1 00:00:05,909 --> 00:00:09,078 Speaker 1: Hello, uh, welcome to COVID time, a podcast series on 2 00:00:09,079 --> 00:00:12,250 Speaker 1: markets and economists from Devious Group Research. I'm Tamra, Chief 3 00:00:12,250 --> 00:00:15,859 Speaker 1: economist back from my summer break, and welcoming you to 4 00:00:15,859 --> 00:00:20,739 Speaker 1: our 157th episode. Today, I'm really happy to have with 5 00:00:20,739 --> 00:00:21,659 Speaker 1: us on this pod. 6 00:00:21,799 --> 00:00:25,450 Speaker 1: Podcast our former colleague and longtime friend, Thorsten Schlock, chief 7 00:00:25,450 --> 00:00:29,209 Speaker 1: economist at Apollo Global Management. Thorsten has been with Apollo 8 00:00:29,209 --> 00:00:32,489 Speaker 1: since 2020, prior to which he was with Deutsche Bank, 9 00:00:32,529 --> 00:00:35,729 Speaker 1: and prior to that in the International Monetary Fund. Thorsten, 10 00:00:36,049 --> 00:00:37,528 Speaker 1: so good to have you on COVID time. 11 00:00:38,240 --> 00:00:42,189 Speaker 2: Thanks so much for having Ting and congratulations. 157 episodes. 12 00:00:42,220 --> 00:00:45,790 Speaker 2: It's a huge uh landmark institution you have created here. So, 13 00:00:46,189 --> 00:00:47,430 Speaker 2: thank you so much for having me. I look forward 14 00:00:47,430 --> 00:00:48,330 Speaker 2: to our conversation. 15 00:00:48,790 --> 00:00:50,949 Speaker 1: Thanks, uh, Tarsan. It's a shame that I haven't had 16 00:00:50,950 --> 00:00:53,250 Speaker 1: you earlier, but you know, better late than never. I'm 17 00:00:53,250 --> 00:00:57,380 Speaker 1: so glad you're on. Uh, as I said to you before. 18 00:00:57,439 --> 00:01:01,060 Speaker 1: This call started, we will mostly talk about the US today. 19 00:01:01,869 --> 00:01:04,029 Speaker 1: So let's just get going. Current state of the US 20 00:01:04,029 --> 00:01:07,949 Speaker 1: economy seems pretty resilient. So where do you see growth 21 00:01:07,949 --> 00:01:12,069 Speaker 1: and inflation heading and taking into account trade war, fiscal 22 00:01:12,069 --> 00:01:15,309 Speaker 1: legislation that just passed, and the immigration actions that the 23 00:01:15,309 --> 00:01:16,519 Speaker 1: Trump administration is taking? 24 00:01:17,220 --> 00:01:21,480 Speaker 2: Yeah, so the summary is that the market is expecting, 25 00:01:21,559 --> 00:01:23,930 Speaker 2: and we are expecting, and the Fed is expecting what 26 00:01:23,930 --> 00:01:27,330 Speaker 2: I would call a Nike swoosh outlook. And a Nike 27 00:01:27,330 --> 00:01:29,730 Speaker 2: swoosh outlook means that growth is going to slow down 28 00:01:29,730 --> 00:01:32,529 Speaker 2: over the next several quarters. And when growth is slowing 29 00:01:32,529 --> 00:01:35,169 Speaker 2: down over the next several quarters, we should of course 30 00:01:35,169 --> 00:01:37,690 Speaker 2: expect to see therefore some headwinds to growth in the 31 00:01:37,690 --> 00:01:40,050 Speaker 2: near term. And the key issue, of course, is what 32 00:01:40,050 --> 00:01:43,089 Speaker 2: are those headwinds? Well, those headwinds exactly as you highlighted, 33 00:01:43,169 --> 00:01:44,610 Speaker 2: number one is, of course, the trade war. 34 00:01:45,209 --> 00:01:48,449 Speaker 2: When you raise tariffs, prices of things that are sold 35 00:01:48,449 --> 00:01:51,370 Speaker 2: in stores will go up. I do understand inflation has 36 00:01:51,370 --> 00:01:54,129 Speaker 2: not gone up quite as much as we thought just 37 00:01:54,129 --> 00:01:56,370 Speaker 2: all of us a few months ago, but inflation will 38 00:01:56,370 --> 00:01:59,489 Speaker 2: eventually go up and sales will eventually go down. Why 39 00:01:59,489 --> 00:02:01,730 Speaker 2: is that the case? Because at the moment the US 40 00:02:01,730 --> 00:02:06,209 Speaker 2: government is raising around $30 billion in revenue from tariffs. 41 00:02:06,230 --> 00:02:08,130 Speaker 2: So if you annualize that, that a little bit less 42 00:02:08,130 --> 00:02:11,529 Speaker 2: than $400 billion a year, someone is paying $400 billion 43 00:02:11,529 --> 00:02:13,288 Speaker 2: to the US government. There is no. 44 00:02:13,413 --> 00:02:16,044 Speaker 2: Free lunch. Either this is passed on to consumers through 45 00:02:16,044 --> 00:02:20,175 Speaker 2: higher inflation or this is paid by companies through lower earnings. 46 00:02:20,285 --> 00:02:22,364 Speaker 2: So the first hip win we're facing in the economic 47 00:02:22,365 --> 00:02:25,125 Speaker 2: outlook is the trade wall. The pig is still coming 48 00:02:25,125 --> 00:02:28,125 Speaker 2: through the python. The trade war is ultimately going to 49 00:02:28,125 --> 00:02:32,195 Speaker 2: have negative consequences for growth and also upward pressure on inflation. 50 00:02:32,404 --> 00:02:36,684 Speaker 2: The second thing that's also important for growth is immigration restrictions. 51 00:02:36,845 --> 00:02:38,883 Speaker 2: The goal from the Trump administration at the moment is 52 00:02:38,883 --> 00:02:41,595 Speaker 2: to deport around 3000 people every single day. 53 00:02:41,899 --> 00:02:44,559 Speaker 2: If you multiply that by 365, you get that the 54 00:02:44,559 --> 00:02:46,959 Speaker 2: annual deportation will roughly be around a million. 55 00:02:47,500 --> 00:02:50,410 Speaker 2: If you deport about a million people and estimates from 56 00:02:50,410 --> 00:02:53,419 Speaker 2: Pew and others estimate that's about 12 million illegal immigrants 57 00:02:53,419 --> 00:02:55,850 Speaker 2: in the US. If you deport about 11 million people 58 00:02:55,850 --> 00:02:58,740 Speaker 2: every day, every year and 3000 a day, that of 59 00:02:58,740 --> 00:03:01,929 Speaker 2: course will lower employment growth, that will employ labor supply. 60 00:03:02,190 --> 00:03:04,339 Speaker 2: So that will also lower, therefore, GDP growth in the 61 00:03:04,339 --> 00:03:06,660 Speaker 2: near term because we can no longer create jobs, especially 62 00:03:06,660 --> 00:03:10,418 Speaker 2: in the sectors where illegal immigrants work in construction, agriculture, 63 00:03:10,570 --> 00:03:12,740 Speaker 2: leisure and hospitality. So that's also a hit when. 64 00:03:13,147 --> 00:03:16,026 Speaker 2: Arguing for the Nike swoosh in growth going forward. And 65 00:03:16,026 --> 00:03:18,067 Speaker 2: the third and final thing that's a headwind is a 66 00:03:18,067 --> 00:03:20,227 Speaker 2: relatively new headwind that has only appeared in the last 67 00:03:20,227 --> 00:03:23,697 Speaker 2: few months, and that is that student loan payments have restarted. 68 00:03:23,947 --> 00:03:26,386 Speaker 2: So there was a moratorium, a pause on paying back 69 00:03:26,386 --> 00:03:29,826 Speaker 2: your student loans after 2020 during the pandemic, and that 70 00:03:29,826 --> 00:03:33,367 Speaker 2: pause ran out in May of 2025, meaning just a 71 00:03:33,367 --> 00:03:35,867 Speaker 2: few months ago. So now if I'm not paying my 72 00:03:35,867 --> 00:03:38,147 Speaker 2: student loans, then it will begin to impact. 73 00:03:38,434 --> 00:03:40,783 Speaker 2: My credit score and if my credit score goes down, 74 00:03:40,833 --> 00:03:42,744 Speaker 2: that means that I'm not able to buy a new car, 75 00:03:42,914 --> 00:03:45,142 Speaker 2: buy a new house, buy a new washer and dryer. 76 00:03:45,384 --> 00:03:48,033 Speaker 2: About 11 million people at the moment are not paying 77 00:03:48,033 --> 00:03:50,113 Speaker 2: their student loans on time, so that's a significant amount 78 00:03:50,113 --> 00:03:52,554 Speaker 2: of consumers that are now facing headwinds with a lower 79 00:03:52,554 --> 00:03:55,833 Speaker 2: credit score. So this is also weighing on the consumer outlook. 80 00:03:55,914 --> 00:03:58,753 Speaker 2: So in summary, and forgive the long answer here, we 81 00:03:58,753 --> 00:04:01,473 Speaker 2: see headwinds coming from the trade war. We see headwinds 82 00:04:01,473 --> 00:04:03,643 Speaker 2: coming from restrictions on immigration and 83 00:04:03,690 --> 00:04:08,391 Speaker 2: We see headwinds to growth coming from um what's been happening, 84 00:04:08,401 --> 00:04:11,761 Speaker 2: of course, with at the same time not only trade 85 00:04:11,761 --> 00:04:14,481 Speaker 2: war and restrictions on immigrations, but also at the same 86 00:04:14,481 --> 00:04:17,450 Speaker 2: time everything has been going on with student loan payments restarting. 87 00:04:17,640 --> 00:04:20,190 Speaker 2: So the conclusion is we expect growth to be lower 88 00:04:20,190 --> 00:04:22,520 Speaker 2: and at the same time we also expect inflation to 89 00:04:22,520 --> 00:04:25,480 Speaker 2: be higher. So in summary, in one sentence, we expect 90 00:04:25,480 --> 00:04:28,410 Speaker 2: a stagflationary outlook with weaker growth and higher 91 00:04:28,411 --> 00:04:29,001 Speaker 2: inflation. 92 00:04:30,178 --> 00:04:34,178 Speaker 1: So Tristan, uh, the market then is kind of getting 93 00:04:34,178 --> 00:04:36,660 Speaker 1: it wrong and by market I mean when we see 94 00:04:36,660 --> 00:04:41,118 Speaker 1: the equity market, which is sort of on an all-time high, uh, 95 00:04:41,178 --> 00:04:45,100 Speaker 1: when we look at guidance coming from companies, it is 96 00:04:45,100 --> 00:04:47,380 Speaker 1: far less dire than I would have expected, to your point, 97 00:04:47,390 --> 00:04:49,339 Speaker 1: that if it's going to be billions and billions of tariffs. 98 00:04:49,470 --> 00:04:51,950 Speaker 1: Paid by US companies at the import level, at the 99 00:04:51,950 --> 00:04:55,750 Speaker 1: customs level, they should be guiding substantially lower earnings, but 100 00:04:55,750 --> 00:04:59,269 Speaker 1: they're not. So where is the disconnect between sort of 101 00:04:59,269 --> 00:05:02,390 Speaker 1: the data and the tautology of a trade war and 102 00:05:02,390 --> 00:05:05,789 Speaker 1: the fact that there's broad complacency in the in the 103 00:05:05,790 --> 00:05:06,470 Speaker 1: market right now? 104 00:05:07,109 --> 00:05:09,339 Speaker 2: Yes, this is very important, so there is a very 105 00:05:09,339 --> 00:05:10,170 Speaker 2: strong disconnect. 106 00:05:10,450 --> 00:05:13,079 Speaker 2: I agree with what you're saying between what I just 107 00:05:13,079 --> 00:05:15,640 Speaker 2: said that the consensus expects growth to slow down. This 108 00:05:15,640 --> 00:05:18,079 Speaker 2: is what you see from your ECFC go on Bloomberg. 109 00:05:18,359 --> 00:05:20,519 Speaker 2: This is the Fed's forecast. This is also what happens 110 00:05:20,519 --> 00:05:23,328 Speaker 2: to be our forecast. So for that reason, you say, well, 111 00:05:23,369 --> 00:05:26,040 Speaker 2: if growth is slowing down, why is the market going up? Well, 112 00:05:26,119 --> 00:05:28,040 Speaker 2: I think the market is going up because sentiment is 113 00:05:28,040 --> 00:05:31,178 Speaker 2: so strong, and we have not yet seen the negative 114 00:05:31,178 --> 00:05:34,920 Speaker 2: consequences of the trade war. So the issue in markets 115 00:05:34,920 --> 00:05:37,279 Speaker 2: is that people are saying, well, there was peak uncertainty 116 00:05:37,279 --> 00:05:39,679 Speaker 2: on the trade war in April. There might have been. 117 00:05:39,773 --> 00:05:43,561 Speaker 2: Peak uncertainty on geopolitical risk also over the last few months. 118 00:05:43,763 --> 00:05:47,203 Speaker 2: So if peak uncertainty is behind us, then, well, maybe 119 00:05:47,202 --> 00:05:50,162 Speaker 2: we should be trading stocks higher. Well, the risk now is, 120 00:05:50,202 --> 00:05:53,522 Speaker 2: of course, that these headwinds that are coming ahead of 121 00:05:53,523 --> 00:05:56,442 Speaker 2: us will eventually begin to and most likely in our view, 122 00:05:56,523 --> 00:05:59,882 Speaker 2: this earnings season slow down earnings growth over the next 123 00:05:59,882 --> 00:06:02,803 Speaker 2: several weeks as we get into when the earnings come 124 00:06:02,803 --> 00:06:04,722 Speaker 2: up from different companies, of course, in the US. So 125 00:06:04,722 --> 00:06:06,683 Speaker 2: the bottom line to your question is I think this 126 00:06:06,683 --> 00:06:09,002 Speaker 2: sentiment is getting better relative to where. 127 00:06:09,096 --> 00:06:11,365 Speaker 2: We were a few months ago, but I still think 128 00:06:11,365 --> 00:06:14,936 Speaker 2: that now those policies that were put in place, IMF style, well, 129 00:06:15,005 --> 00:06:17,165 Speaker 2: now you see the consequences of those policies, and now 130 00:06:17,165 --> 00:06:19,365 Speaker 2: we need to think about how do I quantify the 131 00:06:19,365 --> 00:06:23,544 Speaker 2: impact of trade war, immigration restrictions, and student loan payments restarting. 132 00:06:23,605 --> 00:06:25,885 Speaker 2: And that's where we worry about that those impacts are 133 00:06:25,885 --> 00:06:28,015 Speaker 2: going to be negative. So that's why I still think 134 00:06:28,156 --> 00:06:30,885 Speaker 2: the economic outlook from the Fed and therefore also from 135 00:06:30,885 --> 00:06:32,765 Speaker 2: the consensus and what we're saying we should be what 136 00:06:32,765 --> 00:06:35,484 Speaker 2: we put most weight on rather than the backward looking 137 00:06:35,485 --> 00:06:38,195 Speaker 2: view of saying that we have peak uncertainty behind us. 138 00:06:38,850 --> 00:06:40,429 Speaker 1: So, I want to spend quite a bit of time 139 00:06:40,428 --> 00:06:42,269 Speaker 1: talking about the Fed with you, but before I go there, 140 00:06:42,519 --> 00:06:45,339 Speaker 1: let's just stay with the economy just a little longer. Um, 141 00:06:45,510 --> 00:06:48,309 Speaker 1: your sense of the job market. I'm looking at the 142 00:06:48,309 --> 00:06:51,989 Speaker 1: monthly payrolls data. It seems like public sector employment, which 143 00:06:51,988 --> 00:06:55,220 Speaker 1: I thought would be cratering, is actually doing pretty well. 144 00:06:55,428 --> 00:06:59,709 Speaker 1: So help solve that conundrum. And also has Trump's measures 145 00:06:59,709 --> 00:07:02,029 Speaker 1: over the last 6 months led to any impact on 146 00:07:02,029 --> 00:07:04,708 Speaker 1: the jobs on the good side, or are we talking 147 00:07:04,709 --> 00:07:05,669 Speaker 1: about jobs mostly on the 148 00:07:05,670 --> 00:07:06,308 Speaker 1: services side? 149 00:07:06,769 --> 00:07:09,600 Speaker 2: Yeah, this is really, really important because the general narrative 150 00:07:09,600 --> 00:07:12,119 Speaker 2: in markets is that the labor market is solid. 151 00:07:12,609 --> 00:07:16,079 Speaker 2: We're still creating in round numbers 150,000 jobs every month, 152 00:07:16,160 --> 00:07:19,049 Speaker 2: and we still have a relatively low unemployment rate. It 153 00:07:19,049 --> 00:07:22,600 Speaker 2: ticked down to 4.1% in the month of June. So 154 00:07:22,600 --> 00:07:24,730 Speaker 2: this gives you the impression that the labor market is 155 00:07:24,730 --> 00:07:28,609 Speaker 2: still fine, but exactly as you're highlighting underneath those numbers 156 00:07:28,609 --> 00:07:31,609 Speaker 2: are some very important differences between mainly we have been 157 00:07:31,609 --> 00:07:34,290 Speaker 2: creating government jobs in the last few months and less 158 00:07:34,290 --> 00:07:37,559 Speaker 2: so in private sector jobs. So private sector jobs were 159 00:07:37,559 --> 00:07:40,640 Speaker 2: only 74,000 in the month of June, so that means 160 00:07:40,640 --> 00:07:42,209 Speaker 2: that the private sector has definitely been. 161 00:07:42,384 --> 00:07:46,373 Speaker 2: A slowdown in job growth. So yes, we should expect 162 00:07:46,373 --> 00:07:49,123 Speaker 2: to see still going forward also the labor market weaken. 163 00:07:49,414 --> 00:07:51,053 Speaker 2: One thing that's a little bit of a joker in 164 00:07:51,053 --> 00:07:54,364 Speaker 2: this discussion is this issue of growing the labor supply 165 00:07:54,644 --> 00:07:58,574 Speaker 2: through restrictions on immigration. So if you remove people, of course, 166 00:07:58,644 --> 00:08:01,414 Speaker 2: from the labor force, then of course that means that 167 00:08:01,414 --> 00:08:04,604 Speaker 2: ultimately we have therefore a situation where there's less labor supply. 168 00:08:04,854 --> 00:08:07,213 Speaker 2: So at the same time labor demand is declining. Well 169 00:08:07,213 --> 00:08:10,174 Speaker 2: then we have a race where both supply of labor 170 00:08:10,174 --> 00:08:12,003 Speaker 2: is declining because people are being deported. 171 00:08:12,268 --> 00:08:14,497 Speaker 2: At the same time, demand is slowing down, so that's 172 00:08:14,497 --> 00:08:16,638 Speaker 2: why the unemployment rate may actually end up not going 173 00:08:16,638 --> 00:08:19,217 Speaker 2: up much, but we still should expect to see job 174 00:08:19,217 --> 00:08:22,778 Speaker 2: growth slow down, and that's exactly what we're seeing. Private 175 00:08:22,778 --> 00:08:25,388 Speaker 2: sector job growth has been slowing down in the last 176 00:08:25,388 --> 00:08:27,497 Speaker 2: 6 to 9 months, and that is what I think 177 00:08:27,497 --> 00:08:29,417 Speaker 2: we should be paying most attention to. And why is 178 00:08:29,417 --> 00:08:32,208 Speaker 2: that happening? Well, that's partly happening to your point, exactly 179 00:08:32,208 --> 00:08:34,557 Speaker 2: that the goods sector is beginning to see some slowdown. 180 00:08:34,778 --> 00:08:37,317 Speaker 2: But the overarching reason also why this is happening is, 181 00:08:37,328 --> 00:08:40,307 Speaker 2: of course, that the Fed raised rates in 2022 and 182 00:08:40,307 --> 00:08:42,057 Speaker 2: interest rates have now been relatively high. 183 00:08:42,461 --> 00:08:45,291 Speaker 2: In most people's estimates above our staff for some time, 184 00:08:45,381 --> 00:08:49,021 Speaker 2: that means that monetary policy is still crunching and weighing 185 00:08:49,021 --> 00:08:52,221 Speaker 2: on the economy and therefore slowing down job growth and 186 00:08:52,221 --> 00:08:54,901 Speaker 2: therefore slowing down growth, and that's why we should expect 187 00:08:54,901 --> 00:08:57,061 Speaker 2: to see over the next several months, and that's what 188 00:08:57,062 --> 00:09:01,211 Speaker 2: the consensus expects also that non-farm payrolls continue to slow down. 189 00:09:01,341 --> 00:09:04,780 Speaker 2: The consensus has slowing to around 60,000 here in the 190 00:09:04,780 --> 00:09:08,341 Speaker 2: third quarter, so that means that growth in employment should 191 00:09:08,341 --> 00:09:11,062 Speaker 2: begin to continue to weaken, but it begins to become 192 00:09:11,062 --> 00:09:11,861 Speaker 2: more clear in the data. 193 00:09:12,125 --> 00:09:14,505 Speaker 2: That the headwinds to the economy are beginning to have 194 00:09:14,505 --> 00:09:16,026 Speaker 2: an impact. So the other way of looking at that 195 00:09:16,026 --> 00:09:19,194 Speaker 2: is that in the Nike swoosh outlook here, we are 196 00:09:19,195 --> 00:09:21,625 Speaker 2: still not seeing a recession, but of course the fear 197 00:09:21,625 --> 00:09:23,106 Speaker 2: is that if you have a Nike swoosh, you don't 198 00:09:23,106 --> 00:09:25,265 Speaker 2: want to have the bottom go below zero where you 199 00:09:25,265 --> 00:09:27,866 Speaker 2: get a recession. So that's why the short answer to 200 00:09:27,866 --> 00:09:30,695 Speaker 2: your question is the consensus still expects still where we 201 00:09:30,695 --> 00:09:33,545 Speaker 2: sit today, 35% chance of a recession in the next 202 00:09:33,546 --> 00:09:36,265 Speaker 2: 12 months. That's not our forecast. That doesn't seem to 203 00:09:36,265 --> 00:09:38,684 Speaker 2: be the Fed's forecast either, but we're watching very carefully 204 00:09:38,684 --> 00:09:40,585 Speaker 2: when you have a slowdown for the risk, of course, 205 00:09:40,596 --> 00:09:41,744 Speaker 2: that we do get a recession. 206 00:09:42,510 --> 00:09:44,859 Speaker 1: OK, a little bit of, you know, then backward looking 207 00:09:44,859 --> 00:09:47,228 Speaker 1: analysis than T Tillerson, which is that we could have 208 00:09:47,229 --> 00:09:49,989 Speaker 1: said the same thing 12 months ago that a slowdown 209 00:09:49,989 --> 00:09:53,869 Speaker 1: is coming, the Fed rate cut is going to be delayed, 210 00:09:54,429 --> 00:09:57,460 Speaker 1: but the Fed went ahead and cut anyway in 20234, 211 00:09:57,869 --> 00:10:00,559 Speaker 1: and then we are again beginning to price in rate 212 00:10:00,559 --> 00:10:03,020 Speaker 1: cuts coming in the second half of this year. So, 213 00:10:03,179 --> 00:10:05,429 Speaker 1: so the backward looking question is this, so why did 214 00:10:05,429 --> 00:10:09,960 Speaker 1: we get 2023 wrong when the 2022 rate cuts in 215 00:10:09,960 --> 00:10:11,750 Speaker 1: theory should have led to a sharp slowdown? 216 00:10:12,380 --> 00:10:17,130 Speaker 2: Yeah, this is very, very important. So everyone expected literally 217 00:10:17,130 --> 00:10:22,369 Speaker 2: there was a dramatic consensus across every forecast that when 218 00:10:22,369 --> 00:10:25,890 Speaker 2: the Fed began to raise rates in 2022, everyone expected 219 00:10:25,890 --> 00:10:28,270 Speaker 2: the economy to slow down and there was so much conversation. 220 00:10:28,330 --> 00:10:30,238 Speaker 2: You and I also talked about this at the time. 221 00:10:30,450 --> 00:10:31,609 Speaker 2: Everyone expects a recession. 222 00:10:31,875 --> 00:10:34,604 Speaker 2: coming because normally when the Fed raises interest rates, of 223 00:10:34,604 --> 00:10:37,164 Speaker 2: course it results ultimately in a slowdown. So why didn't 224 00:10:37,164 --> 00:10:39,375 Speaker 2: we get that sharp slowdown when the Fed raised interest 225 00:10:39,375 --> 00:10:43,205 Speaker 2: rates so quickly in 2022 and 23? Well, the main 226 00:10:43,205 --> 00:10:45,604 Speaker 2: reason for that are two things, namely there were tailwinds 227 00:10:45,604 --> 00:10:48,844 Speaker 2: to growth coming from AIAE investment, and there was also 228 00:10:48,844 --> 00:10:50,844 Speaker 2: tailwinds coming from government spending. 229 00:10:51,270 --> 00:10:53,449 Speaker 2: So in the last two years of the Biden administration, 230 00:10:53,530 --> 00:10:57,650 Speaker 2: government spending was very strong, and a significant growth in 231 00:10:57,650 --> 00:11:01,729 Speaker 2: employment in the government sector was therefore accounting for why 232 00:11:01,729 --> 00:11:03,690 Speaker 2: the economy kept on doing so well. So on the 233 00:11:03,690 --> 00:11:06,770 Speaker 2: one hand, the Fed was raising rates, meaning monetary policy 234 00:11:06,770 --> 00:11:09,880 Speaker 2: was tightening, and at the same time, fiscal policy was easing, 235 00:11:10,090 --> 00:11:12,489 Speaker 2: pulling in the other direction, saying no growth should not 236 00:11:12,489 --> 00:11:15,130 Speaker 2: be slowing down when we have this significant government spending. 237 00:11:15,169 --> 00:11:15,890 Speaker 2: What was the significant 238 00:11:15,937 --> 00:11:19,867 Speaker 2: Government spending, it was the chips Act, spending on semiconductor 239 00:11:19,867 --> 00:11:23,806 Speaker 2: production and building chips facilities in the US, and it 240 00:11:23,807 --> 00:11:26,648 Speaker 2: was the inflation Reduction Act that also created a lot 241 00:11:26,648 --> 00:11:32,796 Speaker 2: of demand for manufacturing capacity, especially in renewables, solar panels, windmills, EVs, batteries, 242 00:11:32,968 --> 00:11:35,168 Speaker 2: and all those things, of course, created also a lift 243 00:11:35,168 --> 00:11:37,958 Speaker 2: in the economy. So that meant that we came into 244 00:11:37,958 --> 00:11:40,647 Speaker 2: the election of Trump here with a fairly 245 00:11:40,695 --> 00:11:44,716 Speaker 2: Strong economy that had now faced some tailwinds coming from, 246 00:11:44,765 --> 00:11:48,765 Speaker 2: of course, the AI spending and government spending and now 247 00:11:48,765 --> 00:11:51,726 Speaker 2: of course Trump put in place some policies and this 248 00:11:51,726 --> 00:11:54,465 Speaker 2: is not a political discussion, this is just discussing what 249 00:11:54,466 --> 00:11:57,245 Speaker 2: are the consequences of what different politicians do, but Trump 250 00:11:57,245 --> 00:12:00,595 Speaker 2: put in place some policies, namely trade more, immigration restrictions, 251 00:12:00,806 --> 00:12:02,765 Speaker 2: and those things, of course, including for that matter, even 252 00:12:02,765 --> 00:12:05,406 Speaker 2: the dollar going down, those things of course had some 253 00:12:05,453 --> 00:12:07,564 Speaker 2: Macroeconomic impacts and it just happens to be the case 254 00:12:07,564 --> 00:12:10,004 Speaker 2: that the trade war is he has said to himself, 255 00:12:10,124 --> 00:12:12,713 Speaker 2: Scarpesen has said this, and we should expect a detox. 256 00:12:12,883 --> 00:12:15,882 Speaker 2: We should expect an adjustment period. So that's why we 257 00:12:15,883 --> 00:12:19,203 Speaker 2: came from a relatively solid economy and then some policies 258 00:12:19,203 --> 00:12:21,713 Speaker 2: were put in place that have some adjustments over time, 259 00:12:21,723 --> 00:12:24,424 Speaker 2: and that's the adjustment that most people probably have in 260 00:12:24,424 --> 00:12:26,772 Speaker 2: mind when they think about the Nike swoosh of growth 261 00:12:26,773 --> 00:12:29,272 Speaker 2: being weaker over the next several quarters. So the answer 262 00:12:29,273 --> 00:12:30,153 Speaker 2: to your question is. 263 00:12:30,361 --> 00:12:33,361 Speaker 2: There were some very unique tailwinds to growth, namely AI 264 00:12:33,361 --> 00:12:37,521 Speaker 2: spending and government spending in 2023 and 2024 that made 265 00:12:37,521 --> 00:12:39,671 Speaker 2: it the case that we did not have that slowdown, 266 00:12:39,872 --> 00:12:42,442 Speaker 2: that your textbook would have predicted when you normally see 267 00:12:42,442 --> 00:12:44,731 Speaker 2: the Fed raise interest rates as quickly as they did. 268 00:12:45,322 --> 00:12:47,761 Speaker 1: Indeed. All right, so let's touch on that AI spending 269 00:12:47,761 --> 00:12:50,802 Speaker 1: for a second. Are we seeing any evidence in the 270 00:12:50,802 --> 00:12:53,841 Speaker 1: labor market that all this spending is leading to an 271 00:12:53,841 --> 00:12:54,841 Speaker 1: improvement in productivity? 272 00:12:56,890 --> 00:12:59,299 Speaker 2: The, there's a number of very important aspects of that 273 00:12:59,299 --> 00:13:02,299 Speaker 2: very critical question. So at this point, productivity has been 274 00:13:02,299 --> 00:13:05,419 Speaker 2: going up a bit, but the simplest way I look 275 00:13:05,419 --> 00:13:07,419 Speaker 2: at this is to look at the unemployment rate. Well, 276 00:13:07,500 --> 00:13:09,179 Speaker 2: the unemployment rate just went down. 277 00:13:09,710 --> 00:13:11,940 Speaker 2: I mean, if productivity gains were going to make all 278 00:13:11,940 --> 00:13:14,400 Speaker 2: of us unemployed, then of course the unemployment rate should 279 00:13:14,400 --> 00:13:17,619 Speaker 2: be going up. So that means that one conclusion is 280 00:13:17,619 --> 00:13:20,739 Speaker 2: that maybe the AI boom is still in the early 281 00:13:20,739 --> 00:13:22,820 Speaker 2: stage of us, all of us figuring out how do 282 00:13:22,820 --> 00:13:25,900 Speaker 2: we use perplexity, how do we use chat GBT, how 283 00:13:25,900 --> 00:13:28,439 Speaker 2: can these tools be helpful for all of us? I 284 00:13:28,440 --> 00:13:31,119 Speaker 2: know we have so many anecdotes of doctors using. 285 00:13:31,330 --> 00:13:35,179 Speaker 2: Of course, AI lawyers using AI financial services firms like 286 00:13:35,179 --> 00:13:38,848 Speaker 2: DBS and Apollo using AI, but all those things of 287 00:13:38,849 --> 00:13:41,409 Speaker 2: course are still very early, so we have not quite 288 00:13:41,409 --> 00:13:45,369 Speaker 2: yet seen that dramatic boom in productivity or total factor 289 00:13:45,369 --> 00:13:48,409 Speaker 2: productivity or even labor productivity that some people would have argued. 290 00:13:48,489 --> 00:13:50,809 Speaker 2: So the short answer to your question is we are 291 00:13:50,809 --> 00:13:52,489 Speaker 2: just not quite seeing it yet. 292 00:13:52,979 --> 00:13:55,789 Speaker 2: And for that reason, then there's still a very, very 293 00:13:55,789 --> 00:13:58,830 Speaker 2: open debate around, well, what is this going to do? 294 00:13:58,909 --> 00:14:02,098 Speaker 2: Is this going to be this dramatic change in productivity, 295 00:14:02,270 --> 00:14:05,150 Speaker 2: or is this just going to be the constant technological 296 00:14:05,150 --> 00:14:07,989 Speaker 2: evolution that we've been on for the last 20-30 years? 297 00:14:08,000 --> 00:14:10,630 Speaker 2: And that's the debate that of course is in the 298 00:14:10,630 --> 00:14:12,419 Speaker 2: market at the moment, that some people think that the 299 00:14:12,419 --> 00:14:15,270 Speaker 2: Magnificent Seven should be valued much higher than where they 300 00:14:15,270 --> 00:14:18,468 Speaker 2: are today. And other people, including me, think that they 301 00:14:18,469 --> 00:14:20,469 Speaker 2: are a little bit over value. This AI will make 302 00:14:20,469 --> 00:14:21,469 Speaker 2: a big difference in our lives. 303 00:14:21,950 --> 00:14:24,169 Speaker 2: But that's a different discussion from joking about what is 304 00:14:24,169 --> 00:14:27,619 Speaker 2: the evaluation of Nvidia and Meta and Apple and Amazon, etc. 305 00:14:28,049 --> 00:14:31,169 Speaker 2: So for that reason, the market is still intensely debating 306 00:14:31,169 --> 00:14:34,799 Speaker 2: your question, namely, even we haven't quite seen that yet, well, 307 00:14:35,289 --> 00:14:37,169 Speaker 2: what is the pace, how quickly is it going to come? 308 00:14:37,210 --> 00:14:39,650 Speaker 2: And the last footnote on that, of course, the CBO 309 00:14:39,650 --> 00:14:42,289 Speaker 2: just published a piece where they said, well, let's now 310 00:14:42,289 --> 00:14:45,929 Speaker 2: assume we have an AI scenario where productivity growth is 0.5% 311 00:14:45,929 --> 00:14:49,070 Speaker 2: point higher every year for the next 30 years. Well, 312 00:14:49,090 --> 00:14:50,219 Speaker 2: if that's the case, then 313 00:14:50,280 --> 00:14:53,510 Speaker 2: Actually, the fiscal situation will begin to roll over. In 314 00:14:53,510 --> 00:14:55,989 Speaker 2: other words, it is not only about you and me 315 00:14:55,989 --> 00:14:58,270 Speaker 2: and last language models and what this can do for 316 00:14:58,270 --> 00:15:01,020 Speaker 2: us in terms of productivity. It's also going to have 317 00:15:01,020 --> 00:15:04,059 Speaker 2: a dramatic impact on the fiscal situation if we do 318 00:15:04,059 --> 00:15:07,580 Speaker 2: have the significant benefits coming because of AI, because then 319 00:15:07,580 --> 00:15:10,510 Speaker 2: maybe the fiscal problems could disappear literally from one day 320 00:15:10,510 --> 00:15:13,299 Speaker 2: to the other if we suddenly just simply have higher growth. So, 321 00:15:13,469 --> 00:15:15,950 Speaker 2: so that's why this question you are asking is so 322 00:15:15,950 --> 00:15:18,830 Speaker 2: extremely important for so many reasons at the moment. 323 00:15:19,409 --> 00:15:21,450 Speaker 1: Well, George, you said that with a straight face. I'm 324 00:15:21,450 --> 00:15:25,440 Speaker 1: very impressed. The last bit at least. Uh, OK. Uh, 325 00:15:25,539 --> 00:15:27,450 Speaker 1: I said that earlier that we're going to talk about 326 00:15:27,450 --> 00:15:30,849 Speaker 1: the Fed a lot. Um, Trump versus Powell. Uh, we're 327 00:15:30,849 --> 00:15:34,940 Speaker 1: having this discussion in the third week of July 2025, uh, 328 00:15:35,090 --> 00:15:37,969 Speaker 1: in a month's time, two months' time, will Jay Powell 329 00:15:37,969 --> 00:15:39,289 Speaker 1: still be the Fed chair? 330 00:15:41,359 --> 00:15:42,270 Speaker 2: So. 331 00:15:43,239 --> 00:15:45,059 Speaker 2: You and I worked together and had a lot of 332 00:15:45,059 --> 00:15:47,380 Speaker 2: fun at the IMF and the first thing you learn 333 00:15:47,380 --> 00:15:49,179 Speaker 2: at the IMF when you and I walked in the 334 00:15:49,179 --> 00:15:52,260 Speaker 2: door in the 1990s is that the central bank has 335 00:15:52,260 --> 00:15:56,140 Speaker 2: to be independent. This is really, really important, so uh 336 00:15:56,140 --> 00:15:57,729 Speaker 2: I still think that uh 337 00:15:57,969 --> 00:16:02,099 Speaker 2: This debate around whether the power will be fired and 338 00:16:02,099 --> 00:16:04,510 Speaker 2: who will replace him, I still think this is something 339 00:16:04,510 --> 00:16:08,020 Speaker 2: that the market is not putting enough weight on because 340 00:16:08,020 --> 00:16:10,590 Speaker 2: the risks are, of course, that if the Fed is 341 00:16:10,590 --> 00:16:14,349 Speaker 2: no longer perceived by markets as independent, then it does 342 00:16:14,349 --> 00:16:18,739 Speaker 2: raise all kinds of similarities and worries about that this 343 00:16:18,739 --> 00:16:22,940 Speaker 2: is then maybe not too different from Turkey, Argentina, South Africa, 344 00:16:23,150 --> 00:16:26,479 Speaker 2: various countries where the central banks are not as 345 00:16:26,526 --> 00:16:29,245 Speaker 2: Independent as they are in the US and the ECB, 346 00:16:29,395 --> 00:16:32,026 Speaker 2: Bank of England, of course, Bank of Canada, RBA. So 347 00:16:32,195 --> 00:16:33,995 Speaker 2: for that reason, yes, this is something that I do 348 00:16:33,995 --> 00:16:36,625 Speaker 2: think is very important. I still think at this point, 349 00:16:36,866 --> 00:16:39,596 Speaker 2: the latest discussion where we are recording here is that 350 00:16:39,596 --> 00:16:43,356 Speaker 2: Scott Besson has been arguing also that they do not 351 00:16:43,356 --> 00:16:46,676 Speaker 2: want to fire Jay Powell, and Trump also said that 352 00:16:46,676 --> 00:16:48,825 Speaker 2: they do not want to fire Jay Powell at this point, 353 00:16:49,435 --> 00:16:51,995 Speaker 2: but it's obvious that this is indeed something that's getting 354 00:16:51,995 --> 00:16:54,556 Speaker 2: some attention. And for every time a headline comes through 355 00:16:54,556 --> 00:16:54,995 Speaker 2: your Bloomberg. 356 00:16:55,202 --> 00:16:58,401 Speaker 2: Screen about letting the Fed share go. Of course, the 357 00:16:58,401 --> 00:17:00,322 Speaker 2: dollar goes down a little bit more. So the worry 358 00:17:00,322 --> 00:17:03,521 Speaker 2: here is that the more the dollar goes down, we 359 00:17:03,521 --> 00:17:05,911 Speaker 2: know from the Fed's model when the dollar goes down 10%, 360 00:17:06,202 --> 00:17:10,321 Speaker 2: the US inflation goes up 0.3%. So the more downward 361 00:17:10,321 --> 00:17:12,241 Speaker 2: pressure there is on the dollar, it does begin to 362 00:17:12,241 --> 00:17:15,362 Speaker 2: have some similarities with what you see in here in 363 00:17:15,362 --> 00:17:17,692 Speaker 2: emerging markets when you have the problem that the credit bidder, 364 00:17:17,722 --> 00:17:20,001 Speaker 2: the central bank starts to get hurt and the exchange 365 00:17:20,001 --> 00:17:22,161 Speaker 2: rate goes down and the rates start to go up 366 00:17:22,161 --> 00:17:23,521 Speaker 2: and that's exactly been the. 367 00:17:23,656 --> 00:17:26,166 Speaker 2: The response we've seen on several occasions here as this 368 00:17:26,166 --> 00:17:28,966 Speaker 2: discussion has popped up. So the conclusion to your question 369 00:17:28,967 --> 00:17:31,607 Speaker 2: is I still think the Fed, and most importantly, the 370 00:17:31,607 --> 00:17:34,046 Speaker 2: way the institution is built and the way the design 371 00:17:34,046 --> 00:17:37,686 Speaker 2: of the institution is still very solid against the political pressure. 372 00:17:37,847 --> 00:17:40,087 Speaker 2: Not only we also saw that on the Biden, various 373 00:17:40,087 --> 00:17:42,716 Speaker 2: politicians from the Democratic side have also been putting pressure on, 374 00:17:42,967 --> 00:17:45,005 Speaker 2: on Jay Powell, but the bottom line here is there 375 00:17:45,006 --> 00:17:47,406 Speaker 2: are 12 voters on the FOMC. The Fed chair is 376 00:17:47,406 --> 00:17:49,636 Speaker 2: one of those voters. So the Fed chair comes in 377 00:17:49,636 --> 00:17:51,045 Speaker 2: and a new Fed chair comes in and say, I 378 00:17:51,046 --> 00:17:52,177 Speaker 2: want to lower interest rates, but the 379 00:17:52,223 --> 00:17:54,562 Speaker 2: The 11 other voters say we don't want to lower 380 00:17:54,563 --> 00:17:57,014 Speaker 2: interest rates, well then it's 11 versus 1, and then 381 00:17:57,013 --> 00:17:59,412 Speaker 2: you have the outcome is by the vote that interest 382 00:17:59,413 --> 00:18:02,124 Speaker 2: rates will not be going down. So the institutional setup 383 00:18:02,374 --> 00:18:04,843 Speaker 2: is also done in a way where the Fed chair 384 00:18:04,843 --> 00:18:08,363 Speaker 2: has at least a significant amount of power, but not 385 00:18:08,713 --> 00:18:12,213 Speaker 2: a significant and veto power or monetary policy decisions. And 386 00:18:12,213 --> 00:18:14,183 Speaker 2: the very last point on this is, and I know 387 00:18:14,183 --> 00:18:16,413 Speaker 2: this is a little bit a fine point, but it 388 00:18:16,413 --> 00:18:19,453 Speaker 2: is very important that the president appoints the chair of 389 00:18:19,453 --> 00:18:20,654 Speaker 2: the board of governors. 390 00:18:21,140 --> 00:18:23,930 Speaker 2: But the chair of the FOMC is normally the same person, 391 00:18:24,420 --> 00:18:26,419 Speaker 2: but the chair of the FOMC is elected among the 392 00:18:26,420 --> 00:18:29,189 Speaker 2: FOMC members, so they could have at the first FOMC 393 00:18:29,189 --> 00:18:30,650 Speaker 2: meeting that they elect someone else. 394 00:18:31,060 --> 00:18:33,050 Speaker 2: So this is why there is of course a lot 395 00:18:33,050 --> 00:18:35,310 Speaker 2: of discussion around well what if the chair of the 396 00:18:35,310 --> 00:18:37,650 Speaker 2: board of governors is not the same as the chair 397 00:18:37,650 --> 00:18:40,129 Speaker 2: of the FOMC. So there's a lot of, uh, I 398 00:18:40,130 --> 00:18:42,170 Speaker 2: know my head starts spinning some time when you think 399 00:18:42,170 --> 00:18:43,930 Speaker 2: about the consequences of all this, but there's just a 400 00:18:43,930 --> 00:18:46,530 Speaker 2: lot of nuances that do become important that the institution 401 00:18:46,530 --> 00:18:51,718 Speaker 2: is able to function, uh, despite the various political pressures, 402 00:18:51,729 --> 00:18:53,329 Speaker 2: both under Biden and also under Trump. 403 00:18:54,369 --> 00:18:56,510 Speaker 1: Is there any point to even trying to guess who's 404 00:18:56,510 --> 00:18:58,949 Speaker 1: going to be the Fed chair, or do we just 405 00:18:58,949 --> 00:19:00,310 Speaker 1: leave it to Trump to decide one day? 406 00:19:00,349 --> 00:19:02,469 Speaker 2: So you and I have also talked about that. Last 407 00:19:02,469 --> 00:19:04,469 Speaker 2: time we met you and I was in Copenhagen. 408 00:19:04,900 --> 00:19:08,119 Speaker 2: That's right. So that's, I mean, I look at this 409 00:19:08,119 --> 00:19:09,979 Speaker 2: when we talked about it last time, it is still, 410 00:19:09,989 --> 00:19:12,640 Speaker 2: still the same names that everyone talks about. So Scott Besson, 411 00:19:13,000 --> 00:19:16,520 Speaker 2: Chris Waller, Kevin Hassett, Kevin Walsh, it could also be 412 00:19:16,520 --> 00:19:20,560 Speaker 2: Nicky Bowman, um, all those names, if you ask me personally, 413 00:19:20,800 --> 00:19:23,640 Speaker 2: I still think they will be great fed chairs. I 414 00:19:23,640 --> 00:19:25,680 Speaker 2: still think the market will probably give whoever it is 415 00:19:25,680 --> 00:19:29,180 Speaker 2: the benefit of the doubt, and then the clock starts ticking. 416 00:19:29,439 --> 00:19:32,400 Speaker 2: What is this person saying? How are they behaving? Are 417 00:19:32,400 --> 00:19:34,160 Speaker 2: they firing people inside the 418 00:19:34,204 --> 00:19:37,603 Speaker 2: Fed system, are they hiring new people inside the Fed system? 419 00:19:37,635 --> 00:19:40,314 Speaker 2: What are they saying in speeches? That's when we will 420 00:19:40,314 --> 00:19:42,474 Speaker 2: begin to figure out is this new Fed chair going 421 00:19:42,474 --> 00:19:45,185 Speaker 2: to follow the dual mandate that be given by Congress, 422 00:19:45,354 --> 00:19:47,395 Speaker 2: or are they going to follow the dual mandate, but 423 00:19:47,395 --> 00:19:49,805 Speaker 2: put more weight on lowering interest rates and put more 424 00:19:49,805 --> 00:19:52,155 Speaker 2: weight on growth and less weight on inflation. So that, 425 00:19:52,165 --> 00:19:56,354 Speaker 2: of course, becomes an intellectual discussion around, well, how much 426 00:19:56,354 --> 00:19:59,275 Speaker 2: weight do I put on inflation potentially going up, should 427 00:19:59,275 --> 00:20:02,035 Speaker 2: I say that's not a big deal. Uh goods inflation 428 00:20:02,035 --> 00:20:03,474 Speaker 2: has here in the last few months. 429 00:20:03,560 --> 00:20:06,349 Speaker 2: Started to move higher. You've seen an inflation on tariff 430 00:20:06,349 --> 00:20:11,389 Speaker 2: impacted parts of the CPI. So this is toys, furniture, tools, 431 00:20:12,349 --> 00:20:14,699 Speaker 2: everything that is impacted by tariffs has started to move higher. 432 00:20:14,890 --> 00:20:17,199 Speaker 2: So in that environment, it becomes more difficult for the 433 00:20:17,199 --> 00:20:19,510 Speaker 2: Fed to cut rates unless you begin to say, we're 434 00:20:19,510 --> 00:20:22,040 Speaker 2: no longer focusing on that. Now we focus just on 435 00:20:22,270 --> 00:20:25,069 Speaker 2: growth slowing down. So, so that's why it all becomes 436 00:20:25,349 --> 00:20:27,739 Speaker 2: a big challenge of that the Fed has a dual mandate, 437 00:20:27,750 --> 00:20:29,939 Speaker 2: which is very different. The ECB only has one mandate, 438 00:20:29,949 --> 00:20:32,750 Speaker 2: namely inflation, same thing, Bank of Canada only focused on. 439 00:20:32,915 --> 00:20:35,704 Speaker 2: Inflation Reserve Bank of Australia only focused on inflation. The 440 00:20:35,704 --> 00:20:39,454 Speaker 2: Fed focuses on two things, inflation at 2% and full employment. 441 00:20:39,584 --> 00:20:42,025 Speaker 2: So that's why it gives some flexibility to whoever is 442 00:20:42,025 --> 00:20:44,824 Speaker 2: the Fed chair. Should I focus on 2% inflation? Should 443 00:20:44,824 --> 00:20:46,824 Speaker 2: I focus on the employment side of the mandate? And 444 00:20:46,824 --> 00:20:49,854 Speaker 2: that's why the new Fed chair, once the speeches begin 445 00:20:49,854 --> 00:20:51,863 Speaker 2: to come out, will begin to signal and we have 446 00:20:51,864 --> 00:20:54,204 Speaker 2: to figure out where does the weight, where is the 447 00:20:54,204 --> 00:20:57,035 Speaker 2: weight being given in that conversation about what will the 448 00:20:57,035 --> 00:20:59,544 Speaker 2: Fed do and will they therefore begin to, with the 449 00:20:59,545 --> 00:21:02,135 Speaker 2: new Fed chair begin to push harder for rate cuts coming. 450 00:21:03,420 --> 00:21:07,198 Speaker 1: So Joan, let's think about a scenario 12 months from 451 00:21:07,199 --> 00:21:10,819 Speaker 1: now where the CBO's AI miracle has not yet arrived, 452 00:21:10,939 --> 00:21:13,430 Speaker 1: so we're still talking about conventional growth rates and a 453 00:21:13,430 --> 00:21:18,219 Speaker 1: very large fiscal burden. Um, what's the chance of the 454 00:21:18,219 --> 00:21:21,099 Speaker 1: next Fed chair and the next Treasury Secretary or the 455 00:21:21,099 --> 00:21:24,540 Speaker 1: current Treasury secretary beginning to coordinate and force some degree 456 00:21:24,540 --> 00:21:27,099 Speaker 1: of financial repression down the throat of the US economy? 457 00:21:28,400 --> 00:21:31,670 Speaker 2: Yeah, so because exactly as you're highlighting, and this is 458 00:21:31,670 --> 00:21:34,390 Speaker 2: also page one in your and my IMF textbook, that 459 00:21:34,390 --> 00:21:36,859 Speaker 2: if you both have that debt levels just keep going up, 460 00:21:37,150 --> 00:21:39,389 Speaker 2: and at the same time, now there is some pressure 461 00:21:39,390 --> 00:21:42,188 Speaker 2: on the central bank to lower interest rates because we 462 00:21:42,189 --> 00:21:44,859 Speaker 2: don't like to pay higher debt servicing costs. Of course 463 00:21:44,859 --> 00:21:46,660 Speaker 2: that begins to mean that the central bank is beginning 464 00:21:46,660 --> 00:21:48,790 Speaker 2: to prioritize other things than inflation. 465 00:21:49,140 --> 00:21:52,270 Speaker 2: And when you have those scenarios, of course markets begin 466 00:21:52,270 --> 00:21:55,069 Speaker 2: to worry about, well, maybe tips and break evens should 467 00:21:55,069 --> 00:21:58,030 Speaker 2: trade higher, maybe worries about inflation should be higher, simply 468 00:21:58,030 --> 00:21:59,829 Speaker 2: because now the focus of the central banks seems to 469 00:21:59,829 --> 00:22:03,469 Speaker 2: be other things, namely debt levels, other things, namely debt 470 00:22:03,469 --> 00:22:06,890 Speaker 2: servicing costs. So under those scenarios, of course, I think 471 00:22:06,890 --> 00:22:09,149 Speaker 2: markets will begin to pay a lot more attention to. 472 00:22:09,233 --> 00:22:12,572 Speaker 2: Especially the pricing of tips and break even and inflation, 473 00:22:12,902 --> 00:22:15,042 Speaker 2: because in that case, you of course begin to have 474 00:22:15,042 --> 00:22:18,503 Speaker 2: the risk scenario that interest rates could be cut dramatically 475 00:22:18,503 --> 00:22:20,213 Speaker 2: in the front end of the U curve, and yes, 476 00:22:20,223 --> 00:22:22,782 Speaker 2: that would lower debt servicing costs, but if that comes 477 00:22:22,782 --> 00:22:25,453 Speaker 2: at the same time with a significant risk of inflation 478 00:22:25,453 --> 00:22:28,863 Speaker 2: moving higher, then of course it will ultimately be a 479 00:22:28,863 --> 00:22:29,262 Speaker 2: very difficult. 480 00:22:29,416 --> 00:22:31,855 Speaker 2: Trade off in the political discussion of how do we 481 00:22:31,855 --> 00:22:34,816 Speaker 2: manage that we have a growing high debt level while 482 00:22:34,816 --> 00:22:37,494 Speaker 2: at the same time we also have, of course, that 483 00:22:37,494 --> 00:22:39,215 Speaker 2: we don't want to have inflation to get out of control. 484 00:22:39,296 --> 00:22:42,526 Speaker 2: So yes, you are right. This is highlighting the tension 485 00:22:42,696 --> 00:22:45,936 Speaker 2: that is coming at a time when you have that 486 00:22:45,936 --> 00:22:48,455 Speaker 2: of course debt levels are very high, while at the 487 00:22:48,455 --> 00:22:53,416 Speaker 2: same time inflation is unfortunately still not at the Fed's 2% target. 488 00:22:54,290 --> 00:22:58,170 Speaker 1: Would you put QE on the realms of possibility? Would 489 00:22:58,170 --> 00:23:03,359 Speaker 1: you put increasing bank requirement to hold bonds as a possibility? 490 00:23:03,650 --> 00:23:06,050 Speaker 2: Yeah, so I do think that those things become very important. 491 00:23:06,209 --> 00:23:11,929 Speaker 2: So SLR relief, so supplemental leverage ratio is basically the 492 00:23:11,930 --> 00:23:15,050 Speaker 2: tool that the government has, which has been relatively steady 493 00:23:15,050 --> 00:23:15,930 Speaker 2: for now some time. 494 00:23:16,339 --> 00:23:19,199 Speaker 2: But where they essentially can give the banks more capacity 495 00:23:19,199 --> 00:23:22,040 Speaker 2: to buy treasuries, so if you get some relief on 496 00:23:22,040 --> 00:23:24,760 Speaker 2: the supplemental leverage ratio, then that allows the banks to 497 00:23:24,760 --> 00:23:27,000 Speaker 2: buy more treasuries, and if that's the case, you get 498 00:23:27,000 --> 00:23:30,229 Speaker 2: some more demand for treasury from that source. But you're right, 499 00:23:30,520 --> 00:23:32,680 Speaker 2: QE could also be an option. I think QE will 500 00:23:32,680 --> 00:23:35,839 Speaker 2: only be an option if there is really financial instability. 501 00:23:36,250 --> 00:23:39,420 Speaker 2: Because QE as a decision is also something that needs 502 00:23:39,420 --> 00:23:42,459 Speaker 2: to be decided by the 12 voting FMC members. The 503 00:23:42,459 --> 00:23:45,780 Speaker 2: Fed chair, him or herself, cannot do QE without the 504 00:23:45,780 --> 00:23:48,649 Speaker 2: other FMC members. They do meet and decide to say, 505 00:23:48,900 --> 00:23:51,619 Speaker 2: let's buy the long end of the U curve. So 506 00:23:51,619 --> 00:23:54,979 Speaker 2: that's why yield curve control various discussions and rates markets 507 00:23:54,979 --> 00:23:57,579 Speaker 2: around what would the Fed do is also something that's 508 00:23:57,579 --> 00:24:01,280 Speaker 2: actually quite difficult to get through because it does require 509 00:24:01,500 --> 00:24:04,540 Speaker 2: all 12 FOMC members to vote on that topic. It 510 00:24:04,540 --> 00:24:05,459 Speaker 2: could be a vote of 7. 511 00:24:05,704 --> 00:24:09,084 Speaker 2: 5, which is really, really unusual, but just to say 512 00:24:09,084 --> 00:24:11,765 Speaker 2: that for QE to come, I think we need financial 513 00:24:11,765 --> 00:24:14,004 Speaker 2: instability in some form. I do not believe that they 514 00:24:14,005 --> 00:24:16,805 Speaker 2: will do QE to bail out fiscal policy a little 515 00:24:16,805 --> 00:24:19,645 Speaker 2: bit similar to the ECB. The discussions there also is 516 00:24:19,645 --> 00:24:22,084 Speaker 2: that they do not go out and buy Italian government 517 00:24:22,084 --> 00:24:25,785 Speaker 2: bonds or Spanish or Irish or Portuguese government bonds for 518 00:24:25,785 --> 00:24:28,785 Speaker 2: political reasons, but they normally only do it to, as 519 00:24:28,785 --> 00:24:31,844 Speaker 2: they say, facilitate the transmission mechanism of monetary policy, I 520 00:24:31,844 --> 00:24:34,765 Speaker 2: mean to keep the financial system stable and steady. 521 00:24:35,800 --> 00:24:38,119 Speaker 1: Now, the reason we're having this conversation is because there 522 00:24:38,119 --> 00:24:40,438 Speaker 1: is a very large amount of issuance taking place on 523 00:24:40,439 --> 00:24:43,229 Speaker 1: a regular basis, and there are some questions whether the market, 524 00:24:43,599 --> 00:24:46,359 Speaker 1: US market or global market has the capacity to keep 525 00:24:46,359 --> 00:24:50,280 Speaker 1: on absorbing such massive flows. So to last November when 526 00:24:50,280 --> 00:24:53,079 Speaker 1: the Fed had its last financial stability review, I noticed 527 00:24:53,079 --> 00:24:53,959 Speaker 1: that there was this one part. 528 00:24:54,339 --> 00:24:56,369 Speaker 1: where they talked about this worry that off their own 529 00:24:56,369 --> 00:25:00,639 Speaker 1: bond market liquidity is pretty poor. Uh, and, and so 530 00:25:00,640 --> 00:25:02,670 Speaker 1: that sort of leads me to this question that you, 531 00:25:02,680 --> 00:25:05,599 Speaker 1: you touched on issues related to financial instability. We don't 532 00:25:05,599 --> 00:25:07,879 Speaker 1: really think that's on the table, but we also worry 533 00:25:07,880 --> 00:25:09,880 Speaker 1: about that, right? That it is a lot of issuance, 534 00:25:09,890 --> 00:25:12,319 Speaker 1: and the market's ability to absorb is a question mark. 535 00:25:13,050 --> 00:25:16,359 Speaker 2: Absolutely. So that is why, I mean, so the Congressional 536 00:25:16,359 --> 00:25:19,369 Speaker 2: Budget Office, so today, let's keep the numbers very simple. 537 00:25:19,849 --> 00:25:23,129 Speaker 2: Debt to GDP is 100%, and the Congressional Budget Office 538 00:25:23,130 --> 00:25:26,449 Speaker 2: is forecasting that we're going to 130% over the next 539 00:25:26,449 --> 00:25:29,849 Speaker 2: several decades. So that's going up quite significantly. So if 540 00:25:29,849 --> 00:25:32,489 Speaker 2: that's the case, well then if debt levels are going up. 541 00:25:32,550 --> 00:25:35,180 Speaker 2: We need to issue more treasuries. So this raises the 542 00:25:35,180 --> 00:25:38,419 Speaker 2: important question where on the yield curve should the US 543 00:25:38,420 --> 00:25:41,979 Speaker 2: Treasury issue more government bonds? Should it be 2-year rates, 544 00:25:42,099 --> 00:25:45,389 Speaker 2: 5-year rates, 10 year rates or 30 year rates? This 545 00:25:45,390 --> 00:25:48,260 Speaker 2: becomes every government in the world thinks about this on 546 00:25:48,260 --> 00:25:50,829 Speaker 2: a running basis every single day, namely where on the 547 00:25:50,829 --> 00:25:51,880 Speaker 2: U curve do we issue. 548 00:25:52,329 --> 00:25:55,939 Speaker 2: And there's been a tradition in the US to say, well, 549 00:25:56,099 --> 00:25:58,540 Speaker 2: we would like to keep the weighted average maturity of 550 00:25:58,540 --> 00:26:01,729 Speaker 2: that outstanding, meaning the maturity of all government bonds combined 551 00:26:01,939 --> 00:26:05,458 Speaker 2: at roughly 5 to 6 years. So now, of course, 552 00:26:05,500 --> 00:26:07,500 Speaker 2: the risk is that if people are worried about lending 553 00:26:07,500 --> 00:26:10,780 Speaker 2: money to the US government for 10 years, for 30 years, well, 554 00:26:10,939 --> 00:26:13,160 Speaker 2: maybe now, and this is what's got business has talked 555 00:26:13,160 --> 00:26:15,939 Speaker 2: about more recently, maybe now there is more pressure to 556 00:26:15,939 --> 00:26:16,780 Speaker 2: issue more on the front end. 557 00:26:17,260 --> 00:26:19,139 Speaker 2: And that means in the front of U curve, meaning 558 00:26:19,140 --> 00:26:21,750 Speaker 2: T bills for stablecoin reasons, we could talk about that 559 00:26:21,750 --> 00:26:24,349 Speaker 2: in a second, but also 2 year rates, 3 year rates, 560 00:26:24,380 --> 00:26:27,540 Speaker 2: 5-year rates, because people are generally willing to buy shorter 561 00:26:27,540 --> 00:26:30,979 Speaker 2: duration government debt, but less willing to buy 30 and 562 00:26:30,979 --> 00:26:34,260 Speaker 2: 10 year government debt. That's, of course, now become important 563 00:26:34,260 --> 00:26:36,699 Speaker 2: because what could be the sources of demand then in 564 00:26:36,699 --> 00:26:39,140 Speaker 2: the front end of the U curve? And one new 565 00:26:39,140 --> 00:26:42,449 Speaker 2: source of demand, uh, the Genius Act just went through Congress. 566 00:26:42,739 --> 00:26:46,089 Speaker 2: What is the demand that could potentially come from 567 00:26:46,286 --> 00:26:49,615 Speaker 2: Stablecoins, and stablecoin demand at the moment, if you and 568 00:26:49,615 --> 00:26:54,754 Speaker 2: circle combined, they have T bills of roughly around $140 billion. 569 00:26:55,125 --> 00:27:00,125 Speaker 2: But if suddenly stablecoins become much more widespread used for 570 00:27:00,125 --> 00:27:02,926 Speaker 2: transactions around the world, at the moment, 90% of the 571 00:27:02,926 --> 00:27:06,725 Speaker 2: uses of stablecoins is for trading crypto. But if stablecoins 572 00:27:06,725 --> 00:27:09,446 Speaker 2: suddenly become used for when I come and visit you 573 00:27:09,446 --> 00:27:12,326 Speaker 2: in Singapore, I buy a cup of coffee from the 574 00:27:12,326 --> 00:27:15,046 Speaker 2: coffee shop, and I use US dollar stablecoins to buy. 575 00:27:15,472 --> 00:27:18,102 Speaker 2: When you visit me in Copenhagen or here in New York, 576 00:27:18,311 --> 00:27:20,552 Speaker 2: then you could also come and use stablecoin dollars to 577 00:27:20,552 --> 00:27:22,870 Speaker 2: buy a cup of coffee or buy a meal, or 578 00:27:22,871 --> 00:27:24,311 Speaker 2: we go out to a restaurant or even buy a 579 00:27:24,311 --> 00:27:27,421 Speaker 2: house or a car. If that's the case, Global demand 580 00:27:27,421 --> 00:27:30,842 Speaker 2: for US dollar stablecoins could go up, and there are estimates, 581 00:27:30,852 --> 00:27:34,131 Speaker 2: and the GAC has been discussing the Treasury borrowing Advisory Committee. 582 00:27:34,311 --> 00:27:36,511 Speaker 2: They meet once a quarter, and they've been discussing this, 583 00:27:36,531 --> 00:27:38,670 Speaker 2: and this was a very recent debate. This is on 584 00:27:38,671 --> 00:27:42,612 Speaker 2: the Treasury homepage where there were estimates that this demand 585 00:27:42,612 --> 00:27:43,991 Speaker 2: for stablecoins could go up into the. 586 00:27:44,108 --> 00:27:46,417 Speaker 2: Trillions, and I know this is a bit special issue. 587 00:27:46,498 --> 00:27:48,696 Speaker 2: You may ask why do you and I as macroeconomists 588 00:27:48,696 --> 00:27:51,218 Speaker 2: care about stablecoins. But the reason why this has become 589 00:27:51,218 --> 00:27:54,508 Speaker 2: important is that if stablecoins suddenly become a means of 590 00:27:54,508 --> 00:27:57,417 Speaker 2: payment around the world, not only in Singapore and New 591 00:27:57,417 --> 00:28:01,218 Speaker 2: York and Copenhagen, but also in emerging markets where suddenly 592 00:28:01,218 --> 00:28:03,417 Speaker 2: the financial system is more unstable and people would rather 593 00:28:03,417 --> 00:28:07,258 Speaker 2: pay in dollars than pay in the local currency. That brings, 594 00:28:07,267 --> 00:28:09,977 Speaker 2: of course, the risk that maybe demand for stablecoins and 595 00:28:09,978 --> 00:28:12,878 Speaker 2: therefore for dollars around the world could grow significantly. 596 00:28:13,093 --> 00:28:15,364 Speaker 2: And if that were the case, then of course, a 597 00:28:15,364 --> 00:28:19,043 Speaker 2: lot more T-bills potentially into the trillions could be purchased 598 00:28:19,042 --> 00:28:21,634 Speaker 2: by the stablecoin issuer. So the short answer to your 599 00:28:21,634 --> 00:28:24,802 Speaker 2: question is there are some other issues than the AI 600 00:28:24,803 --> 00:28:27,683 Speaker 2: story that can help our fiscal situation. The AI story 601 00:28:27,683 --> 00:28:30,494 Speaker 2: would be a permanent solution, but the stablecoin solution would 602 00:28:30,494 --> 00:28:33,323 Speaker 2: only be a temporary solution and not solve the underlying 603 00:28:33,323 --> 00:28:35,364 Speaker 2: risk that we still have debt levels going up. But 604 00:28:35,364 --> 00:28:38,203 Speaker 2: it is certainly a source of demand that continues to 605 00:28:38,203 --> 00:28:40,313 Speaker 2: get a lot of attention and therefore, in my view, 606 00:28:40,604 --> 00:28:41,933 Speaker 2: continues to be very important. 607 00:28:42,699 --> 00:28:46,209 Speaker 1: So I will have some degree of healthy skepticism about 608 00:28:46,209 --> 00:28:49,859 Speaker 1: the ubiquity of stablecoins worldwide towards and simply because I 609 00:28:49,859 --> 00:28:53,479 Speaker 1: think that at a national government level, the senior capability, 610 00:28:53,780 --> 00:28:56,459 Speaker 1: the capital control capabilities are so paramount that most countries 611 00:28:56,459 --> 00:28:57,030 Speaker 1: in the world. 612 00:28:57,680 --> 00:29:00,959 Speaker 1: Do not allow for fettered movement of capital. I think 613 00:29:00,959 --> 00:29:03,640 Speaker 1: the ultimate dream of the stablecoin crowd is that the 614 00:29:03,640 --> 00:29:06,680 Speaker 1: world just becomes one that is frictionless, and we have 615 00:29:06,680 --> 00:29:09,680 Speaker 1: just this wallets, you know, doing transactions around the world. Um, 616 00:29:09,920 --> 00:29:13,910 Speaker 1: I think that, ah, governmental prerogatives might come in the way. 617 00:29:14,500 --> 00:29:16,810 Speaker 2: I agree. And let me also just add, our friends, 618 00:29:16,890 --> 00:29:18,729 Speaker 2: some of you know my former colleagues who I work 619 00:29:18,729 --> 00:29:21,209 Speaker 2: at the BIS in Basel, they just wrote about a 620 00:29:21,209 --> 00:29:24,849 Speaker 2: month ago a paper that exactly highlighted, number one, exactly 621 00:29:24,849 --> 00:29:27,250 Speaker 2: what you just said, that maybe governments will not allow 622 00:29:27,250 --> 00:29:31,119 Speaker 2: payments in US dollar stablecoins, and that does make sense. 623 00:29:31,290 --> 00:29:33,290 Speaker 2: You can begin to think about technologically, if you and 624 00:29:33,290 --> 00:29:35,050 Speaker 2: I meet on the street in some country, I could 625 00:29:35,050 --> 00:29:36,459 Speaker 2: buy something from you just by. 626 00:29:36,525 --> 00:29:39,545 Speaker 2: Passing my iPhone to your iPhone, so maybe it could 627 00:29:39,545 --> 00:29:41,375 Speaker 2: become a little bit more challenging for them to control, 628 00:29:41,545 --> 00:29:44,145 Speaker 2: but absolutely I agree with what you're saying. This is 629 00:29:44,145 --> 00:29:47,785 Speaker 2: one very important reason why we may not see stablecoin 630 00:29:47,785 --> 00:29:50,974 Speaker 2: growing to the dramatic size that some people are predicting. 631 00:29:51,145 --> 00:29:53,665 Speaker 2: The second reason why this also, of course, is a 632 00:29:53,665 --> 00:29:57,175 Speaker 2: risk is that let's not forget that stablecoins are issued 633 00:29:57,175 --> 00:29:58,385 Speaker 2: by private companies. 634 00:29:58,829 --> 00:30:01,000 Speaker 2: So that means that this is not issued like dollars 635 00:30:01,000 --> 00:30:05,199 Speaker 2: by the Federal Reserve or a currency by central banks 636 00:30:05,199 --> 00:30:08,520 Speaker 2: around the world. And if you suddenly have counterparty issues 637 00:30:08,520 --> 00:30:11,630 Speaker 2: around a private player issuing a currency or issuing money, 638 00:30:11,920 --> 00:30:13,880 Speaker 2: then of course, immediately you begin to think about what 639 00:30:13,880 --> 00:30:18,560 Speaker 2: are the risks about this private issue of staying in business? 640 00:30:18,800 --> 00:30:21,359 Speaker 2: Are there any issues around, could they be hacked by 641 00:30:21,359 --> 00:30:24,750 Speaker 2: quantum computing? Could they be hacked by hackers from other countries? 642 00:30:25,000 --> 00:30:26,119 Speaker 2: I mean, a lot of risk anything. 643 00:30:26,203 --> 00:30:28,433 Speaker 2: were hacked and suddenly you see that news, you could 644 00:30:28,433 --> 00:30:30,394 Speaker 2: suddenly have a run on a stable coin where everyone 645 00:30:30,394 --> 00:30:32,473 Speaker 2: pulls their money out immediately and then they would have 646 00:30:32,473 --> 00:30:35,593 Speaker 2: to dump trillions in the worst case of T bills 647 00:30:35,593 --> 00:30:37,734 Speaker 2: on the market. And of course, if that's the case, 648 00:30:37,913 --> 00:30:39,994 Speaker 2: that of course then comes with the risk that that 649 00:30:39,994 --> 00:30:42,912 Speaker 2: of course could create significant financial instability. And this was 650 00:30:42,913 --> 00:30:46,413 Speaker 2: the BIS worry in that paper, say, 34 weeks ago, 651 00:30:46,514 --> 00:30:49,793 Speaker 2: namely that yes, we could have payment systems that are 652 00:30:49,793 --> 00:30:52,754 Speaker 2: running and humming and everything is nice until suddenly there's 653 00:30:52,754 --> 00:30:53,553 Speaker 2: risk around 1. 654 00:30:53,848 --> 00:30:56,657 Speaker 2: stablecoin issue and everyone runs away like a bank run 655 00:30:56,657 --> 00:30:59,187 Speaker 2: just like SVB we saw a few years ago a 656 00:30:59,187 --> 00:31:01,578 Speaker 2: bank run where people put all their money out of 657 00:31:01,578 --> 00:31:04,108 Speaker 2: that stablecoin issue, and that could of course create global 658 00:31:04,108 --> 00:31:07,578 Speaker 2: financial instability of significant proportions if that happened to be 659 00:31:07,748 --> 00:31:10,378 Speaker 2: one very significant player in the stablecoin market. So yes, 660 00:31:10,547 --> 00:31:12,748 Speaker 2: this is not, there is no free lunch as usual 661 00:31:12,748 --> 00:31:15,468 Speaker 2: in economics here. This is something of course that could 662 00:31:15,468 --> 00:31:17,228 Speaker 2: be helpful for demand for T bills, but it does 663 00:31:17,228 --> 00:31:19,667 Speaker 2: come with some financial stability risks. 664 00:31:19,828 --> 00:31:21,027 Speaker 1: Right, and I also. 665 00:31:21,151 --> 00:31:23,031 Speaker 1: A little bit about the governance side of the story 666 00:31:23,031 --> 00:31:27,822 Speaker 1: because the US government right now seems very pro crypto, very, 667 00:31:27,942 --> 00:31:30,261 Speaker 1: you know, just go for the innovation, we'll figure out 668 00:31:30,261 --> 00:31:33,741 Speaker 1: the guardrails later. Augustine Carson, I had a conversation with 669 00:31:33,741 --> 00:31:35,472 Speaker 1: him on this issue a few years ago, and he 670 00:31:35,661 --> 00:31:37,722 Speaker 1: gave me this history of the Dutch East India companies, 671 00:31:37,781 --> 00:31:41,302 Speaker 1: corporate backed stablecoins back in the 1600s and 1700s, which 672 00:31:41,302 --> 00:31:44,862 Speaker 1: used to finance the maritime expansion of the Dutch Navy. 673 00:31:44,942 --> 00:31:47,251 Speaker 1: And he said that those things lasted for a while, 674 00:31:47,501 --> 00:31:48,432 Speaker 1: but then the governance, you know, 675 00:31:48,625 --> 00:31:51,056 Speaker 1: The underlying thing, you start sort of lying about how 676 00:31:51,056 --> 00:31:53,166 Speaker 1: many do you have because you want to think that, 677 00:31:53,176 --> 00:31:55,605 Speaker 1: you know, if I just managed to get another successful voyage, 678 00:31:55,776 --> 00:31:58,536 Speaker 1: I'll replenish whatever copper that I'm lying about. And then 679 00:31:58,536 --> 00:32:01,895 Speaker 1: at one point, even those things, the mighty Dutch Navy's 680 00:32:01,895 --> 00:32:05,605 Speaker 1: copper bag stable coins fell apart. And I hope that, 681 00:32:05,735 --> 00:32:08,036 Speaker 1: you know, history lessons are not particularly the strong suit 682 00:32:08,036 --> 00:32:10,816 Speaker 1: of the Trump administration, but I hope somebody is still 683 00:32:10,816 --> 00:32:13,215 Speaker 1: sort of, you know, a bit worried about the governance 684 00:32:13,215 --> 00:32:15,975 Speaker 1: aspect and does not lose their focus on that. 685 00:32:16,660 --> 00:32:19,329 Speaker 2: Yeah, because as you say, I mean, if, if you 686 00:32:19,329 --> 00:32:21,219 Speaker 2: and I really lean back and think about it exactly 687 00:32:21,219 --> 00:32:25,829 Speaker 2: as you just said, here we have privately issued money 688 00:32:26,250 --> 00:32:31,530 Speaker 2: and if privately issued money grows in significant size, then 689 00:32:31,530 --> 00:32:34,170 Speaker 2: of course the systemic risks also grow. 690 00:32:34,660 --> 00:32:37,829 Speaker 2: So that's why, as you're saying, governance issues around who 691 00:32:37,829 --> 00:32:41,199 Speaker 2: are the issuers, how are they regulated, what are the risks, 692 00:32:41,439 --> 00:32:44,160 Speaker 2: all kinds of things, and again, quantum computing, given some 693 00:32:44,160 --> 00:32:46,189 Speaker 2: of the things that are going on, including with Bitcoin, 694 00:32:46,319 --> 00:32:48,739 Speaker 2: that's just a lot of different things that can be 695 00:32:48,739 --> 00:32:51,640 Speaker 2: risks that potentially could come along in different forms, which 696 00:32:51,640 --> 00:32:54,130 Speaker 2: is exactly why, of course, now at the moment we 697 00:32:54,130 --> 00:32:56,959 Speaker 2: only or mainly have government issued money, namely the Federal 698 00:32:56,959 --> 00:32:59,729 Speaker 2: Reserve and ECB and Bank of Canada issuing money, etc. 699 00:33:00,739 --> 00:33:03,380 Speaker 1: Totally. Ah, Tan, earlier in the conversation, you mentioned a 700 00:33:03,380 --> 00:33:06,699 Speaker 1: little bit about investor sentiment being still fairly sanguine. I 701 00:33:06,699 --> 00:33:08,979 Speaker 1: want to push on that, uh, expand on that question 702 00:33:08,979 --> 00:33:11,939 Speaker 1: a little bit. Um, we have this whole story of 703 00:33:11,939 --> 00:33:14,140 Speaker 1: on one hand, you know, stablecoin and all these things 704 00:33:14,140 --> 00:33:16,689 Speaker 1: could boost dollar demand. On the other hand, all this 705 00:33:16,689 --> 00:33:19,099 Speaker 1: trade war related stuff is making people nervous about holding 706 00:33:19,099 --> 00:33:20,020 Speaker 1: the dollar to some extent. 707 00:33:20,449 --> 00:33:22,050 Speaker 1: Some of the investors that you talked to on a 708 00:33:22,050 --> 00:33:25,959 Speaker 1: day to day basis, is there any sign at all 709 00:33:25,959 --> 00:33:31,280 Speaker 1: of a desire to hold more non-US based assets, Europe, China, 710 00:33:31,449 --> 00:33:33,380 Speaker 1: EM and so on? What's your sense? 711 00:33:33,890 --> 00:33:35,890 Speaker 2: Yeah, this is a very important discussion. For the last 712 00:33:35,890 --> 00:33:38,810 Speaker 2: 6 months, obviously the dollar has gone down in trade 713 00:33:38,810 --> 00:33:42,619 Speaker 2: weighted terms, around 10%. So of course this raises the question, 714 00:33:42,729 --> 00:33:43,920 Speaker 2: why did the dollar go down? 715 00:33:44,619 --> 00:33:46,729 Speaker 2: Well, if I at the same time over the same period, 716 00:33:46,819 --> 00:33:49,738 Speaker 2: look at the S&P 500, or IG spreads and high 717 00:33:49,739 --> 00:33:52,859 Speaker 2: yield spreads. So the S&P 500 is close to all-time highs, 718 00:33:53,020 --> 00:33:56,089 Speaker 2: IG spreads are super tight, high yield spreads are super tight. 719 00:33:56,380 --> 00:33:59,739 Speaker 2: So one quick conclusion is it doesn't look like foreigners 720 00:33:59,739 --> 00:34:03,540 Speaker 2: were selling US assets because if foreigners were selling US assets, 721 00:34:03,579 --> 00:34:05,540 Speaker 2: then the stock market would not have gone up. Remember. 722 00:34:05,925 --> 00:34:09,235 Speaker 2: Foreigners own about 20% of the S&P 500. Foreigners own 723 00:34:09,235 --> 00:34:12,875 Speaker 2: about 30% of treasuries, and foreigners own about 30% of 724 00:34:12,875 --> 00:34:16,715 Speaker 2: the public credit market. So if foreigners really had decided 725 00:34:16,715 --> 00:34:20,195 Speaker 2: to sell, then you would have expected to see not 726 00:34:20,195 --> 00:34:22,264 Speaker 2: only the dollar go down, but also the stock market 727 00:34:22,264 --> 00:34:24,705 Speaker 2: go down. And given we didn't see that, that tells 728 00:34:24,705 --> 00:34:26,464 Speaker 2: me that the main reason why the dollar went down 729 00:34:26,465 --> 00:34:27,314 Speaker 2: was probably hedging. 730 00:34:27,780 --> 00:34:29,520 Speaker 2: And I think that the main reason why people were 731 00:34:29,520 --> 00:34:32,330 Speaker 2: hedging was for two reasons, namely the trade war and 732 00:34:32,330 --> 00:34:35,520 Speaker 2: very importantly Section 899 and the Mar a Lago Accord. 733 00:34:35,729 --> 00:34:38,739 Speaker 2: There was initial discussion in the beginning of the Trump 734 00:34:38,739 --> 00:34:41,689 Speaker 2: administration that we would have a Mar a Lago accord 735 00:34:41,689 --> 00:34:43,610 Speaker 2: where the rest of the world would be paying a 736 00:34:43,610 --> 00:34:46,609 Speaker 2: fee for holding US dollar assets, and in return the 737 00:34:46,610 --> 00:34:49,489 Speaker 2: rest of the world would get protection through security. So 738 00:34:49,489 --> 00:34:51,409 Speaker 2: this would be the Mar a Lago accord. The US 739 00:34:51,409 --> 00:34:53,009 Speaker 2: gives the rest of the world defense. 740 00:34:53,301 --> 00:34:56,060 Speaker 2: Security and the rest of the world in return pays 741 00:34:56,061 --> 00:34:59,781 Speaker 2: a small fee, and Section 899, that temporarily was in 742 00:34:59,781 --> 00:35:02,430 Speaker 2: the one big deal of a bill was an idea 743 00:35:02,660 --> 00:35:05,391 Speaker 2: to put that idea into the world by saying, well, 744 00:35:05,500 --> 00:35:08,980 Speaker 2: if you hold US Treasuries in Singapore or in Europe 745 00:35:08,980 --> 00:35:12,781 Speaker 2: or in Canada or Australia, then we can certainly introduce 746 00:35:12,781 --> 00:35:15,370 Speaker 2: a tax of 5 to 20% where we tax your 747 00:35:15,371 --> 00:35:18,430 Speaker 2: cash flows on your US assets and as a result, 748 00:35:18,521 --> 00:35:21,062 Speaker 2: That you will now have to pay a small fee 749 00:35:21,062 --> 00:35:23,112 Speaker 2: for the security that we give you on the defense side. 750 00:35:23,221 --> 00:35:26,072 Speaker 2: I know these things are a little bit un wavy, 751 00:35:26,082 --> 00:35:28,112 Speaker 2: the argument, but this was the conclusion and this was 752 00:35:28,112 --> 00:35:31,471 Speaker 2: the debate. But Section 899, when that was in the 753 00:35:31,471 --> 00:35:33,791 Speaker 2: one big bill of a bill, it created a lot 754 00:35:33,791 --> 00:35:36,221 Speaker 2: of downward pressure on the dollar. So in my opinion, 755 00:35:36,392 --> 00:35:38,791 Speaker 2: now Section 899 is no longer part of the one 756 00:35:38,791 --> 00:35:41,190 Speaker 2: big bill bill. It was taken out. And at the 757 00:35:41,190 --> 00:35:43,842 Speaker 2: same time, given the trade war, it looks like when 758 00:35:43,893 --> 00:35:46,352 Speaker 2: The August 1st deadline, and it looks like we're getting 759 00:35:46,353 --> 00:35:49,443 Speaker 2: some more clarity and maybe the trade war also looks better, 760 00:35:49,522 --> 00:35:51,083 Speaker 2: at least in the next several months, if you take 761 00:35:51,083 --> 00:35:54,042 Speaker 2: a longer lens. So those two things behind us, namely 762 00:35:54,042 --> 00:35:56,843 Speaker 2: Section 899, no longer being part of the conversation, and 763 00:35:56,843 --> 00:35:58,832 Speaker 2: Mar a Lago no longer being part of the conversation. 764 00:35:59,002 --> 00:36:01,482 Speaker 2: And at the same time, also here, we have now 765 00:36:01,482 --> 00:36:03,562 Speaker 2: that the trade war looks also we're getting closer to 766 00:36:03,562 --> 00:36:06,322 Speaker 2: the end. Deals are no deals, we'll figure out, but 767 00:36:06,322 --> 00:36:08,093 Speaker 2: at least closer to the end of that, I think 768 00:36:08,093 --> 00:36:09,163 Speaker 2: all that will argue for. 769 00:36:09,263 --> 00:36:12,694 Speaker 2: Less hedging needs. And if there's less hedging needs, that 770 00:36:12,694 --> 00:36:14,973 Speaker 2: then tells me that the risks are now, and this 771 00:36:14,974 --> 00:36:16,654 Speaker 2: is my view that I think the dollar is actually 772 00:36:16,654 --> 00:36:18,694 Speaker 2: about to go up. And this is also what you 773 00:36:18,694 --> 00:36:20,884 Speaker 2: saw on the TI data. The TI data is the 774 00:36:20,884 --> 00:36:24,093 Speaker 2: Treasury Department's data for what is the flows in and 775 00:36:24,093 --> 00:36:26,813 Speaker 2: out of US different financial assets. So what's the flows 776 00:36:26,813 --> 00:36:29,174 Speaker 2: in and out of the stock market, of treasuries, of 777 00:36:29,174 --> 00:36:33,333 Speaker 2: credit markets. And you saw very significant down slowdown in 778 00:36:33,333 --> 00:36:34,573 Speaker 2: flows where basically, 779 00:36:34,705 --> 00:36:38,425 Speaker 2: saw very little buying of US assets in the month 780 00:36:38,425 --> 00:36:40,745 Speaker 2: of April, but the data that just came out from 781 00:36:40,745 --> 00:36:43,675 Speaker 2: May saw a significant rebound where a lot of foreign 782 00:36:43,675 --> 00:36:48,185 Speaker 2: investors basically started buying US assets, stocks, treasury, credit, and 783 00:36:48,185 --> 00:36:51,104 Speaker 2: for that reason, I am not so worried about that 784 00:36:51,104 --> 00:36:53,864 Speaker 2: foreigners are running away from US assets. I think the 785 00:36:53,864 --> 00:36:56,425 Speaker 2: latest data actually shows this risk that we should be 786 00:36:56,425 --> 00:36:58,864 Speaker 2: more worried about the upside risks to the dollar for 787 00:36:58,864 --> 00:36:59,465 Speaker 2: the next 6 788 00:36:59,465 --> 00:36:59,854 Speaker 2: months. 789 00:37:00,610 --> 00:37:04,049 Speaker 1: OK, that is a fascinating point. I think that you 790 00:37:04,050 --> 00:37:07,100 Speaker 1: are not in the majority in making that call, it's 791 00:37:07,100 --> 00:37:09,610 Speaker 1: very interesting because everybody's out there, you know, sort of 792 00:37:09,610 --> 00:37:11,800 Speaker 1: writing the obituary of the dollar and how there is 793 00:37:11,800 --> 00:37:14,149 Speaker 1: this marks a big structural shift. I think it's a 794 00:37:14,149 --> 00:37:18,449 Speaker 1: premature obituary of the dollar and we'll see, uh. 795 00:37:18,939 --> 00:37:22,169 Speaker 1: Particularly, you know, interesting US stocks remaining the most interesting 796 00:37:22,169 --> 00:37:24,370 Speaker 1: and compelling cases around the world. Trust and, you and 797 00:37:24,370 --> 00:37:26,649 Speaker 1: I can chat for the next 4 hours, but you 798 00:37:26,649 --> 00:37:28,209 Speaker 1: have stuff to do. I don't want to keep you 799 00:37:28,209 --> 00:37:28,419 Speaker 1: to 800 00:37:28,419 --> 00:37:28,529 Speaker 2: come 801 00:37:28,530 --> 00:37:28,770 Speaker 1: back 802 00:37:28,770 --> 00:37:31,020 Speaker 2: again. Section 300, yeah, 803 00:37:31,409 --> 00:37:34,330 Speaker 1: exactly. Um, so yeah, thank you so much for your 804 00:37:34,330 --> 00:37:37,479 Speaker 1: time and insights Torin, really, really appreciate it. Thank you. 805 00:37:38,179 --> 00:37:41,100 Speaker 1: Uh, thanks to our listeners as well. Copy Time was 806 00:37:41,100 --> 00:37:43,899 Speaker 1: produced by Ken Delbridge at Spice Studios. Daisy Sharma and 807 00:37:43,899 --> 00:37:47,500 Speaker 1: Violet Lee provided additional assistance. All 157 episodes of the 808 00:37:47,500 --> 00:37:50,500 Speaker 1: podcast are available on YouTube, as well as on all 809 00:37:50,500 --> 00:37:54,739 Speaker 1: major podcast platforms, including Apple, Google, and Spotify. This conversation 810 00:37:54,739 --> 00:37:58,580 Speaker 1: was for information only, no investment advice, guys, and for 811 00:37:58,580 --> 00:38:01,340 Speaker 1: our research material and webinars, you can find them all 812 00:38:01,340 --> 00:38:04,489 Speaker 1: by Googling DBS Research Library. Have a great day.