May 22, 2025 • 43 mins
This week the big story in markets is the selloff in bonds. Yields on benchmark 10-year US Treasuries jumped 20 basis points from last Friday’s low, while the 30-year rate is back above 5%. Meanwhile, 30-year Japanese government bonds clocked their highest yield since records began in 1999. And rates on UK gilts, German bunds, and Australian bonds are also rising. To make matters even more unusual, US Treasury yields are going up while the dollar is weakening (something that doesn’t usually happen.) So what’s going on? And how much does this have to with worries over the US fiscal position, the return of inflation, and the outlook for rate cuts from the Federal Reserve? On this episode, we speak with Steven Englander, global head of G-10 FX research at Standard Chartered. We talk about what’s driving the dramatic moves and the relationship between fiscal and monetary policy.
Read more:
Deglobalization’s Threat to the Bond Market
US Bonds Swing as Dip Buyers Enter After Moody’s-Fueled Selloff
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Authoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Joe Wisenthal.
Speaker 2 (00:24):
Joe, how about them JGB yields?
Speaker 3 (00:27):
So this is the thing, which is that in some
sense the markets have quieted down certainly compared to early
April or mid April, but there are some major moves
still happening, particularly in rates, some currency stuff. If you
know where to look, these markets are not boring at all.
Speaker 2 (00:45):
I don't even think you have to like actively go
looking for interesting moves. So we're recording this on May twentieth,
and the twenty year JGB yield was up something like
fifteen basis points to about two point five percent. That's
the highest since two thousand. So basically, back when I
was living in Tokyo going to high school.
Speaker 3 (01:05):
Were telling how I measure everything, Well, what were you
borrowing from local Japanese banks or were you buying when
you were in high school?
Speaker 2 (01:14):
Sadly, sadly not, although well they wouldn't have been a
great investment.
Speaker 3 (01:18):
Well you should have watch of jgb's back. Then you
get great price appreciation, you get great yields. But yes,
there's a lot going on. It's a global thing. So
in the US we're also seeing fairly elevated rates lately,
and to some extent that might be a story of
expectations that the current budget negotiations are going to continue
(01:38):
widening the deficit, you know, the sort of moody story.
But there's clearly global factor here that cannot simply be
explained by, say, like the willingness or unwillingness of members
of Congress to like expand the salt deduction. There is
a bigger macro story unfolding that I don't think I
have my head fully wrapped around. Right.
Speaker 2 (01:58):
So, as we're recording this, the year is back at
four point four eight percent, and perhaps more importantly, the
thirty year is creeping back towards five percent. The dollar
is falling again, so the Cell America theme is kind
of getting another airing. There are concerns over the fiscal
trajectory and the big beautiful bill that you know, you
just kind.
Speaker 3 (02:18):
Of call is. I know it's a liter called beautiful, but.
Speaker 2 (02:21):
I love that, And so the worry is that that
will push up the deficit and possibly inflation. Plus, of course,
we have tariffs Meanwhile, as rates appear to be going up,
there are plenty of people still out there who are
talking about the prospect of the economy, the US economy
actually slowing down and getting rate cuts later this year,
and the market is still pricing those in. So we're
(02:42):
at this really interesting juncture in the bond market where
we're getting a lot of conflicting signals, a lot of
confusing signals, as you mentioned, and it seems like maintaining
stable prices, low inflation, and trying to fight all these
different cross currents is going to fall almost entirely on
the FED. I think we should talk about all.
Speaker 3 (03:01):
Of this absolutely. Let's jump right into it. We have
a great guest today.
Speaker 2 (03:05):
We have the perfect guest, you might say. We're going
to be speaking with Steven Englander, the global head of
G ten FX Strategy at Standard Chartered, And to be honest, Joe,
I cannot believe we haven't had Stephen on the podcast before.
Speaker 3 (03:18):
I've been reading Steven's notes for years and years and years.
I was actually really surprised to realize he's never been
on before. I know, our oversight, major our oversight. Lately,
his emails have become a must click for me, I
always open them and so yes, he's here with us
in studio.
Speaker 2 (03:36):
Steven, welcome to the show.
Speaker 4 (03:37):
Thank you very much. I'm honored to be here with
the best interviewers in the world.
Speaker 3 (03:42):
That's right. We are going to clip that and save
it for our highlight reel.
Speaker 2 (03:45):
That's very kind. So why don't we start with jgb's
and also UST's. Is there a common theme running through
that sell off or are they being driven by entirely
different things.
Speaker 4 (03:58):
I think it's mostly different. There is a common element
in that if US yields are going up, everybody's yelds
are going to be going up. But I think in
the case of jgb's there's, you know, particular dynamics. There's
uncertainty about what they're going to do. On the QT side,
they had this very kind of painful twenty year auction
(04:18):
which was pretty close to failing. The BOJ published that
there was some debate as to what pace of quantitative
tightening they should be going at, if any, and I
think there's a general view in the world that yields
are too low and they're going to be going up. However,
it's puzzling because the market seems to like the end
(04:41):
and normally that would be associated with the lower yields.
Speaker 3 (04:44):
Well, you're getting paid a lot to buy you and
I can I mean, right, isn't that part of the story,
Like yields are going up, so it's like I'll buy
some yen because at least they're paying me a lot
more yen to hold them.
Speaker 4 (04:53):
Well, remarkably, today there have been times when the end
thirty year yield has been higher than the German thirty
year yield.
Speaker 3 (05:00):
So just on this point, I'm looking so anticipated. I
literally on my terminal had just pulled up a chart
of German thirty year yields as well, which are above
three percent. That's crazy. They were at zero at the
start of twenty twenty two, and that's the thirty year
they're over three percent. There must be a global factor.
Speaker 4 (05:20):
Well, some of it is fiscal, especially in Europe and
the US. The Europe had like ten twelve years of
debt crisis in which they didn't want to expand fiscal deficits.
The pressure was to do the opposite, and now they've
discovered that defense spending is the key to economic growth.
But the market, I think is looking at it, and
(05:40):
they're looking at the fiscal prospects in the US and
kind of guessing that we're not going to see zero
in German yields.
Speaker 2 (05:46):
Again, just going back to the yen and people buying it.
How much of that is a strong yen story versus
a week dollar story. This is why I hate currencies.
Speaker 4 (05:56):
By the way, well, they're good because you have two
chances to be wrong. I think that much of it
is a week dollar story. And looking to see in
terms of the negotiations on tariffs and in terms of
how kind of off base the currency is, which currencies
are most likely to move, which ones will face the
(06:18):
least resistance in appreciating against the dollar, and I think
Japan wins on several counts that the tariff negotiations will
be tough because they still have a very big trade
deficit with the US. Trade surplus, yes, trade surplus with
the US. The non tariff barriers, even if you really
can't quantify them, they're pretty significant, and you know, the
(06:40):
US has a point in complaining about some of them,
and there's a sense in the market, and I think
correctly that once you get past the ten percent baseline
tariff that the US needs for fiscal purposes that they
may be will link to trade, some of the reciprocal tariffs,
the you know, the beyond that ten percent for currency appreciation.
(07:04):
And there's been a number of currencies under discussion, but
you know, the end is one of the prime currencies,
given that it's so weak relative to any kind of
PPP type of basis.
Speaker 3 (07:14):
Right, this is sort of a general East Asian story.
Speaker 4 (07:17):
You know.
Speaker 3 (07:17):
Obviously we talked about the Taiwanies dollar and the South
Korean one and so forth, and there is this view
that maybe some sort of different in currency policy could
be part of the packages here. Before we get more
to that, you know, one of the things that you
heard maybe six months ago or a year or even
a few months ago, they're like, oh, if we impose tariffs,
(07:39):
it will be offset because that will be a strengthening
of the US dollar. And we've seen literally the opposite.
But that was a common meme, a common conventional wisdom
among a lot of economists both Wall Street academia are
the ones who appear on TV et cetera. What is
this simple story for why the dollar has been so
weak since April second, even at a time when stop
(08:00):
rebounded interest rates have stabilized a little bit. The one
major move that hasn't really reversed is the dollar. What's
this simple story there.
Speaker 5 (08:08):
Well for the complex story, well, it's a medium story,
but it basically goes something like this said, you know,
I might choose to pick your pocket if I thought
you wouldn't respond, but if you did respond, you know,
the consequences might not be as much fun for me.
Speaker 4 (08:23):
And I think that if you start with the assumption
that the US can tariff everybody, yeah, and you know,
the market is not going to say, well, wait a second,
if they do tariffs, what about that Mara Lago stuff,
what about foreign policy? You know what, what is the
limit to which they can expand that policy envelope? You
had to risk premium to US assets. So the offset
(08:45):
to that is that the market is looking at US
assets and kind of saying, well, safe haven, maybe not
so much reliability, maybe not so much as it used
to be.
Speaker 2 (08:55):
Is there good dollar depreciation and bad dollar depreciation? And
I remember one of your notes you talked about this
idea that you could get a weaker dollar that supports competitiveness,
but you could also get a weaker dollar that reduces
the amount of capital coming into the US. How would
you measure those two things?
Speaker 4 (09:13):
Well, in a sense, we're getting some of that measurement
now when we look at the dollar weakening and interest
rates going up. I think it's a pretty good sign that,
notwithstanding the greater competitiveness on paper, at least of the US,
that investors aren't that enthusiastic about holding US assets. So
I think that's one real signal that the market's not
(09:35):
thinking that it's an unalloyed plus. But I'd say that
most of the time if the dollar goes down is
for bad reasons. The basic good story would be something
like this that the rest of the world, for whatever reason,
does fiscal policy and kind of expands consumption and they
start buying US assets. US foreign yields go up relative
(09:57):
to the US. Never mind what they're do. That picture
is over, you know, five, ten, fifteen years, and they say, okay,
you know, instead of buying US treasuries, we're going to
buy you know, German and European and Asian because they're
all expanding their fiscal deficits and their rates are going up.
The return is higher, and you can start say, yeah,
the dollar's weaker, but it's it's okay for the US,
(10:19):
they can do their own thing. I'd say that if
you're focused on the US, and this is something I
can't emphasize enough that just about for every major, even
medium sized country, ninety percent of the policy solution is
going to be domestic. The idea that you can fix
your economic problems by doing something on the international side,
(10:43):
I think is an illusion. If you did the right
thing on the domestic side, you might get good stuff
happening on the international side. But it's really really hard
to get around domestic issues by saying, oh, well, well,
just appreciate ten or fifteen percent. Most of the time
when you'd appreciate that way, something's going wrong. Either the
(11:04):
market says, hey, their real interest rates are too low
and they're not going to be able to push them up,
so there's no point to holding their paper, or they
say brisk premium should be higher, or something not going great.
So I'd say that even though there's a route by
which you can say that a week or dollar reflects
good stuff, that's not the most common rute. Most of
(11:25):
the time, a weaker currency reflects bad stuff happening on
the domestic side.
Speaker 3 (11:29):
No, I think this is a really good point. I
wrote a thing in the newsletter. I call it like
one weird triconomics, because we have all of these things
that we can all talk about and sort of al
or plague the US economy. It's difficult to build here.
We seem to have lost our capacity to so.
Speaker 2 (11:46):
If you do the whole list, we're going to be
here for like twenty minutes.
Speaker 3 (11:49):
Right. We seem to have gotten worse at building airplanes,
which is one of the things that we actually still
do export to the world. In much of the ways,
these are really tough problems to solve, and it strikes
me as sort of fantasy that suddenly we can revive
all of these things just by coming to an agreement
with our foreign partners about some difference in currency or
a trade policy.
Speaker 4 (12:11):
I completely agree. And the other fantasy I would add
to that is the implication all we got to do
is depreciate five or ten percent and that's going to
be enough. If you take a look at the way
the dollar has moved against the euros the end, you know,
the range over the last ten years for the euro
I think is ninety five to one twenty five, and
the US has run a trade deficit, significant trade against Europe. Yeah,
(12:35):
both at ninety five and at one twenty five. I
think there's too much faith that a weak currency is
is going to bail you out of your problems. But
it's the easy thing to do, and it kind of
sounds nice in principle.
Speaker 3 (13:05):
Was there ever in Urine economic history in which economies
did stabilize more directly and more linear fashion? You know now?
And I think of like, okay specialization Tawan makes the chips,
Europe makes the engines, the US makes soybeans and complex
financial products. I get why currency adjustments don't have this
stabilizing effect. Was there a period when economic specialty was
(13:29):
more distributed, that there was a more clear link between
exchange rate fluctuations and trade balancing.
Speaker 4 (13:37):
The simple answer I think is no. I think that
there was a time maybe when you had the gold standard. Yeah,
but there's also an issue that the movements of gold
reflected the confidence of markets that the economy was sustainable.
There were no imbalances. So if he ran a trade
deficit in the nineteenth century, yes, you know, we have
(13:59):
to be settled in gold eventually, but it wasn't a
problem until everyone decided that maybe you wouldn't be able
to do it, and then you would have these kinds
of crunches most of my careers. It's so funny because
when you go to school, all you learn is PPP
and trade balances and sort of adjustment of exchange rates
and so on to get trade into equilibrium. Once you're
(14:21):
sitting at a trading desk, all you see our capital
flows and that's kind of the driver. And the issue
is does the market have enough confidence to keep lending
you the money? And if you look at the US,
say for you know, the last twenty years or so,
through thick and thin till recently, the market was pretty
(14:42):
confident that the risk adju just returns into US would
be positive. And yeah, the US ran a trade deficit,
but it didn't seem to harm US welfare.
Speaker 2 (14:54):
What do you see in the capitol flows now? Because
this seems to be one of the difficulties of the
current moment, which which is there are a lot of
people talking about the sell America idea, but if you
look at some of the data, and a lot of
it comes out on a lag, you don't really see
a lot of selling. For instance, foreign account selling, a
lot of US treasuries. Are you seeing any evidence of
(15:16):
the sell America theme emerging?
Speaker 4 (15:19):
Well, I think you see it in the weaker dollar.
And you know, my best friend is the balance of
payments identity, and I might talk to it every day.
Speaker 3 (15:27):
And this little sad but charming.
Speaker 4 (15:30):
The thing is that when the market decides that it's
not going to lend you money at yesterday's interest rates
and exchange rates, there are two ways of getting that adjustment.
Either your demand for credit can go down, which we
sometimes see with emerging markets when they hit the wall
with respect to foreign funding, and the economy crashes because
(15:53):
basically they have to get into trade balance or surplus
even in order to meet their obligations. In G ten,
mostly and historically with the US, the adjustment has been
via the currency occasionally, like in seventy eight in April,
with the currency and interest rates, but there's no big
(16:15):
demand shock, there's no big shock to output because the
money's not there. The money's there, but it's at a
different price than you expect it to pay. So I
think you have to look at the path that's traced
by US interest rates in the exchange rates, you know,
as well as sentiment and seeing what people are saying
to understand whether the financing is coming easily or with difficulty.
Speaker 3 (16:39):
Going back to Europe for a second, so Germany has suddenly,
maybe briefly, but suddenly found this willingness to spend more
money and that's going to benefit German defense companies. We
see higher rates, so maybe a longer term more inflationary
temperature in the European economy. Is Europe actually a desirable
(17:01):
destination though? For global capital? I mean it doesn't have
really an alternative to US treasuries. The fundamental growth prospects
still don't look great. Do you see any changing perspective?
And like the pure desirability of capital to enter Europe?
Speaker 4 (17:17):
Some but I'd say most of what we're seeing is
the market beginning to debate whether the US is going
to fall back into the pack in terms of being attractive.
I don't think it's really that is Europe pulling away
from the pack in terms of attractiveness. And going back
to the first principle that I mentioned, when you list
the issues limiting growth in Europe, you know there's been there.
(17:41):
You know, energy policy which hasn't worked out, there's the
over regulation, there's taxation, lack of incentives, the labor market,
the inflexibility, all the issues that we've discussed for twenty
or thirty years. It would be remarkable if defense spending
was the answer to all of those. And you know,
(18:01):
I'm a bit skeptical in the short term it might
make a difference in the long term. You know, it's
not as if we study Attila the Hunts Textbook of
economics to see how, you know, preparing for war is
going to give you a better economy.
Speaker 2 (18:13):
Yeah, that's another one weird triconomics thing. Yeah, the belief
that defense spending is going to change everything. I mean,
it is a big it is a big change, but
the idea that it's going to really reverberate across the
European Union. Going back to US problems for a second,
So if we can't count on a weaker dollar to
(18:33):
save us, and meanwhile it seems like we're going to
get probably more fiscal spending, a bigger deficit. Does the
job of reining in inflation now fall entirely to the
Fed pretty much.
Speaker 4 (18:47):
Yeah, there's a hope that some spending can be reduced
because if you look at the share of government spending
and GDP. It's way higher than it was twenty eighteen,
twenty nineteen, you know, for the decade before we hit COVID,
and you know, the Republicans kind of got snookered by
Biden when they did the debt deal in that they
(19:08):
accepted a higher baseline level of spending that was way
above the historical norm for the US. So the question
is can they get that back down, and can they
do that in a way that's you know, fair equitable,
that's not really going to be on the backs of
you know, one segment of the population or you know,
the forest or the weakest or whatever. If they can,
(19:31):
it would be remarkable if dose can get rid of
wasteful spending. You know, if they can actually find waste,
fraud and abuse, that would be terrific. But if they can't,
and we know the history of these fiscal bills, which
is that the easiest thing to do is to kind
of say, well, we'll have a lot of supply side
effects or we're counting on this revenue or that revenue
(19:54):
which may or may not come. If it turns out
that it's kind of steepening the the deficit path in
the path of death accumulation, the FED may be the
only story in town.
Speaker 3 (20:07):
You wrote an interesting piece earlier this week talking about
the sort of short to medium term outlook for the FED,
and it sounded like, you see the window for rate
cuts is being sort of narrow and shallow that basically
in twenty six, twenty twenty seven, we're going to be
getting a stimulative impact assuming this tax bill goes through,
(20:30):
and something that it looks like talk to us about like,
you know, what the market is pricing in for rate
cuts versus what realistically the FED might be able to
do here.
Speaker 4 (20:39):
Yeah, I guess I'm kind of at odds with the market,
both in the short term and and the longer.
Speaker 3 (20:44):
Love media, this is what makes an interesting conversation.
Speaker 4 (20:46):
And in the short term I kind of think, Look,
every survey you get tells you that everybody's concerned about growth,
they expect growth to slow down. How many weak payroll
numbers do you need to say, Oh, wait a second,
the people have been telling us that nothing's happening, that
things are slowing down. Now we get evidence. Do you
(21:07):
need three, do you need six? Or do you just say, well, yeah,
that just confirms what everybody's been saying. So I actually
think that they will do the right thing, which would
be to ease in response to incoming economic data. Having
said that, I would see that as an insurance policy.
Because the fiscal bill is likely to introduce net stimulus,
(21:29):
We're going to get something uncertain inflation. We'll get certain
inflation effects from the tariffs. What's uncertain is whether they're
one off or persistent. So between the combination of tariff
and used inflation and fiscal stimulus, it's not clear to
me how they're going to cut. I think that the
(21:50):
FED might see themselves as having an issue and sitting
in terms of saying, well, if we cut in Q
two or Q three, can we take it back in
Q four and Q one, with you know, the president
over our shoulders saying, you know, don't do that. But
if you're running a model, you'd probably say, given all
the data that have come in, if you get confirmation
(22:12):
that the economy is blowing, you should cut, and then
you should keep your eyes open to see what's happening,
you know, at the end of the year, to turn
into twenty twenty six and see if you have to
take it back. Because the inflation picture has deteriorated.
Speaker 2 (22:27):
Can I ask a basic question which I've kind of
always wanted to ask someone, and given your experience in
the market, I think I should ask you, what is
the central bank playbook for stagflation?
Speaker 4 (22:39):
Pray look in some ways when you look at the history,
Arthur Burns got out a very bad deck and he
probably didn't play it well, but he didn't have a
good deck to play with green Span, Burnank, even yelling
to some degree, Greensprand and BERNANKI actually had pretty strong
(22:59):
product deep growth when they were there, so unit labor
costs were soft. Yellen had low inflation, so she could
be everybody's friend because they were trying to get to
their targets, you know, and even Powell in his first
term was faced with that issue. But do you think
with stagflation? Is really tough and there's no good answer
(23:21):
because you know in the longer term that you can't
accommodate the negative productivity shock or negative output shock because
you'll just have persistent inflation. The only question is how
quickly do you try and ring it out of the system,
And that's you know, that's a very hard decision to make.
Speaker 3 (23:39):
Speaking of having views that are out of consensus. You
wrote an interesting note a couple of weeks ago. I
think it was before the quote did haunt with China,
but actually you were of the view, Yeah, and you've
been talking about this tariff. We'll have an inflationary impulse.
We'll see how far it goes. But that actually the
sort of short term disruption from the terriff you sort
(24:00):
of thought have been overstated, and I think the markets
increasingly come around to this view. I mean, if we
were trying to you in April early April, people were,
you know, sudden to stop to the economy. They pulled
the plug on the economy, so to speak. But at
least in the short term, your view is that it's
not quite as big of a deal from a sheer
like economic activity standpoint.
Speaker 4 (24:21):
Yeah, Look, ten percent shocks the competitiveness. We get those
all the time via exchange rates, and life goes on.
You know, in the last ten years, the euro dollars
moved ten percent in a relatively short period of time,
three or four times. It's not it's not fun for
the business people on the wrong side of that move,
but they managed to deal with it. And China was different.
(24:44):
But you know, the imports from China in twenty twenty
four were like one point six percent of GDP at
the US GDP of US GDP correct and even at
the worst of the sort of you know when we
saw no boats there. Yeah, we're probably running at about
fifty sixty percent of normal. So you talk about one
point eight percent shock, and you start to say, okay,
(25:07):
you know, you look at other shocks that the US gets,
you know, either via the exchange rate when you have
a big move, or via energy prices, you know, which
is like seven or eight percent of the CPI. They
can easily move twenty or thirty percent. That's something that
everybody has to deal with. It's never comfortable, but the
economy can deal with it. Where I did see a
potential issue which I think is really important, is that
(25:29):
if we move from tariffs, which is a way of
adjusting relative prices, to start saying now we just don't
want x, y or Z from China, or we're going
to limit imports of stuff, using quantities to regulate trade
rather than prices potentially has a much deeper effect because
(25:50):
you really don't know how our prices will have to
move in the event of a shortage to clear the market,
so with that, you'd be playing with fire. But percent tariffs.
It's not that I'm endorsing it, I just don't. I
don't think that they are as big a deal as
they were made out to be.
Speaker 2 (26:22):
It does feel to me like one of the complications
of the current environment other than uncertainty, which you know,
we've been joking on the podcast that we cannot get
through a single interview at the moment without mentioning the
word uncertainty. But one of the complications is you potentially
have the economy sort of moving in different directions, or
(26:43):
maybe the impacts of the tariffs are moving at different speeds,
So you could have an impact on inflation, you know,
relatively soon as prices start going up, but you could
have an impact on the labor market later on, because
it takes a while for you know, reduce demand to
work its way through the economy, and that strikes me
(27:04):
as something that's difficult to deal with for the FED
and also means they have a sort of limited window
to operate. And how realistic do you think that timing
scenario is.
Speaker 4 (27:15):
It's pretty realistic, although I think that the effects on
labors show up sooner oh, okay, because the say import
from China crash, Are we going to build stuff in
the US, And the answer is probably not. The US
is probably not even with ten percent tariffs on a
bunch of countries. The US is probably not the second
lowest cost producer for most of the stuff that China
(27:37):
was producing. So you know, we would get the price
effects from China. I don't see that there would be
any significant increase in employment, So I think we'd get
them both at about the same time that demand was
getting squeezed because this is a decline in real wages
because of the price effects. But I think that they
(27:57):
are very hopeful in terms of the quantity effects the
output benefits that they expect to get in the short
term from the tariffs, and I suspect we're going to
see the downside of that quicker than any kind of
upside is likely to emerge.
Speaker 3 (28:12):
Before I forget you said something at the beginning, there
actually are real non tear iff trade barriers employed by Japan.
Apparently it's not true that they have a bowling ball
test where they drop a bowling ball on a car
and if it dents, you're not allowed to sell the car.
There apparently that is something of an urban legend. But
(28:34):
whether it's Japan or anywhere else, what substantive non tear
iff trade barriers do you see out there that the
administration has a legitimate case should be modified in some way.
Speaker 4 (28:46):
What trade in agriculture is very limited in most countries.
You know, there's certain health you know, with more processed food,
there are health regulations which may or may not be
completely justified. And there are sort of barriers that you've
seen documented over time. It's not that they're wrong. I mean,
(29:07):
the US put out this very thick book documenting non
tariff barriers, but I think the importance is probably overstated.
They should be gotten rid of. But it's not like
cataclysmic type of thing. I mean, look, I think US
demand has been stronger than that in the rest of
(29:27):
the world, so we've imported more and that's most of
the trade story.
Speaker 2 (29:30):
I got distracted looking up the bowling ball test Joe.
Speaker 3 (29:34):
Interesting.
Speaker 2 (29:35):
It seems to be something that Donald Trump talked to
is probably not true by the way.
Speaker 3 (29:41):
I know, we already had that agreement with the UK,
but I think they should let cars drive on the
right side of the road and would probably make it
a lot easier for Americans to you know, sell into
that market.
Speaker 2 (29:52):
Joe, why do you feel the need to say these
things keep going?
Speaker 4 (29:56):
All right?
Speaker 2 (29:57):
Steven, I'm going to ask a very basic question, you know,
typical question for you, I imagine, But what are your
clients asking you about at the moment? What concerns are
you seeing out there? What are the questions that you're
getting repeatedly?
Speaker 4 (30:09):
I think corporate clients, you know, people who are in
real businesses make things, sell things. I hate to use
the word uncertainty as much as you do.
Speaker 2 (30:18):
It's okay, it is allowed, Okay.
Speaker 1 (30:20):
You know.
Speaker 4 (30:20):
The question for them is, you know, if I want
to increase capacity, where should I do it? Should I
do it in the US? Should I do it elsewhere?
How is this going to play out? Is it going
to play out for four years? Or is it going
to play out for eternity? And I think that they're
having a very hard time getting their hands around it,
and to them, that's the biggest issue. I think if
(30:43):
you're investors, people who manage portfolios, are you know, trying
to eke out gains in the market. The question about
where the dollar is going, where rates are going, how
fast they're going, and especially nobody wants to be the
sixth person on a trade because that makes you vulnerable.
So they're very obsessed with kind of understanding whether any
(31:08):
trade that they want to do is like I say,
a steepener trade in the rates market, has everybody else
done it already, or is there's still a room to
get in and be able to do well on that trade.
Speaker 3 (31:20):
Yeah.
Speaker 2 (31:21):
On this note, I was out last night. I was
talking to a couple investors, one of whom is involved
in a very large family office, but he was saying
that it feels like everyone is basically fully allocated at
this point, and like there's a lot of nervousness about
putting on new trades, and there's not a lot of
cash actually sitting on the sidelines anymore.
Speaker 4 (31:40):
You know, I think we would welcome some of that
cash in the FX market because I don't think that
positions are very heavy one way or another, given the
moves that we've seen, say in the dollar the end
of last year, than the beginning the Liberation Day, then
post Liberation Day, and you know, after the semi accord
(32:01):
with China, I think a lot of people have actually
headed to the sidelines. As far as the FX goes,
I may be more positioning inequity is given the way
it's moved the last month or so, and on fixed
income as well. I mean, our view that rates will
probably be higher at the end of the year is
shared by a lot of people. Yeah, you know, it
(32:22):
doesn't mean it's wrong, but yeah, I think that the
caution about, say, buying bonds right now is very widespread.
Speaker 2 (32:31):
What is your end of your target for the tenure.
Speaker 4 (32:33):
I believe we're just under five percent, so we'll be
closer to five than to four and a half by
the end of the year.
Speaker 3 (32:39):
You know. I want to go back actually to something
you said, which is that when you're in school, you're
sort of taught that purchasing power parody. These are the
things that help determine the fair value of currencies, and
then once you want it became on Wall Street areas.
It's all about capital flows and investment and things like that.
What else have you talked to us a little bit
more about the gap between academic economics. You have a
(33:02):
PhD in economics from Yale academic economics, and then the
type of economics that's actually useful and that people pay
money for on wallstream And what did you learn or
what did you have to unlearn?
Speaker 4 (33:15):
Oh, that's a hard one. I think that you have
to learn to question things and you know the assumptions
that everyone makes. Yeah, and you mentioned one of the
pieces we did on how exposed is the US? Actually?
You know, you sort of look at what everyone's saying
and saying, can I find some data that well either
support it or oppose it? So the questioning of the data,
(33:37):
being willing to question central banks and their policies and
even their policy framework. I think that that's something that
that's really important, and it's something that is respected in
the market. I mean, you don't have to be right
all the time, but your arguments have to be well crafted.
(33:58):
And being able to formulate those arguments I think is
very important.
Speaker 3 (34:02):
What was your PhD thesis about?
Speaker 4 (34:04):
Oh? My goodness, it was about agricultural development, how transferable
technology was from one country to another.
Speaker 3 (34:12):
And when you think about, like when you look at
your career in finance, like how helpful is this sort
of like core academic macro that you know all those
equations and all that stuff.
Speaker 4 (34:25):
If it gives you the confidence to question what people
are saying is enormously helpful. If you're just another brick
on the wall sort of repeating with you know the
models that you got taught in graduate school and thinking
that they're right. I think you're going to have a
tough time. And I still use some of the techniques
that I used in my dissertation. But I think the
(34:46):
key thing is to walk away from this and being
able to say, Okay, I know the model says, this
is the model robust enough to actually capture what's essential
in the real world, and if not, how can I
do better? And that's the value I think of the PhD.
It enables you to question what everybody else is saying.
Speaker 3 (35:07):
It's like an arms race, right. The PhD doesn't necessarily help,
But without the PhD, you don't have the confidence to
question the PhD. Everybody just needs to unilaterally agree no
more PhDs.
Speaker 2 (35:18):
That's right, and everyone will.
Speaker 4 (35:21):
That works for me, But I know a lot of
people without PhDs who are very very sharp. Okay, and
you know, even Powell, whom I respect for, Yeah, you know,
no PhD, but he gauges the weaknesses are star what's
the standard air or maybe plus or minus twenty You know,
that sort of understanding that having the intuition to sort
of know when something is really well founded versus something
(35:44):
that's you know, sounds nice, but it's all over the places.
You know, only works on a blackboard. That's really important.
Speaker 2 (35:50):
I know we touched on a few areas where your
theories differ from the market stance at the moment. But
just on the note of, you know, the usefulness of
theoretical academic economics versus real world what's the biggest assumption
that the market or policy makers or investors are getting
wrong at the moment.
Speaker 4 (36:12):
I think policy makers everywhere should pay a lot of
attention to the risk premium of having erratic policy and
policy uncertainty. And you read some of the stuff that's written,
and it's sometimes it's written almost as if it's in
a vacuum. I can do this and it will affect
this market, which is the one I'm trying to affect,
(36:34):
but kind of nobody else is going to pay attention
to it. You know, in the real world, everybody else
pays attention to it, and so I think that that's
sort of an issue that you want to take into account,
you know, I think more generally, especially central bank policy makers.
They're sometimes wedded to academic models, and if they don't
have an alternative model that's viewed as respectable in academics,
(36:58):
it's hard for them to say, well, doesn't matter that
it's not respectable, that it works, whereas the one that
is respectable doesn't work.
Speaker 3 (37:06):
It strikes me that part of the reason that there's
so much uncertainty or confusion is that a lot of
the big topics being discussed right now to some extent,
precede economics because they're really about, like, you know, we're
getting to sort of like core questions about institutional structure
and politics, the quality of our political discourse, et cetera,
(37:29):
and like the quality of elected leaders all around the
world and so forth. And as such, it seems like
you sort of like run into a hard limit of
like how far you can go in understanding anything simply
by looking at the economic lens, which is no not
to economics. I love talking to economists such as yourself,
(37:49):
but at some level, the tools and the economists toolkit
are just not going to get you very far in
sort of like discerning which way some of these questions
are going to go.
Speaker 4 (37:58):
Well. I think at a significant level. You don't need
a high school degree to understand the issues. If you
don't trust your trading partners to be reliable suppliers so
much so that you you're willing to forego the benefits
of trade, the benefits of economies of scale and efficiency,
that's a real pity. And then there's a real cost
(38:19):
to it. And if you know, we have to make
all the stuff that is made elsewhere, there's a cost.
And a bit of my own background, I come from Canada.
There are parts of Canada that make very good wine,
and there are parts of Canada that make very bad wine.
If you've ever had the bad wine, you're a free
(38:39):
trader and wine for the rest of your life.
Speaker 3 (38:42):
Where's the bad wine?
Speaker 4 (38:43):
Reader? I will not I will not denounce the country
of my birth.
Speaker 3 (38:49):
I have a guess. Actually, oh, what do you think?
Speaker 4 (38:52):
Well?
Speaker 3 (38:52):
I was reading so I was recently talking to someone
actually while we were in Atlanta, and I randomly heard
someone talking about how there are some really good wine
tours that you can take in the sort of Finger
Lakes region of New York with the only caveat It's
very beautiful and you can take boats around from one
(39:13):
winery to another. The only caveat is that the wine
isn't very good, and so my guess is that it
would be somewhere on the other side of that New
York Canada border around there where the wine is not good.
But that's just my that's my hunt.
Speaker 4 (39:26):
You can get a lot worse wine than the finger legs.
Speaker 2 (39:30):
All right, we'll have to do a wine episode with Steven,
but for now we have to leave it there. Steven,
thank you so much for coming on the show. I'm
so glad we finally got a chance to talk with you.
Speaker 4 (39:41):
Thank you both. It's a great pleasure, and you lived
up to your awesome reputation.
Speaker 3 (39:48):
Thank you so much.
Speaker 4 (40:01):
Joe, that was great.
Speaker 2 (40:02):
I'm so glad we finally had Stephen on.
Speaker 3 (40:05):
Steven's great You know, on that last point where he
is talking about the sort of the degradation of the
comfort that countries have with their trading partners, it strikes
me that this has to be a big part of
the global rate story because if every country, and it
fits into an episode we recently did with Scott back
(40:25):
about the risks of deglobalization, if every country suddenly needs
to start building its own things because their trading partners
are unreliable. That means A, you get less productivity and
b you just need more spending, whether it's private spending
or public spending. And so you get this story where
every country sort of logically feels it has to spend
(40:47):
more into an environment of less productivity, which means higher inflation,
which means higher rates.
Speaker 4 (40:52):
Right.
Speaker 2 (40:52):
And the irony I guess is that that happens at
the same time that a lot of countries, to Steven's
earlier point, think that they can solve all their domestic
problems through international trade policies.
Speaker 3 (41:04):
Yeah, you know, I remember, like you know, it was
a popular thing to talk about, like currency wars in
the wake of two thousand and nine, twenty ten, twenty eleven,
and this sort of fantasy that countries can revive their
economic fortunes simply via the exchange rate. And I'm sure
within any country there are sectors of the economy for
(41:25):
which that is true. I suspect that a weaker currency
for the US is as always going to benefit our
soybean farmers and our corn farmers to some extent, but
it is not going to magically put us at the
front of the line when it comes to the high
value exports or the high value products period that typically
characterize in the advanced economy.
Speaker 2 (41:47):
Just one more depreciation, bro, one more appreciation.
Speaker 3 (41:51):
One more appreciation road. We're going to mage TSMC's Taiwan
semiconductor prowess.
Speaker 2 (41:57):
That's right, all right?
Speaker 3 (41:58):
Shall we leave it there. Let's leave it there.
Speaker 2 (42:00):
This has been another episode of the oud Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (42:05):
I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Kerman Ermann Dash, O
Bennett at Dashbod and Calebrooks at Kalebrooks. More odd Loads
content go to Bloomberg dot com slash odd Lots, where
we have a daily newsletter and all of our episodes,
and you can chat with fellow listeners twenty four seven
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Speaker 2 (42:27):
And if you enjoy odd Lots, if you like it
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And remember, if you are a Bloomberg subscriber, you can
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(43:09):
Benea
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Authoughts podcast.
I'm Tracy Alloway.
Speaker 3 (00:23):
And I'm Joe Wisenthal.
Speaker 2 (00:24):
Joe, how about them JGB yields?
Speaker 3 (00:27):
So this is the thing, which is that in some
sense the markets have quieted down certainly compared to early
April or mid April, but there are some major moves
still happening, particularly in rates, some currency stuff. If you
know where to look, these markets are not boring at all.
Speaker 2 (00:45):
I don't even think you have to like actively go
looking for interesting moves. So we're recording this on May twentieth,
and the twenty year JGB yield was up something like
fifteen basis points to about two point five percent. That's
the highest since two thousand. So basically, back when I
was living in Tokyo going to high school.
Speaker 3 (01:05):
Were telling how I measure everything, Well, what were you
borrowing from local Japanese banks or were you buying when
you were in high school?
Speaker 2 (01:14):
Sadly, sadly not, although well they wouldn't have been a
great investment.
Speaker 3 (01:18):
Well you should have watch of jgb's back. Then you
get great price appreciation, you get great yields. But yes,
there's a lot going on. It's a global thing. So
in the US we're also seeing fairly elevated rates lately,
and to some extent that might be a story of
expectations that the current budget negotiations are going to continue
(01:38):
widening the deficit, you know, the sort of moody story.
But there's clearly global factor here that cannot simply be
explained by, say, like the willingness or unwillingness of members
of Congress to like expand the salt deduction. There is
a bigger macro story unfolding that I don't think I
have my head fully wrapped around. Right.
Speaker 2 (01:58):
So, as we're recording this, the year is back at
four point four eight percent, and perhaps more importantly, the
thirty year is creeping back towards five percent. The dollar
is falling again, so the Cell America theme is kind
of getting another airing. There are concerns over the fiscal
trajectory and the big beautiful bill that you know, you
just kind.
Speaker 3 (02:18):
Of call is. I know it's a liter called beautiful, but.
Speaker 2 (02:21):
I love that, And so the worry is that that
will push up the deficit and possibly inflation. Plus, of course,
we have tariffs Meanwhile, as rates appear to be going up,
there are plenty of people still out there who are
talking about the prospect of the economy, the US economy
actually slowing down and getting rate cuts later this year,
and the market is still pricing those in. So we're
(02:42):
at this really interesting juncture in the bond market where
we're getting a lot of conflicting signals, a lot of
confusing signals, as you mentioned, and it seems like maintaining
stable prices, low inflation, and trying to fight all these
different cross currents is going to fall almost entirely on
the FED. I think we should talk about all.
Speaker 3 (03:01):
Of this absolutely. Let's jump right into it. We have
a great guest today.
Speaker 2 (03:05):
We have the perfect guest, you might say. We're going
to be speaking with Steven Englander, the global head of
G ten FX Strategy at Standard Chartered, And to be honest, Joe,
I cannot believe we haven't had Stephen on the podcast before.
Speaker 3 (03:18):
I've been reading Steven's notes for years and years and years.
I was actually really surprised to realize he's never been
on before. I know, our oversight, major our oversight. Lately,
his emails have become a must click for me, I
always open them and so yes, he's here with us
in studio.
Speaker 2 (03:36):
Steven, welcome to the show.
Speaker 4 (03:37):
Thank you very much. I'm honored to be here with
the best interviewers in the world.
Speaker 3 (03:42):
That's right. We are going to clip that and save
it for our highlight reel.
Speaker 2 (03:45):
That's very kind. So why don't we start with jgb's
and also UST's. Is there a common theme running through
that sell off or are they being driven by entirely
different things.
Speaker 4 (03:58):
I think it's mostly different. There is a common element
in that if US yields are going up, everybody's yelds
are going to be going up. But I think in
the case of jgb's there's, you know, particular dynamics. There's
uncertainty about what they're going to do. On the QT side,
they had this very kind of painful twenty year auction
(04:18):
which was pretty close to failing. The BOJ published that
there was some debate as to what pace of quantitative
tightening they should be going at, if any, and I
think there's a general view in the world that yields
are too low and they're going to be going up. However,
it's puzzling because the market seems to like the end
(04:41):
and normally that would be associated with the lower yields.
Speaker 3 (04:44):
Well, you're getting paid a lot to buy you and
I can I mean, right, isn't that part of the story,
Like yields are going up, so it's like I'll buy
some yen because at least they're paying me a lot
more yen to hold them.
Speaker 4 (04:53):
Well, remarkably, today there have been times when the end
thirty year yield has been higher than the German thirty
year yield.
Speaker 3 (05:00):
So just on this point, I'm looking so anticipated. I
literally on my terminal had just pulled up a chart
of German thirty year yields as well, which are above
three percent. That's crazy. They were at zero at the
start of twenty twenty two, and that's the thirty year
they're over three percent. There must be a global factor.
Speaker 4 (05:20):
Well, some of it is fiscal, especially in Europe and
the US. The Europe had like ten twelve years of
debt crisis in which they didn't want to expand fiscal deficits.
The pressure was to do the opposite, and now they've
discovered that defense spending is the key to economic growth.
But the market, I think is looking at it, and
(05:40):
they're looking at the fiscal prospects in the US and
kind of guessing that we're not going to see zero
in German yields.
Speaker 2 (05:46):
Again, just going back to the yen and people buying it.
How much of that is a strong yen story versus
a week dollar story. This is why I hate currencies.
Speaker 4 (05:56):
By the way, well, they're good because you have two
chances to be wrong. I think that much of it
is a week dollar story. And looking to see in
terms of the negotiations on tariffs and in terms of
how kind of off base the currency is, which currencies
are most likely to move, which ones will face the
(06:18):
least resistance in appreciating against the dollar, and I think
Japan wins on several counts that the tariff negotiations will
be tough because they still have a very big trade
deficit with the US. Trade surplus, yes, trade surplus with
the US. The non tariff barriers, even if you really
can't quantify them, they're pretty significant, and you know, the
(06:40):
US has a point in complaining about some of them,
and there's a sense in the market, and I think
correctly that once you get past the ten percent baseline
tariff that the US needs for fiscal purposes that they
may be will link to trade, some of the reciprocal tariffs,
the you know, the beyond that ten percent for currency appreciation.
(07:04):
And there's been a number of currencies under discussion, but
you know, the end is one of the prime currencies,
given that it's so weak relative to any kind of
PPP type of basis.
Speaker 3 (07:14):
Right, this is sort of a general East Asian story.
Speaker 4 (07:17):
You know.
Speaker 3 (07:17):
Obviously we talked about the Taiwanies dollar and the South
Korean one and so forth, and there is this view
that maybe some sort of different in currency policy could
be part of the packages here. Before we get more
to that, you know, one of the things that you
heard maybe six months ago or a year or even
a few months ago, they're like, oh, if we impose tariffs,
(07:39):
it will be offset because that will be a strengthening
of the US dollar. And we've seen literally the opposite.
But that was a common meme, a common conventional wisdom
among a lot of economists both Wall Street academia are
the ones who appear on TV et cetera. What is
this simple story for why the dollar has been so
weak since April second, even at a time when stop
(08:00):
rebounded interest rates have stabilized a little bit. The one
major move that hasn't really reversed is the dollar. What's
this simple story there.
Speaker 5 (08:08):
Well for the complex story, well, it's a medium story,
but it basically goes something like this said, you know,
I might choose to pick your pocket if I thought
you wouldn't respond, but if you did respond, you know,
the consequences might not be as much fun for me.
Speaker 4 (08:23):
And I think that if you start with the assumption
that the US can tariff everybody, yeah, and you know,
the market is not going to say, well, wait a second,
if they do tariffs, what about that Mara Lago stuff,
what about foreign policy? You know what, what is the
limit to which they can expand that policy envelope? You
had to risk premium to US assets. So the offset
(08:45):
to that is that the market is looking at US
assets and kind of saying, well, safe haven, maybe not
so much reliability, maybe not so much as it used
to be.
Speaker 2 (08:55):
Is there good dollar depreciation and bad dollar depreciation? And
I remember one of your notes you talked about this
idea that you could get a weaker dollar that supports competitiveness,
but you could also get a weaker dollar that reduces
the amount of capital coming into the US. How would
you measure those two things?
Speaker 4 (09:13):
Well, in a sense, we're getting some of that measurement
now when we look at the dollar weakening and interest
rates going up. I think it's a pretty good sign that,
notwithstanding the greater competitiveness on paper, at least of the US,
that investors aren't that enthusiastic about holding US assets. So
I think that's one real signal that the market's not
(09:35):
thinking that it's an unalloyed plus. But I'd say that
most of the time if the dollar goes down is
for bad reasons. The basic good story would be something
like this that the rest of the world, for whatever reason,
does fiscal policy and kind of expands consumption and they
start buying US assets. US foreign yields go up relative
(09:57):
to the US. Never mind what they're do. That picture
is over, you know, five, ten, fifteen years, and they say, okay,
you know, instead of buying US treasuries, we're going to
buy you know, German and European and Asian because they're
all expanding their fiscal deficits and their rates are going up.
The return is higher, and you can start say, yeah,
the dollar's weaker, but it's it's okay for the US,
(10:19):
they can do their own thing. I'd say that if
you're focused on the US, and this is something I
can't emphasize enough that just about for every major, even
medium sized country, ninety percent of the policy solution is
going to be domestic. The idea that you can fix
your economic problems by doing something on the international side,
(10:43):
I think is an illusion. If you did the right
thing on the domestic side, you might get good stuff
happening on the international side. But it's really really hard
to get around domestic issues by saying, oh, well, well,
just appreciate ten or fifteen percent. Most of the time
when you'd appreciate that way, something's going wrong. Either the
(11:04):
market says, hey, their real interest rates are too low
and they're not going to be able to push them up,
so there's no point to holding their paper, or they
say brisk premium should be higher, or something not going great.
So I'd say that even though there's a route by
which you can say that a week or dollar reflects
good stuff, that's not the most common rute. Most of
(11:25):
the time, a weaker currency reflects bad stuff happening on
the domestic side.
Speaker 3 (11:29):
No, I think this is a really good point. I
wrote a thing in the newsletter. I call it like
one weird triconomics, because we have all of these things
that we can all talk about and sort of al
or plague the US economy. It's difficult to build here.
We seem to have lost our capacity to so.
Speaker 2 (11:46):
If you do the whole list, we're going to be
here for like twenty minutes.
Speaker 3 (11:49):
Right. We seem to have gotten worse at building airplanes,
which is one of the things that we actually still
do export to the world. In much of the ways,
these are really tough problems to solve, and it strikes
me as sort of fantasy that suddenly we can revive
all of these things just by coming to an agreement
with our foreign partners about some difference in currency or
a trade policy.
Speaker 4 (12:11):
I completely agree. And the other fantasy I would add
to that is the implication all we got to do
is depreciate five or ten percent and that's going to
be enough. If you take a look at the way
the dollar has moved against the euros the end, you know,
the range over the last ten years for the euro
I think is ninety five to one twenty five, and
the US has run a trade deficit, significant trade against Europe. Yeah,
(12:35):
both at ninety five and at one twenty five. I
think there's too much faith that a weak currency is
is going to bail you out of your problems. But
it's the easy thing to do, and it kind of
sounds nice in principle.
Speaker 3 (13:05):
Was there ever in Urine economic history in which economies
did stabilize more directly and more linear fashion? You know now?
And I think of like, okay specialization Tawan makes the chips,
Europe makes the engines, the US makes soybeans and complex
financial products. I get why currency adjustments don't have this
stabilizing effect. Was there a period when economic specialty was
(13:29):
more distributed, that there was a more clear link between
exchange rate fluctuations and trade balancing.
Speaker 4 (13:37):
The simple answer I think is no. I think that
there was a time maybe when you had the gold standard. Yeah,
but there's also an issue that the movements of gold
reflected the confidence of markets that the economy was sustainable.
There were no imbalances. So if he ran a trade
deficit in the nineteenth century, yes, you know, we have
(13:59):
to be settled in gold eventually, but it wasn't a
problem until everyone decided that maybe you wouldn't be able
to do it, and then you would have these kinds
of crunches most of my careers. It's so funny because
when you go to school, all you learn is PPP
and trade balances and sort of adjustment of exchange rates
and so on to get trade into equilibrium. Once you're
(14:21):
sitting at a trading desk, all you see our capital
flows and that's kind of the driver. And the issue
is does the market have enough confidence to keep lending
you the money? And if you look at the US,
say for you know, the last twenty years or so,
through thick and thin till recently, the market was pretty
(14:42):
confident that the risk adju just returns into US would
be positive. And yeah, the US ran a trade deficit,
but it didn't seem to harm US welfare.
Speaker 2 (14:54):
What do you see in the capitol flows now? Because
this seems to be one of the difficulties of the
current moment, which which is there are a lot of
people talking about the sell America idea, but if you
look at some of the data, and a lot of
it comes out on a lag, you don't really see
a lot of selling. For instance, foreign account selling, a
lot of US treasuries. Are you seeing any evidence of
(15:16):
the sell America theme emerging?
Speaker 4 (15:19):
Well, I think you see it in the weaker dollar.
And you know, my best friend is the balance of
payments identity, and I might talk to it every day.
Speaker 3 (15:27):
And this little sad but charming.
Speaker 4 (15:30):
The thing is that when the market decides that it's
not going to lend you money at yesterday's interest rates
and exchange rates, there are two ways of getting that adjustment.
Either your demand for credit can go down, which we
sometimes see with emerging markets when they hit the wall
with respect to foreign funding, and the economy crashes because
(15:53):
basically they have to get into trade balance or surplus
even in order to meet their obligations. In G ten,
mostly and historically with the US, the adjustment has been
via the currency occasionally, like in seventy eight in April,
with the currency and interest rates, but there's no big
(16:15):
demand shock, there's no big shock to output because the
money's not there. The money's there, but it's at a
different price than you expect it to pay. So I
think you have to look at the path that's traced
by US interest rates in the exchange rates, you know,
as well as sentiment and seeing what people are saying
to understand whether the financing is coming easily or with difficulty.
Speaker 3 (16:39):
Going back to Europe for a second, so Germany has suddenly,
maybe briefly, but suddenly found this willingness to spend more
money and that's going to benefit German defense companies. We
see higher rates, so maybe a longer term more inflationary
temperature in the European economy. Is Europe actually a desirable
(17:01):
destination though? For global capital? I mean it doesn't have
really an alternative to US treasuries. The fundamental growth prospects
still don't look great. Do you see any changing perspective?
And like the pure desirability of capital to enter Europe?
Speaker 4 (17:17):
Some but I'd say most of what we're seeing is
the market beginning to debate whether the US is going
to fall back into the pack in terms of being attractive.
I don't think it's really that is Europe pulling away
from the pack in terms of attractiveness. And going back
to the first principle that I mentioned, when you list
the issues limiting growth in Europe, you know there's been there.
(17:41):
You know, energy policy which hasn't worked out, there's the
over regulation, there's taxation, lack of incentives, the labor market,
the inflexibility, all the issues that we've discussed for twenty
or thirty years. It would be remarkable if defense spending
was the answer to all of those. And you know,
(18:01):
I'm a bit skeptical in the short term it might
make a difference in the long term. You know, it's
not as if we study Attila the Hunts Textbook of
economics to see how, you know, preparing for war is
going to give you a better economy.
Speaker 2 (18:13):
Yeah, that's another one weird triconomics thing. Yeah, the belief
that defense spending is going to change everything. I mean,
it is a big it is a big change, but
the idea that it's going to really reverberate across the
European Union. Going back to US problems for a second,
So if we can't count on a weaker dollar to
(18:33):
save us, and meanwhile it seems like we're going to
get probably more fiscal spending, a bigger deficit. Does the
job of reining in inflation now fall entirely to the
Fed pretty much.
Speaker 4 (18:47):
Yeah, there's a hope that some spending can be reduced
because if you look at the share of government spending
and GDP. It's way higher than it was twenty eighteen,
twenty nineteen, you know, for the decade before we hit COVID,
and you know, the Republicans kind of got snookered by
Biden when they did the debt deal in that they
(19:08):
accepted a higher baseline level of spending that was way
above the historical norm for the US. So the question
is can they get that back down, and can they
do that in a way that's you know, fair equitable,
that's not really going to be on the backs of
you know, one segment of the population or you know,
the forest or the weakest or whatever. If they can,
(19:31):
it would be remarkable if dose can get rid of
wasteful spending. You know, if they can actually find waste,
fraud and abuse, that would be terrific. But if they can't,
and we know the history of these fiscal bills, which
is that the easiest thing to do is to kind
of say, well, we'll have a lot of supply side
effects or we're counting on this revenue or that revenue
(19:54):
which may or may not come. If it turns out
that it's kind of steepening the the deficit path in
the path of death accumulation, the FED may be the
only story in town.
Speaker 3 (20:07):
You wrote an interesting piece earlier this week talking about
the sort of short to medium term outlook for the FED,
and it sounded like, you see the window for rate
cuts is being sort of narrow and shallow that basically
in twenty six, twenty twenty seven, we're going to be
getting a stimulative impact assuming this tax bill goes through,
(20:30):
and something that it looks like talk to us about like,
you know, what the market is pricing in for rate
cuts versus what realistically the FED might be able to
do here.
Speaker 4 (20:39):
Yeah, I guess I'm kind of at odds with the market,
both in the short term and and the longer.
Speaker 3 (20:44):
Love media, this is what makes an interesting conversation.
Speaker 4 (20:46):
And in the short term I kind of think, Look,
every survey you get tells you that everybody's concerned about growth,
they expect growth to slow down. How many weak payroll
numbers do you need to say, Oh, wait a second,
the people have been telling us that nothing's happening, that
things are slowing down. Now we get evidence. Do you
(21:07):
need three, do you need six? Or do you just say, well, yeah,
that just confirms what everybody's been saying. So I actually
think that they will do the right thing, which would
be to ease in response to incoming economic data. Having
said that, I would see that as an insurance policy.
Because the fiscal bill is likely to introduce net stimulus,
(21:29):
We're going to get something uncertain inflation. We'll get certain
inflation effects from the tariffs. What's uncertain is whether they're
one off or persistent. So between the combination of tariff
and used inflation and fiscal stimulus, it's not clear to
me how they're going to cut. I think that the
(21:50):
FED might see themselves as having an issue and sitting
in terms of saying, well, if we cut in Q
two or Q three, can we take it back in
Q four and Q one, with you know, the president
over our shoulders saying, you know, don't do that. But
if you're running a model, you'd probably say, given all
the data that have come in, if you get confirmation
(22:12):
that the economy is blowing, you should cut, and then
you should keep your eyes open to see what's happening,
you know, at the end of the year, to turn
into twenty twenty six and see if you have to
take it back. Because the inflation picture has deteriorated.
Speaker 2 (22:27):
Can I ask a basic question which I've kind of
always wanted to ask someone, and given your experience in
the market, I think I should ask you, what is
the central bank playbook for stagflation?
Speaker 4 (22:39):
Pray look in some ways when you look at the history,
Arthur Burns got out a very bad deck and he
probably didn't play it well, but he didn't have a
good deck to play with green Span, Burnank, even yelling
to some degree, Greensprand and BERNANKI actually had pretty strong
(22:59):
product deep growth when they were there, so unit labor
costs were soft. Yellen had low inflation, so she could
be everybody's friend because they were trying to get to
their targets, you know, and even Powell in his first
term was faced with that issue. But do you think
with stagflation? Is really tough and there's no good answer
(23:21):
because you know in the longer term that you can't
accommodate the negative productivity shock or negative output shock because
you'll just have persistent inflation. The only question is how
quickly do you try and ring it out of the system,
And that's you know, that's a very hard decision to make.
Speaker 3 (23:39):
Speaking of having views that are out of consensus. You
wrote an interesting note a couple of weeks ago. I
think it was before the quote did haunt with China,
but actually you were of the view, Yeah, and you've
been talking about this tariff. We'll have an inflationary impulse.
We'll see how far it goes. But that actually the
sort of short term disruption from the terriff you sort
(24:00):
of thought have been overstated, and I think the markets
increasingly come around to this view. I mean, if we
were trying to you in April early April, people were,
you know, sudden to stop to the economy. They pulled
the plug on the economy, so to speak. But at
least in the short term, your view is that it's
not quite as big of a deal from a sheer
like economic activity standpoint.
Speaker 4 (24:21):
Yeah, Look, ten percent shocks the competitiveness. We get those
all the time via exchange rates, and life goes on.
You know, in the last ten years, the euro dollars
moved ten percent in a relatively short period of time,
three or four times. It's not it's not fun for
the business people on the wrong side of that move,
but they managed to deal with it. And China was different.
(24:44):
But you know, the imports from China in twenty twenty
four were like one point six percent of GDP at
the US GDP of US GDP correct and even at
the worst of the sort of you know when we
saw no boats there. Yeah, we're probably running at about
fifty sixty percent of normal. So you talk about one
point eight percent shock, and you start to say, okay,
(25:07):
you know, you look at other shocks that the US gets,
you know, either via the exchange rate when you have
a big move, or via energy prices, you know, which
is like seven or eight percent of the CPI. They
can easily move twenty or thirty percent. That's something that
everybody has to deal with. It's never comfortable, but the
economy can deal with it. Where I did see a
potential issue which I think is really important, is that
(25:29):
if we move from tariffs, which is a way of
adjusting relative prices, to start saying now we just don't
want x, y or Z from China, or we're going
to limit imports of stuff, using quantities to regulate trade
rather than prices potentially has a much deeper effect because
(25:50):
you really don't know how our prices will have to
move in the event of a shortage to clear the market,
so with that, you'd be playing with fire. But percent tariffs.
It's not that I'm endorsing it, I just don't. I
don't think that they are as big a deal as
they were made out to be.
Speaker 2 (26:22):
It does feel to me like one of the complications
of the current environment other than uncertainty, which you know,
we've been joking on the podcast that we cannot get
through a single interview at the moment without mentioning the
word uncertainty. But one of the complications is you potentially
have the economy sort of moving in different directions, or
(26:43):
maybe the impacts of the tariffs are moving at different speeds,
So you could have an impact on inflation, you know,
relatively soon as prices start going up, but you could
have an impact on the labor market later on, because
it takes a while for you know, reduce demand to
work its way through the economy, and that strikes me
(27:04):
as something that's difficult to deal with for the FED
and also means they have a sort of limited window
to operate. And how realistic do you think that timing
scenario is.
Speaker 4 (27:15):
It's pretty realistic, although I think that the effects on
labors show up sooner oh, okay, because the say import
from China crash, Are we going to build stuff in
the US, And the answer is probably not. The US
is probably not even with ten percent tariffs on a
bunch of countries. The US is probably not the second
lowest cost producer for most of the stuff that China
(27:37):
was producing. So you know, we would get the price
effects from China. I don't see that there would be
any significant increase in employment, So I think we'd get
them both at about the same time that demand was
getting squeezed because this is a decline in real wages
because of the price effects. But I think that they
(27:57):
are very hopeful in terms of the quantity effects the
output benefits that they expect to get in the short
term from the tariffs, and I suspect we're going to
see the downside of that quicker than any kind of
upside is likely to emerge.
Speaker 3 (28:12):
Before I forget you said something at the beginning, there
actually are real non tear iff trade barriers employed by Japan.
Apparently it's not true that they have a bowling ball
test where they drop a bowling ball on a car
and if it dents, you're not allowed to sell the car.
There apparently that is something of an urban legend. But
(28:34):
whether it's Japan or anywhere else, what substantive non tear
iff trade barriers do you see out there that the
administration has a legitimate case should be modified in some way.
Speaker 4 (28:46):
What trade in agriculture is very limited in most countries.
You know, there's certain health you know, with more processed food,
there are health regulations which may or may not be
completely justified. And there are sort of barriers that you've
seen documented over time. It's not that they're wrong. I mean,
(29:07):
the US put out this very thick book documenting non
tariff barriers, but I think the importance is probably overstated.
They should be gotten rid of. But it's not like
cataclysmic type of thing. I mean, look, I think US
demand has been stronger than that in the rest of
(29:27):
the world, so we've imported more and that's most of
the trade story.
Speaker 2 (29:30):
I got distracted looking up the bowling ball test Joe.
Speaker 3 (29:34):
Interesting.
Speaker 2 (29:35):
It seems to be something that Donald Trump talked to
is probably not true by the way.
Speaker 3 (29:41):
I know, we already had that agreement with the UK,
but I think they should let cars drive on the
right side of the road and would probably make it
a lot easier for Americans to you know, sell into
that market.
Speaker 2 (29:52):
Joe, why do you feel the need to say these
things keep going?
Speaker 4 (29:56):
All right?
Speaker 2 (29:57):
Steven, I'm going to ask a very basic question, you know,
typical question for you, I imagine, But what are your
clients asking you about at the moment? What concerns are
you seeing out there? What are the questions that you're
getting repeatedly?
Speaker 4 (30:09):
I think corporate clients, you know, people who are in
real businesses make things, sell things. I hate to use
the word uncertainty as much as you do.
Speaker 2 (30:18):
It's okay, it is allowed, Okay.
Speaker 1 (30:20):
You know.
Speaker 4 (30:20):
The question for them is, you know, if I want
to increase capacity, where should I do it? Should I
do it in the US? Should I do it elsewhere?
How is this going to play out? Is it going
to play out for four years? Or is it going
to play out for eternity? And I think that they're
having a very hard time getting their hands around it,
and to them, that's the biggest issue. I think if
(30:43):
you're investors, people who manage portfolios, are you know, trying
to eke out gains in the market. The question about
where the dollar is going, where rates are going, how
fast they're going, and especially nobody wants to be the
sixth person on a trade because that makes you vulnerable.
So they're very obsessed with kind of understanding whether any
(31:08):
trade that they want to do is like I say,
a steepener trade in the rates market, has everybody else
done it already, or is there's still a room to
get in and be able to do well on that trade.
Speaker 3 (31:20):
Yeah.
Speaker 2 (31:21):
On this note, I was out last night. I was
talking to a couple investors, one of whom is involved
in a very large family office, but he was saying
that it feels like everyone is basically fully allocated at
this point, and like there's a lot of nervousness about
putting on new trades, and there's not a lot of
cash actually sitting on the sidelines anymore.
Speaker 4 (31:40):
You know, I think we would welcome some of that
cash in the FX market because I don't think that
positions are very heavy one way or another, given the
moves that we've seen, say in the dollar the end
of last year, than the beginning the Liberation Day, then
post Liberation Day, and you know, after the semi accord
(32:01):
with China, I think a lot of people have actually
headed to the sidelines. As far as the FX goes,
I may be more positioning inequity is given the way
it's moved the last month or so, and on fixed
income as well. I mean, our view that rates will
probably be higher at the end of the year is
shared by a lot of people. Yeah, you know, it
(32:22):
doesn't mean it's wrong, but yeah, I think that the
caution about, say, buying bonds right now is very widespread.
Speaker 2 (32:31):
What is your end of your target for the tenure.
Speaker 4 (32:33):
I believe we're just under five percent, so we'll be
closer to five than to four and a half by
the end of the year.
Speaker 3 (32:39):
You know. I want to go back actually to something
you said, which is that when you're in school, you're
sort of taught that purchasing power parody. These are the
things that help determine the fair value of currencies, and
then once you want it became on Wall Street areas.
It's all about capital flows and investment and things like that.
What else have you talked to us a little bit
more about the gap between academic economics. You have a
(33:02):
PhD in economics from Yale academic economics, and then the
type of economics that's actually useful and that people pay
money for on wallstream And what did you learn or
what did you have to unlearn?
Speaker 4 (33:15):
Oh, that's a hard one. I think that you have
to learn to question things and you know the assumptions
that everyone makes. Yeah, and you mentioned one of the
pieces we did on how exposed is the US? Actually?
You know, you sort of look at what everyone's saying
and saying, can I find some data that well either
support it or oppose it? So the questioning of the data,
(33:37):
being willing to question central banks and their policies and
even their policy framework. I think that that's something that
that's really important, and it's something that is respected in
the market. I mean, you don't have to be right
all the time, but your arguments have to be well crafted.
(33:58):
And being able to formulate those arguments I think is
very important.
Speaker 3 (34:02):
What was your PhD thesis about?
Speaker 4 (34:04):
Oh? My goodness, it was about agricultural development, how transferable
technology was from one country to another.
Speaker 3 (34:12):
And when you think about, like when you look at
your career in finance, like how helpful is this sort
of like core academic macro that you know all those
equations and all that stuff.
Speaker 4 (34:25):
If it gives you the confidence to question what people
are saying is enormously helpful. If you're just another brick
on the wall sort of repeating with you know the
models that you got taught in graduate school and thinking
that they're right. I think you're going to have a
tough time. And I still use some of the techniques
that I used in my dissertation. But I think the
(34:46):
key thing is to walk away from this and being
able to say, Okay, I know the model says, this
is the model robust enough to actually capture what's essential
in the real world, and if not, how can I
do better? And that's the value I think of the PhD.
It enables you to question what everybody else is saying.
Speaker 3 (35:07):
It's like an arms race, right. The PhD doesn't necessarily help,
But without the PhD, you don't have the confidence to
question the PhD. Everybody just needs to unilaterally agree no
more PhDs.
Speaker 2 (35:18):
That's right, and everyone will.
Speaker 4 (35:21):
That works for me, But I know a lot of
people without PhDs who are very very sharp. Okay, and
you know, even Powell, whom I respect for, Yeah, you know,
no PhD, but he gauges the weaknesses are star what's
the standard air or maybe plus or minus twenty You know,
that sort of understanding that having the intuition to sort
of know when something is really well founded versus something
(35:44):
that's you know, sounds nice, but it's all over the places.
You know, only works on a blackboard. That's really important.
Speaker 2 (35:50):
I know we touched on a few areas where your
theories differ from the market stance at the moment. But
just on the note of, you know, the usefulness of
theoretical academic economics versus real world what's the biggest assumption
that the market or policy makers or investors are getting
wrong at the moment.
Speaker 4 (36:12):
I think policy makers everywhere should pay a lot of
attention to the risk premium of having erratic policy and
policy uncertainty. And you read some of the stuff that's written,
and it's sometimes it's written almost as if it's in
a vacuum. I can do this and it will affect
this market, which is the one I'm trying to affect,
(36:34):
but kind of nobody else is going to pay attention
to it. You know, in the real world, everybody else
pays attention to it, and so I think that that's
sort of an issue that you want to take into account,
you know, I think more generally, especially central bank policy makers.
They're sometimes wedded to academic models, and if they don't
have an alternative model that's viewed as respectable in academics,
(36:58):
it's hard for them to say, well, doesn't matter that
it's not respectable, that it works, whereas the one that
is respectable doesn't work.
Speaker 3 (37:06):
It strikes me that part of the reason that there's
so much uncertainty or confusion is that a lot of
the big topics being discussed right now to some extent,
precede economics because they're really about, like, you know, we're
getting to sort of like core questions about institutional structure
and politics, the quality of our political discourse, et cetera,
(37:29):
and like the quality of elected leaders all around the
world and so forth. And as such, it seems like
you sort of like run into a hard limit of
like how far you can go in understanding anything simply
by looking at the economic lens, which is no not
to economics. I love talking to economists such as yourself,
(37:49):
but at some level, the tools and the economists toolkit
are just not going to get you very far in
sort of like discerning which way some of these questions
are going to go.
Speaker 4 (37:58):
Well. I think at a significant level. You don't need
a high school degree to understand the issues. If you
don't trust your trading partners to be reliable suppliers so
much so that you you're willing to forego the benefits
of trade, the benefits of economies of scale and efficiency,
that's a real pity. And then there's a real cost
(38:19):
to it. And if you know, we have to make
all the stuff that is made elsewhere, there's a cost.
And a bit of my own background, I come from Canada.
There are parts of Canada that make very good wine,
and there are parts of Canada that make very bad wine.
If you've ever had the bad wine, you're a free
(38:39):
trader and wine for the rest of your life.
Speaker 3 (38:42):
Where's the bad wine?
Speaker 4 (38:43):
Reader? I will not I will not denounce the country
of my birth.
Speaker 3 (38:49):
I have a guess. Actually, oh, what do you think?
Speaker 4 (38:52):
Well?
Speaker 3 (38:52):
I was reading so I was recently talking to someone
actually while we were in Atlanta, and I randomly heard
someone talking about how there are some really good wine
tours that you can take in the sort of Finger
Lakes region of New York with the only caveat It's
very beautiful and you can take boats around from one
(39:13):
winery to another. The only caveat is that the wine
isn't very good, and so my guess is that it
would be somewhere on the other side of that New
York Canada border around there where the wine is not good.
But that's just my that's my hunt.
Speaker 4 (39:26):
You can get a lot worse wine than the finger legs.
Speaker 2 (39:30):
All right, we'll have to do a wine episode with Steven,
but for now we have to leave it there. Steven,
thank you so much for coming on the show. I'm
so glad we finally got a chance to talk with you.
Speaker 4 (39:41):
Thank you both. It's a great pleasure, and you lived
up to your awesome reputation.
Speaker 3 (39:48):
Thank you so much.
Speaker 4 (40:01):
Joe, that was great.
Speaker 2 (40:02):
I'm so glad we finally had Stephen on.
Speaker 3 (40:05):
Steven's great You know, on that last point where he
is talking about the sort of the degradation of the
comfort that countries have with their trading partners, it strikes
me that this has to be a big part of
the global rate story because if every country, and it
fits into an episode we recently did with Scott back
(40:25):
about the risks of deglobalization, if every country suddenly needs
to start building its own things because their trading partners
are unreliable. That means A, you get less productivity and
b you just need more spending, whether it's private spending
or public spending. And so you get this story where
every country sort of logically feels it has to spend
(40:47):
more into an environment of less productivity, which means higher inflation,
which means higher rates.
Speaker 4 (40:52):
Right.
Speaker 2 (40:52):
And the irony I guess is that that happens at
the same time that a lot of countries, to Steven's
earlier point, think that they can solve all their domestic
problems through international trade policies.
Speaker 3 (41:04):
Yeah, you know, I remember, like you know, it was
a popular thing to talk about, like currency wars in
the wake of two thousand and nine, twenty ten, twenty eleven,
and this sort of fantasy that countries can revive their
economic fortunes simply via the exchange rate. And I'm sure
within any country there are sectors of the economy for
(41:25):
which that is true. I suspect that a weaker currency
for the US is as always going to benefit our
soybean farmers and our corn farmers to some extent, but
it is not going to magically put us at the
front of the line when it comes to the high
value exports or the high value products period that typically
characterize in the advanced economy.
Speaker 2 (41:47):
Just one more depreciation, bro, one more appreciation.
Speaker 3 (41:51):
One more appreciation road. We're going to mage TSMC's Taiwan
semiconductor prowess.
Speaker 2 (41:57):
That's right, all right?
Speaker 3 (41:58):
Shall we leave it there. Let's leave it there.
Speaker 2 (42:00):
This has been another episode of the oud Lots podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 3 (42:05):
I'm Joe Wisenthal. You can follow me at the Stalwart.
Follow our producers Carmen Rodriguez at Kerman Ermann Dash, O
Bennett at Dashbod and Calebrooks at Kalebrooks. More odd Loads
content go to Bloomberg dot com slash odd Lots, where
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