WEBVTT - Why Interest Rates Are Shooting Up All Around the World 0:00:02.720 --> 0:00:16.480 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.640 --> 0:00:21.800 Hello and welcome to another episode of the Authoughts podcast. 0:00:21.920 --> 0:00:23.360 I'm Tracy Alloway. 0:00:23.000 --> 0:00:24.200 And I'm Joe Wisenthal. 0:00:24.600 --> 0:00:27.400 Joe, how about them JGB yields? 0:00:27.800 --> 0:00:29.880 So this is the thing, which is that in some 0:00:29.960 --> 0:00:33.400 sense the markets have quieted down certainly compared to early 0:00:33.440 --> 0:00:37.000 April or mid April, but there are some major moves 0:00:37.280 --> 0:00:42.479 still happening, particularly in rates, some currency stuff. If you 0:00:42.600 --> 0:00:45.200 know where to look, these markets are not boring at all. 0:00:45.440 --> 0:00:47.440 I don't even think you have to like actively go 0:00:47.640 --> 0:00:51.440 looking for interesting moves. So we're recording this on May twentieth, 0:00:51.600 --> 0:00:55.200 and the twenty year JGB yield was up something like 0:00:55.240 --> 0:00:59.280 fifteen basis points to about two point five percent. That's 0:00:59.320 --> 0:01:02.400 the highest since two thousand. So basically, back when I 0:01:02.480 --> 0:01:04.800 was living in Tokyo going to high school. 0:01:05.720 --> 0:01:08.280 Were telling how I measure everything, Well, what were you 0:01:08.319 --> 0:01:13.479 borrowing from local Japanese banks or were you buying when 0:01:13.480 --> 0:01:14.319 you were in high school? 0:01:14.520 --> 0:01:17.760 Sadly, sadly not, although well they wouldn't have been a 0:01:17.760 --> 0:01:18.440 great investment. 0:01:18.440 --> 0:01:21.240 Well you should have watch of jgb's back. Then you 0:01:21.280 --> 0:01:24.760 get great price appreciation, you get great yields. But yes, 0:01:24.800 --> 0:01:26.679 there's a lot going on. It's a global thing. So 0:01:26.760 --> 0:01:31.040 in the US we're also seeing fairly elevated rates lately, 0:01:31.600 --> 0:01:34.480 and to some extent that might be a story of 0:01:34.760 --> 0:01:38.520 expectations that the current budget negotiations are going to continue 0:01:38.640 --> 0:01:41.880 widening the deficit, you know, the sort of moody story. 0:01:42.000 --> 0:01:45.640 But there's clearly global factor here that cannot simply be 0:01:45.880 --> 0:01:50.000 explained by, say, like the willingness or unwillingness of members 0:01:50.040 --> 0:01:52.760 of Congress to like expand the salt deduction. There is 0:01:52.800 --> 0:01:56.080 a bigger macro story unfolding that I don't think I 0:01:56.120 --> 0:01:58.200 have my head fully wrapped around. Right. 0:01:58.280 --> 0:02:01.200 So, as we're recording this, the year is back at 0:02:01.240 --> 0:02:04.520 four point four eight percent, and perhaps more importantly, the 0:02:04.640 --> 0:02:07.800 thirty year is creeping back towards five percent. The dollar 0:02:08.080 --> 0:02:11.320 is falling again, so the Cell America theme is kind 0:02:11.360 --> 0:02:14.320 of getting another airing. There are concerns over the fiscal 0:02:14.360 --> 0:02:17.680 trajectory and the big beautiful bill that you know, you 0:02:17.800 --> 0:02:18.320 just kind. 0:02:18.120 --> 0:02:21.640 Of call is. I know it's a liter called beautiful, but. 0:02:21.720 --> 0:02:23.320 I love that, And so the worry is that that 0:02:23.360 --> 0:02:26.600 will push up the deficit and possibly inflation. Plus, of course, 0:02:26.639 --> 0:02:30.400 we have tariffs Meanwhile, as rates appear to be going up, 0:02:30.440 --> 0:02:32.360 there are plenty of people still out there who are 0:02:32.360 --> 0:02:35.120 talking about the prospect of the economy, the US economy 0:02:35.120 --> 0:02:39.240 actually slowing down and getting rate cuts later this year, 0:02:39.600 --> 0:02:42.079 and the market is still pricing those in. So we're 0:02:42.120 --> 0:02:45.360 at this really interesting juncture in the bond market where 0:02:45.440 --> 0:02:47.960 we're getting a lot of conflicting signals, a lot of 0:02:48.000 --> 0:02:51.760 confusing signals, as you mentioned, and it seems like maintaining 0:02:51.800 --> 0:02:55.480 stable prices, low inflation, and trying to fight all these 0:02:55.520 --> 0:02:59.240 different cross currents is going to fall almost entirely on 0:02:59.280 --> 0:03:01.800 the FED. I think we should talk about all. 0:03:01.720 --> 0:03:04.160 Of this absolutely. Let's jump right into it. We have 0:03:04.160 --> 0:03:05.080 a great guest today. 0:03:05.120 --> 0:03:07.400 We have the perfect guest, you might say. We're going 0:03:07.480 --> 0:03:09.920 to be speaking with Steven Englander, the global head of 0:03:09.960 --> 0:03:15.160 G ten FX Strategy at Standard Chartered, And to be honest, Joe, 0:03:15.240 --> 0:03:18.440 I cannot believe we haven't had Stephen on the podcast before. 0:03:18.720 --> 0:03:23.120 I've been reading Steven's notes for years and years and years. 0:03:23.280 --> 0:03:25.480 I was actually really surprised to realize he's never been 0:03:25.480 --> 0:03:29.400 on before. I know, our oversight, major our oversight. Lately, 0:03:29.680 --> 0:03:32.800 his emails have become a must click for me, I 0:03:32.840 --> 0:03:35.600 always open them and so yes, he's here with us 0:03:35.640 --> 0:03:36.120 in studio. 0:03:36.240 --> 0:03:37.400 Steven, welcome to the show. 0:03:37.600 --> 0:03:40.080 Thank you very much. I'm honored to be here with 0:03:40.120 --> 0:03:41.800 the best interviewers in the world. 0:03:42.080 --> 0:03:44.280 That's right. We are going to clip that and save 0:03:44.320 --> 0:03:45.400 it for our highlight reel. 0:03:45.600 --> 0:03:49.040 That's very kind. So why don't we start with jgb's 0:03:49.200 --> 0:03:53.040 and also UST's. Is there a common theme running through 0:03:53.040 --> 0:03:56.520 that sell off or are they being driven by entirely 0:03:56.600 --> 0:03:57.840 different things. 0:03:58.520 --> 0:04:01.280 I think it's mostly different. There is a common element 0:04:01.520 --> 0:04:04.160 in that if US yields are going up, everybody's yelds 0:04:04.160 --> 0:04:06.840 are going to be going up. But I think in 0:04:06.880 --> 0:04:10.400 the case of jgb's there's, you know, particular dynamics. There's 0:04:10.480 --> 0:04:14.160 uncertainty about what they're going to do. On the QT side, 0:04:14.560 --> 0:04:18.400 they had this very kind of painful twenty year auction 0:04:18.640 --> 0:04:22.960 which was pretty close to failing. The BOJ published that 0:04:23.000 --> 0:04:26.159 there was some debate as to what pace of quantitative 0:04:26.160 --> 0:04:30.320 tightening they should be going at, if any, and I 0:04:30.400 --> 0:04:33.360 think there's a general view in the world that yields 0:04:33.400 --> 0:04:37.000 are too low and they're going to be going up. However, 0:04:37.640 --> 0:04:40.520 it's puzzling because the market seems to like the end 0:04:41.160 --> 0:04:44.600 and normally that would be associated with the lower yields. 0:04:44.880 --> 0:04:46.520 Well, you're getting paid a lot to buy you and 0:04:46.560 --> 0:04:48.640 I can I mean, right, isn't that part of the story, 0:04:48.800 --> 0:04:51.080 Like yields are going up, so it's like I'll buy 0:04:51.080 --> 0:04:52.800 some yen because at least they're paying me a lot 0:04:52.839 --> 0:04:53.760 more yen to hold them. 0:04:53.960 --> 0:04:57.040 Well, remarkably, today there have been times when the end 0:04:57.080 --> 0:04:59.440 thirty year yield has been higher than the German thirty 0:04:59.520 --> 0:04:59.920 year yield. 0:05:00.440 --> 0:05:04.880 So just on this point, I'm looking so anticipated. I 0:05:05.000 --> 0:05:07.960 literally on my terminal had just pulled up a chart 0:05:07.960 --> 0:05:11.600 of German thirty year yields as well, which are above 0:05:11.760 --> 0:05:14.440 three percent. That's crazy. They were at zero at the 0:05:14.440 --> 0:05:16.640 start of twenty twenty two, and that's the thirty year 0:05:16.880 --> 0:05:19.719 they're over three percent. There must be a global factor. 0:05:20.320 --> 0:05:23.160 Well, some of it is fiscal, especially in Europe and 0:05:23.240 --> 0:05:26.960 the US. The Europe had like ten twelve years of 0:05:27.400 --> 0:05:31.280 debt crisis in which they didn't want to expand fiscal deficits. 0:05:31.320 --> 0:05:34.440 The pressure was to do the opposite, and now they've 0:05:34.480 --> 0:05:38.560 discovered that defense spending is the key to economic growth. 0:05:38.640 --> 0:05:40.599 But the market, I think is looking at it, and 0:05:40.600 --> 0:05:43.880 they're looking at the fiscal prospects in the US and 0:05:44.160 --> 0:05:46.080 kind of guessing that we're not going to see zero 0:05:46.120 --> 0:05:46.880 in German yields. 0:05:46.880 --> 0:05:50.240 Again, just going back to the yen and people buying it. 0:05:50.320 --> 0:05:52.559 How much of that is a strong yen story versus 0:05:52.680 --> 0:05:56.120 a week dollar story. This is why I hate currencies. 0:05:56.160 --> 0:05:59.440 By the way, well, they're good because you have two 0:05:59.520 --> 0:06:03.320 chances to be wrong. I think that much of it 0:06:03.400 --> 0:06:06.880 is a week dollar story. And looking to see in 0:06:06.960 --> 0:06:10.600 terms of the negotiations on tariffs and in terms of 0:06:10.640 --> 0:06:14.960 how kind of off base the currency is, which currencies 0:06:15.000 --> 0:06:17.920 are most likely to move, which ones will face the 0:06:18.120 --> 0:06:22.440 least resistance in appreciating against the dollar, and I think 0:06:22.839 --> 0:06:26.600 Japan wins on several counts that the tariff negotiations will 0:06:26.640 --> 0:06:29.520 be tough because they still have a very big trade 0:06:29.520 --> 0:06:33.159 deficit with the US. Trade surplus, yes, trade surplus with 0:06:33.200 --> 0:06:36.680 the US. The non tariff barriers, even if you really 0:06:36.720 --> 0:06:40.440 can't quantify them, they're pretty significant, and you know, the 0:06:40.520 --> 0:06:43.080 US has a point in complaining about some of them, 0:06:43.480 --> 0:06:46.599 and there's a sense in the market, and I think 0:06:47.320 --> 0:06:51.520 correctly that once you get past the ten percent baseline 0:06:51.560 --> 0:06:55.400 tariff that the US needs for fiscal purposes that they 0:06:55.440 --> 0:06:58.760 may be will link to trade, some of the reciprocal tariffs, 0:06:58.760 --> 0:07:03.320 the you know, the beyond that ten percent for currency appreciation. 0:07:04.000 --> 0:07:06.520 And there's been a number of currencies under discussion, but 0:07:06.680 --> 0:07:09.200 you know, the end is one of the prime currencies, 0:07:09.240 --> 0:07:12.200 given that it's so weak relative to any kind of 0:07:12.240 --> 0:07:14.040 PPP type of basis. 0:07:14.160 --> 0:07:16.920 Right, this is sort of a general East Asian story. 0:07:17.120 --> 0:07:17.280 You know. 0:07:17.320 --> 0:07:19.840 Obviously we talked about the Taiwanies dollar and the South 0:07:19.920 --> 0:07:22.240 Korean one and so forth, and there is this view 0:07:22.640 --> 0:07:26.640 that maybe some sort of different in currency policy could 0:07:26.640 --> 0:07:30.000 be part of the packages here. Before we get more 0:07:30.040 --> 0:07:32.200 to that, you know, one of the things that you 0:07:32.360 --> 0:07:35.520 heard maybe six months ago or a year or even 0:07:36.080 --> 0:07:38.880 a few months ago, they're like, oh, if we impose tariffs, 0:07:39.000 --> 0:07:41.400 it will be offset because that will be a strengthening 0:07:41.400 --> 0:07:43.640 of the US dollar. And we've seen literally the opposite. 0:07:43.680 --> 0:07:47.960 But that was a common meme, a common conventional wisdom 0:07:48.080 --> 0:07:51.000 among a lot of economists both Wall Street academia are 0:07:51.040 --> 0:07:53.800 the ones who appear on TV et cetera. What is 0:07:53.840 --> 0:07:57.400 this simple story for why the dollar has been so 0:07:57.560 --> 0:07:59.960 weak since April second, even at a time when stop 0:08:00.320 --> 0:08:03.760 rebounded interest rates have stabilized a little bit. The one 0:08:03.960 --> 0:08:06.800 major move that hasn't really reversed is the dollar. What's 0:08:06.840 --> 0:08:08.000 this simple story there. 0:08:08.400 --> 0:08:11.160 Well for the complex story, well, it's a medium story, 0:08:11.160 --> 0:08:14.680 but it basically goes something like this said, you know, 0:08:14.840 --> 0:08:16.960 I might choose to pick your pocket if I thought 0:08:17.000 --> 0:08:20.760 you wouldn't respond, but if you did respond, you know, 0:08:20.800 --> 0:08:22.920 the consequences might not be as much fun for me. 0:08:23.360 --> 0:08:25.600 And I think that if you start with the assumption 0:08:25.760 --> 0:08:28.920 that the US can tariff everybody, yeah, and you know, 0:08:29.000 --> 0:08:30.960 the market is not going to say, well, wait a second, 0:08:31.440 --> 0:08:34.200 if they do tariffs, what about that Mara Lago stuff, 0:08:34.240 --> 0:08:37.200 what about foreign policy? You know what, what is the 0:08:37.280 --> 0:08:42.360 limit to which they can expand that policy envelope? You 0:08:42.400 --> 0:08:45.480 had to risk premium to US assets. So the offset 0:08:45.559 --> 0:08:48.240 to that is that the market is looking at US 0:08:48.280 --> 0:08:50.920 assets and kind of saying, well, safe haven, maybe not 0:08:51.000 --> 0:08:54.079 so much reliability, maybe not so much as it used 0:08:54.120 --> 0:08:54.320 to be. 0:08:55.040 --> 0:08:59.240 Is there good dollar depreciation and bad dollar depreciation? And 0:08:59.320 --> 0:09:01.360 I remember one of your notes you talked about this 0:09:01.440 --> 0:09:05.679 idea that you could get a weaker dollar that supports competitiveness, 0:09:05.840 --> 0:09:08.360 but you could also get a weaker dollar that reduces 0:09:08.920 --> 0:09:11.720 the amount of capital coming into the US. How would 0:09:11.720 --> 0:09:13.120 you measure those two things? 0:09:13.720 --> 0:09:16.680 Well, in a sense, we're getting some of that measurement 0:09:16.880 --> 0:09:19.760 now when we look at the dollar weakening and interest 0:09:19.840 --> 0:09:23.000 rates going up. I think it's a pretty good sign that, 0:09:23.559 --> 0:09:27.640 notwithstanding the greater competitiveness on paper, at least of the US, 0:09:28.080 --> 0:09:31.680 that investors aren't that enthusiastic about holding US assets. So 0:09:32.120 --> 0:09:35.520 I think that's one real signal that the market's not 0:09:35.880 --> 0:09:39.800 thinking that it's an unalloyed plus. But I'd say that 0:09:39.920 --> 0:09:43.040 most of the time if the dollar goes down is 0:09:43.080 --> 0:09:46.640 for bad reasons. The basic good story would be something 0:09:46.720 --> 0:09:50.360 like this that the rest of the world, for whatever reason, 0:09:50.400 --> 0:09:54.040 does fiscal policy and kind of expands consumption and they 0:09:54.040 --> 0:09:57.679 start buying US assets. US foreign yields go up relative 0:09:57.760 --> 0:10:00.600 to the US. Never mind what they're do. That picture 0:10:00.760 --> 0:10:04.800 is over, you know, five, ten, fifteen years, and they say, okay, 0:10:04.880 --> 0:10:07.480 you know, instead of buying US treasuries, we're going to 0:10:07.520 --> 0:10:11.080 buy you know, German and European and Asian because they're 0:10:11.080 --> 0:10:14.040 all expanding their fiscal deficits and their rates are going up. 0:10:14.120 --> 0:10:17.079 The return is higher, and you can start say, yeah, 0:10:17.160 --> 0:10:19.520 the dollar's weaker, but it's it's okay for the US, 0:10:19.600 --> 0:10:22.560 they can do their own thing. I'd say that if 0:10:22.600 --> 0:10:25.600 you're focused on the US, and this is something I 0:10:25.720 --> 0:10:30.280 can't emphasize enough that just about for every major, even 0:10:30.320 --> 0:10:34.640 medium sized country, ninety percent of the policy solution is 0:10:34.640 --> 0:10:38.600 going to be domestic. The idea that you can fix 0:10:38.720 --> 0:10:43.560 your economic problems by doing something on the international side, 0:10:43.559 --> 0:10:46.680 I think is an illusion. If you did the right 0:10:46.679 --> 0:10:49.880 thing on the domestic side, you might get good stuff 0:10:49.880 --> 0:10:53.680 happening on the international side. But it's really really hard 0:10:53.840 --> 0:10:57.520 to get around domestic issues by saying, oh, well, well, 0:10:57.559 --> 0:11:00.840 just appreciate ten or fifteen percent. Most of the time 0:11:00.880 --> 0:11:04.600 when you'd appreciate that way, something's going wrong. Either the 0:11:04.679 --> 0:11:07.160 market says, hey, their real interest rates are too low 0:11:08.000 --> 0:11:09.679 and they're not going to be able to push them up, 0:11:09.720 --> 0:11:12.559 so there's no point to holding their paper, or they 0:11:12.600 --> 0:11:16.800 say brisk premium should be higher, or something not going great. 0:11:16.880 --> 0:11:19.520 So I'd say that even though there's a route by 0:11:19.520 --> 0:11:22.000 which you can say that a week or dollar reflects 0:11:22.040 --> 0:11:24.960 good stuff, that's not the most common rute. Most of 0:11:25.000 --> 0:11:28.200 the time, a weaker currency reflects bad stuff happening on 0:11:28.240 --> 0:11:29.240 the domestic side. 0:11:29.480 --> 0:11:31.800 No, I think this is a really good point. I 0:11:31.840 --> 0:11:33.800 wrote a thing in the newsletter. I call it like 0:11:33.880 --> 0:11:36.640 one weird triconomics, because we have all of these things 0:11:36.640 --> 0:11:39.400 that we can all talk about and sort of al 0:11:39.600 --> 0:11:43.040 or plague the US economy. It's difficult to build here. 0:11:43.520 --> 0:11:46.680 We seem to have lost our capacity to so. 0:11:46.760 --> 0:11:48.600 If you do the whole list, we're going to be 0:11:48.640 --> 0:11:49.840 here for like twenty minutes. 0:11:49.920 --> 0:11:52.199 Right. We seem to have gotten worse at building airplanes, 0:11:52.200 --> 0:11:53.960 which is one of the things that we actually still 0:11:53.960 --> 0:11:56.000 do export to the world. In much of the ways, 0:11:56.480 --> 0:12:00.520 these are really tough problems to solve, and it strikes 0:12:00.520 --> 0:12:04.080 me as sort of fantasy that suddenly we can revive 0:12:04.160 --> 0:12:06.559 all of these things just by coming to an agreement 0:12:06.600 --> 0:12:09.839 with our foreign partners about some difference in currency or 0:12:09.840 --> 0:12:10.640 a trade policy. 0:12:11.640 --> 0:12:14.280 I completely agree. And the other fantasy I would add 0:12:14.280 --> 0:12:16.880 to that is the implication all we got to do 0:12:16.920 --> 0:12:19.240 is depreciate five or ten percent and that's going to 0:12:19.280 --> 0:12:22.120 be enough. If you take a look at the way 0:12:22.320 --> 0:12:25.040 the dollar has moved against the euros the end, you know, 0:12:25.080 --> 0:12:27.920 the range over the last ten years for the euro 0:12:27.960 --> 0:12:30.480 I think is ninety five to one twenty five, and 0:12:30.520 --> 0:12:35.600 the US has run a trade deficit, significant trade against Europe. Yeah, 0:12:35.880 --> 0:12:37.920 both at ninety five and at one twenty five. I 0:12:37.960 --> 0:12:41.760 think there's too much faith that a weak currency is 0:12:41.760 --> 0:12:45.520 is going to bail you out of your problems. But 0:12:45.720 --> 0:12:47.840 it's the easy thing to do, and it kind of 0:12:47.880 --> 0:12:49.440 sounds nice in principle. 0:13:05.080 --> 0:13:09.160 Was there ever in Urine economic history in which economies 0:13:09.200 --> 0:13:13.240 did stabilize more directly and more linear fashion? You know now? 0:13:13.240 --> 0:13:16.400 And I think of like, okay specialization Tawan makes the chips, 0:13:16.480 --> 0:13:20.480 Europe makes the engines, the US makes soybeans and complex 0:13:20.520 --> 0:13:24.600 financial products. I get why currency adjustments don't have this 0:13:24.679 --> 0:13:29.320 stabilizing effect. Was there a period when economic specialty was 0:13:29.360 --> 0:13:33.680 more distributed, that there was a more clear link between 0:13:34.080 --> 0:13:37.240 exchange rate fluctuations and trade balancing. 0:13:37.679 --> 0:13:40.240 The simple answer I think is no. I think that 0:13:40.280 --> 0:13:44.559 there was a time maybe when you had the gold standard. Yeah, 0:13:44.600 --> 0:13:47.440 but there's also an issue that the movements of gold 0:13:47.679 --> 0:13:53.000 reflected the confidence of markets that the economy was sustainable. 0:13:53.040 --> 0:13:55.559 There were no imbalances. So if he ran a trade 0:13:55.559 --> 0:13:59.160 deficit in the nineteenth century, yes, you know, we have 0:13:59.280 --> 0:14:01.880 to be settled in gold eventually, but it wasn't a 0:14:01.920 --> 0:14:05.280 problem until everyone decided that maybe you wouldn't be able 0:14:05.320 --> 0:14:08.360 to do it, and then you would have these kinds 0:14:08.400 --> 0:14:11.480 of crunches most of my careers. It's so funny because 0:14:11.480 --> 0:14:13.960 when you go to school, all you learn is PPP 0:14:14.200 --> 0:14:18.400 and trade balances and sort of adjustment of exchange rates 0:14:18.400 --> 0:14:21.800 and so on to get trade into equilibrium. Once you're 0:14:21.800 --> 0:14:23.960 sitting at a trading desk, all you see our capital 0:14:24.000 --> 0:14:28.720 flows and that's kind of the driver. And the issue 0:14:28.760 --> 0:14:32.480 is does the market have enough confidence to keep lending 0:14:32.520 --> 0:14:35.320 you the money? And if you look at the US, 0:14:36.240 --> 0:14:39.000 say for you know, the last twenty years or so, 0:14:39.520 --> 0:14:42.840 through thick and thin till recently, the market was pretty 0:14:42.840 --> 0:14:47.040 confident that the risk adju just returns into US would 0:14:47.080 --> 0:14:51.160 be positive. And yeah, the US ran a trade deficit, 0:14:51.240 --> 0:14:53.360 but it didn't seem to harm US welfare. 0:14:54.360 --> 0:14:56.680 What do you see in the capitol flows now? Because 0:14:56.760 --> 0:14:59.240 this seems to be one of the difficulties of the 0:14:59.240 --> 0:15:00.800 current moment, which which is there are a lot of 0:15:00.800 --> 0:15:04.400 people talking about the sell America idea, but if you 0:15:04.480 --> 0:15:06.680 look at some of the data, and a lot of 0:15:06.680 --> 0:15:10.160 it comes out on a lag, you don't really see 0:15:10.440 --> 0:15:13.680 a lot of selling. For instance, foreign account selling, a 0:15:13.720 --> 0:15:16.920 lot of US treasuries. Are you seeing any evidence of 0:15:16.920 --> 0:15:18.560 the sell America theme emerging? 0:15:19.120 --> 0:15:21.040 Well, I think you see it in the weaker dollar. 0:15:21.160 --> 0:15:23.440 And you know, my best friend is the balance of 0:15:23.440 --> 0:15:26.720 payments identity, and I might talk to it every day. 0:15:27.280 --> 0:15:29.920 And this little sad but charming. 0:15:30.560 --> 0:15:34.160 The thing is that when the market decides that it's 0:15:34.240 --> 0:15:37.920 not going to lend you money at yesterday's interest rates 0:15:37.960 --> 0:15:41.560 and exchange rates, there are two ways of getting that adjustment. 0:15:41.960 --> 0:15:45.600 Either your demand for credit can go down, which we 0:15:45.640 --> 0:15:48.720 sometimes see with emerging markets when they hit the wall 0:15:48.800 --> 0:15:53.440 with respect to foreign funding, and the economy crashes because 0:15:53.480 --> 0:15:57.520 basically they have to get into trade balance or surplus 0:15:57.560 --> 0:16:01.400 even in order to meet their obligations. In G ten, 0:16:01.600 --> 0:16:05.360 mostly and historically with the US, the adjustment has been 0:16:06.000 --> 0:16:10.960 via the currency occasionally, like in seventy eight in April, 0:16:11.040 --> 0:16:15.000 with the currency and interest rates, but there's no big 0:16:15.240 --> 0:16:19.160 demand shock, there's no big shock to output because the 0:16:19.200 --> 0:16:21.880 money's not there. The money's there, but it's at a 0:16:21.880 --> 0:16:24.560 different price than you expect it to pay. So I 0:16:24.600 --> 0:16:28.080 think you have to look at the path that's traced 0:16:28.120 --> 0:16:30.920 by US interest rates in the exchange rates, you know, 0:16:30.960 --> 0:16:33.760 as well as sentiment and seeing what people are saying 0:16:34.080 --> 0:16:39.080 to understand whether the financing is coming easily or with difficulty. 0:16:39.880 --> 0:16:43.600 Going back to Europe for a second, so Germany has suddenly, 0:16:44.320 --> 0:16:48.000 maybe briefly, but suddenly found this willingness to spend more 0:16:48.000 --> 0:16:51.760 money and that's going to benefit German defense companies. We 0:16:51.800 --> 0:16:56.080 see higher rates, so maybe a longer term more inflationary 0:16:56.520 --> 0:17:01.720 temperature in the European economy. Is Europe actually a desirable 0:17:01.760 --> 0:17:05.719 destination though? For global capital? I mean it doesn't have 0:17:05.800 --> 0:17:09.560 really an alternative to US treasuries. The fundamental growth prospects 0:17:09.560 --> 0:17:12.840 still don't look great. Do you see any changing perspective? 0:17:12.920 --> 0:17:16.880 And like the pure desirability of capital to enter Europe? 0:17:17.480 --> 0:17:20.240 Some but I'd say most of what we're seeing is 0:17:20.480 --> 0:17:23.960 the market beginning to debate whether the US is going 0:17:24.000 --> 0:17:26.919 to fall back into the pack in terms of being attractive. 0:17:27.720 --> 0:17:30.280 I don't think it's really that is Europe pulling away 0:17:30.320 --> 0:17:33.720 from the pack in terms of attractiveness. And going back 0:17:33.760 --> 0:17:37.280 to the first principle that I mentioned, when you list 0:17:37.320 --> 0:17:40.920 the issues limiting growth in Europe, you know there's been there. 0:17:41.000 --> 0:17:43.879 You know, energy policy which hasn't worked out, there's the 0:17:44.320 --> 0:17:50.040 over regulation, there's taxation, lack of incentives, the labor market, 0:17:50.160 --> 0:17:53.240 the inflexibility, all the issues that we've discussed for twenty 0:17:53.280 --> 0:17:57.000 or thirty years. It would be remarkable if defense spending 0:17:58.119 --> 0:18:00.919 was the answer to all of those. And you know, 0:18:01.359 --> 0:18:03.400 I'm a bit skeptical in the short term it might 0:18:03.440 --> 0:18:05.640 make a difference in the long term. You know, it's 0:18:05.680 --> 0:18:08.199 not as if we study Attila the Hunts Textbook of 0:18:08.480 --> 0:18:11.879 economics to see how, you know, preparing for war is 0:18:11.920 --> 0:18:13.280 going to give you a better economy. 0:18:13.359 --> 0:18:17.439 Yeah, that's another one weird triconomics thing. Yeah, the belief 0:18:17.480 --> 0:18:20.000 that defense spending is going to change everything. I mean, 0:18:20.040 --> 0:18:22.199 it is a big it is a big change, but 0:18:22.440 --> 0:18:25.520 the idea that it's going to really reverberate across the 0:18:25.560 --> 0:18:30.520 European Union. Going back to US problems for a second, 0:18:30.760 --> 0:18:33.399 So if we can't count on a weaker dollar to 0:18:33.520 --> 0:18:37.159 save us, and meanwhile it seems like we're going to 0:18:37.240 --> 0:18:41.800 get probably more fiscal spending, a bigger deficit. Does the 0:18:41.960 --> 0:18:46.040 job of reining in inflation now fall entirely to the 0:18:46.080 --> 0:18:47.600 Fed pretty much. 0:18:47.880 --> 0:18:51.160 Yeah, there's a hope that some spending can be reduced 0:18:51.200 --> 0:18:53.439 because if you look at the share of government spending 0:18:53.440 --> 0:18:57.760 and GDP. It's way higher than it was twenty eighteen, 0:18:57.800 --> 0:19:00.720 twenty nineteen, you know, for the decade before we hit COVID, 0:19:01.400 --> 0:19:03.840 and you know, the Republicans kind of got snookered by 0:19:04.240 --> 0:19:08.160 Biden when they did the debt deal in that they 0:19:08.200 --> 0:19:11.360 accepted a higher baseline level of spending that was way 0:19:11.400 --> 0:19:16.000 above the historical norm for the US. So the question 0:19:16.080 --> 0:19:18.959 is can they get that back down, and can they 0:19:18.960 --> 0:19:21.359 do that in a way that's you know, fair equitable, 0:19:21.440 --> 0:19:24.760 that's not really going to be on the backs of 0:19:25.000 --> 0:19:27.720 you know, one segment of the population or you know, 0:19:27.960 --> 0:19:31.080 the forest or the weakest or whatever. If they can, 0:19:31.160 --> 0:19:34.280 it would be remarkable if dose can get rid of 0:19:34.359 --> 0:19:37.320 wasteful spending. You know, if they can actually find waste, 0:19:37.320 --> 0:19:41.639 fraud and abuse, that would be terrific. But if they can't, 0:19:41.880 --> 0:19:44.760 and we know the history of these fiscal bills, which 0:19:44.880 --> 0:19:48.360 is that the easiest thing to do is to kind 0:19:48.400 --> 0:19:51.120 of say, well, we'll have a lot of supply side 0:19:51.160 --> 0:19:54.600 effects or we're counting on this revenue or that revenue 0:19:54.600 --> 0:19:57.440 which may or may not come. If it turns out 0:19:57.680 --> 0:20:01.679 that it's kind of steepening the the deficit path in 0:20:01.720 --> 0:20:05.520 the path of death accumulation, the FED may be the 0:20:05.560 --> 0:20:06.600 only story in town. 0:20:07.000 --> 0:20:10.760 You wrote an interesting piece earlier this week talking about 0:20:10.800 --> 0:20:14.480 the sort of short to medium term outlook for the FED, 0:20:15.320 --> 0:20:19.040 and it sounded like, you see the window for rate 0:20:19.080 --> 0:20:23.359 cuts is being sort of narrow and shallow that basically 0:20:23.960 --> 0:20:26.520 in twenty six, twenty twenty seven, we're going to be 0:20:26.520 --> 0:20:30.200 getting a stimulative impact assuming this tax bill goes through, 0:20:30.200 --> 0:20:32.640 and something that it looks like talk to us about like, 0:20:32.960 --> 0:20:35.720 you know, what the market is pricing in for rate 0:20:35.800 --> 0:20:39.359 cuts versus what realistically the FED might be able to 0:20:39.400 --> 0:20:39.680 do here. 0:20:39.920 --> 0:20:42.240 Yeah, I guess I'm kind of at odds with the market, 0:20:42.280 --> 0:20:43.960 both in the short term and and the longer. 0:20:44.200 --> 0:20:46.240 Love media, this is what makes an interesting conversation. 0:20:46.240 --> 0:20:48.720 And in the short term I kind of think, Look, 0:20:48.960 --> 0:20:53.720 every survey you get tells you that everybody's concerned about growth, 0:20:53.720 --> 0:20:57.520 they expect growth to slow down. How many weak payroll 0:20:57.600 --> 0:21:01.159 numbers do you need to say, Oh, wait a second, 0:21:01.480 --> 0:21:04.480 the people have been telling us that nothing's happening, that 0:21:04.520 --> 0:21:07.119 things are slowing down. Now we get evidence. Do you 0:21:07.160 --> 0:21:09.920 need three, do you need six? Or do you just say, well, yeah, 0:21:09.920 --> 0:21:13.480 that just confirms what everybody's been saying. So I actually 0:21:13.520 --> 0:21:15.800 think that they will do the right thing, which would 0:21:15.840 --> 0:21:20.840 be to ease in response to incoming economic data. Having 0:21:20.880 --> 0:21:24.040 said that, I would see that as an insurance policy. 0:21:24.080 --> 0:21:28.760 Because the fiscal bill is likely to introduce net stimulus, 0:21:29.320 --> 0:21:33.960 We're going to get something uncertain inflation. We'll get certain 0:21:34.000 --> 0:21:37.760 inflation effects from the tariffs. What's uncertain is whether they're 0:21:37.960 --> 0:21:42.199 one off or persistent. So between the combination of tariff 0:21:42.240 --> 0:21:47.119 and used inflation and fiscal stimulus, it's not clear to 0:21:47.160 --> 0:21:49.560 me how they're going to cut. I think that the 0:21:50.160 --> 0:21:52.600 FED might see themselves as having an issue and sitting 0:21:52.600 --> 0:21:56.040 in terms of saying, well, if we cut in Q 0:21:56.119 --> 0:21:58.720 two or Q three, can we take it back in 0:21:58.800 --> 0:22:01.680