
Speaker 3: Steven's great You know, on that last point where he
Speaker 3: is talking about the sort of the degradation of the
Speaker 3: comfort that countries have with their trading partners, it strikes
Speaker 3: me that this has to be a big part of
Speaker 3: the global rate story because if every country, and it
Speaker 3: fits into an episode we recently did with Scott back
Speaker 3: about the risks of deglobalization, if every country suddenly needs
Speaker 3: to start building its own things because their trading partners
Speaker 3: are unreliable. That means A, you get less productivity and
Speaker 3: b you just need more spending, whether it's private spending
Speaker 3: or public spending. And so you get this story where
Speaker 3: every country sort of logically feels it has to spend
Speaker 3: more into an environment of less productivity, which means higher inflation,
Speaker 3: which means higher rates.
Speaker 4: Right.
Speaker 2: And the irony I guess is that that happens at
Speaker 2: the same time that a lot of countries, to Steven's
Speaker 2: earlier point, think that they can solve all their domestic
Speaker 2: problems through international trade policies.
Speaker 3: Yeah, you know, I remember, like you know, it was
Speaker 3: a popular thing to talk about, like currency wars in
Speaker 3: the wake of two thousand and nine, twenty ten, twenty eleven,
Speaker 3: and this sort of fantasy that countries can revive their
Speaker 3: economic fortunes simply via the exchange rate. And I'm sure
Speaker 3: within any country there are sectors of the economy for
Speaker 3: which that is true. I suspect that a weaker currency
Speaker 3: for the US is as always going to benefit our
Speaker 3: soybean farmers and our corn farmers to some extent, but
Speaker 3: it is not going to magically put us at the
Speaker 3: front of the line when it comes to the high
Speaker 3: value exports or the high value products period that typically
Speaker 3: characterize in the advanced economy.
Speaker 2: Just one more depreciation, bro, one more appreciation.
Speaker 3: One more appreciation road. We're going to mage TSMC's Taiwan
Speaker 3: semiconductor prowess.
Speaker 2: That's right, all right?
Speaker 3: Shall we leave it there. Let's leave it there.
Speaker 2: This has been another episode of the oud Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart.
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