WEBVTT - Why the US Dollar Is Booming And Creating A Possible Doom Loop 0:00:10.000 --> 0:00:13.240 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.280 --> 0:00:17.000 I'm Tracy Alloway and I'm Joe Joe. Happy parody day 0:00:17.000 --> 0:00:19.959 to you. So I looked I actually got a little 0:00:20.079 --> 0:00:24.159 late this morning at five am instead of four, But 0:00:24.400 --> 0:00:27.080 I don't think it did. It quite exactly hit a dollar. 0:00:27.200 --> 0:00:29.680 I saw the ambiguity. It looked like the low on 0:00:29.760 --> 0:00:34.280 the terminal was like euro one zero zero zero zero 0:00:34.400 --> 0:00:36.720 zero zero zero one or something. And then I saw 0:00:36.760 --> 0:00:39.920 others posted I don't know. It's sad that we work 0:00:40.040 --> 0:00:43.200 for a gigantic financial data company and we can't figure 0:00:43.240 --> 0:00:46.480 this out. I thought it did. I'm pretty sure it did, 0:00:46.680 --> 0:00:50.560 very very briefly. Um, but let's just you know, even 0:00:50.600 --> 0:00:53.720 if it hasn't actually hit parody today, we're recording this 0:00:53.960 --> 0:00:58.840 on July twelve. It seems like it's going to any moment. 0:00:59.400 --> 0:01:01.160 And I got to say the fact that we're recording 0:01:01.160 --> 0:01:04.840 this episode though, probably means that this is marketing the peak, right. Yeah, 0:01:04.880 --> 0:01:07.920 So of course when this episode comes out, it's going 0:01:07.959 --> 0:01:09.760 to be the peak of the dollar, because that's how 0:01:09.760 --> 0:01:14.400 it works. Nonetheless, yes, euro has come very close to 0:01:14.520 --> 0:01:17.959 parody with the dollar. De facto parody. The dollar itself 0:01:18.120 --> 0:01:21.480 is just like incredibly strong. It might even be you know, 0:01:21.520 --> 0:01:25.840 obviously inflation and the trajectory of inflation is sort of 0:01:25.880 --> 0:01:29.280 this huge variable question for the economy. But in terms 0:01:29.280 --> 0:01:32.480 of like maybe the defining market story right now has 0:01:32.680 --> 0:01:35.680 just been this incredible strength of the US dollar, which 0:01:36.160 --> 0:01:39.200 all kinds of different ramification exactly. So setting aside what 0:01:39.280 --> 0:01:42.240 happens to the Euro, you cannot argue with the fact 0:01:42.240 --> 0:01:45.679 that we have had this broad based dollar strength. You know, 0:01:45.680 --> 0:01:48.040 there's some irony that, of course everyone's talking about the 0:01:48.120 --> 0:01:51.080 end of the world, and we recorded episodes about how 0:01:51.240 --> 0:01:54.080 the Russia Ukraine conflict and the sanctions mean that the 0:01:54.120 --> 0:01:55.760 dollar is going to fall out of favor in the 0:01:55.760 --> 0:01:59.880 global financial system. And yet the immediate knee jerk reaction 0:02:00.040 --> 0:02:03.360 to the world falling apart is dollar strength. It almost 0:02:03.360 --> 0:02:06.760 always is, yeah, right, because in the end, in the 0:02:06.800 --> 0:02:09.320 good times, you never really have to pay your bills. 0:02:09.400 --> 0:02:11.640 You just sort of roll over your debts or you 0:02:11.639 --> 0:02:14.000 don't worry about that or your flesh with money. In 0:02:14.040 --> 0:02:15.600 the bad times, you're like, oh, how am I going 0:02:15.639 --> 0:02:17.600 to pay my bills? I can't pay my bill is 0:02:17.600 --> 0:02:20.440 probably in bitcoin. I can't pay my bills and shares 0:02:20.480 --> 0:02:23.280 of Tesla. I can't pay my bills in you know, 0:02:23.360 --> 0:02:27.200 shares of arc or whatever. What I do is I 0:02:27.240 --> 0:02:29.560 need dollars. So everyone scrambles for dollars and they get 0:02:29.560 --> 0:02:31.880 more expensive. Right, so the dollar is basically a play 0:02:31.919 --> 0:02:35.000 on risk appetite at this point. But I guess the 0:02:35.120 --> 0:02:37.280 ultimate irony This is the second time I brought up 0:02:37.320 --> 0:02:40.800 irony so far. Ultimate The ultimate ultimate irony is that 0:02:41.440 --> 0:02:45.799 when everyone's worried about the future of the economy, the 0:02:45.919 --> 0:02:49.280 dollar tends to strengthen, and then the dollar strengthening actually 0:02:49.360 --> 0:02:52.680 has a negative impact on the global economy, and so 0:02:52.760 --> 0:02:55.000 you can get the situation where it becomes a self 0:02:55.040 --> 0:02:59.080 fulfilling cycle. The dollar doom loop is what some people 0:02:59.120 --> 0:03:01.400 have called it, Yeah, a feedback loop. But if you're 0:03:01.400 --> 0:03:04.280 a Germany and you're already sort of like moving from 0:03:04.320 --> 0:03:08.960 this huge current account surplus to current account deficit largely 0:03:09.040 --> 0:03:12.239 due to the surging price of energy, and then obviously 0:03:12.240 --> 0:03:16.400 everything becomes even more expensive now, especially things price and 0:03:16.440 --> 0:03:18.639 dollars or invoice in dollars, and so yeah, you can 0:03:18.680 --> 0:03:20.840 have this sort of doom loop where the strength of 0:03:20.840 --> 0:03:23.680 the dollar even further puts the squeeze on different players. 0:03:24.440 --> 0:03:27.560 So without further ado, to talk about the doom loop 0:03:27.680 --> 0:03:30.200 and more broadly what's going on with the dollar and 0:03:30.280 --> 0:03:32.600 a bunch of other currencies like the euro and the yen. 0:03:33.040 --> 0:03:35.960 We are going to be speaking with John Turke. He is, 0:03:36.000 --> 0:03:39.000 of course the founder of JST Advisors and the author 0:03:39.080 --> 0:03:42.280 of the Cheap Convexity blog. John, Welcome to the show. 0:03:43.520 --> 0:03:45.320 Thank you so much for having me. So, I think 0:03:45.360 --> 0:03:47.280 the first time we had you on was actually to 0:03:47.360 --> 0:03:51.360 talk about exactly this dynamic, the dollar doom loop. Yeah, 0:03:51.440 --> 0:03:53.920 it was. It was actually I think in the beginning 0:03:53.920 --> 0:03:59.440 of around pandemic had just started, and it was really 0:03:59.520 --> 0:04:02.920 the first time that FED really fully unleashed its swap 0:04:02.960 --> 0:04:06.120 program in terms of foreign exchange, and I felt that, 0:04:06.280 --> 0:04:09.680 you know, the doom loop was a very prevalent factor 0:04:09.800 --> 0:04:14.360 in kind of the cycle where we saw this slow 0:04:14.440 --> 0:04:18.320 down in the manufacturing side of the economy, largely on 0:04:18.360 --> 0:04:23.599 the fact of China's aggregate growth numbers starting to structurally fall, 0:04:24.160 --> 0:04:26.880 which you know, as the US is less exposed to 0:04:26.960 --> 0:04:30.880 global trade, global manufacturing saw it become a relative beneficiary, 0:04:30.960 --> 0:04:35.680 and then given the dollar linkages through global trade and manufacturing, 0:04:36.279 --> 0:04:42.279 it only reinforced the weaknesses of manufacturing. So it seems 0:04:42.320 --> 0:04:45.440 like we're in a similar dynamic with different catalysts. So 0:04:45.680 --> 0:04:48.400 before we even get into the dynamics, like how would 0:04:48.440 --> 0:04:50.760 you describe, I mean, everyone is sort of waking up 0:04:50.839 --> 0:04:53.480 to this weird phenomenon, which is that after an era 0:04:53.520 --> 0:04:55.800 of like so much stress and so must talking, you 0:04:55.800 --> 0:04:57.800 know another like end of the dollar, it's going to 0:04:57.880 --> 0:05:01.120 be replaced. It's gonna be a if my bitcoin, or 0:05:01.320 --> 0:05:04.240 China and Russia are gonna like circumvent the dollar or 0:05:04.279 --> 0:05:06.680 something like. You know, all this every crisis, this kind 0:05:06.680 --> 0:05:08.760 of talk. I am old enough to remember when the 0:05:08.760 --> 0:05:13.080 euro was going to replace gold. We've we've we've we 0:05:13.160 --> 0:05:15.000 all we've heard it, the bricks are going to like 0:05:15.279 --> 0:05:18.440 form some sort of new like deutsch mark whatever. You 0:05:18.440 --> 0:05:20.599 you know, that all the theories. If someone's like, Okay, 0:05:20.640 --> 0:05:22.960 here's the dollar, it's like basically back at all time highs. 0:05:23.040 --> 0:05:25.640 And someone says, John, well, as the dollar so strong, 0:05:25.680 --> 0:05:30.240 what's your answer? Well, I think that that part of 0:05:30.240 --> 0:05:34.600 the reason this time is that it's a structural dynamic. 0:05:34.960 --> 0:05:37.600 You know. I think a lot of it was the 0:05:37.720 --> 0:05:41.440 US was the cleanest of the dirty shirts, and I 0:05:41.480 --> 0:05:44.840 think that this time, the US is the most self sufficient, 0:05:45.440 --> 0:05:47.760 and I think that is that is I think the 0:05:47.800 --> 0:05:52.520 relative dynamic at play this time, as opposed to last time, 0:05:52.560 --> 0:05:56.440 when we were just broadly in a slowing nominal GDP 0:05:56.560 --> 0:05:59.480 world where we had you know, low levels of realized 0:05:59.480 --> 0:06:02.200 growth and the US was kind of growing just a 0:06:02.200 --> 0:06:06.800 bit faster. Um. Now, I think it is really a 0:06:07.520 --> 0:06:11.520 self sufficiency thing that I think is you know, really 0:06:11.560 --> 0:06:14.560 been encapsulated by this energy crunch that we're seeing, especially 0:06:15.160 --> 0:06:18.440 you know, Tracy, And I'm thinking back to our last 0:06:18.480 --> 0:06:21.159 conversation from a few months ago, exulting Posar, and of 0:06:21.160 --> 0:06:23.479 course he has this whole framework of like you know, 0:06:23.760 --> 0:06:27.320 Brent Wood's bree commodity centrality, and I did have that 0:06:27.440 --> 0:06:29.320 thought at the time, and I think it's on the episode. 0:06:29.320 --> 0:06:32.520 It's like it's in the US also like filled with 0:06:32.600 --> 0:06:35.760 tons and tons of commodities, like maybe like you know, 0:06:35.800 --> 0:06:37.680 it's like if we are going to be entering this 0:06:37.800 --> 0:06:41.640 new like commodity oriented regime where whoever has the most stuff, right, 0:06:41.680 --> 0:06:44.200 and like US is pretty good on that front too, right, 0:06:44.279 --> 0:06:47.119 It's not the worst place to be. But Okay, so John, 0:06:47.200 --> 0:06:49.880 maybe talk to us a little bit more about how 0:06:50.080 --> 0:06:54.599 energy factors into currency, you know, the weakness in the euro, 0:06:54.760 --> 0:06:57.159 the strength and the dollar, if it all comes down 0:06:57.400 --> 0:07:01.320 to energy, could you maybe walk us through exactly how 0:07:01.800 --> 0:07:05.760 energy prices or an energy shortage actually feed into currency 0:07:05.800 --> 0:07:09.320 weakness or strength. Yeah, of course, So you know, I 0:07:09.360 --> 0:07:12.080 think that a good way to do this also take 0:07:12.120 --> 0:07:13.720 a step back in the sense that a lot of 0:07:13.760 --> 0:07:17.720 currency movements, especially in the previous cycle, and I would 0:07:17.720 --> 0:07:23.000 say even really argue until the Russian invasion, was a 0:07:23.000 --> 0:07:25.280 lot of it was predicated on relative interest rates and 0:07:25.360 --> 0:07:27.800 kind of you know which central bank was a bit 0:07:27.840 --> 0:07:31.040 more hawkish, which was dubbish, That was kind of usually 0:07:31.160 --> 0:07:34.840 the forward rate space was a big marginal factor in 0:07:34.920 --> 0:07:37.040 kind of you know which currencies would be best off. 0:07:37.520 --> 0:07:40.640 And I think you know, really what changed now is 0:07:40.720 --> 0:07:43.880 that we're really in a terms of trade trade balanced 0:07:43.960 --> 0:07:48.680 current account world where the market in currency space is 0:07:48.720 --> 0:07:51.840 really looking beyond you know, which central bank is going 0:07:51.880 --> 0:07:55.720 to do the most to where are trade balance is 0:07:55.760 --> 0:08:00.160 going to settle. And given that energy has now a 0:08:00.240 --> 0:08:03.680 two pronged effect on that, I think it really emboldens 0:08:04.160 --> 0:08:07.239 that to play a more determinant role in exchange y prices. 0:08:07.280 --> 0:08:10.000 And I think you know, getting into the role of energy, 0:08:10.080 --> 0:08:14.200 especially when it's this sort of crunch where you know, 0:08:14.320 --> 0:08:18.440 we're talking about the potential of Russia turning off gas 0:08:18.440 --> 0:08:22.880 flows into Europe, it really does have a two pronged effect. 0:08:23.000 --> 0:08:27.760 One is that either the price of you know, related 0:08:27.840 --> 0:08:31.080 fossil fuels or energy inputs goes up, which is something 0:08:31.120 --> 0:08:34.920 we've seen that gas prices in Europe are very very high, 0:08:34.960 --> 0:08:37.520 power prices as a byproducts that have risen a lot, 0:08:38.000 --> 0:08:40.880 so the trade balance is getting hit on that. And 0:08:40.920 --> 0:08:45.360 then we have this factor where because it is a crunch, 0:08:46.040 --> 0:08:48.560 Europe is not able or at least projected to not 0:08:48.600 --> 0:08:52.160 be able to produce as much as it's product as 0:08:52.160 --> 0:08:57.920 its capacity is, so their exports by nature will fall 0:08:58.040 --> 0:08:59.959 relative to what they could have been because they don't 0:09:00.120 --> 0:09:03.400 have the energy inputs to facilitate it. So really, in 0:09:03.520 --> 0:09:05.880 terms of thinking about the current account of the trade 0:09:05.880 --> 0:09:09.640 balance more importantly is it's really a a double whammy 0:09:09.760 --> 0:09:13.319 because they're importing more energy inputs and they can't export 0:09:13.760 --> 0:09:17.120 as as as many outputs. And as we started to 0:09:17.160 --> 0:09:20.640 see with the Northern European trade balance, you know, Germany, 0:09:20.679 --> 0:09:24.880 after twenty years of running significant significant trade surpluss is 0:09:24.920 --> 0:09:28.600 now running a pretty significant trade deficite, and I think 0:09:28.679 --> 0:09:32.680 that is why this factor is so so important, because 0:09:33.000 --> 0:09:36.000 it really hits on both fronts. So I have two 0:09:36.080 --> 0:09:38.559 quick questions, one short and one is a little bit more. 0:09:38.559 --> 0:09:40.760 But the first one real quickly, have we actually seen 0:09:40.920 --> 0:09:44.360 exports start to weaken in Germany? Because I know, obviously 0:09:44.400 --> 0:09:46.920 the import bill has surged, and we know a lot 0:09:46.920 --> 0:09:49.000 of industrial players have said like, look, we can't just 0:09:49.240 --> 0:09:52.320 we can't work economically with these high gas prices. But 0:09:52.400 --> 0:09:54.520 have we actually seen that in the data where the 0:09:54.559 --> 0:09:59.360 exports start to turn down. So exports haven't started to 0:09:59.760 --> 0:10:03.559 fall all meaningfully yet, but we have already seen the 0:10:03.600 --> 0:10:08.240 imbalance grow between the imports side and the export side 0:10:08.240 --> 0:10:10.800 by nature of you know, the trade deficit, and we've 0:10:10.840 --> 0:10:12.960 already started to see at least in you know, the 0:10:13.040 --> 0:10:15.720 p m I data on the manufacturing side, that there 0:10:15.720 --> 0:10:19.480 will be slowdowns. It's just not economical for a lot 0:10:19.520 --> 0:10:22.000 of the heavy industry players at these prices. So and 0:10:22.000 --> 0:10:25.719 then my related question is in a situation like this 0:10:25.880 --> 0:10:28.800 where there is a true crunch that you know, the 0:10:28.920 --> 0:10:32.960 energy bill is soaring, but also you have domestic weakness 0:10:33.080 --> 0:10:36.240 because you just can't even maybe run the factories at 0:10:36.280 --> 0:10:41.240 these level of power prices. Does that contribute to does 0:10:41.280 --> 0:10:43.400 that make it essentially harder for the e c B 0:10:43.520 --> 0:10:47.040 to fight inflation? Because here, I guess look like maybe 0:10:47.080 --> 0:10:50.960 I don't know, you know, the U S economy is hot, right, 0:10:51.240 --> 0:10:53.760 or at least has been up until very recently. So 0:10:53.800 --> 0:10:55.800 it's sort of like a very natural thing for the 0:10:55.840 --> 0:10:58.000 FED to wanna hike rates and tap the brakes and 0:10:58.040 --> 0:11:01.280 try to diminish demand. It does doesn't seem like the 0:11:01.480 --> 0:11:05.559 ECB has that luxury. Yeah, so the e c B 0:11:05.760 --> 0:11:09.200 is really in a proper bund here, and I think 0:11:09.200 --> 0:11:14.120 it really boils down to two problems. One is even 0:11:14.320 --> 0:11:17.480 taking I think more meta structurally, even looking beyond this 0:11:17.920 --> 0:11:21.480 shock in its specific nature, is that the ECB was 0:11:21.520 --> 0:11:24.360 already faced with a problem of you have central banks 0:11:24.400 --> 0:11:28.640 around the world who are aggressively responding to much above 0:11:28.679 --> 0:11:33.839 target inflation and the threat of higher inflation expectations, and 0:11:33.960 --> 0:11:36.080 the e c B was going to have to play 0:11:36.360 --> 0:11:38.640 catch up in some capacity. And we've we we already 0:11:38.679 --> 0:11:40.600 started to see that pivot over the course of the year. 0:11:40.679 --> 0:11:43.000 We know they'll hike at their meeting next week and 0:11:43.000 --> 0:11:45.640 they'll hike again in September and kind of commence a 0:11:45.720 --> 0:11:49.000 hiking cycle. But the problem we started to see as 0:11:49.040 --> 0:11:53.280 more hikes got priced into the European curve is that 0:11:53.679 --> 0:11:56.679 it started to create stresses in the periphery where we 0:11:56.720 --> 0:12:00.760 had an uneven transmission of policy as spread heads between 0:12:00.840 --> 0:12:03.320 you know, Italy and Germany UM and really the periphery 0:12:03.360 --> 0:12:06.640 and the core started to blow out. And this was 0:12:06.720 --> 0:12:11.280 really emblematic of the structural um imbalance that is sort 0:12:11.280 --> 0:12:14.840 of innate to the your area, where we started to 0:12:14.920 --> 0:12:18.840 see the world of potentially you could have a rate 0:12:19.000 --> 0:12:22.800 that is not high enough to fight inflation and too 0:12:22.880 --> 0:12:26.640 high for the perfect and this led to the forthcoming 0:12:26.720 --> 0:12:30.480 ECB meeting will be sort of introduced to a anti 0:12:30.480 --> 0:12:34.800 fragmentation tool. We've seen that the ECB has already started 0:12:34.920 --> 0:12:39.200 flexibly reinvesting their their pet purchase portfolio kind of a 0:12:39.200 --> 0:12:43.480 way to alleviate these issues in spreads, but nonetheless it's 0:12:43.520 --> 0:12:47.800 still a big issue. And going before all of the 0:12:48.120 --> 0:12:51.040 gas related energy country issues, that we were already entering 0:12:51.040 --> 0:12:55.520 a world where rates weren't getting high enough to cut 0:12:55.559 --> 0:12:59.840 off imported inflation by currency weakness, and they were getting 0:12:59.840 --> 0:13:03.280 to you high for some of the perfect holders, namely Italy. 0:13:03.360 --> 0:13:06.079 So that is one side of the ECB challenges, which 0:13:06.120 --> 0:13:09.800 is already pretty drastic. The other side is the nature 0:13:10.080 --> 0:13:15.400 of this shock is innately very stagflationary in the sense 0:13:15.480 --> 0:13:19.760 that it raises the cost of energy by a lot, 0:13:19.840 --> 0:13:23.760 and it also reduces output by that actually isn't enough 0:13:24.160 --> 0:13:27.680 or there'll have to be some sort of reallocation of resources. 0:13:27.800 --> 0:13:30.400 Right if the decision becomes you know, making sure that 0:13:30.480 --> 0:13:33.160 everyone stays on in the winter or turning off one 0:13:33.240 --> 0:13:35.320 or two factories, the decision is going to be pretty 0:13:35.360 --> 0:13:38.520 easy for policy makers, um as unfortunate as it is. 0:13:38.800 --> 0:13:41.960 That is the second fold of it, where the now 0:13:42.000 --> 0:13:46.280 we have a shock that really worsens the inflationary pressure 0:13:46.760 --> 0:13:51.400 in Europe but also further reduces the growth impulse and 0:13:51.480 --> 0:13:55.280 on the output side, all in the backdrop of a 0:13:56.240 --> 0:13:59.200 imbalance at the ECB is fighting that is almost innate 0:13:59.240 --> 0:14:03.080 to their bout design, which is you know, common common 0:14:03.080 --> 0:14:06.720 Currency Union, no common fiscal So it's gonna be an 0:14:06.720 --> 0:14:10.440 extremely challenging task for the e c B. I think, 0:14:10.480 --> 0:14:12.480 you know, at the forthcoming meeting it will be interesting 0:14:12.520 --> 0:14:14.480 as we begin to outline you know, the e c 0:14:14.600 --> 0:14:17.280 B has taken a stand that growth is still good, 0:14:17.559 --> 0:14:20.440 and you know, nominal growth, especially on the consumption side 0:14:20.440 --> 0:14:23.320 in Europe is still pretty good. But we we know 0:14:23.480 --> 0:14:27.640 that once the industrial side, especially in the Core and Germany, 0:14:27.800 --> 0:14:31.440 becomes uncompetitive, that the economic spillovers are going to be 0:14:31.880 --> 0:14:35.520 pretty significant. And we could be looking at, you know, 0:14:35.600 --> 0:14:38.600 for the second time and into the last two e 0:14:38.680 --> 0:14:40.960 c B hiking cycles, or the ECB is hiking into 0:14:41.000 --> 0:14:43.880 a recession, and you know how the e c B 0:14:44.080 --> 0:14:47.200 kind of structures, you know, their inflation fight in the 0:14:47.240 --> 0:14:50.040 context of the material growth slow down. It's going to 0:14:50.120 --> 0:14:52.360 be very interesting. And I think the currency right now 0:14:52.440 --> 0:14:55.320 is proving to be on top of all of these factors, 0:14:55.320 --> 0:14:59.440 proving to be an outlet for that unknown what happens 0:14:59.480 --> 0:15:03.080 to capa all flows or capital inflows when the ECB 0:15:03.200 --> 0:15:06.600 starts hiking, because one of the weird things about what 0:15:06.600 --> 0:15:08.720 we've seen so far this year is that even with 0:15:08.840 --> 0:15:12.600 all the challenges that your faces at the moment, I 0:15:12.600 --> 0:15:16.800 think they've still had net inflows into the euro Zone. 0:15:16.920 --> 0:15:19.400 And you would expect if the ECB hikes rates that 0:15:19.400 --> 0:15:22.960 that would make um them more attractive compared to some 0:15:23.040 --> 0:15:27.440 other yields on offer. But like even if inflows happened positive, 0:15:27.440 --> 0:15:29.440 it doesn't seem to have had much of an effect 0:15:29.480 --> 0:15:32.840 on the euro. Yeah, it's it's it's an interesting one 0:15:32.880 --> 0:15:35.920 because this year was supposed to be and I you know, 0:15:36.200 --> 0:15:39.040 I think if we scrolled back to the last time 0:15:39.040 --> 0:15:42.520 it was on going into our preview, this year was 0:15:42.600 --> 0:15:46.440 kind of supposed to be a very positive euro currency 0:15:46.520 --> 0:15:48.800 story in the sense the potential of the end of 0:15:48.800 --> 0:15:52.920 negative interest rates was going to spur this return of 0:15:53.440 --> 0:15:56.520 you know, longer term stick year capital, either through reserve managers, 0:15:56.520 --> 0:15:59.760 pension funds, etcetera. That kind of became you know, priced 0:15:59.760 --> 0:16:02.280 out by negative rates, and you know, we saw the 0:16:02.600 --> 0:16:06.440 story of a p P and nerve in Europe is 0:16:06.560 --> 0:16:09.880 very much this one of you know, starting from on. 0:16:10.160 --> 0:16:13.440 It was basically this replacement of ownership between a lot 0:16:13.520 --> 0:16:17.440 of foreign owners who owned buns BTPs in Italy and 0:16:17.440 --> 0:16:20.600 and and French government bonds, and it was basically replaced 0:16:20.600 --> 0:16:22.840 by the e CB. So the currency channel was we 0:16:22.880 --> 0:16:26.560 had what called portfolio The portfolio channel was really in 0:16:26.640 --> 0:16:29.400 full effect, and there was some thought that we could 0:16:29.600 --> 0:16:33.280 trigger the inverse by leaving negative rates, and I think 0:16:33.320 --> 0:16:35.880 we really did start to see that, especially after February 0:16:36.240 --> 0:16:39.400 ECB when it became clear that you know, negative rates 0:16:39.400 --> 0:16:41.640 were probably going to end this year. I think it 0:16:41.720 --> 0:16:46.280 was a trigger. There were yielding, nominal, yielding securities in 0:16:46.280 --> 0:16:49.560 your area that we're compelling that hadn't been for eight 0:16:49.640 --> 0:16:52.480 years almost, and I think that was a spur for capital. 0:16:52.960 --> 0:16:56.400 I think the problem now is is as the e 0:16:56.480 --> 0:17:00.680 c B fights this is we really don't know, you know, 0:17:00.720 --> 0:17:03.280 what is it going to look like and kind of 0:17:03.400 --> 0:17:06.400 in the in the choices of bad choices, which bad 0:17:06.440 --> 0:17:08.679 choice do they lean on me? And I think the 0:17:09.040 --> 0:17:11.880 thing that you know is probably worth watching the most 0:17:12.400 --> 0:17:14.879 is that if there really is rationing and some of 0:17:14.880 --> 0:17:18.000 the industrial activity has to go offline, is there's going 0:17:18.040 --> 0:17:20.400 to be a fiscal response? Right? I don't think we 0:17:21.240 --> 0:17:23.800 none of us really assumed that, you know, the fiscal 0:17:23.800 --> 0:17:27.680 authorities are going to just let companies default or people 0:17:27.720 --> 0:17:30.520 be laid off because their factory can't run because they 0:17:30.560 --> 0:17:33.239 don't have the proper inputs. There is going to be 0:17:33.280 --> 0:17:36.000 a response. And then the question is, you know, especially 0:17:36.000 --> 0:17:39.480 in the context of an already problem in Italy in 0:17:39.600 --> 0:17:42.960 terms of perferee spreads, is how does the e c 0:17:43.119 --> 0:17:46.000 B respond and you know, I think we are setting 0:17:46.080 --> 0:17:48.840 up for the potential. I wouldn't you know that everything 0:17:48.840 --> 0:17:52.199 on this, but you could envision a world where the 0:17:52.240 --> 0:17:56.320 ECB is actually net buying securities again while they're hiking things. 0:17:56.840 --> 0:17:59.120 And this is something that you know, tri she actually 0:17:59.160 --> 0:18:02.960 talked about on a Bloomberg interview not too long ago. 0:18:03.480 --> 0:18:05.119 And you know, I, I don't know that it's I 0:18:05.119 --> 0:18:08.840 wouldn't say it as a base case, but given how 0:18:09.359 --> 0:18:13.000 the energy crunch could turn into a liquidity crunch at 0:18:13.000 --> 0:18:15.760 the same time that you know, Italy is facing a 0:18:15.880 --> 0:18:19.560 problem with you know, rising European rates, it's not impossible 0:18:19.800 --> 0:18:22.280 start to think about, you know, kind of what does 0:18:22.440 --> 0:18:26.800 the ECB balance sheet approach look like in that context. 0:18:26.840 --> 0:18:30.160 And I don't think it's one of significant contraction, even 0:18:30.200 --> 0:18:33.720 though they are tightening policy to deal with above target inflation. 0:18:34.240 --> 0:18:37.480 If the ECB is expanding its balance sheet in order 0:18:37.560 --> 0:18:41.800 to maintain or constrain Italian spreads while at the same 0:18:41.840 --> 0:18:45.760 time hiking your rates in order to fight inflation, that 0:18:45.840 --> 0:18:48.000 seems like one of those things where it's like, yeah, 0:18:48.000 --> 0:18:50.159 a bunch of people are going to dunk on that 0:18:50.280 --> 0:18:52.760 on Twitter and get it it's like, oh, those look 0:18:52.800 --> 0:18:54.480 at the A, C, E, C B folks, they don't 0:18:54.480 --> 0:18:56.280 know what they're doing. They're trying to fight inflation but 0:18:56.320 --> 0:18:58.919 expanding the balance sheet. But said I, I I said, Twitter 0:18:59.000 --> 0:19:03.720 dunks like, it's not necessarily economically unsound, right, Like you 0:19:03.760 --> 0:19:05.320 could do both at the same time. They're not. It's 0:19:05.320 --> 0:19:10.920 not necessarily contradictory. It is not necessarily contradictory. It will 0:19:11.040 --> 0:19:12.960 be in a relative sense because we'll be in a 0:19:13.000 --> 0:19:15.520 world where every other central bank outside of the Bank 0:19:15.520 --> 0:19:19.919 of Japan is withdrawing liquidity, So it would be in 0:19:19.960 --> 0:19:23.720 that sense, and I think the currency message would be confusing. 0:19:23.720 --> 0:19:26.879 But I personally think and you know, I don't know 0:19:26.960 --> 0:19:29.320 how relevant this is, but I think the ECP did 0:19:29.320 --> 0:19:31.520 make a mistake in terms of linking a p P 0:19:32.400 --> 0:19:35.560 their QI program to rates the same way that every 0:19:35.560 --> 0:19:39.520 other central bank had, only because we know that in 0:19:40.280 --> 0:19:42.879 for the b o E or for the FED that 0:19:42.960 --> 0:19:46.800 they've kind of outlined, QWI is sort of this almost 0:19:46.800 --> 0:19:49.280 forward guidance tool, which you know, when it exists, we 0:19:49.320 --> 0:19:51.879 know that they can't high rates, and the linkage between 0:19:51.960 --> 0:19:56.439 KIWI and rates actually enhances the net easing effect. And 0:19:56.480 --> 0:19:59.359 I think the ECB wanted to do this, which was 0:19:59.400 --> 0:20:01.840 basically kind of set up these guardrails for the market 0:20:01.880 --> 0:20:05.320 to price and hikes via the balance sheet. The problem 0:20:05.440 --> 0:20:09.280 is is that as we're sort of seeing, especially in 0:20:09.480 --> 0:20:14.800 periods of wide economic variants, is that QUI is probably 0:20:14.840 --> 0:20:19.280 a more structural dynamic to Europe given the innate and 0:20:19.359 --> 0:20:22.359 balances of the Union then it is let's say in 0:20:22.400 --> 0:20:25.000 the US, or in the UK, or in you know, 0:20:25.600 --> 0:20:28.679 really any other developed country. So I think that is 0:20:28.960 --> 0:20:31.439 something that will probably become more talked about as we 0:20:31.480 --> 0:20:34.080 get to the end of the year in Europe. Is 0:20:34.200 --> 0:20:38.840 in this you know, kind of nasty stagflationary world, is 0:20:38.920 --> 0:20:42.359 you know, what is the role of you know, QUEI 0:20:43.040 --> 0:20:46.440 even in a hiking cycle, especially as the e c 0:20:46.560 --> 0:20:48.439 B is never going to be able to kind of 0:20:48.480 --> 0:20:52.880 have a quote unquote QT episode where the stock of 0:20:52.960 --> 0:20:56.879 liquidity would also basically fall not only the flow but no, 0:20:57.000 --> 0:20:59.119 I I think it would be you know, on the 0:20:59.240 --> 0:21:01.280 day if that were to be announced, I think you 0:21:01.280 --> 0:21:06.280 would like further amplify currency weakness just as a byproduct 0:21:06.400 --> 0:21:09.200 is they would be the only ones injecting liquidity at 0:21:09.240 --> 0:21:13.080 the same time that everyone else is withdrawing it, and 0:21:13.200 --> 0:21:17.439 as we move forward on I think it could become 0:21:17.480 --> 0:21:21.879 like it, just a more institutionalized. Part of how the 0:21:21.880 --> 0:21:24.879 ECB kentuckt monetary policy is that you know, there is 0:21:25.040 --> 0:21:29.280 sort of this like net sticky buying of government bonds, 0:21:29.320 --> 0:21:49.199 even that is agnostic for the policies. So you mentioned 0:21:49.240 --> 0:21:51.919 something striking, which is the idea of a lot of 0:21:51.960 --> 0:21:54.760 the major central banks, you know, being in tightening mode 0:21:54.800 --> 0:21:59.480 all at once. And we've had previous situations where the 0:21:59.520 --> 0:22:03.639 major control banks have been in loosening mode all at once, 0:22:03.680 --> 0:22:07.040 and they've been you know, launching their own keeweep programs 0:22:07.040 --> 0:22:09.159 and things like that and lowering interest rates all at 0:22:09.200 --> 0:22:12.199 the same time. And in that environment, people used to 0:22:12.200 --> 0:22:16.520 worry about competitive currency devaluations and a sort of race 0:22:16.560 --> 0:22:20.400 to the bottom. With more people tightening, do you worry 0:22:20.440 --> 0:22:25.080 about currencies going up like a competitive valuation? That seems 0:22:25.119 --> 0:22:27.280 kind of weird. Like what I guess what I'm asking 0:22:27.359 --> 0:22:30.200 is what is the impact of all these people trying 0:22:30.240 --> 0:22:34.119 to raise rates at the same time. Yeah, it's a 0:22:34.200 --> 0:22:36.760 it's a great question, and I think it's it's only 0:22:36.840 --> 0:22:41.560 has added importance given that many of the world central 0:22:41.560 --> 0:22:45.680 banks right now we're fighting imported inflation much more so 0:22:45.720 --> 0:22:48.320 than excess demand. We do have cases like the UK 0:22:48.520 --> 0:22:52.399 and the US where there is there was some signs 0:22:52.400 --> 0:22:55.520 of overheating or excess demand. But you know, taking the 0:22:55.560 --> 0:22:58.480