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Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway and I'm Joe Joe. Happy parody day

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Speaker 1: to you. So I looked I actually got a little

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Speaker 1: late this morning at five am instead of four, But

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Speaker 1: I don't think it did. It quite exactly hit a dollar.

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Speaker 1: I saw the ambiguity. It looked like the low on

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Speaker 1: the terminal was like euro one zero zero zero zero

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Speaker 1: zero zero zero one or something. And then I saw

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Speaker 1: others posted I don't know. It's sad that we work

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Speaker 1: for a gigantic financial data company and we can't figure

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Speaker 1: this out. I thought it did. I'm pretty sure it did,

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Speaker 1: very very briefly. Um, but let's just you know, even

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Speaker 1: if it hasn't actually hit parody today, we're recording this

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Speaker 1: on July twelve. It seems like it's going to any moment.

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Speaker 1: And I got to say the fact that we're recording

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Speaker 1: this episode though, probably means that this is marketing the peak, right. Yeah,

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Speaker 1: So of course when this episode comes out, it's going

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Speaker 1: to be the peak of the dollar, because that's how

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Speaker 1: it works. Nonetheless, yes, euro has come very close to

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Speaker 1: parody with the dollar. De facto parody. The dollar itself

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Speaker 1: is just like incredibly strong. It might even be you know,

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Speaker 1: obviously inflation and the trajectory of inflation is sort of

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Speaker 1: this huge variable question for the economy. But in terms

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Speaker 1: of like maybe the defining market story right now has

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Speaker 1: just been this incredible strength of the US dollar, which

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Speaker 1: all kinds of different ramification exactly. So setting aside what

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Speaker 1: happens to the Euro, you cannot argue with the fact

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Speaker 1: that we have had this broad based dollar strength. You know,

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Speaker 1: there's some irony that, of course everyone's talking about the

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Speaker 1: end of the world, and we recorded episodes about how

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Speaker 1: the Russia Ukraine conflict and the sanctions mean that the

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Speaker 1: dollar is going to fall out of favor in the

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Speaker 1: global financial system. And yet the immediate knee jerk reaction

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Speaker 1: to the world falling apart is dollar strength. It almost

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Speaker 1: always is, yeah, right, because in the end, in the

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Speaker 1: good times, you never really have to pay your bills.

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Speaker 1: You just sort of roll over your debts or you

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Speaker 1: don't worry about that or your flesh with money. In

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Speaker 1: the bad times, you're like, oh, how am I going

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Speaker 1: to pay my bills? I can't pay my bill is

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Speaker 1: probably in bitcoin. I can't pay my bills and shares

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Speaker 1: of Tesla. I can't pay my bills in you know,

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Speaker 1: shares of arc or whatever. What I do is I

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Speaker 1: need dollars. So everyone scrambles for dollars and they get

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Speaker 1: more expensive. Right, so the dollar is basically a play

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Speaker 1: on risk appetite at this point. But I guess the

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Speaker 1: ultimate irony This is the second time I brought up

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Speaker 1: irony so far. Ultimate The ultimate ultimate irony is that

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Speaker 1: when everyone's worried about the future of the economy, the

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Speaker 1: dollar tends to strengthen, and then the dollar strengthening actually

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Speaker 1: has a negative impact on the global economy, and so

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Speaker 1: you can get the situation where it becomes a self

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Speaker 1: fulfilling cycle. The dollar doom loop is what some people

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Speaker 1: have called it, Yeah, a feedback loop. But if you're

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Speaker 1: a Germany and you're already sort of like moving from

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Speaker 1: this huge current account surplus to current account deficit largely

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Speaker 1: due to the surging price of energy, and then obviously

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Speaker 1: everything becomes even more expensive now, especially things price and

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Speaker 1: dollars or invoice in dollars, and so yeah, you can

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Speaker 1: have this sort of doom loop where the strength of

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Speaker 1: the dollar even further puts the squeeze on different players.

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Speaker 1: So without further ado, to talk about the doom loop

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Speaker 1: and more broadly what's going on with the dollar and

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Speaker 1: a bunch of other currencies like the euro and the yen.

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Speaker 1: We are going to be speaking with John Turke. He is,

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Speaker 1: of course the founder of JST Advisors and the author

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Speaker 1: of the Cheap Convexity blog. John, Welcome to the show.

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Speaker 1: Thank you so much for having me. So, I think

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Speaker 1: the first time we had you on was actually to

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Speaker 1: talk about exactly this dynamic, the dollar doom loop. Yeah,

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Speaker 1: it was. It was actually I think in the beginning

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Speaker 1: of around pandemic had just started, and it was really

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Speaker 1: the first time that FED really fully unleashed its swap

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Speaker 1: program in terms of foreign exchange, and I felt that,

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Speaker 1: you know, the doom loop was a very prevalent factor

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Speaker 1: in kind of the cycle where we saw this slow

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Speaker 1: down in the manufacturing side of the economy, largely on

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Speaker 1: the fact of China's aggregate growth numbers starting to structurally fall,

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Speaker 1: which you know, as the US is less exposed to

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Speaker 1: global trade, global manufacturing saw it become a relative beneficiary,

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Speaker 1: and then given the dollar linkages through global trade and manufacturing,

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Speaker 1: it only reinforced the weaknesses of manufacturing. So it seems

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Speaker 1: like we're in a similar dynamic with different catalysts. So

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Speaker 1: before we even get into the dynamics, like how would

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Speaker 1: you describe, I mean, everyone is sort of waking up

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Speaker 1: to this weird phenomenon, which is that after an era

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Speaker 1: of like so much stress and so must talking, you

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Speaker 1: know another like end of the dollar, it's going to

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Speaker 1: be replaced. It's gonna be a if my bitcoin, or

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Speaker 1: China and Russia are gonna like circumvent the dollar or

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Speaker 1: something like. You know, all this every crisis, this kind

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Speaker 1: of talk. I am old enough to remember when the

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Speaker 1: euro was going to replace gold. We've we've we've we

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Speaker 1: all we've heard it, the bricks are going to like

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Speaker 1: form some sort of new like deutsch mark whatever. You

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Speaker 1: you know, that all the theories. If someone's like, Okay,

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Speaker 1: here's the dollar, it's like basically back at all time highs.

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Speaker 1: And someone says, John, well, as the dollar so strong,

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Speaker 1: what's your answer? Well, I think that that part of

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Speaker 1: the reason this time is that it's a structural dynamic.

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Speaker 1: You know. I think a lot of it was the

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Speaker 1: US was the cleanest of the dirty shirts, and I

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Speaker 1: think that this time, the US is the most self sufficient,

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Speaker 1: and I think that is that is I think the

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Speaker 1: relative dynamic at play this time, as opposed to last time,

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Speaker 1: when we were just broadly in a slowing nominal GDP

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Speaker 1: world where we had you know, low levels of realized

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Speaker 1: growth and the US was kind of growing just a

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Speaker 1: bit faster. Um. Now, I think it is really a

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Speaker 1: self sufficiency thing that I think is you know, really

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Speaker 1: been encapsulated by this energy crunch that we're seeing, especially

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Speaker 1: you know, Tracy, And I'm thinking back to our last

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Speaker 1: conversation from a few months ago, exulting Posar, and of

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Speaker 1: course he has this whole framework of like you know,

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Speaker 1: Brent Wood's bree commodity centrality, and I did have that

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Speaker 1: thought at the time, and I think it's on the episode.

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Speaker 1: It's like it's in the US also like filled with

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Speaker 1: tons and tons of commodities, like maybe like you know,

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Speaker 1: it's like if we are going to be entering this

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Speaker 1: new like commodity oriented regime where whoever has the most stuff, right,

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Speaker 1: and like US is pretty good on that front too, right,

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Speaker 1: It's not the worst place to be. But Okay, so John,

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Speaker 1: maybe talk to us a little bit more about how

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Speaker 1: energy factors into currency, you know, the weakness in the euro,

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Speaker 1: the strength and the dollar, if it all comes down

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Speaker 1: to energy, could you maybe walk us through exactly how

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Speaker 1: energy prices or an energy shortage actually feed into currency

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Speaker 1: weakness or strength. Yeah, of course, So you know, I

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Speaker 1: think that a good way to do this also take

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Speaker 1: a step back in the sense that a lot of

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Speaker 1: currency movements, especially in the previous cycle, and I would

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Speaker 1: say even really argue until the Russian invasion, was a

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Speaker 1: lot of it was predicated on relative interest rates and

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Speaker 1: kind of you know which central bank was a bit

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Speaker 1: more hawkish, which was dubbish, That was kind of usually

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Speaker 1: the forward rate space was a big marginal factor in

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Speaker 1: kind of you know which currencies would be best off.

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Speaker 1: And I think you know, really what changed now is

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Speaker 1: that we're really in a terms of trade trade balanced

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Speaker 1: current account world where the market in currency space is

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Speaker 1: really looking beyond you know, which central bank is going

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Speaker 1: to do the most to where are trade balance is

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Speaker 1: going to settle. And given that energy has now a

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Speaker 1: two pronged effect on that, I think it really emboldens

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Speaker 1: that to play a more determinant role in exchange y prices.

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Speaker 1: And I think you know, getting into the role of energy,

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Speaker 1: especially when it's this sort of crunch where you know,

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Speaker 1: we're talking about the potential of Russia turning off gas

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Speaker 1: flows into Europe, it really does have a two pronged effect.

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Speaker 1: One is that either the price of you know, related

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Speaker 1: fossil fuels or energy inputs goes up, which is something

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Speaker 1: we've seen that gas prices in Europe are very very high,

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Speaker 1: power prices as a byproducts that have risen a lot,

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Speaker 1: so the trade balance is getting hit on that. And

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Speaker 1: then we have this factor where because it is a crunch,

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Speaker 1: Europe is not able or at least projected to not

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Speaker 1: be able to produce as much as it's product as

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Speaker 1: its capacity is, so their exports by nature will fall

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Speaker 1: relative to what they could have been because they don't

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Speaker 1: have the energy inputs to facilitate it. So really, in

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Speaker 1: terms of thinking about the current account of the trade

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Speaker 1: balance more importantly is it's really a a double whammy

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Speaker 1: because they're importing more energy inputs and they can't export

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Speaker 1: as as as many outputs. And as we started to

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Speaker 1: see with the Northern European trade balance, you know, Germany,

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Speaker 1: after twenty years of running significant significant trade surpluss is

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Speaker 1: now running a pretty significant trade deficite, and I think

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Speaker 1: that is why this factor is so so important, because

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Speaker 1: it really hits on both fronts. So I have two

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Speaker 1: quick questions, one short and one is a little bit more.

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Speaker 1: But the first one real quickly, have we actually seen

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Speaker 1: exports start to weaken in Germany? Because I know, obviously

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Speaker 1: the import bill has surged, and we know a lot

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Speaker 1: of industrial players have said like, look, we can't just

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Speaker 1: we can't work economically with these high gas prices. But

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Speaker 1: have we actually seen that in the data where the

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Speaker 1: exports start to turn down. So exports haven't started to

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Speaker 1: fall all meaningfully yet, but we have already seen the

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Speaker 1: imbalance grow between the imports side and the export side

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Speaker 1: by nature of you know, the trade deficit, and we've

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Speaker 1: already started to see at least in you know, the

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Speaker 1: p m I data on the manufacturing side, that there

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Speaker 1: will be slowdowns. It's just not economical for a lot

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Speaker 1: of the heavy industry players at these prices. So and

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Speaker 1: then my related question is in a situation like this

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Speaker 1: where there is a true crunch that you know, the

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Speaker 1: energy bill is soaring, but also you have domestic weakness

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Speaker 1: because you just can't even maybe run the factories at

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Speaker 1: these level of power prices. Does that contribute to does

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Speaker 1: that make it essentially harder for the e c B

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Speaker 1: to fight inflation? Because here, I guess look like maybe

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Speaker 1: I don't know, you know, the U S economy is hot, right,

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Speaker 1: or at least has been up until very recently. So

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Speaker 1: it's sort of like a very natural thing for the

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Speaker 1: FED to wanna hike rates and tap the brakes and

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Speaker 1: try to diminish demand. It does doesn't seem like the

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Speaker 1: ECB has that luxury. Yeah, so the e c B

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Speaker 1: is really in a proper bund here, and I think

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Speaker 1: it really boils down to two problems. One is even

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Speaker 1: taking I think more meta structurally, even looking beyond this

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Speaker 1: shock in its specific nature, is that the ECB was

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Speaker 1: already faced with a problem of you have central banks

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Speaker 1: around the world who are aggressively responding to much above

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Speaker 1: target inflation and the threat of higher inflation expectations, and

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Speaker 1: the e c B was going to have to play

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Speaker 1: catch up in some capacity. And we've we we already

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Speaker 1: started to see that pivot over the course of the year.

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Speaker 1: We know they'll hike at their meeting next week and

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Speaker 1: they'll hike again in September and kind of commence a

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Speaker 1: hiking cycle. But the problem we started to see as

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Speaker 1: more hikes got priced into the European curve is that

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Speaker 1: it started to create stresses in the periphery where we

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Speaker 1: had an uneven transmission of policy as spread heads between

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Speaker 1: you know, Italy and Germany UM and really the periphery

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Speaker 1: and the core started to blow out. And this was

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Speaker 1: really emblematic of the structural um imbalance that is sort

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Speaker 1: of innate to the your area, where we started to

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Speaker 1: see the world of potentially you could have a rate

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Speaker 1: that is not high enough to fight inflation and too

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Speaker 1: high for the perfect and this led to the forthcoming

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Speaker 1: ECB meeting will be sort of introduced to a anti

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Speaker 1: fragmentation tool. We've seen that the ECB has already started

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Speaker 1: flexibly reinvesting their their pet purchase portfolio kind of a

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Speaker 1: way to alleviate these issues in spreads, but nonetheless it's

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Speaker 1: still a big issue. And going before all of the

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Speaker 1: gas related energy country issues, that we were already entering

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Speaker 1: a world where rates weren't getting high enough to cut

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Speaker 1: off imported inflation by currency weakness, and they were getting

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Speaker 1: to you high for some of the perfect holders, namely Italy.

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Speaker 1: So that is one side of the ECB challenges, which

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Speaker 1: is already pretty drastic. The other side is the nature

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Speaker 1: of this shock is innately very stagflationary in the sense

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Speaker 1: that it raises the cost of energy by a lot,

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Speaker 1: and it also reduces output by that actually isn't enough

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Speaker 1: or there'll have to be some sort of reallocation of resources.

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Speaker 1: Right if the decision becomes you know, making sure that

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Speaker 1: everyone stays on in the winter or turning off one

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Speaker 1: or two factories, the decision is going to be pretty

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Speaker 1: easy for policy makers, um as unfortunate as it is.

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Speaker 1: That is the second fold of it, where the now

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Speaker 1: we have a shock that really worsens the inflationary pressure

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Speaker 1: in Europe but also further reduces the growth impulse and

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Speaker 1: on the output side, all in the backdrop of a

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Speaker 1: imbalance at the ECB is fighting that is almost innate

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Speaker 1: to their bout design, which is you know, common common

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Speaker 1: Currency Union, no common fiscal So it's gonna be an

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Speaker 1: extremely challenging task for the e c B. I think,

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Speaker 1: you know, at the forthcoming meeting it will be interesting

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Speaker 1: as we begin to outline you know, the e c

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Speaker 1: B has taken a stand that growth is still good,

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Speaker 1: and you know, nominal growth, especially on the consumption side

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Speaker 1: in Europe is still pretty good. But we we know

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Speaker 1: that once the industrial side, especially in the Core and Germany,

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Speaker 1: becomes uncompetitive, that the economic spillovers are going to be

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Speaker 1: pretty significant. And we could be looking at, you know,

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Speaker 1: for the second time and into the last two e

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Speaker 1: c B hiking cycles, or the ECB is hiking into

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Speaker 1: a recession, and you know how the e c B

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Speaker 1: kind of structures, you know, their inflation fight in the

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Speaker 1: context of the material growth slow down. It's going to

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Speaker 1: be very interesting. And I think the currency right now

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Speaker 1: is proving to be on top of all of these factors,

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Speaker 1: proving to be an outlet for that unknown what happens

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Speaker 1: to capa all flows or capital inflows when the ECB

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Speaker 1: starts hiking, because one of the weird things about what

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Speaker 1: we've seen so far this year is that even with

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Speaker 1: all the challenges that your faces at the moment, I

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Speaker 1: think they've still had net inflows into the euro Zone.

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Speaker 1: And you would expect if the ECB hikes rates that

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Speaker 1: that would make um them more attractive compared to some

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Speaker 1: other yields on offer. But like even if inflows happened positive,

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Speaker 1: it doesn't seem to have had much of an effect

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Speaker 1: on the euro. Yeah, it's it's it's an interesting one

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Speaker 1: because this year was supposed to be and I you know,

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Speaker 1: I think if we scrolled back to the last time

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Speaker 1: it was on going into our preview, this year was

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Speaker 1: kind of supposed to be a very positive euro currency

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Speaker 1: story in the sense the potential of the end of

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Speaker 1: negative interest rates was going to spur this return of

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Speaker 1: you know, longer term stick year capital, either through reserve managers,

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Speaker 1: pension funds, etcetera. That kind of became you know, priced

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Speaker 1: out by negative rates, and you know, we saw the

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Speaker 1: story of a p P and nerve in Europe is

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Speaker 1: very much this one of you know, starting from on.

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Speaker 1: It was basically this replacement of ownership between a lot

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Speaker 1: of foreign owners who owned buns BTPs in Italy and

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Speaker 1: and and French government bonds, and it was basically replaced

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Speaker 1: by the e CB. So the currency channel was we

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Speaker 1: had what called portfolio The portfolio channel was really in

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Speaker 1: full effect, and there was some thought that we could

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Speaker 1: trigger the inverse by leaving negative rates, and I think

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Speaker 1: we really did start to see that, especially after February

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Speaker 1: ECB when it became clear that you know, negative rates

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Speaker 1: were probably going to end this year. I think it

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Speaker 1: was a trigger. There were yielding, nominal, yielding securities in

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Speaker 1: your area that we're compelling that hadn't been for eight

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Speaker 1: years almost, and I think that was a spur for capital.

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Speaker 1: I think the problem now is is as the e

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Speaker 1: c B fights this is we really don't know, you know,

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Speaker 1: what is it going to look like and kind of

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Speaker 1: in the in the choices of bad choices, which bad

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Speaker 1: choice do they lean on me? And I think the

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Speaker 1: thing that you know is probably worth watching the most

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Speaker 1: is that if there really is rationing and some of

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Speaker 1: the industrial activity has to go offline, is there's going

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Speaker 1: to be a fiscal response? Right? I don't think we

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Speaker 1: none of us really assumed that, you know, the fiscal

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Speaker 1: authorities are going to just let companies default or people

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Speaker 1: be laid off because their factory can't run because they

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Speaker 1: don't have the proper inputs. There is going to be

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Speaker 1: a response. And then the question is, you know, especially

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Speaker 1: in the context of an already problem in Italy in

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Speaker 1: terms of perferee spreads, is how does the e c

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Speaker 1: B respond and you know, I think we are setting

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Speaker 1: up for the potential. I wouldn't you know that everything

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Speaker 1: on this, but you could envision a world where the

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Speaker 1: ECB is actually net buying securities again while they're hiking things.

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Speaker 1: And this is something that you know, tri she actually

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Speaker 1: talked about on a Bloomberg interview not too long ago.

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Speaker 1: And you know, I, I don't know that it's I

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Speaker 1: wouldn't say it as a base case, but given how

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Speaker 1: the energy crunch could turn into a liquidity crunch at

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Speaker 1: the same time that you know, Italy is facing a

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Speaker 1: problem with you know, rising European rates, it's not impossible

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Speaker 1: start to think about, you know, kind of what does

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Speaker 1: the ECB balance sheet approach look like in that context.

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Speaker 1: And I don't think it's one of significant contraction, even

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Speaker 1: though they are tightening policy to deal with above target inflation.

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Speaker 1: If the ECB is expanding its balance sheet in order

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Speaker 1: to maintain or constrain Italian spreads while at the same

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Speaker 1: time hiking your rates in order to fight inflation, that

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Speaker 1: seems like one of those things where it's like, yeah,

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Speaker 1: a bunch of people are going to dunk on that

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Speaker 1: on Twitter and get it it's like, oh, those look

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Speaker 1: at the A, C, E, C B folks, they don't

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Speaker 1: know what they're doing. They're trying to fight inflation but

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Speaker 1: expanding the balance sheet. But said I, I I said, Twitter

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Speaker 1: dunks like, it's not necessarily economically unsound, right, Like you

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Speaker 1: could do both at the same time. They're not. It's

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Speaker 1: not necessarily contradictory. It is not necessarily contradictory. It will

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Speaker 1: be in a relative sense because we'll be in a

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Speaker 1: world where every other central bank outside of the Bank

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Speaker 1: of Japan is withdrawing liquidity, So it would be in

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Speaker 1: that sense, and I think the currency message would be confusing.

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Speaker 1: But I personally think and you know, I don't know

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Speaker 1: how relevant this is, but I think the ECP did

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Speaker 1: make a mistake in terms of linking a p P

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Speaker 1: their QI program to rates the same way that every

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Speaker 1: other central bank had, only because we know that in

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Speaker 1: for the b o E or for the FED that

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Speaker 1: they've kind of outlined, QWI is sort of this almost

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Speaker 1: forward guidance tool, which you know, when it exists, we

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Speaker 1: know that they can't high rates, and the linkage between

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Speaker 1: KIWI and rates actually enhances the net easing effect. And

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Speaker 1: I think the ECB wanted to do this, which was

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Speaker 1: basically kind of set up these guardrails for the market

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Speaker 1: to price and hikes via the balance sheet. The problem

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Speaker 1: is is that as we're sort of seeing, especially in

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Speaker 1: periods of wide economic variants, is that QUI is probably

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Speaker 1: a more structural dynamic to Europe given the innate and

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Speaker 1: balances of the Union then it is let's say in

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Speaker 1: the US, or in the UK, or in you know,

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Speaker 1: really any other developed country. So I think that is

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Speaker 1: something that will probably become more talked about as we

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Speaker 1: get to the end of the year in Europe. Is

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Speaker 1: in this you know, kind of nasty stagflationary world, is

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Speaker 1: you know, what is the role of you know, QUEI

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Speaker 1: even in a hiking cycle, especially as the e c

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Speaker 1: B is never going to be able to kind of

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Speaker 1: have a quote unquote QT episode where the stock of

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Speaker 1: liquidity would also basically fall not only the flow but no,

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Speaker 1: I I think it would be you know, on the

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Speaker 1: day if that were to be announced, I think you

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Speaker 1: would like further amplify currency weakness just as a byproduct

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Speaker 1: is they would be the only ones injecting liquidity at

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Speaker 1: the same time that everyone else is withdrawing it, and

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Speaker 1: as we move forward on I think it could become

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Speaker 1: like it, just a more institutionalized. Part of how the

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Speaker 1: ECB kentuckt monetary policy is that you know, there is

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Speaker 1: sort of this like net sticky buying of government bonds,

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Speaker 1: even that is agnostic for the policies. So you mentioned

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Speaker 1: something striking, which is the idea of a lot of

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Speaker 1: the major central banks, you know, being in tightening mode

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Speaker 1: all at once. And we've had previous situations where the

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Speaker 1: major control banks have been in loosening mode all at once,

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Speaker 1: and they've been you know, launching their own keeweep programs

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Speaker 1: and things like that and lowering interest rates all at

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Speaker 1: the same time. And in that environment, people used to

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Speaker 1: worry about competitive currency devaluations and a sort of race

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Speaker 1: to the bottom. With more people tightening, do you worry

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Speaker 1: about currencies going up like a competitive valuation? That seems

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Speaker 1: kind of weird. Like what I guess what I'm asking

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Speaker 1: is what is the impact of all these people trying

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Speaker 1: to raise rates at the same time. Yeah, it's a

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Speaker 1: it's a great question, and I think it's it's only

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Speaker 1: has added importance given that many of the world central

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Speaker 1: banks right now we're fighting imported inflation much more so

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Speaker 1: than excess demand. We do have cases like the UK

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Speaker 1: and the US where there is there was some signs

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Speaker 1: of overheating or excess demand. But you know, taking the

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Speaker 1: Europe example, and something that I think Leguard has been

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Speaker 1: quick to point out, but even more so the Chief

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Speaker 1: economist Philip Laying, is this idea that you know, real

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Speaker 1: real output has not exceeded it's pre pandemic level in Europe.

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Speaker 1: Yet it doesn't mean that this hasn't been a strong recovery.

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Speaker 1: It has. We know that unemployment is the lowest it's

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Speaker 1: ever been in Europe. There are signs that you know,

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Speaker 1: wage games are picking up, and it has been a

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Speaker 1: strong recovery from COVID. But it's not just purely a

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Speaker 1: there is too much demand story. There is a lot

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Speaker 1: of There is an imported inflation terms of trade shock

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Speaker 1: that is clearly amplified the inflationary dynamics that we've seen.

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Speaker 1: And in that world, the biggest health in terms of

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Speaker 1: tightening policy is the currency because that's sort of how

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Speaker 1: you nwter the imported inflationary dynamics. This is something that

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Speaker 1: we've seen China do actually relatively well over the last

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Speaker 1: call it year is being able to kind of neutralize

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Speaker 1: the imported inflationary dynamics from energy, commodities, food, etcetera by

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Speaker 1: having a stay able, strong currency basket, you know, the

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Speaker 1: remmby against the currency basket that they track um and

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Speaker 1: I think, you know, we're in a world now where

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Speaker 1: central banks, who are all dealing with above target inflation,

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Speaker 1: have very little tolerance for massive currency weakness because it's

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Speaker 1: thought to only amplify the pressures that they're dealing with

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Speaker 1: by hiking rates. And this is something we've seen pretty

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Speaker 1: much across the board. We've seen the SMB in Switzerland

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Speaker 1: high rates fifty basis points at the first meeting. They

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Speaker 1: surprised the market, and part of their calculus is that

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Speaker 1: even though the Swiss frank has been strong, it hasn't

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Speaker 1: been strong enough in the real terms to kind of

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Speaker 1: offset some of the above target inflation that even they're seeing.

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Speaker 1: We've seen kind of a little bit of a pivot

433
00:24:42,880 --> 00:24:45,760
Speaker 1: from the Bank of England, who originally had was kind

434
00:24:45,760 --> 00:24:48,240
Speaker 1: of the first central bank to entertain the idea that

435
00:24:48,280 --> 00:24:51,720
Speaker 1: a growth scare should also be part of their kind

436
00:24:51,720 --> 00:24:55,240
Speaker 1: of calculus in in resetting policy. But we've seen from

437
00:24:55,280 --> 00:24:57,600
Speaker 1: you know, external OLYMPC member Katherine Man put out his

438
00:24:57,720 --> 00:25:01,520
Speaker 1: speech about the idea that not if we're not keeping

439
00:25:01,560 --> 00:25:04,560
Speaker 1: track with the FED, then we're gonna be you know,

440
00:25:04,560 --> 00:25:06,879
Speaker 1: we're going to further exchange right pressures, which is going

441
00:25:06,920 --> 00:25:10,520
Speaker 1: to further the important inflation dynamics that we're dealing with already.

442
00:25:10,600 --> 00:25:13,000
Speaker 1: And we've seen kind of you know, more people on

443
00:25:13,040 --> 00:25:15,439
Speaker 1: the b OE entertained this idea that you know, the

444
00:25:15,480 --> 00:25:19,200
Speaker 1: exchange passed through is amplified right now, especially as we're

445
00:25:19,200 --> 00:25:21,400
Speaker 1: in this like kind of bind and in terms of

446
00:25:21,440 --> 00:25:24,960
Speaker 1: where inflation expectations are they moving away from target, and

447
00:25:25,000 --> 00:25:27,639
Speaker 1: we've seen that central banks have sort of taken a

448
00:25:27,720 --> 00:25:30,119
Speaker 1: risk management approach to that where if there is no

449
00:25:30,240 --> 00:25:33,200
Speaker 1: doubt that they're kind of threat at all, then they're

450
00:25:33,200 --> 00:25:35,399
Speaker 1: going to act. So I do think, you know, I

451
00:25:35,600 --> 00:25:40,240
Speaker 1: don't know that it's we're averse currency war in a way,

452
00:25:40,280 --> 00:25:43,040
Speaker 1: but I do think you have central banks around the

453
00:25:43,080 --> 00:25:46,840
Speaker 1: world saying that, you know, our currencies have weakened and

454
00:25:47,480 --> 00:25:51,040
Speaker 1: that has only amplified the pressure that we're facing because

455
00:25:51,040 --> 00:25:53,280
Speaker 1: a lot of the nature of the shot is imported

456
00:25:53,280 --> 00:25:55,959
Speaker 1: by the commodity side. So I I do think we

457
00:25:56,040 --> 00:25:58,480
Speaker 1: are in that sort of world. And to further this

458
00:25:58,640 --> 00:26:01,320
Speaker 1: that we've seen central bank that have relied on currency

459
00:26:01,359 --> 00:26:04,800
Speaker 1: strength as a way to almost not hike interest rates,

460
00:26:05,040 --> 00:26:07,240
Speaker 1: hike interest rates the cycle because the currency is either

461
00:26:07,280 --> 00:26:10,120
Speaker 1: weakening or not doing enough. We've seen Switzerland hike, We've

462
00:26:10,160 --> 00:26:13,560
Speaker 1: seen the Bank of Israel hike, We've seen Taiwan hike.

463
00:26:13,680 --> 00:26:15,760
Speaker 1: And these are central banks last cycle that we're able

464
00:26:15,800 --> 00:26:19,600
Speaker 1: to weather sort of you know, participating in hiking cycles

465
00:26:19,760 --> 00:26:22,840
Speaker 1: via just having a very strong nominal effective exchange rate.

466
00:26:22,960 --> 00:26:26,040
Speaker 1: And this cycle we're seeing is there's a difference between

467
00:26:26,040 --> 00:26:28,960
Speaker 1: your near and your rear, which is your real effective

468
00:26:28,960 --> 00:26:32,280
Speaker 1: exchange right, and you kind of they don't move automatically

469
00:26:32,280 --> 00:26:35,920
Speaker 1: one for one in a very high inflation environment. So

470
00:26:36,600 --> 00:26:39,479
Speaker 1: I do think we are in this sort of you know,

471
00:26:39,600 --> 00:26:43,320
Speaker 1: reverse currency war. But I think that central banks are

472
00:26:43,320 --> 00:26:46,439
Speaker 1: clearly making an emphasis on the role of currencies, some

473
00:26:46,520 --> 00:26:49,040
Speaker 1: more explicit than others, of course, But I do think

474
00:26:49,080 --> 00:26:51,000
Speaker 1: given the nature of the shop, it doesn't make sense

475
00:26:51,040 --> 00:26:53,239
Speaker 1: for central banks to have a very big, you know,

476
00:26:53,320 --> 00:26:57,200
Speaker 1: overarching currency focus. We need to do like a series

477
00:26:57,200 --> 00:27:00,480
Speaker 1: of john with like all these niche central banks or

478
00:27:00,560 --> 00:27:03,280
Speaker 1: these smaller ones. All right, let's Bank of his reel day,

479
00:27:04,720 --> 00:27:08,800
Speaker 1: Swiss National Bank day, uh Taiwan new Central Bank. That

480
00:27:08,840 --> 00:27:10,639
Speaker 1: would be you know, of course we would need to

481
00:27:10,680 --> 00:27:13,280
Speaker 1: have a whole week just devoted to Australia and New

482
00:27:13,359 --> 00:27:15,800
Speaker 1: Zealand because they tend to be bill whethers that being said,

483
00:27:15,840 --> 00:27:18,840
Speaker 1: I wanna pivot a little bit to Japan, where we

484
00:27:18,920 --> 00:27:23,600
Speaker 1: see dollar yen basically at its highest level. Since I

485
00:27:23,640 --> 00:27:25,680
Speaker 1: don't think my understanding, I don't think the Bank of

486
00:27:25,760 --> 00:27:28,240
Speaker 1: Japan has pivoted in any way like some of these

487
00:27:28,240 --> 00:27:30,880
Speaker 1: other major central banks in terms of easing. I think

488
00:27:30,880 --> 00:27:34,000
Speaker 1: they're still doing old curve control. The yield on the

489
00:27:34,080 --> 00:27:37,280
Speaker 1: tenure Japanese government bond is still like, you know, point

490
00:27:37,359 --> 00:27:39,840
Speaker 1: to five or something like super low. Like what's going

491
00:27:39,880 --> 00:27:41,520
Speaker 1: on there? I seem to recall something to were like

492
00:27:41,600 --> 00:27:44,040
Speaker 1: last month the market thought it was gonna try testing

493
00:27:44,040 --> 00:27:46,280
Speaker 1: the b o J in some way and the GGB

494
00:27:46,440 --> 00:27:48,200
Speaker 1: futures got out of hand a little bit. But what's

495
00:27:48,240 --> 00:27:51,359
Speaker 1: going on there? Yeah? So, I mean the last B

496
00:27:51,480 --> 00:27:54,240
Speaker 1: a J meeting in June, we really had a real

497
00:27:54,280 --> 00:27:57,800
Speaker 1: earnest test of b o j's resolve in terms of fighting,

498
00:27:57,840 --> 00:28:00,760
Speaker 1: where we saw ten years swap rates in Japan move

499
00:28:01,000 --> 00:28:04,080
Speaker 1: a lot further away from where the you know, ten

500
00:28:04,119 --> 00:28:06,560
Speaker 1: year equivalent j GB yield is, which is you know,

501
00:28:06,640 --> 00:28:09,000
Speaker 1: enforced by the b O. J saw the same thing

502
00:28:09,000 --> 00:28:11,560
Speaker 1: in futures, and it was kind of of this idea

503
00:28:11,640 --> 00:28:13,720
Speaker 1: that you know, once dollar an gets above one thirty

504
00:28:13,760 --> 00:28:16,440
Speaker 1: gets to one thirty five, you know, maybe they don't

505
00:28:16,480 --> 00:28:19,400
Speaker 1: drop yield curve control, but maybe they readjust the band.

506
00:28:19,440 --> 00:28:22,840
Speaker 1: Maybe they go from you know, targeting twenty five basis

507
00:28:22,840 --> 00:28:25,600
Speaker 1: points to fifty basis points. Maybe they move y c

508
00:28:25,760 --> 00:28:27,560
Speaker 1: C to the five year instead of the ten year.

509
00:28:27,960 --> 00:28:30,840
Speaker 1: And the market was really, you know, kind of wrestling

510
00:28:30,880 --> 00:28:34,960
Speaker 1: with this. You know, how do they adjust because certainly

511
00:28:35,000 --> 00:28:38,360
Speaker 1: they're not okay with kind of this further rapid depreciation

512
00:28:38,400 --> 00:28:42,680
Speaker 1: in the end, especially as Japan, like everyone else, maybe

513
00:28:42,760 --> 00:28:45,680
Speaker 1: to a lesser extent, is dealing with an energy shock

514
00:28:45,920 --> 00:28:49,520
Speaker 1: and you know, higher levels of spot inflation domestically, etcetera.

515
00:28:49,520 --> 00:28:52,640
Speaker 1: It's funny, I'm looking at the Bloomberg and Japan's inflation

516
00:28:52,760 --> 00:28:55,000
Speaker 1: is its highest in multiple years. But so two and

517
00:28:55,000 --> 00:28:59,640
Speaker 1: a half of the through that's a big change. Anyone

518
00:28:59,640 --> 00:29:03,240
Speaker 1: that grew up in Japan, that's a big change. Yeah, right, right,

519
00:29:03,400 --> 00:29:05,600
Speaker 1: And you know, I think the so where where the

520
00:29:05,600 --> 00:29:08,960
Speaker 1: b o J is And I think what their stubbornness

521
00:29:09,000 --> 00:29:12,200
Speaker 1: has has surprised a lot of people. But I actually

522
00:29:12,200 --> 00:29:15,440
Speaker 1: think they've been pretty you know, consistent with their reaction

523
00:29:15,480 --> 00:29:18,480
Speaker 1: function and their idea is that they're not going to

524
00:29:18,560 --> 00:29:22,600
Speaker 1: jump on this bandwagon of you know, global tightening of

525
00:29:22,640 --> 00:29:25,440
Speaker 1: policy in the context of something that they think is

526
00:29:25,520 --> 00:29:29,440
Speaker 1: only a one year phenomenon. Because what's idiosyncratic to Japan

527
00:29:29,480 --> 00:29:32,160
Speaker 1: as well is that a big part of the above

528
00:29:32,200 --> 00:29:34,680
Speaker 1: target inflation we're seeing this year is not only from

529
00:29:34,720 --> 00:29:37,720
Speaker 1: the energy side, it's also from mobile phone prices, which

530
00:29:37,720 --> 00:29:41,280
Speaker 1: has kind of had this mechanical upward pressure on prices

531
00:29:41,320 --> 00:29:43,560
Speaker 1: that will kind of come out next year. They're committed,

532
00:29:44,000 --> 00:29:47,880
Speaker 1: so they're still team transitory in Japan. They're still team

533
00:29:47,920 --> 00:29:50,400
Speaker 1: transitory in Japan. I think the thing that would change

534
00:29:50,440 --> 00:29:54,840
Speaker 1: them from being team transitory is that something that Kuroda

535
00:29:54,960 --> 00:30:00,080
Speaker 1: has really emphasized is that the medium term forecast or

536
00:30:00,120 --> 00:30:03,000
Speaker 1: inflation has to move close to two percent. Maybe that

537
00:30:03,000 --> 00:30:05,840
Speaker 1: would be the catalyst for a change, because as we've

538
00:30:05,880 --> 00:30:08,000
Speaker 1: seen is the b o J has sort of operated

539
00:30:08,040 --> 00:30:10,720
Speaker 1: in this well. Inflation is at two percent right now

540
00:30:11,080 --> 00:30:13,400
Speaker 1: or it's going to be above two percent for this year.

541
00:30:13,640 --> 00:30:15,880
Speaker 1: But if you look at kind of we the last

542
00:30:16,000 --> 00:30:17,840
Speaker 1: bank View meeting we had, which is where the b

543
00:30:17,880 --> 00:30:20,880
Speaker 1: o J publishes their economic forecast, was in April, and

544
00:30:20,920 --> 00:30:24,479
Speaker 1: looking back at that meeting, they had three inflation between

545
00:30:24,600 --> 00:30:27,640
Speaker 1: one point one one point three percent for three and

546
00:30:27,680 --> 00:30:30,520
Speaker 1: then twenty four, you know, somewhere around that ringe. And

547
00:30:30,560 --> 00:30:33,520
Speaker 1: the b o J has contextualized their reaction function as

548
00:30:34,080 --> 00:30:36,720
Speaker 1: that prices need to be going to two percent in

549
00:30:36,760 --> 00:30:40,360
Speaker 1: a stable manner, and you know one point one percent

550
00:30:40,400 --> 00:30:44,000
Speaker 1: inflation next year would not be considered stable. So what

551
00:30:44,120 --> 00:30:47,479
Speaker 1: that is meant in terms of them setting policy is

552
00:30:47,600 --> 00:30:51,360
Speaker 1: that not only is it do not don't move y

553
00:30:51,440 --> 00:30:55,000
Speaker 1: c C continue to let these like currency pressures manifest

554
00:30:55,040 --> 00:30:57,640
Speaker 1: between widening interest rates, but also if you look at

555
00:30:57,640 --> 00:31:00,240
Speaker 1: the bankage fan statement, it still has an easy by us.

556
00:31:00,240 --> 00:31:03,240
Speaker 1: And we've even heard from Corona over the last few

557
00:31:03,320 --> 00:31:05,520
Speaker 1: days where he's talked about, you know, the b o

558
00:31:05,600 --> 00:31:07,920
Speaker 1: J could be willing to do more, which I just

559
00:31:07,960 --> 00:31:11,720
Speaker 1: think really like encapsulates how all in they are as

560
00:31:11,760 --> 00:31:13,960
Speaker 1: and this is going to be you know, some sort

561
00:31:14,000 --> 00:31:18,280
Speaker 1: of procyclical reflation that is b o J endorsed because

562
00:31:18,320 --> 00:31:21,040
Speaker 1: not only is it do they not want to marginally tighten,

563
00:31:21,560 --> 00:31:24,080
Speaker 1: it's they actually still have their full easing posture in

564
00:31:24,160 --> 00:31:27,080
Speaker 1: terms of four guidance. So I think that, you know,

565
00:31:27,280 --> 00:31:29,520
Speaker 1: in terms of thinking about the b o J and

566
00:31:29,600 --> 00:31:31,800
Speaker 1: especially as it relates to the currency, I think really

567
00:31:31,840 --> 00:31:35,360
Speaker 1: this whole year we've been in this inconsistency between what

568
00:31:35,440 --> 00:31:37,640
Speaker 1: the market implied pain point is for the b o

569
00:31:37,720 --> 00:31:39,960
Speaker 1: J and what the b o J keeps telling you

570
00:31:40,000 --> 00:31:43,560
Speaker 1: their pain point is. And they have continued to say

571
00:31:43,600 --> 00:31:46,800
Speaker 1: implicitly effectively that there's still plenty of room to go

572
00:31:46,880 --> 00:31:51,360
Speaker 1: on getting resetting inflation, inflation expectations higher. And I think,

573
00:31:51,400 --> 00:31:54,360
Speaker 1: you know, the thing to look for now is less

574
00:31:54,360 --> 00:31:56,760
Speaker 1: of a well dollar young goes to one forty, so

575
00:31:56,800 --> 00:31:59,160
Speaker 1: they'll definitely move. And I think this has kind of

576
00:31:59,200 --> 00:32:02,600
Speaker 1: become amplified by the fact that the politics and Japan

577
00:32:02,640 --> 00:32:07,400
Speaker 1: have become less favorable to a very weekend policy. But

578
00:32:07,480 --> 00:32:10,040
Speaker 1: I think the thing to look for now is as

579
00:32:10,080 --> 00:32:13,920
Speaker 1: we actually this month will get a new fresh forecasts

580
00:32:14,000 --> 00:32:16,959
Speaker 1: of you know, more medium term inflation in Japan, and

581
00:32:17,000 --> 00:32:20,960
Speaker 1: I think that would be the catalyst who maybe a rethink,

582
00:32:21,080 --> 00:32:24,600
Speaker 1: especially as energy pressures have only increased a lot since April,

583
00:32:24,680 --> 00:32:28,200
Speaker 1: currency has weakened a lot. It's very plausible to think

584
00:32:28,320 --> 00:32:31,760
Speaker 1: that that the medium term inflation projections are starting to

585
00:32:31,800 --> 00:32:35,600
Speaker 1: move higher, and as they do, I think the kind

586
00:32:35,640 --> 00:32:38,239
Speaker 1: of wrinkle will be is the b o J is

587
00:32:38,520 --> 00:32:40,720
Speaker 1: not the FED, they're not the ECB, they're not the

588
00:32:40,760 --> 00:32:43,920
Speaker 1: Bank of England. There don't promise to be overly transparent.

589
00:32:44,720 --> 00:32:48,040
Speaker 1: Is that y CC starts to move in a kind

590
00:32:48,040 --> 00:32:51,320
Speaker 1: of non announced way. So I think that is kind

591
00:32:51,360 --> 00:32:54,440
Speaker 1: of the thing to sort of look out for. I

592
00:32:54,440 --> 00:32:56,720
Speaker 1: think for now we're in this world where the b

593
00:32:56,800 --> 00:33:00,480
Speaker 1: o J is still max easy because they have seen

594
00:33:01,120 --> 00:33:03,520
Speaker 1: the things that they've told you or told us that

595
00:33:03,560 --> 00:33:06,680
Speaker 1: they want to seek to trigger some form of marginally

596
00:33:06,720 --> 00:33:10,440
Speaker 1: tighter monetary policy, and they're dealing as much of the

597
00:33:10,480 --> 00:33:13,520
Speaker 1: developed world is is with this massive trade shock in

598
00:33:13,640 --> 00:33:16,680
Speaker 1: terms of deterior terms of trade and worsening trade balance.

599
00:33:17,000 --> 00:33:20,320
Speaker 1: So it's kind of been this this double whammy. Um

600
00:33:20,360 --> 00:33:24,120
Speaker 1: And I don't think that you know gets arrested immediately,

601
00:33:24,160 --> 00:33:25,880
Speaker 1: but I do think the thing to watch in terms

602
00:33:25,880 --> 00:33:28,560
Speaker 1: of why SEC is these and will see in July

603
00:33:28,640 --> 00:33:31,640
Speaker 1: and we'll see again in October, I believe is kind

604
00:33:31,680 --> 00:33:33,800
Speaker 1: of this medium term inflation forecast is that would be

605
00:33:33,880 --> 00:33:54,200
Speaker 1: kind of more the catalyst change. Of course, in the intro,

606
00:33:54,600 --> 00:33:57,080
Speaker 1: Joe and I were talking about the doom loop and

607
00:33:57,120 --> 00:33:59,960
Speaker 1: this idea that it sort of becomes a self reinforcing

608
00:34:00,240 --> 00:34:03,400
Speaker 1: cycle because people worry about global growth and that sends

609
00:34:03,440 --> 00:34:08,200
Speaker 1: the dollar higher, and then the higher dollar implies slower

610
00:34:08,360 --> 00:34:11,320
Speaker 1: global growth, and so you get this never ending cycle.

611
00:34:11,760 --> 00:34:15,160
Speaker 1: What what, in your opinion, is most likely to break

612
00:34:15,680 --> 00:34:20,640
Speaker 1: that loop in the current scenario. It's a good question,

613
00:34:20,760 --> 00:34:23,360
Speaker 1: So I think you know true. What we saw in

614
00:34:23,400 --> 00:34:29,080
Speaker 1: the is there was really two circuit breakers to the

615
00:34:29,120 --> 00:34:33,240
Speaker 1: dollar doom loop. One is, you know, a massive Chinese

616
00:34:33,400 --> 00:34:37,160
Speaker 1: credit easing that had global macro economic spillovers by just

617
00:34:38,040 --> 00:34:43,320
Speaker 1: increased global aggregate demand. The other was a dubbish pivot

618
00:34:43,360 --> 00:34:46,040
Speaker 1: from the FED. And the pivot from the Fed is

619
00:34:46,120 --> 00:34:49,040
Speaker 1: something we saw a few times in times. We saw

620
00:34:49,080 --> 00:34:53,360
Speaker 1: it at the end of We saw it in January

621
00:34:53,880 --> 00:34:57,200
Speaker 1: after hiking once and the dollar kind of went nuts,

622
00:34:57,280 --> 00:35:00,120
Speaker 1: and you know, commodity prices started to follow manufacturings or

623
00:35:00,160 --> 00:35:03,040
Speaker 1: the fall. The FED after that said, you know, we're

624
00:35:03,040 --> 00:35:04,920
Speaker 1: not going to be hiking as much. And sixteen, as

625
00:35:04,920 --> 00:35:07,080
Speaker 1: we said we were going to be in fifteen. I

626
00:35:07,120 --> 00:35:11,920
Speaker 1: think that has also been a catalysis time. What makes

627
00:35:12,000 --> 00:35:16,000
Speaker 1: this version of the doom loop really scary is it's

628
00:35:16,080 --> 00:35:18,640
Speaker 1: kind of hard to see how those circuit breakers play

629
00:35:18,640 --> 00:35:23,040
Speaker 1: out over the near term, where you know, we're now

630
00:35:23,080 --> 00:35:27,080
Speaker 1: in this world of we have a European problem, which

631
00:35:27,320 --> 00:35:30,520
Speaker 1: creates pressure on the euro, which sends the dollar higher,

632
00:35:30,800 --> 00:35:34,280
Speaker 1: which worsens the manufacturing cycle, which does this whole thing again.

633
00:35:34,960 --> 00:35:38,239
Speaker 1: But is the FED going to pivot with spot inflation

634
00:35:38,840 --> 00:35:42,480
Speaker 1: at an eight handle? Is we've seen that China has

635
00:35:42,520 --> 00:35:46,439
Speaker 1: already um started a pretty significant credit easing. We saw

636
00:35:46,680 --> 00:35:49,480
Speaker 1: two numbers this week which were high. We've seen we

637
00:35:49,520 --> 00:35:52,280
Speaker 1: started to seem like new loans beat. But we also

638
00:35:52,360 --> 00:35:56,960
Speaker 1: are going to be very cautious and almost doubtful of

639
00:35:57,080 --> 00:35:59,719
Speaker 1: some sort of Chinese credit expansion when we don't really

640
00:35:59,760 --> 00:36:03,279
Speaker 1: get passed through in the context of COVID zeroth. So

641
00:36:03,400 --> 00:36:05,560
Speaker 1: you know, it seems a little bit like a broken

642
00:36:05,600 --> 00:36:08,000
Speaker 1: transmission mechanism, at least in the context of the current

643
00:36:08,000 --> 00:36:11,880
Speaker 1: economic constraints. So it's it's very I think that is

644
00:36:12,040 --> 00:36:14,200
Speaker 1: kind of the dynamic we're now where it's a little

645
00:36:14,280 --> 00:36:18,239
Speaker 1: hard to see what kind of stops this, and I

646
00:36:18,280 --> 00:36:21,400
Speaker 1: guess the best answer is that it could stop itself.

647
00:36:21,960 --> 00:36:23,879
Speaker 1: And I think, you know, something to start to think

648
00:36:23,880 --> 00:36:27,600
Speaker 1: about as we get specially path September fom C and

649
00:36:27,640 --> 00:36:30,840
Speaker 1: really into the end of the year depending on how

650
00:36:31,080 --> 00:36:34,760
Speaker 1: you know bad the growth conditions are, especially in Europe,

651
00:36:35,280 --> 00:36:37,759
Speaker 1: is that the will the FED sort of be able

652
00:36:37,800 --> 00:36:43,600
Speaker 1: to do this implicit handoff from interest rates to global

653
00:36:43,600 --> 00:36:47,520
Speaker 1: economic conditions for an exchange general f C. I s

654
00:36:47,960 --> 00:36:50,560
Speaker 1: where you know, I think something that's possible to me

655
00:36:50,600 --> 00:36:53,919
Speaker 1: and something I started thinking about, you know, talking to clients,

656
00:36:54,080 --> 00:36:58,720
Speaker 1: is that the FED may be able to hand off

657
00:36:58,840 --> 00:37:00,840
Speaker 1: in a sense to the dollar. It's not this idea

658
00:37:00,880 --> 00:37:05,399
Speaker 1: that the FED would stop hiking or would be easing immediately,

659
00:37:05,960 --> 00:37:08,840
Speaker 1: but sort of this idea that the FED can start

660
00:37:08,880 --> 00:37:11,799
Speaker 1: to slow down maybe in November UM as we get

661
00:37:11,840 --> 00:37:15,879
Speaker 1: like a few more consistent readings of lower core PC

662
00:37:16,160 --> 00:37:19,160
Speaker 1: or point threes on core PC, and you know, the

663
00:37:19,160 --> 00:37:21,520
Speaker 1: FED can be able to point to look at what

664
00:37:21,520 --> 00:37:23,719
Speaker 1: the dollar is doing, look at what financial markets are doing,

665
00:37:24,160 --> 00:37:28,840
Speaker 1: and basically the FED can net effectively tightened by staying

666
00:37:28,920 --> 00:37:32,120
Speaker 1: still given the context they're in. And I think this

667
00:37:32,200 --> 00:37:36,279
Speaker 1: is like an interesting dynamic that could possibly start to

668
00:37:37,000 --> 00:37:40,120
Speaker 1: curtail some of these pressures. But you know, I think

669
00:37:40,200 --> 00:37:44,040
Speaker 1: until we get there, we're still in this bind of

670
00:37:44,560 --> 00:37:48,239
Speaker 1: you know, these are big disinflationary forces that the FED

671
00:37:48,360 --> 00:37:50,719
Speaker 1: is cheerleading at the moment. Right. The thing that we

672
00:37:50,760 --> 00:37:53,799
Speaker 1: saw last cycle is the FED wanted to prevent them

673
00:37:53,840 --> 00:37:58,920
Speaker 1: because it was always a financial conditions tightener that was

674
00:37:59,120 --> 00:38:04,680
Speaker 1: more than what monetary policy setting warranted. Where even where

675
00:38:04,680 --> 00:38:06,640
Speaker 1: the FED was on a you know, a quote unquote

676
00:38:06,640 --> 00:38:09,800
Speaker 1: path to neutral is, it always ended up being tighter

677
00:38:09,840 --> 00:38:12,640
Speaker 1: than they thought. And this was obviously the case when

678
00:38:12,640 --> 00:38:16,520
Speaker 1: they only had hiked once in December fifteen. Where now

679
00:38:16,880 --> 00:38:19,960
Speaker 1: the FED is telling us they want to be restrictive,

680
00:38:19,960 --> 00:38:23,440
Speaker 1: they want to get to restricted expeditiously, and this is

681
00:38:23,520 --> 00:38:27,120
Speaker 1: sort of a mechanism that amplifies the outcomes they're trying

682
00:38:27,160 --> 00:38:30,640
Speaker 1: to engineer. I think it's very hard to see sort

683
00:38:30,680 --> 00:38:33,719
Speaker 1: of you know what the off ramp is in sort

684
00:38:33,719 --> 00:38:36,600
Speaker 1: of an indulgent sense. I mean, the obvious you know,

685
00:38:36,640 --> 00:38:38,880
Speaker 1: other off ramps is sort of some sort of resolution

686
00:38:39,520 --> 00:38:42,840
Speaker 1: in in Ukraine and that you know, I don't I

687
00:38:42,880 --> 00:38:46,440
Speaker 1: don't have any uh and any good insights into but

688
00:38:46,560 --> 00:38:48,600
Speaker 1: it will also become a byproduct, you know, of how

689
00:38:48,680 --> 00:38:51,440
Speaker 1: much pain Europe is willing to take. I would assume,

690
00:38:51,840 --> 00:38:54,000
Speaker 1: you know, I think that is kind of what makes

691
00:38:54,480 --> 00:38:58,399
Speaker 1: this version of the doom loop so challenging is that

692
00:38:58,480 --> 00:39:03,400
Speaker 1: it is a condition or externality that the Fed, in

693
00:39:03,480 --> 00:39:08,520
Speaker 1: its efforts to lower inflation and lower inflation quickly, is

694
00:39:08,560 --> 00:39:12,280
Speaker 1: actually accentuating that I think is almost in their view positive.

695
00:39:12,320 --> 00:39:15,680
Speaker 1: The question I think that you know, market participants should

696
00:39:15,680 --> 00:39:18,279
Speaker 1: begin to ask, is if the dollar is doing all

697
00:39:18,360 --> 00:39:20,680
Speaker 1: this work, you know, does the Fed have to go

698
00:39:20,760 --> 00:39:22,799
Speaker 1: to four and a half or something like that. I

699
00:39:22,800 --> 00:39:25,400
Speaker 1: think that is an interesting question on its own. But

700
00:39:25,400 --> 00:39:29,399
Speaker 1: in terms of like what arrests this current dynamic, it's

701
00:39:29,440 --> 00:39:35,400
Speaker 1: really tricky. We have seen this pretty significant decrease in

702
00:39:35,680 --> 00:39:39,560
Speaker 1: commodity prices over the last month, and granted commodity prices

703
00:39:39,600 --> 00:39:42,799
Speaker 1: aren't cp I, but they feed through like there are

704
00:39:43,040 --> 00:39:48,200
Speaker 1: signs of this disinflationary impulse. Gasoline prices have been rolling

705
00:39:48,200 --> 00:39:50,840
Speaker 1: over other commodity prices, like some food commodities of like

706
00:39:50,920 --> 00:39:54,080
Speaker 1: way down, Like is it a is it possible that

707
00:39:54,400 --> 00:39:58,440
Speaker 1: inflation actually meaningfully starts to surprise on the downside? Like

708
00:39:58,600 --> 00:40:02,319
Speaker 1: is there any prospect of that, yeah, I do think

709
00:40:02,360 --> 00:40:05,359
Speaker 1: so I think that, you know, it will be very

710
00:40:05,400 --> 00:40:08,719
Speaker 1: tricky to I think it meaningfully lower prints and some

711
00:40:08,880 --> 00:40:12,080
Speaker 1: of the stickier stuff on the services side, where especially

712
00:40:12,080 --> 00:40:14,840
Speaker 1: in the US will be dealing with headwinds from shelter

713
00:40:15,080 --> 00:40:18,080
Speaker 1: for a while, where I think it will be tricky

714
00:40:18,239 --> 00:40:20,720
Speaker 1: to kind of get back into the you know, high

715
00:40:20,760 --> 00:40:24,319
Speaker 1: twos on inflation. But I do think that, you know,

716
00:40:24,360 --> 00:40:27,320
Speaker 1: and something that markets are pretty clearly starting to suggest

717
00:40:27,360 --> 00:40:30,360
Speaker 1: is that we're on a path back to you know,

718
00:40:30,680 --> 00:40:34,880
Speaker 1: still maybe elevated inflation, but certainly nowhere near the levels

719
00:40:34,880 --> 00:40:37,560
Speaker 1: we are now. And I think know the dollar has

720
00:40:37,600 --> 00:40:41,520
Speaker 1: clearly been a big part of reinforcing that mechanism between

721
00:40:41,560 --> 00:40:43,960
Speaker 1: the exchange rate and things like you know, break evens

722
00:40:44,040 --> 00:40:47,520
Speaker 1: or the market supplied inflation rates, because I think that

723
00:40:47,480 --> 00:40:50,160
Speaker 1: the nexus of all of that is that the dollar

724
00:40:50,200 --> 00:40:52,840
Speaker 1: has started to get to a level which has really

725
00:40:53,040 --> 00:40:56,200
Speaker 1: started to hurt commodity prices, even though we haven't seen

726
00:40:56,239 --> 00:40:59,000
Speaker 1: any alleviations per se on the supply side. So and

727
00:40:59,040 --> 00:41:02,080
Speaker 1: then my fun question is, and you mentioned, you know,

728
00:41:02,120 --> 00:41:03,600
Speaker 1: and we talked at the start of the year, at

729
00:41:03,600 --> 00:41:05,120
Speaker 1: the end of the last year, you know, there's hope

730
00:41:05,160 --> 00:41:07,160
Speaker 1: it might have been a good year for Europe and

731
00:41:07,239 --> 00:41:10,440
Speaker 1: the positive benefit to the end of nerve, etcetera. But

732
00:41:10,920 --> 00:41:13,319
Speaker 1: the big thing that we certainly did not talk about

733
00:41:13,360 --> 00:41:15,480
Speaker 1: the end of last year, and which most economists were

734
00:41:15,520 --> 00:41:18,279
Speaker 1: not thinking about, is the possibility of the war in

735
00:41:18,440 --> 00:41:20,839
Speaker 1: Ukraine and the effect that that would have on commodities,

736
00:41:21,120 --> 00:41:23,759
Speaker 1: and so like, how much of this whole discussion that

737
00:41:23,800 --> 00:41:26,160
Speaker 1: we're having, you know, we sort of talked tongue in

738
00:41:26,239 --> 00:41:30,040
Speaker 1: cheek about a team transitory and everyone abandoned that last year, Like,

739
00:41:30,520 --> 00:41:33,680
Speaker 1: how much does so much of the surprise to markets

740
00:41:34,040 --> 00:41:36,279
Speaker 1: really just a function of this thing that happened that

741
00:41:36,320 --> 00:41:39,200
Speaker 1: did not have to do with anything that at least

742
00:41:39,280 --> 00:41:42,320
Speaker 1: economists were equipped to be predicting at the end of

743
00:41:42,400 --> 00:41:45,640
Speaker 1: last year at the very beginning of two. Yeah, I mean,

744
00:41:45,680 --> 00:41:50,919
Speaker 1: I think it's led to the stickiness partly. I think

745
00:41:51,040 --> 00:41:53,880
Speaker 1: it's more amplified the severity. You know, I think that

746
00:41:54,040 --> 00:41:57,240
Speaker 1: something we've seen, you know, in the US, we we've

747
00:41:57,239 --> 00:42:00,759
Speaker 1: had more evidence that you know, there's a large part

748
00:42:00,800 --> 00:42:03,520
Speaker 1: of the inflation that overshoot is non energy, especially as

749
00:42:03,600 --> 00:42:06,160
Speaker 1: energy costs are so much lower than they are in Europe.

750
00:42:06,320 --> 00:42:08,600
Speaker 1: But even in Europe we've seen in like Christian the

751
00:42:08,680 --> 00:42:11,399
Speaker 1: Guard you know, talk at CenTra that you know, four

752
00:42:11,520 --> 00:42:14,840
Speaker 1: fifths of their core basket is running above two percent.

753
00:42:15,360 --> 00:42:18,400
Speaker 1: We've seen the Bank of England say, you know something similar,

754
00:42:18,480 --> 00:42:21,600
Speaker 1: that of their core basket is running above I think

755
00:42:21,840 --> 00:42:24,399
Speaker 1: two and a half. So I think that we were

756
00:42:24,719 --> 00:42:29,239
Speaker 1: in a a higher nominal GDP world, with inflation being

757
00:42:29,280 --> 00:42:32,360
Speaker 1: a big part of that to begin with. I think

758
00:42:32,480 --> 00:42:38,480
Speaker 1: that probably what has contributed to further central bank fears

759
00:42:38,480 --> 00:42:42,800
Speaker 1: about inflation expectations and very elevated readings of headline inflation

760
00:42:43,239 --> 00:42:46,080
Speaker 1: has been the has been the resh of Ukraine War.

761
00:42:46,600 --> 00:42:50,600
Speaker 1: But I think that we were in a probably higher

762
00:42:50,600 --> 00:42:55,880
Speaker 1: inflationary regime than we realized, call it December of one

763
00:42:56,360 --> 00:43:01,560
Speaker 1: that was probably going to be persistent regardless. John Turk,

764
00:43:01,719 --> 00:43:04,040
Speaker 1: thank you so much for coming on odd lots. Always

765
00:43:04,080 --> 00:43:06,759
Speaker 1: impressed by both your ability to explain all these things,

766
00:43:06,840 --> 00:43:10,360
Speaker 1: but also like your breadth, like you know, keeping tabs

767
00:43:10,400 --> 00:43:12,520
Speaker 1: on what the Bank of its real is up to

768
00:43:13,360 --> 00:43:16,040
Speaker 1: is a very helpful. So thank you so much. Always

769
00:43:16,040 --> 00:43:19,279
Speaker 1: a blast. Thank you so much. Guys really appreciate it.

770
00:43:34,560 --> 00:43:38,200
Speaker 1: So Joe, I guess, uh, two things jumped out at

771
00:43:38,200 --> 00:43:41,239
Speaker 1: me there. One is the US is in a relatively

772
00:43:41,320 --> 00:43:45,239
Speaker 1: good place once again, dollar privilege strikes, but also in

773
00:43:45,640 --> 00:43:50,040
Speaker 1: commodity privilege and commodity privilege. But to Europe just sounds

774
00:43:50,080 --> 00:43:53,080
Speaker 1: like it's in a whole lot of trouble. Right, Yes,

775
00:43:53,480 --> 00:43:57,000
Speaker 1: the double whammy on Germany is really striking. So the

776
00:43:57,440 --> 00:44:01,600
Speaker 1: import bills soaring, and then if you can't even operate

777
00:44:01,680 --> 00:44:04,520
Speaker 1: parts of your economy because they're dependent on this one

778
00:44:04,520 --> 00:44:08,879
Speaker 1: specific input gas at a certain price, that's brutal, right.

779
00:44:08,920 --> 00:44:11,960
Speaker 1: And it also feels like, you know, Japan, the bo

780
00:44:12,040 --> 00:44:16,400
Speaker 1: j could sort of face off against speculators last month,

781
00:44:16,520 --> 00:44:18,719
Speaker 1: and they were somewhat successful in doing that, but the

782
00:44:18,800 --> 00:44:22,799
Speaker 1: e c B, facing that particular inflationary back drop, it

783
00:44:22,880 --> 00:44:25,239
Speaker 1: just feels like there's no possibility that they're going to

784
00:44:25,239 --> 00:44:27,440
Speaker 1: be able to job on the market in any way. No.

785
00:44:27,680 --> 00:44:30,040
Speaker 1: And then and you know, on top of the sort

786
00:44:30,080 --> 00:44:33,400
Speaker 1: of double whammy to the core of how your industry works,

787
00:44:33,719 --> 00:44:36,640
Speaker 1: you have the spreads problem, and that's because of the

788
00:44:36,719 --> 00:44:40,080
Speaker 1: nature of European you know, your area architecture and having

789
00:44:40,160 --> 00:44:43,640
Speaker 1: to contain Italian spreads, which might mean expanding the balance

790
00:44:43,640 --> 00:44:46,920
Speaker 1: sheet at a time when it's fighting inflation. That's tricky.

791
00:44:46,960 --> 00:44:50,319
Speaker 1: That's a tough job for the ECB. Yeah, I feel

792
00:44:50,320 --> 00:44:52,560
Speaker 1: like this always comes up when we talk about central banks,

793
00:44:52,600 --> 00:44:55,799
Speaker 1: But like I do not envy central bankers and what

794
00:44:55,840 --> 00:44:57,719
Speaker 1: they have to do right now. I don't know. I

795
00:44:57,760 --> 00:45:00,319
Speaker 1: mean in Japan, it's just like we're setting the yield,

796
00:45:00,400 --> 00:45:02,640
Speaker 1: we're setting rates at this you could just go on

797
00:45:02,719 --> 00:45:06,320
Speaker 1: vacation for setting rates or setting tenure rates. Well, that's different. Okay. Wait,

798
00:45:06,440 --> 00:45:08,360
Speaker 1: if you were going to be ahead of any central

799
00:45:08,400 --> 00:45:11,000
Speaker 1: bank in the world right now, which one would you choose?

800
00:45:11,360 --> 00:45:13,440
Speaker 1: I think I would choose Japan because it really does

801
00:45:13,480 --> 00:45:15,359
Speaker 1: seem like they could say, like, you know what, and

802
00:45:15,520 --> 00:45:18,400
Speaker 1: is John pointed out they don't have the same commitment

803
00:45:18,480 --> 00:45:22,000
Speaker 1: to transparency as others have moved towards. She's like, you know,

804
00:45:22,080 --> 00:45:24,680
Speaker 1: we're setting this at zero. We're gonna take off for

805
00:45:24,719 --> 00:45:26,480
Speaker 1: a while. We'll be back in a few months, will

806
00:45:26,600 --> 00:45:28,680
Speaker 1: check in. That's how I would do it. Yeah, two

807
00:45:28,680 --> 00:45:31,960
Speaker 1: point five percent inflation looks good in any other country.

808
00:45:32,160 --> 00:45:36,560
Speaker 1: Two point five basically target in the US. All right, um,

809
00:45:36,560 --> 00:45:38,960
Speaker 1: shall we leave it. Let's leave it there. Okay. This

810
00:45:39,000 --> 00:45:41,680
Speaker 1: has been another episode of the All Thoughts podcast. I'm

811
00:45:41,719 --> 00:45:44,440
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy

812
00:45:44,440 --> 00:45:46,760
Speaker 1: Alloway and I'm Joe. Why Isn't All? You could follow

813
00:45:46,760 --> 00:45:49,719
Speaker 1: me on Twitter at The Stalwart, Follow our guest John

814
00:45:49,719 --> 00:45:54,200
Speaker 1: Turret He's at ja Turret eighteen. Follow our producer Kerman

815
00:45:54,320 --> 00:45:57,600
Speaker 1: Rodriguez at Carmen Arman, and check out all of our

816
00:45:57,640 --> 00:46:02,080
Speaker 1: podcasts at Bloomberg under the handle add Podcasts. Thanks for listening.