June 30, 2023 • 52 mins
Zoltan Pozsar has built a reputation for covering the intricacies of money markets. For the past eight years, he published those insights as a strategist at Credit Suisse. But in this episode of the Odd Lots podcast, Pozsar reveals his next career move following his departure from the Swiss bank earlier this year. He also gives us an update on his Bretton Woods III thesis, or the idea that the global financial system is going through a "monetary divorce" from US dollar hegemony and becoming more multi-polar. He also gives us his take on the recent banking crisis and what it means for global funding markets going forward.
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Episode Transcript
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Speaker 1 (00:10):
Hello, and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway.
Speaker 2 (00:15):
And I'm Joe.
Speaker 1 (00:15):
Why isn't thal Joe? Do you remember what we were
doing this time last year?
Speaker 3 (00:21):
No?
Speaker 1 (00:22):
Yeah, I can barely remember two weeks ago. Yeah, but
I actually I remember this one mostly because I looked
it up right before we started doing this recording. But
this time last year, we were preparing organizing our first
live All Thoughts debate between Zultan Posar and Perry Maryland.
That was really fun.
Speaker 2 (00:43):
We got to do that again.
Speaker 1 (00:44):
Yeah, So we were sort of frantically doing a lot
of the sort of travel arrangements and things like that
for that.
Speaker 2 (00:52):
Sorry, waking up early in the morning, like of the
day of the debate, entering names into a database so
that people could get into the Bloomberg.
Speaker 1 (01:00):
Yeah, yes too. It was fun, all right. But my
point is it's been a while since we've spoken to
Sultan Posar.
Speaker 2 (01:10):
It has been a while, and it's unfortunate because he
is one of our most requested guests. People would listen
to him every month if we interviewed him.
Speaker 1 (01:18):
I agree, in fact, I think we should do monthly
or even quarterly interviews with Sultan. But I am very
happy to say without further ado that Sultan is he's back.
Speaker 2 (01:29):
He's back and so right. So he was at Credit Sweeze,
he left Credit Sweeze. He's been kind of silent. There
has been this incredible mystery about what he's going to
do next, and uh, we don't know. But he's coming
out on the Odd Lots podcast, so let's find out.
Speaker 1 (01:43):
He's gonna tell us. Now, Sultan, welcome back to the show.
We're so glad to have you back on.
Speaker 2 (01:48):
This is like when Lebron James announced on ESPN all
those years ago what he was going to do next.
Speaker 1 (01:55):
So very nice, thanks for having all right, so what
are you doing? Just jump right into it. Yeah, you
were strategistic credits us as everyone knows at this point,
and now what are you up to?
Speaker 3 (02:07):
Well, the next steps is I have founded my own
macroeconomic consultancy. The name of the firm is Exlunoplurus, and
I will be providing research to institutional investors and consult
institutional investors about plumbing as I always have.
Speaker 2 (02:25):
Okay, meny questions, Well let's just start simple. What is
X you know?
Speaker 3 (02:29):
Plurist man exlunopluris is the opposite of a plural busulum,
which is this little motto that we can find on
a great seal of the United States and on the
dollar bill. It means in English, out of one many.
It's meant to capture two ideas. The first idea is,
you know that my retrospective on what I've been doing
(02:50):
for a strategies for a decade is basically anticipating moments
when prices fall apart in funding and rates markets. So
the basic idea is that most of the time things
straight on top of each other, you know, the industry
structure is orderly, and then then something bad happens, whether
it's panic or a pandemic or a balance sheet constraint
(03:12):
or liquidity constraint, prices fall apart. So out of one price,
you are dealing with many prices. And so that's basically
the bread and butter of what a rate strategist and
a rate strater is doing, anticipating those moments and being
on the right.
Speaker 4 (03:26):
Side of those movements.
Speaker 3 (03:28):
And then the other idea is that you know global
macro as such, I think it grew up as a
concept and an asset price, if you will in the
unicorn or moment where globalization was moving forward, the dollar
was the undisputed global hegemonic currency, and so we were
(03:49):
all kind of creating the global dollar cycle and going forward.
As we discussed this in the context of bread in
was three, that's no longer going to be the case.
So it's kind of capturing the site PST. You know,
China is trying to extract itself from the Western financial system,
much like the Western real economy is trying to extract
(04:10):
itself out of supply chains that.
Speaker 4 (04:12):
Are running through China.
Speaker 3 (04:13):
And so we are I think at the beginning of
this era the next five ten years.
Speaker 4 (04:19):
At least, where we are going to go through this.
Speaker 3 (04:21):
Monitory divorce and you know, the dollars hegemony is going
to be challenged by some geo financial moves that the
chain is blooding, So out of one dominant reserve currency,
we will have the world where we will have.
Speaker 2 (04:36):
Met That's a great name.
Speaker 1 (04:38):
So, you know, you mentioned moments in macro and I
think last year when you released that Breton Woods three
thesis that you talked about on the show and wrote
a number of research notes about it, definitely demarketed a
thing that seemed to be, you know, floating out there
in people's minds, this idea that maybe finally some things
(05:02):
were changing around dollar hegemony, as you just mentioned. Talk
to us about that original thesis a little bit more
and whether or not you think it's been born out
over the course of the last I guess twelve to
fifteen months or so.
Speaker 3 (05:19):
I think the concept is very healthy and it's alive.
I personally see more and more signs that some of
these teams that we have discussed on that first show
when we talked about Bretton Woodstree or computer fruition, and
also the conversation with bit Perry, I think we did
a quick temperature check on the idea and at the
conclusion I had there was that, you know, Bretton wood
(05:40):
Tree is a healthy baby boy, so to speak. So
it's throwing and development rapidly. Look a couple of things.
The frame that my answer to that question is, I
think it's becoming very obvious that when you talk to
policy circles and investors in the West, I think the
primary focus is on how do we, so to speak,
(06:03):
de risk supply chains that are running through China. How
do we become more you know self sufficient in terms
of rare or the capital goods we need for energy,
transition ships and so.
Speaker 4 (06:15):
On and support.
Speaker 3 (06:16):
And so the focus in the West is on making
sure that the real economy is decoupled from the East,
so to speak. And when you speak to market participants
and policy makers in the East, the primary focus.
Speaker 4 (06:30):
There because they have all the supply chains and so
they are in control of that part of the equation.
Speaker 3 (06:34):
There, the primary focus is on how do you expect
yourself from the Western financial system and how do you
de risk this relationship that you have financially with the
US dollar and Western national institutions and financial centers in general.
And I would say that since we last spoke about
this topic, there have been a number of news headlines
(06:56):
you know, read out from state visits, what have you,
where you know things like the rendmen b invoicing of
commodities is moving ahead. We are reading about more and
more stories where natural gas deals and oil deals are
invoiced in.
Speaker 4 (07:10):
Redmond and not equest dollar.
Speaker 3 (07:13):
I have not talked about this aspect of breaton Woodstree,
but I kind of uncovered the new aspect of it,
which is the whole Central Bank digital currency topic and
how all that fits into breadon wood tree. And you know,
when you start digging in that domain, I think you
uncover several things that are kind of eye opening. So
let me just offer one for example, the real economy
(07:35):
and real economy analog again is you know, in the US,
for example, they don't allow Huawei.
Speaker 4 (07:40):
To build cell phone towers for obvious reasons.
Speaker 3 (07:43):
You know, there's a risk of beevesdropping and spionage, and
you know, the Central Bank digital currencies are basically the
same story. I have been kind of cursorially following CBDCs,
but I couldn't truly put into an overall macro picture
as to what are CBDCs about. You know, if you
think about it, China has been quite busy trying to
(08:05):
internationalize the rent, being it more for trade settlement purposes
since the middle of the last decades. Around twenty fifteen
is when they started, and then that process somehow stalled.
And I think the reason why that process talled is
that they recognize that it's pointless to internationalize your currency
through a Western financial system, through London, through New York,
(08:26):
and through the balance sheets of Western finational institutions when
you basically do not control that network of institutions that
your currency is running through for you to do something
like that to basically knewed out a whole new correspondent
banking system, Okay. And so you know, this is also
the time when Russia annexed Ukraine, so the financial sanctions
(08:47):
became a much more dominant topic in the financial press.
So I think that was a wake up role for
China that if they want to indeed internationalized rent fee,
they need to start from scratch and they need to
build a the noblestial network that they control. And so
this is also the time when CBDC has become a
hot topic. You know, CBDCs started in China, you know
(09:08):
the ec and y. And the way I think about
CBDCs and developments in net space today is that you
basically need to imagine a world where five ten years
from now, we are going to have the renmnty that's
far more internationally used than today, but the settlement of
international R and B transactions are going to happen on
(09:30):
the balance sheets of central banks. So instead of having
a network of correspondent banks, we should be thinking about
a network of correspondent central banks and a world where
you have a number of different countries. In each of
those different countries have their banking systems using the local currency.
But when country A wants to trade the country B
(09:51):
you know, Thailand with China, for example, the effects needs
of those two local banking systems are going to be
met by dealings between two central banks.
Speaker 4 (10:01):
And so when you reimagine a.
Speaker 3 (10:03):
System like this, it's basically a state the state, and
a central bank to central bank network that is completely
independent of Western financial centers and the dollar. So there's
a ton of development we can develop some time liter
and show talk about this. So there's a ton of
development on NetFront. And also the context here is that
(10:23):
if you want to imagine an alternative to a dollar
based system, you know, the single most important thing that
makes the dollar so important is that ninety percent of
ethics transactions any given day in the world use the
US dollar as one leg of the transaction. Okay, So
basically that's because we inherited the system where if you
(10:45):
want to sell you know, if you want to settle
a transaction between someone in Hungary in Thailand, okay, the
way you will do that today is you would sell
your Hungarian for it buy.
Speaker 4 (10:56):
Euros, sell the euro and buy the dollar and sell
the US iBOT.
Speaker 3 (11:01):
So that's basically three different currency pairers, three market makers,
three bid ask spreads. Incredibly inefficient. But again, if you
go back to this concept of correspondent central banks as
opposed to correspondent banks, this transaction just can settle between
the local Bagarian banking system and the local tie banking system.
We have to do central banks as dealers of less
(11:24):
resorts in the FX markets.
Speaker 4 (11:26):
And so that that's the last piece I want to mention.
Speaker 3 (11:29):
In this part, which is that you know, in the
West we are talking about this dealer of less resort
thing a lot. And the context in which we talk
about dealer of less resort in the West and in
the US case specific, is that we need a dealer
of less resort for the treasury market because the treasuring
market is not liquid.
Speaker 4 (11:45):
That's where the focus is.
Speaker 3 (11:46):
And of course we need a dealer of less resort
and the repo market and the FX pop market, but
I think it's also time to start thinking about dealers
of first resorts in terms of FX market making for
the global East, and which is the Central Bank Salfurence,
the Central Bank correspondent system that I'm describing.
Speaker 2 (12:21):
This is so interesting because I don't think i'd ever
heard anyone talk about cbdc's within the context of like
a new kind of plumbing, and you hear stuff about, Okay, well,
you know, it's the twenty twenty first century and we
need to be able to pay our stuff on our phones,
which we already can do, or sometimes you hear about
it in the context of privacy. I've always had this
(12:43):
theory that CBDCs are just a way for central bankers
to get invited to panels and yet and get really
plush jobs after they leave the central banking world, like
doing digital money for visa or something like that. So
but this is like actually sort of like an interesting
theory before we go a little bit further down on
this road, because I want to talk more about it,
but I'm still curious about the business. You know, you're
(13:04):
going to be going out to, you know, be independent.
What is your sort of vision for X you know pluris,
which is again I think is a really clever name,
the opposite of e plurbus union. What is your vision
for like what kind of business who it will be?
Is it going to be who are your clients like,
talk to us a little bit about what your vision
for your your firmat.
Speaker 4 (13:25):
Well, thanks for coming back to that. I mean, look,
I figure you're.
Speaker 2 (13:28):
Going to announce the decision, the big decision here on
odd lots happy, I like, I'm actually also just I'm
very curious about how this world works.
Speaker 3 (13:35):
Okay, So look, I have a lot for two streams
of publications in terms of research. The first one there
will be money, Banks and Bases. This would be the
publication that that most people kind of you know, identify
me with. So I'd be looking at the fifty largest
balan hips in the world with a lot of attention,
you know that what the big banks are up to,
what the gesips are up to, what are they doing
(13:55):
in their portfolios or the balanceships constraints. And it's going
to be based on a research piece about the day
to day working of the dollar system as we know
it today. And then the parallel publication will be Money
and World Order, which is going to keep track of
how Breton Bookstree is evolving because you know these topics
(14:17):
of the dollarization, the remodetization of gold, you know, using
central bank digital currencies to build out to knit out,
you know, the novo financial system, you know, the petrol
you want, and the rending be invoicing of commodities and
created goods going forward.
Speaker 4 (14:33):
I think these are basically.
Speaker 3 (14:35):
The two lenses through which one should be following dollar
funding and dollar rates markets going forward, because you know,
the day to day we just have to live with,
but then we absolutely cannot lift our eyes off all
the geopolitical realities and challenges that that the dollar will
be facing. So these will be the two publications that
(14:56):
subscribers will get. As I said, you know, it's a
it's a price side, so you know, the target audiences
institutional investors exclusively and that and not retail investors, and
so I will be completely behind the paywall and subscribers
will be able to chat with me and the conference
calls and meetings, And that's basically the simple vision.
Speaker 1 (15:16):
I was actually going to circle back to that towards
the ends, but since you guzumped me, let me ask
a question that sort of squares these two thoughts, like
the new business and the Breton Woods three vision. So
one of the criticisms that we sometimes hear about, you know,
big bold predictions about changes in the overall financial system
(15:40):
is that it's hard to actually invest money based on them.
So I guess the question is, you know, if someone
hears Breton Wood's three new central bank digital currencies, four
x lenders of first resort, things like that, what's actionable
about those ideas? What is it actually mean for investors?
Speaker 4 (16:02):
I think it means a lot.
Speaker 3 (16:03):
So Number one, I think if you are looking at
a whole new plumbing where you know, let's back up
for example, I mean we are used to thinking about
a world where there is either a dollar shortage in
some regions or dollar surplus in other regions, and then
these surfaces get recycled either in the FX swap market
(16:23):
or in the rate market. And you know, I think
if we end up in a world where countries are
now going to have several options, for example, as to
how they pay for commodities, and let's take oil for
an example. You know, people hold dollars many reasons. One
(16:45):
reason why people hold dollars is because oil it has
been historically priced in dollars. So if you are a
poor country that needs to import oil on the margin,
you need to have dollars to be able.
Speaker 4 (16:58):
To do that.
Speaker 3 (16:58):
Now, if you are going to live a world where
you can pay dollars for oil, but you can also
pay rendmin b or oil. But if you are a
gold miner, you can also pay for oil to gold
like Gone for example. You know, that's basically three options
you're looking on at a screen, and so you will
(17:20):
just choose whichever one is cheaper. And that picture gets,
you know, further complicated by the fact that there is
oil blowing west, which is one price, and oil blowing east, which.
Speaker 4 (17:31):
Is another price.
Speaker 3 (17:32):
So it's not just again out of one many it's
not just one price anymore, but it's a bunch of
prices and a bunch of currencies, and choose whichever works
best for you. So and also if you go into
a world where trade is not dominantly invoiced in dollars,
so people don't have to borrow dollars to import stuff
and the exporters don't earn dollars exclusively, then it's no
(17:55):
longer a machinery where you know the dollars are getting
created on the margin, that dollars are getting accumulated on
the margin, and the question is how do you recycle
the earned dollars back into funding and rates markets. So
if that world splits into you know, we are now
doing half of this in rendment B and the other
half we are doing it in dollars, then naturally, for
(18:16):
example the fxplop market, the landscape of the fx pop
market is going to get redrawn.
Speaker 4 (18:22):
The following way.
Speaker 3 (18:23):
There will be regions that used to be short dollars,
but now they are not because they can you know,
source rendmen be through the rentman b spoplanes from the PBOC,
So dollars shortages and certain regions are going to disappear.
Then there will be regions that used to recycle dollar
surpluses into the fx splop market. You know, maybe the
(18:43):
Reserve Bank of Australia putting in the fx pop market
and then you know, some Japanese investor picking those dollars
up in the fx pop market. You has their treasury portfolios,
but have you you know, if Australia ends up, you know,
earning only half as much dollars then as they used
to in the past, and the other half is now
in renomn B, then the dollar recycling is going.
Speaker 4 (19:04):
To suffer as well.
Speaker 3 (19:05):
So you know, the supply of dollars in fx pop
markets and the demand for dollars in the fx pop
market is going to get redrawn, and I think there
will be some regions that are going to turn that
are going to be turned on their head, you know.
So there will be positive trust currency bases that will
turn negative, and there will be negative trust currency bases
that will turn positives. So it's just one example for
(19:27):
example in terms of fxpops, and then in terms of
you know, the rest of the world's demand for treasuries,
which is a big question again. Dollars you historically need
because you need to import a bunch of things which
have been exclusively invoiced in dollars. But if you have
a world where things are being invoiced half in dollars
and have rende, you know, that need to accumulate dollar.
Speaker 4 (19:48):
Reserves doesn't exist there.
Speaker 3 (19:50):
China, I think is a very important example in this
regard because one reason why China has so many fex
reserves because that's kind of like your life insurance policy,
because all the commodities and foodstuffs that they need to import.
I mean, I think the big five commodities that the
import is natural gas, oil, soybeans, copper, gut knows what
else but you know, the annual bill for those imports
(20:13):
is running the five hundred billions, you know, so if
you don't have the dollars to pay for those, your toast.
Speaker 4 (20:20):
So you have to have a lot of dollar reserves.
Speaker 3 (20:22):
But if you end up in a world where you
can now force commodity exporters to accept your currency for
those commodity imports and not the US dollar, you basically
have gained sovereignty from a monetary perspective, and so again
you will not have to run with as much effects reserves.
And so you know, this is going to have feedback
effect on you know, demand for treasuries in general and
(20:45):
on the margin. You know, things are always in the
margin devidance. So I think if these teams are going
to play out over the next five to ten years
on the margin, you know, demand for treasuries and the
recycling of dollars in the front end, then an affect
and the upgrades market, I think, is going to get
pushed around.
Speaker 2 (21:02):
Would you anticipate in you know, or do you have
some timing Like we talked about this on a recent
episode with Karthik centerund But they will see, you know,
there are a lot of countries around the world that
float dollar bonds for one reason or another. Do you
anticipate that we'll see if rinmand B internationalization continues, that
we will see various ems float more rinman B bonds
(21:25):
or would that be a crucial aspect towards a successful
internationalization of R and B.
Speaker 3 (21:32):
I think it can be a part of our MBA internationalization.
I mean, you know, it's just the way of kind
of raising offshore R and B that's out there, and
you can either tap swaplights with the PBOC. You know,
that's a very important aspect of it. I mean, BBOC
has swap lined with way more countries than the USA
swop lines for example, So there is you know, when
(21:53):
you kind of look at the topography of that EBOC
spopline network and when you look at the topography of
the central banks that are actively planning to have a
CBDC or they actually have a CBDC pilot up and
running already, I mean, there's a perfect overlap.
Speaker 4 (22:07):
You know.
Speaker 3 (22:08):
So if you think about the swaps as the funding
angle to the RENVP that you don't have in the
system get and then if you look at the CBDC
as the kind of swapping and clearing of existing local
currencies in the system. I mean you basically have a
spot effects market and a funding market infrastructure around it.
So you know, you can internationalize the rendom be that way,
(22:29):
you can internet nationalize it by you know, em compries
raising r and bonds to raise term RMB liquidity. But again,
I think the most important thing here is that we
are starting to see evidence that more and more commodity
trades are being settled in rendmen b. And also over
(22:49):
the past year, the renminb's share of trade and ends
has increased tremendously. I think it has increased from barely
one percent to five percent in a twelve month period
and now it's at far with the euro's share of tradements.
And again, if that one twelve month period is any sign,
you know, you project that five ten years out you
can have a lot of ground.
Speaker 4 (23:09):
That's the rent if you can gain you know.
Speaker 1 (23:12):
Sultan, you mentioned changes in structural demand for treasuries and
I wanted to ask you about this because this is
one of the I guess the last research notes that
you wrote at Credit Swiss. I think it was in January,
so definitely not the final one. But you were talking
about at some point the Fed's going to need to
come in and support the treasury market once again because
(23:36):
you have all these natural buyers of bonds who are
starting to step away. And I think you talked about
potentially the FED having to restart asset purchases as soon
as the summer. Is that something that you still see.
Speaker 3 (23:49):
On the table, Well, it's the summer. Yeah, So let's
put it this way. I mean, we have now the
offer on buyback program that's up and running. You can
find that mistake and correct yep, you're right, yeap, Okay,
so there is that, and then we had, you know,
the problems around SVP and some other banks.
Speaker 4 (24:08):
So let's just put it this way.
Speaker 3 (24:10):
I think that when we think about these what is
the government going to have to do to step in
on the margin to calm things down? You know, I
always tell you that the answer is always the longest spectrum.
So I think we are in the ante room of something.
You know, we are dealing with illiquidity with the buybacks.
So far, so good. We have dealt with underwater bank portfolios.
(24:33):
I mean the bank term funding program effectively your ability
to raise at you know, to value underwater bonds at
the FED at bar and raise liquidity that way if
you have to. I think that's a pretty that's a
pretty big support to market functioning.
Speaker 4 (24:51):
So I think, you know, things are happening on the.
Speaker 3 (24:53):
Margin, which kind of points to the FED and the
Treasury building scaffolding around the treasury market to deal with
the illiquidity issues and this lack of marginal buyer issues
that we have been talking about.
Speaker 4 (25:07):
You know.
Speaker 3 (25:08):
The other point here is that you know, in the
front end there is a ton of liquidity, and so
all these issue and that the Treasury has been doing
and will be doing is going to be front and heavy,
you know. So that's another way of dealing with treasury
market functioning. I mean, you have two trillion dollars in
our fy viacility. You're just going to issue where you
can most likely soak up a lot of liquidity without
(25:29):
any glitches.
Speaker 4 (25:30):
But again, I think this underlying issue that we are talking.
Speaker 3 (25:33):
About that the world is probably going through a split
where demand for treasuries from the rest of the world
is probably not going to be what it wants was.
It's going to be an issue and as these issues
pop up, we are going to be dealing with them
in a step by step passion. But again, I think
these illiquidity problems are present and we are dealing with
them as they pop up.
Speaker 2 (26:11):
I want to get you know, your take further on
like some of the banks and particularly the aftermath of
SVB et cetera. But before we do, you know, going
with thinking back a year ago, this conversation or versions
of this conversation might have been much more commodity centric.
And obviously oil has fallen quite a little bit. There
was a lot of stress a year ago about the
(26:33):
European electricity costs, which have come down significantly. Generally, there's
been a lot of easing there. But I'm curious, like,
was that just a sort of like a one time
reset in terms of maybe post pandemic shocks and of
course the invasion of Ukraine and that things are settled
or will sort of like commodity fragility, commodity volatility, anxiety
(26:56):
about sourcing energy be sort of a permanent or semi
permanent condition over the next several years as part of
this sort of Bretton Wood's three point zero vision.
Speaker 3 (27:07):
Yeah, so, you know, to be intellectually honest to ourselves
and to the listeners, yes, we did talk about you know,
commodities creating a bigger goal in you know, reserve management practices.
Speaker 4 (27:18):
And whatnot, among many other teams. So I would say that.
Speaker 3 (27:23):
For me, what survives that commodity aspect of the Breton
would three pieces is that I think gold is definitely
something that's coming back as a theme. I mean, just
to give you a very good example, when I saw
I think Barry Ikagreen was a co author on that paper.
The IM published a paper about gold and the title
(27:46):
I think was a barbarous relic no More and it
was co authored by Barry Ikongreen. So I'll hide behind
it a little bit, but I think it's noteworthy when
someone like Barry ikongreenews probably the official biographer of the dollar,
rites of paper like that, and I think we are
seeing the more and more in the data that especially
(28:07):
the countries that are not geopolitically aligned to the US
are shunning treasuries and shunning the dollar and they are
buying gold instead. I think there is also a number
of other headlines which I think are important to keep
an eye on because individually they might not sum up
too much. But I think in the fatality of these
things probably point a trend. You know, Ghana and Russia
(28:32):
basically had an oil for gold deal whereby Russia ships
oil to Ghana and Ghana pays gold for.
Speaker 4 (28:41):
The oil that they receive.
Speaker 3 (28:42):
I mean, the basic idea was that a country that
has prepidy and offex reserves US dollars mostly that also
minds a lot of gold is going to pointless for
them to spend their precious dollars on oil when they
can just swap gold for oil and kind of get
their oil de band and they have you know, effects
reserves left for other stuff pharmaceuticals for example. Again, geopolitics
(29:06):
is at the angle here, but you know, Russia and
Iran are establishing a special economic zone along the CASP
and c where the trade is going to be settled
in a gold act digital token. Forget which country it was,
but you know there's another gold rich African country which
is playing with this idea of a gold bag digital token. Again,
(29:27):
I think these are interesting developments, but again some of
the last ones that I mentioned are probably on the fringes.
But again you know in the IMF data and in
the data Gold Council, we see this massive increase in
foreign central banks purchases of gold, so that gold aspect
definitely survives. And yes, you know, energy markets have gone
up and they have come down, but again I think
(29:48):
it's just hard to escape the reality that you know,
Saudi Arabia is not exactly falling over backwards to increase
oil production, but in fact that there is this stug
of war where I think the Cran Prince has the
stic economic agenda. It needs oil prices to trade between
one hundred dollars a barrel for them to pull up
that quite ambitious domestic and regional and also geopolitical agenda.
(30:11):
And I think there is a stug of war between
the oil consumers and the oil producers where you know,
things haven't really breaken out into either side, but I
think that pullback is basically given us a body language
where you know, if there's not enough demand for oil
and oil prices are falling, we need our revenue, so
we're just going to not supply such that prices don't
pull too much. So again I think the commodity shortage
(30:33):
and this, you know, I think the team that I
used was our commodity your problem. I think it's definitely
there in oil again, you know, Russian oil. Surprisingly, I
think it all found a way to alternative markets. So
you know, tanker rates are up. You know, we talked
about this a year ago, that tanker rates being the
balance sheet for you know, the real economy balance sheet
(30:53):
equivalents in the oil market, and the tanker rates are
through the rule because these shadow fleets had to be
a sampled to find those pternative markets.
Speaker 4 (31:00):
For Russian oil. And I think, you know, the supply
chains are probably.
Speaker 3 (31:04):
Getting more caught up in this team involving you know,
energy transition, you know, getting the lifting and all these
things that are.
Speaker 4 (31:10):
Needed for that. So I would say that the commodity
aspect is a mixed bag, except for goal.
Speaker 1 (31:16):
That other African country I think it was Zimbabwe doing
all digital token So I guess make of that what
you will.
Speaker 5 (31:23):
But I wanted to go back, well, make makeup well,
I just wanted to say, you can make up that,
but you Bill and perhaps a lot of countries that
people mention on this conversation are going to be the
sanctioned countries.
Speaker 4 (31:33):
Let's put it that way. But I think that's precisely
I mean, you know, these are not not.
Speaker 3 (31:37):
The countries that you think about when you're talking on
the financial press about things. But I think the underlying
team here is very much one where if you look
look at this unicorn or world that we are, you know,
talking about whether it's supply chains or whether it's the
monster regimes, whether it's you know, foreign policy alignments between
East and West, you know, two great powers and a
(31:59):
bunch of on a life, non alive countries. I think
it's important to pull in these fringe countries because you know,
there is powering numbers and like, yeah, one country's GDP
is not much, but you know when you kind of
plump them all together and they kind of sign into
one system as opposed to another system, these things are
going to be meaningful on the market. So I think
(32:19):
that's why it's important to think about best case countries,
so to speak. But that's why that's why we mentioned Yeah.
Speaker 1 (32:26):
And I mean US dollar transactions I think are a
pretty big thing in Zimbabwe, so you know the fact
that they're experimenting with a new type of thing to
try to maybe get away from that is interesting. But
I wanted to go back to what we saw in
the banking system because everyone who knows your origin story,
(32:47):
probably knows that you know, started out working at the
New York FED. There was the famous shadow banking chart
that you did before the financial crisis, sort of laying
out how this is entire system actually worked. What do
you make of the most recent banking crisis? And I
know some people take issue with actually labeling a crisis.
(33:10):
We can call it a banking drama or whatever. But
is the drama over for now?
Speaker 3 (33:16):
Well, it feels like, let me tell you this, It
feels very different from two thousand and eight. Obviously, I
mean there it was an existential moment and you know,
the central nervous system of the global dollar system was
at risk, you know, the big banks, So the big
banks were a source of strength this time rapping. I
would say that we basically have three institutions that became
(33:40):
collateral damage either to crypto or the tech inclosion or
you know, your inability to make to underpride you know
mortgages intelligently, so you know, signature bank is crypto related.
SPB I think is a very unique case because what
it kind of tells you is that it is important
for a bank to be diversified both in terms of
(34:02):
its lending portfolio and also.
Speaker 4 (34:04):
Its deposit mixed. You know, when I was following the
SVV the backle the.
Speaker 3 (34:12):
Thing that came to mind for me was, I don't
know if you remember his tracy, but bear Sterns used
to have to hatch funds, which were the first hetch
funds to.
Speaker 4 (34:20):
Blow up in Yeah.
Speaker 3 (34:23):
I forget what they were called, but they had I
think the bear Sterns Enhanced Leverage fund or whatever they
were called. You know, those hedge funds were the first
ones to blow up because they had the worst assets
imaginable and they had the worst live of the structure imaginable.
Speaker 5 (34:39):
Yeah.
Speaker 1 (34:39):
I think they were like really high yield structured credit
or something like that.
Speaker 3 (34:44):
Yes, high yield structure credit, you know cdo so that
stuff on the asset side, you know, overnight funding, so
pickled funding.
Speaker 4 (34:53):
You know.
Speaker 3 (34:53):
SVB, I would say, is a case where on the
liability decide. I mean, we know who the big deposit
the school, the clients were. They were reading about some
of them in the financial press. But basically, you know,
if you think about the tech sector, venture capital sector,
where all the valuations have basically taken a big nose
dive after tech stocks corrected. You basically had a depositor
(35:16):
base that was liquidity constraints. So they basically pulled money
from one bank where a lot of tech entrepreneurs kept
their cash and so that's a liquidity drain and it
wasn't diversified on the asset side. SVB had a lot
of duration. I mean, you know, you guys know that
my bread and butter is you know, going through all
(35:37):
the cold reports of the biggest institutions and you know,
I mean, very few banks have as big a share
of their agebre a portfolio in strips stripped port respect
securities as they did. But you know, they had a
lot of coupon explore, they had a lot of principal
exposure there. They had a lot of duration in these
portfolios and they didn't hedge them properly. They also had
(35:57):
a lending book where they were lending to the same
you know, customers that were pulling funds away from them.
But again, the collaboral on that landing book was tex related,
so you had valuation issues. So that was just kind
of a perfect storm. Systemic absolutely not, but it's hurt them.
And you know, first Republic, I mean, I have to
say I. I have a friend in New York who
once texted me when First Public was going under, saying,
(36:20):
I didn't realize I got such a great deal on
my mortgage that it's the end the first problem. And
I said, you know, I told him that, Well, next
time you get a mortgage that's too good to be true,
you should also short the bank. Maybe the mortgage is
going to pay it stuff up faster then you anticipate.
So so again, I think this is basically the story
of these three the three banks that got into difficulties.
(36:42):
The solution that the FAT crafted for some of these
licurity problems, I think they were extremely powerful. I was surprised,
even shocked when I saw the terms of the BDFP.
When I talked to my context. You know, there were
two types of responses to this BDFP program. Number one, yes,
that's the right move, because the letter and spirit of
Basal Tree says that treasuries and Genie Maison reserves are
(37:05):
level one assets, no haircut.
Speaker 4 (37:08):
But again that assumes that you also have the brains
to hedge the interstraight exposure there.
Speaker 3 (37:13):
And also, I mean, you know, you can put some
of these bonds that are underwater into a whole maturity
portfolio where if you are sitting on huge market market losses,
it doesn't hit your bank's activity and you don't have
to book those losses.
Speaker 4 (37:24):
And it doesn't hit your capital.
Speaker 3 (37:26):
But again, that assumes that your deposit base is sticky
and so you're not going to lose deposits in the
aggregate to the point where you actually have to liquidate
these underwater bonds. And you know, it was not the
case for SVV, its case for other banks like Bank
of America for example. You know, and the other response
to the BTFB is that you know this is this
(37:48):
should not have happened because it basically euthanizes the need
for interest rate risk management in bank portfolio. So it
was a kind of a polar response. But again, what's
done is done. I think it's a part of the system.
Speaker 4 (38:01):
Now.
Speaker 3 (38:01):
I think the BTFB is going to be there as
a standard feature of the system, much like standing people
facility and spoplanes are there. So you know, these facilities
tend to be born and slip around. But it's again
it's the part of the scaffoldings that we have. I mean, imagine,
imagine the treasury market coming under strain because some of
these banks have to meet, you know, bitterly short balls,
(38:23):
and then instead of pledging to the fat off market
to be at liquidity, you basically have to dump it
on the dealers. And imagine what that would have done
the treasury market. Nothing, So we just basically kept this
treasure is off the great so to speak.
Speaker 2 (38:39):
When when SVB failed, there were sort of two conversations
that sprung up right afterwards. One had to do with
like the sort of like, okay, all deposits in the
US are do we just accept that they're all implicitly
guaranteed regardless of what the formal FDI C cap is.
And then there's also a conversation about, you know, five
thousand banks in the US would which is like I think,
(39:00):
probably the most banked country in the world. Do we
just sort of, you know, does anything change with the
business model of banking or do we just sort of
accept that there are these contradictions and these tensions but
we sort of we don't talk about them, and we
just sort of let these issues go on and occasionally
we have to clean up a mess. But by and large,
(39:22):
there's some of these structural questions about the banking system.
We just sort of kicked the can and let them persist.
Speaker 3 (39:28):
Well, look, I mean I don't think the blanket deposit
insurances in the cards, but I think again, you know,
other than the BTFB, we have this other tool, which
is the FDIC steps in between the PLAT and the
troubled institution.
Speaker 4 (39:41):
And so there's a capital buffer.
Speaker 3 (39:43):
So you know, it's some of the it's some of
the same playbooks in a different fashion that we have
seen in two thousand. You know that that always has
to be secure through its satisfaction that it's planting, you know,
but always wants to eliminate credit risk. And you know,
the FDIC standing has it been plus a special loan
that the FAT extends. Trouble institutions serve exactly that purpose.
(40:03):
So I think we will be dealing with whatever problems
we will be dealing with on a case by case basis.
Speaker 4 (40:09):
Again, I think SVB. You know, the conceptually, the problem.
Speaker 3 (40:13):
Of underwater security portfolios we kind of dealt with commercial
real estate is going to be a slow burning problem.
Perry Merton likes to say a bank can be insolvent
but liquid, but it cannot be solvent, and in liquid
you know, for as long as the pass don't run,
we will be able.
Speaker 4 (40:32):
To deal with these issues.
Speaker 3 (40:34):
You know, interest on reserves is manna from heaven. You know,
it's providing banks to steady stream of interesting income. So
if you have capitalization issues, that's going to be a
back door way of kind of refilling your capital base.
You know, back during the early nineteen eighties when the
bulbul curve was in charge and we had Latin American
death crisis and Thanks for underwater and had their capital issues,
(40:56):
you know, the FED had to generate the steep yield
curve in the system, which was a way to recapitalize
the banks, you know, with interest from deserves. You know,
that's no longer necessary, so it's actually easier. So I
think the banking system is fine for now. I think
we had a scare and you know, we are definitely
going to be dealing with issues in credit portfolios. We
(41:19):
are going to be dealing with cr lending books. There
will be consolidation across the banking system. But there are
many levers that the that can who to help clean
things up.
Speaker 4 (41:31):
You know.
Speaker 3 (41:31):
JP Morgan, for example, was an institution that came in
as a healthy hand because I'd like to remind people
haven't written about as far agoing.
Speaker 4 (41:40):
A long time.
Speaker 3 (41:40):
But you know, don't forget now, You can't thank now.
I can you know that bank is still under an
asset cap. You know, it has a ton of unused
balance sheet capacity, So you know, that's a lot of
balance sheet capacity to want chain if you need a
healthy private hand to clean up some stuff in I mean,
some of the banks that are already very big, and
(42:02):
we're big beneficiaries of dislocations and banking crisis in recent times,
are probably not going to be able to add much
to their balance because they are already too big. But
you know, I think Wells Fargo is another kind of
case in the back pocket of the TAT that could
be pulled out if need be.
Speaker 4 (42:20):
So I think the system is fine.
Speaker 3 (42:22):
I think we're just going to be dealing with these
microL dislocations here and there, you know, regional bank here,
regional bank there, treasury market. But again, people will be
dealing to these things. But you know the name of
the game is to anticipate this and the appropriate positions.
Speaker 1 (42:39):
Well, can I ask one more question, just going back
to your sort of shadow banking origins, but the expectation
now seems to be that, you know, if banks maybe
have to hold even more capital or maybe d lever
in one way or another, that a lot of that
activity is going to end up being pushed into shadow
(43:01):
banks essentially, so private equity perhaps or some sort of
non bank lender. And to some extent, this is what
we've seen since the two thousand and eight financial crisis
by design of the financial regulators. There is some concern
that even more starts to get pushed out now and
maybe if you have interest rates that remain substantially higher,
(43:24):
that's going to be a big hit for both corporate
credit and commercial real estate. Should we worry about exposure
to those sectors in non banks.
Speaker 3 (43:36):
Yes, because I think credit has yet to have its
threckoning and commercial real estate has yet to have its thckoning.
But again, it's better to suffer those losses in non
banks that banks, because you know, banking crises are very
nasty things. But if these losses get booked and absorbed
in balance sheets that are I don't want to say
(43:58):
not levered, because they all are. But you know that
leverage doesn't really have much to do with money markets.
That's orders of magnitude better to deal with than dealing
with a lot of these concentrated exposures in the banking system.
Speaker 4 (44:14):
Regarding that shuttle banking question that you also asked, Tracy,
I think.
Speaker 3 (44:19):
Where we started this conversation that you know, world trade
trading of commodities is going to get invoiced in currencies
other than just the dollar, you know, rent fee and
all these central bank digital currency market making and EFX markets,
you know, migrating to the balance sheets of central banks
and instead of correspondent banks, you should be imaginating correspondent
(44:41):
central banks. If that pisis is true, I think over
time that's going to provide balance sheet lead to all
the jesuves because e FX market making credit lines exclusively
provided into US dollars to oil and cover and other
commodities around. You know, that's the bread and butter to
main of JP, Morgan, Bank of American and City Bank.
(45:03):
You know, if you kind of moved to this world
that I'm describing, you know, that's going to provide balangy
really for the big US banks on the market. You
can use that for other things, you know, as the
shot banks are licking their wounds because they are suffering
their credit and real estate problems. You know, the banking
system is going to be potentially a source of strength
in a sense that not only do you have the
(45:25):
capital to land, but you also have the balent sheet
to do so. I think so, I think things are
going to work themselves out. I think it's a good
thing that things are happening in the shadow banking system.
The shadow banking system we are talking about today, it's
very different from the shadow banking system I have. I
didn't come up with the sexy definition of shadow banking.
That's very early who said that shadow banking is money
(45:47):
market funding of capital market landing. And I think the
general understanding about shadow banking these days is that anything
that happens outside of a bank that involves credit is
shadow banking.
Speaker 4 (45:58):
That's not true too to me, at least, because you.
Speaker 3 (46:01):
Know, you have to have a very strong mind market component,
which is what appifies things, and so that shuttle banking
is fine and if you will, you know, basically a
lot of traditional bread and butter Western financial market making,
credit provisioning, financing functions migrating to the balance sheet of
(46:22):
central banks cbdc's different currencies. I think that's the new
shuttle banking terrain that we need to be focusing that
I will be focusing on, and I will be mapping
and thinking about because I think that's the frontier that's
going to drive rate some Tonic markets going forward.
Speaker 2 (46:39):
All Right, Sulton, I have one last, very tiny question,
and I'm only asking this really because I need to
know it for the outro of the episode.
Speaker 1 (46:48):
Are you going to join Twitter?
Speaker 4 (46:50):
I will not be doing Twitter, really, I will not
do social media. Really. Maybe we can say this at
the end. I will say the name of my website
where people can go and look.
Speaker 2 (47:00):
Wow, incredible. That's an incredible restraint. It's an incredible restraint.
I'm very impressed by.
Speaker 4 (47:09):
Is that a good thing? I think it's a good thing.
Speaker 2 (47:12):
I mean, it would make you very scarce, but it's
an incredible restraint, So I'm impressed.
Speaker 3 (47:18):
No, I will be strictly behind the payball, and probably
this would be my last public appearance and then I
would just disappear.
Speaker 2 (47:30):
Okay, well, this is a gift.
Speaker 3 (47:32):
Thank you.
Speaker 2 (47:33):
It was, thank you, it was it was a pleasure.
Speaker 4 (47:36):
Thank you very much for having me.
Speaker 1 (47:37):
All Right, well, thanks so much, Sultan, and the website,
the new website is expluris dot h U. You should
definitely check that out, Joe. I love talking to Sultan
(48:01):
me too. That's such a treat. The quote about like
we are in the ante room of something. I'm going
to steal that, yeah, for coverage, but I thought, I mean, look,
every time we talked to him, there are a number
of really interesting big picture points. The one thing I
would say is, I remember when the Breton Woods three
thesis came out last year. Yeah, there were a lot
of people saying that this was never going to happen,
(48:24):
and many of those people now have sort of tweaked
that statement to oh, you know, it may happen, but
not for a long time.
Speaker 4 (48:33):
You Know what I think is a.
Speaker 2 (48:34):
Really interesting point that I don't think gets discussed enough
in this which I appreciated Sultan bringing up, was you know,
people look at this from a very sort of like
financial angle, or they talk about China specifically. But I
liked that he brought up you know, all these other countries,
the sort of non aligned countries, they matter to a
(48:55):
significant degree, particularly when added up and sort of the
politics of on theline countries who don't necessarily see the
world through the same lens as the US, or have
the same perspective on many of these global trends. Obviously,
some of the bricks nations, et cetera, like I just
the pure like you know, geopolitics sort of gets trotted
(49:15):
out too much, but they're sort of like the sovereignty
and the impulses and desires of all these other countries.
Speaker 1 (49:21):
They really matter.
Speaker 2 (49:22):
And as their wealth grows and there as their need
to grow, what they do economically and who they trade
with is going to sort of be determinative to some
extent about who rises and fall.
Speaker 3 (49:35):
Well.
Speaker 1 (49:35):
The other thing I thought was really interesting was this
idea of maybe outsourcing more dealer functions to the central bank. Yes,
and if you were to do that, it could potentially
solve some of the concerns that you just outlined, but
also free up some balance sheet for big banks to
do other types of activities, maybe more like non market
(49:57):
making activities, more loans like that. I hadn't really considered that.
Speaker 2 (50:02):
Yeah, that's a really it's a really interesting point, and
no one else has really talked about that. But you know,
we do sort of live in this era in which
sort of like state capitalism or state directed capitalism is
such a big thing, right, and so the extent to
which central banks become bigger sort of active dealers rather
than just sort of behind the scenes supporters of private
(50:24):
banks is something to takes seriously. And maybe there is
a context there in which the sort of the CBDC
or digital currencies could sort of have like a natural
fit in that framework.
Speaker 1 (50:35):
Yeah, we need a new map, Yeah we really do,
don't we. Well, maybe Sultan will publish at his new
research firm. Shall we leave it there? Let's leave it there?
All right? This has been another episode of the All
Thoughts podcast. I'm Tracy Alloway. You can follow me on
Twitter at Tracy Alloway.
Speaker 2 (50:51):
And I'm Joe Wisenthal. You can follow me on Twitter
at the Stalwart. Our guest, Sultan Poster, is not on Twitter,
but you should go check out his brand new website
xunopluris dot hu. I certainly will be follow our producers
Carmen Rodriguez at Carmen Arman and dash Ol Bennett at
(51:11):
dashbot and check out all of our podcasts under the
handle at podcasts and for more odd Laws content, go
to Bloomberg dot com slash odd Lots, where we have transcripts,
a blog, a new newsletter, and you can chat twenty
four to seven with fellow listeners about all of these topics.
I'm sure there's going to be a lot of discussion
about this one in there on the odd Lots discord
(51:33):
at discord dot gg slash odd Lots. It's a lot
of fun.
Speaker 1 (51:37):
I go in there a lot and aud lots listeners.
If you enjoy these podcasts, if you like listening to
the guests that we have on, like Sultan Posear, please
go and leave us a review on any of the
big podcast platforms. If you like us, please let us know.
Thanks so much, thanks for listening
Speaker 4 (52:01):
In
Hello, and welcome to another episode of the All Thoughts Podcast.
I'm Tracy Alloway.
Speaker 2 (00:15):
And I'm Joe.
Speaker 1 (00:15):
Why isn't thal Joe? Do you remember what we were
doing this time last year?
Speaker 3 (00:21):
No?
Speaker 1 (00:22):
Yeah, I can barely remember two weeks ago. Yeah, but
I actually I remember this one mostly because I looked
it up right before we started doing this recording. But
this time last year, we were preparing organizing our first
live All Thoughts debate between Zultan Posar and Perry Maryland.
That was really fun.
Speaker 2 (00:43):
We got to do that again.
Speaker 1 (00:44):
Yeah, So we were sort of frantically doing a lot
of the sort of travel arrangements and things like that
for that.
Speaker 2 (00:52):
Sorry, waking up early in the morning, like of the
day of the debate, entering names into a database so
that people could get into the Bloomberg.
Speaker 1 (01:00):
Yeah, yes too. It was fun, all right. But my
point is it's been a while since we've spoken to
Sultan Posar.
Speaker 2 (01:10):
It has been a while, and it's unfortunate because he
is one of our most requested guests. People would listen
to him every month if we interviewed him.
Speaker 1 (01:18):
I agree, in fact, I think we should do monthly
or even quarterly interviews with Sultan. But I am very
happy to say without further ado that Sultan is he's back.
Speaker 2 (01:29):
He's back and so right. So he was at Credit Sweeze,
he left Credit Sweeze. He's been kind of silent. There
has been this incredible mystery about what he's going to
do next, and uh, we don't know. But he's coming
out on the Odd Lots podcast, so let's find out.
Speaker 1 (01:43):
He's gonna tell us. Now, Sultan, welcome back to the show.
We're so glad to have you back on.
Speaker 2 (01:48):
This is like when Lebron James announced on ESPN all
those years ago what he was going to do next.
Speaker 1 (01:55):
So very nice, thanks for having all right, so what
are you doing? Just jump right into it. Yeah, you
were strategistic credits us as everyone knows at this point,
and now what are you up to?
Speaker 3 (02:07):
Well, the next steps is I have founded my own
macroeconomic consultancy. The name of the firm is Exlunoplurus, and
I will be providing research to institutional investors and consult
institutional investors about plumbing as I always have.
Speaker 2 (02:25):
Okay, meny questions, Well let's just start simple. What is
X you know?
Speaker 3 (02:29):
Plurist man exlunopluris is the opposite of a plural busulum,
which is this little motto that we can find on
a great seal of the United States and on the
dollar bill. It means in English, out of one many.
It's meant to capture two ideas. The first idea is,
you know that my retrospective on what I've been doing
(02:50):
for a strategies for a decade is basically anticipating moments
when prices fall apart in funding and rates markets. So
the basic idea is that most of the time things
straight on top of each other, you know, the industry
structure is orderly, and then then something bad happens, whether
it's panic or a pandemic or a balance sheet constraint
(03:12):
or liquidity constraint, prices fall apart. So out of one price,
you are dealing with many prices. And so that's basically
the bread and butter of what a rate strategist and
a rate strater is doing, anticipating those moments and being
on the right.
Speaker 4 (03:26):
Side of those movements.
Speaker 3 (03:28):
And then the other idea is that you know global
macro as such, I think it grew up as a
concept and an asset price, if you will in the
unicorn or moment where globalization was moving forward, the dollar
was the undisputed global hegemonic currency, and so we were
(03:49):
all kind of creating the global dollar cycle and going forward.
As we discussed this in the context of bread in
was three, that's no longer going to be the case.
So it's kind of capturing the site PST. You know,
China is trying to extract itself from the Western financial system,
much like the Western real economy is trying to extract
(04:10):
itself out of supply chains that.
Speaker 4 (04:12):
Are running through China.
Speaker 3 (04:13):
And so we are I think at the beginning of
this era the next five ten years.
Speaker 4 (04:19):
At least, where we are going to go through this.
Speaker 3 (04:21):
Monitory divorce and you know, the dollars hegemony is going
to be challenged by some geo financial moves that the
chain is blooding, So out of one dominant reserve currency,
we will have the world where we will have.
Speaker 2 (04:36):
Met That's a great name.
Speaker 1 (04:38):
So, you know, you mentioned moments in macro and I
think last year when you released that Breton Woods three
thesis that you talked about on the show and wrote
a number of research notes about it, definitely demarketed a
thing that seemed to be, you know, floating out there
in people's minds, this idea that maybe finally some things
(05:02):
were changing around dollar hegemony, as you just mentioned. Talk
to us about that original thesis a little bit more
and whether or not you think it's been born out
over the course of the last I guess twelve to
fifteen months or so.
Speaker 3 (05:19):
I think the concept is very healthy and it's alive.
I personally see more and more signs that some of
these teams that we have discussed on that first show
when we talked about Bretton Woodstree or computer fruition, and
also the conversation with bit Perry, I think we did
a quick temperature check on the idea and at the
conclusion I had there was that, you know, Bretton wood
(05:40):
Tree is a healthy baby boy, so to speak. So
it's throwing and development rapidly. Look a couple of things.
The frame that my answer to that question is, I
think it's becoming very obvious that when you talk to
policy circles and investors in the West, I think the
primary focus is on how do we, so to speak,
(06:03):
de risk supply chains that are running through China. How
do we become more you know self sufficient in terms
of rare or the capital goods we need for energy,
transition ships and so.
Speaker 4 (06:15):
On and support.
Speaker 3 (06:16):
And so the focus in the West is on making
sure that the real economy is decoupled from the East,
so to speak. And when you speak to market participants
and policy makers in the East, the primary focus.
Speaker 4 (06:30):
There because they have all the supply chains and so
they are in control of that part of the equation.
Speaker 3 (06:34):
There, the primary focus is on how do you expect
yourself from the Western financial system and how do you
de risk this relationship that you have financially with the
US dollar and Western national institutions and financial centers in general.
And I would say that since we last spoke about
this topic, there have been a number of news headlines
(06:56):
you know, read out from state visits, what have you,
where you know things like the rendmen b invoicing of
commodities is moving ahead. We are reading about more and
more stories where natural gas deals and oil deals are
invoiced in.
Speaker 4 (07:10):
Redmond and not equest dollar.
Speaker 3 (07:13):
I have not talked about this aspect of breaton Woodstree,
but I kind of uncovered the new aspect of it,
which is the whole Central Bank digital currency topic and
how all that fits into breadon wood tree. And you know,
when you start digging in that domain, I think you
uncover several things that are kind of eye opening. So
let me just offer one for example, the real economy
(07:35):
and real economy analog again is you know, in the US,
for example, they don't allow Huawei.
Speaker 4 (07:40):
To build cell phone towers for obvious reasons.
Speaker 3 (07:43):
You know, there's a risk of beevesdropping and spionage, and
you know, the Central Bank digital currencies are basically the
same story. I have been kind of cursorially following CBDCs,
but I couldn't truly put into an overall macro picture
as to what are CBDCs about. You know, if you
think about it, China has been quite busy trying to
(08:05):
internationalize the rent, being it more for trade settlement purposes
since the middle of the last decades. Around twenty fifteen
is when they started, and then that process somehow stalled.
And I think the reason why that process talled is
that they recognize that it's pointless to internationalize your currency
through a Western financial system, through London, through New York,
(08:26):
and through the balance sheets of Western finational institutions when
you basically do not control that network of institutions that
your currency is running through for you to do something
like that to basically knewed out a whole new correspondent
banking system, Okay. And so you know, this is also
the time when Russia annexed Ukraine, so the financial sanctions
(08:47):
became a much more dominant topic in the financial press.
So I think that was a wake up role for
China that if they want to indeed internationalized rent fee,
they need to start from scratch and they need to
build a the noblestial network that they control. And so
this is also the time when CBDC has become a
hot topic. You know, CBDCs started in China, you know
(09:08):
the ec and y. And the way I think about
CBDCs and developments in net space today is that you
basically need to imagine a world where five ten years
from now, we are going to have the renmnty that's
far more internationally used than today, but the settlement of
international R and B transactions are going to happen on
(09:30):
the balance sheets of central banks. So instead of having
a network of correspondent banks, we should be thinking about
a network of correspondent central banks and a world where
you have a number of different countries. In each of
those different countries have their banking systems using the local currency.
But when country A wants to trade the country B
(09:51):
you know, Thailand with China, for example, the effects needs
of those two local banking systems are going to be
met by dealings between two central banks.
Speaker 4 (10:01):
And so when you reimagine a.
Speaker 3 (10:03):
System like this, it's basically a state the state, and
a central bank to central bank network that is completely
independent of Western financial centers and the dollar. So there's
a ton of development we can develop some time liter
and show talk about this. So there's a ton of
development on NetFront. And also the context here is that
(10:23):
if you want to imagine an alternative to a dollar
based system, you know, the single most important thing that
makes the dollar so important is that ninety percent of
ethics transactions any given day in the world use the
US dollar as one leg of the transaction. Okay, So
basically that's because we inherited the system where if you
(10:45):
want to sell you know, if you want to settle
a transaction between someone in Hungary in Thailand, okay, the
way you will do that today is you would sell
your Hungarian for it buy.
Speaker 4 (10:56):
Euros, sell the euro and buy the dollar and sell
the US iBOT.
Speaker 3 (11:01):
So that's basically three different currency pairers, three market makers,
three bid ask spreads. Incredibly inefficient. But again, if you
go back to this concept of correspondent central banks as
opposed to correspondent banks, this transaction just can settle between
the local Bagarian banking system and the local tie banking system.
We have to do central banks as dealers of less
(11:24):
resorts in the FX markets.
Speaker 4 (11:26):
And so that that's the last piece I want to mention.
Speaker 3 (11:29):
In this part, which is that you know, in the
West we are talking about this dealer of less resort
thing a lot. And the context in which we talk
about dealer of less resort in the West and in
the US case specific, is that we need a dealer
of less resort for the treasury market because the treasuring
market is not liquid.
Speaker 4 (11:45):
That's where the focus is.
Speaker 3 (11:46):
And of course we need a dealer of less resort
and the repo market and the FX pop market, but
I think it's also time to start thinking about dealers
of first resorts in terms of FX market making for
the global East, and which is the Central Bank Salfurence,
the Central Bank correspondent system that I'm describing.
Speaker 2 (12:21):
This is so interesting because I don't think i'd ever
heard anyone talk about cbdc's within the context of like
a new kind of plumbing, and you hear stuff about, Okay, well,
you know, it's the twenty twenty first century and we
need to be able to pay our stuff on our phones,
which we already can do, or sometimes you hear about
it in the context of privacy. I've always had this
(12:43):
theory that CBDCs are just a way for central bankers
to get invited to panels and yet and get really
plush jobs after they leave the central banking world, like
doing digital money for visa or something like that. So
but this is like actually sort of like an interesting
theory before we go a little bit further down on
this road, because I want to talk more about it,
but I'm still curious about the business. You know, you're
(13:04):
going to be going out to, you know, be independent.
What is your sort of vision for X you know pluris,
which is again I think is a really clever name,
the opposite of e plurbus union. What is your vision
for like what kind of business who it will be?
Is it going to be who are your clients like,
talk to us a little bit about what your vision
for your your firmat.
Speaker 4 (13:25):
Well, thanks for coming back to that. I mean, look,
I figure you're.
Speaker 2 (13:28):
Going to announce the decision, the big decision here on
odd lots happy, I like, I'm actually also just I'm
very curious about how this world works.
Speaker 3 (13:35):
Okay, So look, I have a lot for two streams
of publications in terms of research. The first one there
will be money, Banks and Bases. This would be the
publication that that most people kind of you know, identify
me with. So I'd be looking at the fifty largest
balan hips in the world with a lot of attention,
you know that what the big banks are up to,
what the gesips are up to, what are they doing
(13:55):
in their portfolios or the balanceships constraints. And it's going
to be based on a research piece about the day
to day working of the dollar system as we know
it today. And then the parallel publication will be Money
and World Order, which is going to keep track of
how Breton Bookstree is evolving because you know these topics
(14:17):
of the dollarization, the remodetization of gold, you know, using
central bank digital currencies to build out to knit out,
you know, the novo financial system, you know, the petrol
you want, and the rending be invoicing of commodities and
created goods going forward.
Speaker 4 (14:33):
I think these are basically.
Speaker 3 (14:35):
The two lenses through which one should be following dollar
funding and dollar rates markets going forward, because you know,
the day to day we just have to live with,
but then we absolutely cannot lift our eyes off all
the geopolitical realities and challenges that that the dollar will
be facing. So these will be the two publications that
(14:56):
subscribers will get. As I said, you know, it's a
it's a price side, so you know, the target audiences
institutional investors exclusively and that and not retail investors, and
so I will be completely behind the paywall and subscribers
will be able to chat with me and the conference
calls and meetings, And that's basically the simple vision.
Speaker 1 (15:16):
I was actually going to circle back to that towards
the ends, but since you guzumped me, let me ask
a question that sort of squares these two thoughts, like
the new business and the Breton Woods three vision. So
one of the criticisms that we sometimes hear about, you know,
big bold predictions about changes in the overall financial system
(15:40):
is that it's hard to actually invest money based on them.
So I guess the question is, you know, if someone
hears Breton Wood's three new central bank digital currencies, four
x lenders of first resort, things like that, what's actionable
about those ideas? What is it actually mean for investors?
Speaker 4 (16:02):
I think it means a lot.
Speaker 3 (16:03):
So Number one, I think if you are looking at
a whole new plumbing where you know, let's back up
for example, I mean we are used to thinking about
a world where there is either a dollar shortage in
some regions or dollar surplus in other regions, and then
these surfaces get recycled either in the FX swap market
(16:23):
or in the rate market. And you know, I think
if we end up in a world where countries are
now going to have several options, for example, as to
how they pay for commodities, and let's take oil for
an example. You know, people hold dollars many reasons. One
(16:45):
reason why people hold dollars is because oil it has
been historically priced in dollars. So if you are a
poor country that needs to import oil on the margin,
you need to have dollars to be able.
Speaker 4 (16:58):
To do that.
Speaker 3 (16:58):
Now, if you are going to live a world where
you can pay dollars for oil, but you can also
pay rendmin b or oil. But if you are a
gold miner, you can also pay for oil to gold
like Gone for example. You know, that's basically three options
you're looking on at a screen, and so you will
(17:20):
just choose whichever one is cheaper. And that picture gets,
you know, further complicated by the fact that there is
oil blowing west, which is one price, and oil blowing east, which.
Speaker 4 (17:31):
Is another price.
Speaker 3 (17:32):
So it's not just again out of one many it's
not just one price anymore, but it's a bunch of
prices and a bunch of currencies, and choose whichever works
best for you. So and also if you go into
a world where trade is not dominantly invoiced in dollars,
so people don't have to borrow dollars to import stuff
and the exporters don't earn dollars exclusively, then it's no
(17:55):
longer a machinery where you know the dollars are getting
created on the margin, that dollars are getting accumulated on
the margin, and the question is how do you recycle
the earned dollars back into funding and rates markets. So
if that world splits into you know, we are now
doing half of this in rendment B and the other
half we are doing it in dollars, then naturally, for
(18:16):
example the fxplop market, the landscape of the fx pop
market is going to get redrawn.
Speaker 4 (18:22):
The following way.
Speaker 3 (18:23):
There will be regions that used to be short dollars,
but now they are not because they can you know,
source rendmen be through the rentman b spoplanes from the PBOC,
So dollars shortages and certain regions are going to disappear.
Then there will be regions that used to recycle dollar
surpluses into the fx splop market. You know, maybe the
(18:43):
Reserve Bank of Australia putting in the fx pop market
and then you know, some Japanese investor picking those dollars
up in the fx pop market. You has their treasury portfolios,
but have you you know, if Australia ends up, you know,
earning only half as much dollars then as they used
to in the past, and the other half is now
in renomn B, then the dollar recycling is going.
Speaker 4 (19:04):
To suffer as well.
Speaker 3 (19:05):
So you know, the supply of dollars in fx pop
markets and the demand for dollars in the fx pop
market is going to get redrawn, and I think there
will be some regions that are going to turn that
are going to be turned on their head, you know.
So there will be positive trust currency bases that will
turn negative, and there will be negative trust currency bases
that will turn positives. So it's just one example for
(19:27):
example in terms of fxpops, and then in terms of
you know, the rest of the world's demand for treasuries,
which is a big question again. Dollars you historically need
because you need to import a bunch of things which
have been exclusively invoiced in dollars. But if you have
a world where things are being invoiced half in dollars
and have rende, you know, that need to accumulate dollar.
Speaker 4 (19:48):
Reserves doesn't exist there.
Speaker 3 (19:50):
China, I think is a very important example in this
regard because one reason why China has so many fex
reserves because that's kind of like your life insurance policy,
because all the commodities and foodstuffs that they need to import.
I mean, I think the big five commodities that the
import is natural gas, oil, soybeans, copper, gut knows what
else but you know, the annual bill for those imports
(20:13):
is running the five hundred billions, you know, so if
you don't have the dollars to pay for those, your toast.
Speaker 4 (20:20):
So you have to have a lot of dollar reserves.
Speaker 3 (20:22):
But if you end up in a world where you
can now force commodity exporters to accept your currency for
those commodity imports and not the US dollar, you basically
have gained sovereignty from a monetary perspective, and so again
you will not have to run with as much effects reserves.
And so you know, this is going to have feedback
effect on you know, demand for treasuries in general and
(20:45):
on the margin. You know, things are always in the
margin devidance. So I think if these teams are going
to play out over the next five to ten years
on the margin, you know, demand for treasuries and the
recycling of dollars in the front end, then an affect
and the upgrades market, I think, is going to get
pushed around.
Speaker 2 (21:02):
Would you anticipate in you know, or do you have
some timing Like we talked about this on a recent
episode with Karthik centerund But they will see, you know,
there are a lot of countries around the world that
float dollar bonds for one reason or another. Do you
anticipate that we'll see if rinmand B internationalization continues, that
we will see various ems float more rinman B bonds
(21:25):
or would that be a crucial aspect towards a successful
internationalization of R and B.
Speaker 3 (21:32):
I think it can be a part of our MBA internationalization.
I mean, you know, it's just the way of kind
of raising offshore R and B that's out there, and
you can either tap swaplights with the PBOC. You know,
that's a very important aspect of it. I mean, BBOC
has swap lined with way more countries than the USA
swop lines for example, So there is you know, when
(21:53):
you kind of look at the topography of that EBOC
spopline network and when you look at the topography of
the central banks that are actively planning to have a
CBDC or they actually have a CBDC pilot up and
running already, I mean, there's a perfect overlap.
Speaker 4 (22:07):
You know.
Speaker 3 (22:08):
So if you think about the swaps as the funding
angle to the RENVP that you don't have in the
system get and then if you look at the CBDC
as the kind of swapping and clearing of existing local
currencies in the system. I mean you basically have a
spot effects market and a funding market infrastructure around it.
So you know, you can internationalize the rendom be that way,
(22:29):
you can internet nationalize it by you know, em compries
raising r and bonds to raise term RMB liquidity. But again,
I think the most important thing here is that we
are starting to see evidence that more and more commodity
trades are being settled in rendmen b. And also over
(22:49):
the past year, the renminb's share of trade and ends
has increased tremendously. I think it has increased from barely
one percent to five percent in a twelve month period
and now it's at far with the euro's share of tradements.
And again, if that one twelve month period is any sign,
you know, you project that five ten years out you
can have a lot of ground.
Speaker 4 (23:09):
That's the rent if you can gain you know.
Speaker 1 (23:12):
Sultan, you mentioned changes in structural demand for treasuries and
I wanted to ask you about this because this is
one of the I guess the last research notes that
you wrote at Credit Swiss. I think it was in January,
so definitely not the final one. But you were talking
about at some point the Fed's going to need to
come in and support the treasury market once again because
(23:36):
you have all these natural buyers of bonds who are
starting to step away. And I think you talked about
potentially the FED having to restart asset purchases as soon
as the summer. Is that something that you still see.
Speaker 3 (23:49):
On the table, Well, it's the summer. Yeah, So let's
put it this way. I mean, we have now the
offer on buyback program that's up and running. You can
find that mistake and correct yep, you're right, yeap, Okay,
so there is that, and then we had, you know,
the problems around SVP and some other banks.
Speaker 4 (24:08):
So let's just put it this way.
Speaker 3 (24:10):
I think that when we think about these what is
the government going to have to do to step in
on the margin to calm things down? You know, I
always tell you that the answer is always the longest spectrum.
So I think we are in the ante room of something.
You know, we are dealing with illiquidity with the buybacks.
So far, so good. We have dealt with underwater bank portfolios.
(24:33):
I mean the bank term funding program effectively your ability
to raise at you know, to value underwater bonds at
the FED at bar and raise liquidity that way if
you have to. I think that's a pretty that's a
pretty big support to market functioning.
Speaker 4 (24:51):
So I think, you know, things are happening on the.
Speaker 3 (24:53):
Margin, which kind of points to the FED and the
Treasury building scaffolding around the treasury market to deal with
the illiquidity issues and this lack of marginal buyer issues
that we have been talking about.
Speaker 4 (25:07):
You know.
Speaker 3 (25:08):
The other point here is that you know, in the
front end there is a ton of liquidity, and so
all these issue and that the Treasury has been doing
and will be doing is going to be front and heavy,
you know. So that's another way of dealing with treasury
market functioning. I mean, you have two trillion dollars in
our fy viacility. You're just going to issue where you
can most likely soak up a lot of liquidity without
(25:29):
any glitches.
Speaker 4 (25:30):
But again, I think this underlying issue that we are talking.
Speaker 3 (25:33):
About that the world is probably going through a split
where demand for treasuries from the rest of the world
is probably not going to be what it wants was.
It's going to be an issue and as these issues
pop up, we are going to be dealing with them
in a step by step passion. But again, I think
these illiquidity problems are present and we are dealing with
them as they pop up.
Speaker 2 (26:11):
I want to get you know, your take further on
like some of the banks and particularly the aftermath of
SVB et cetera. But before we do, you know, going
with thinking back a year ago, this conversation or versions
of this conversation might have been much more commodity centric.
And obviously oil has fallen quite a little bit. There
was a lot of stress a year ago about the
(26:33):
European electricity costs, which have come down significantly. Generally, there's
been a lot of easing there. But I'm curious, like,
was that just a sort of like a one time
reset in terms of maybe post pandemic shocks and of
course the invasion of Ukraine and that things are settled
or will sort of like commodity fragility, commodity volatility, anxiety
(26:56):
about sourcing energy be sort of a permanent or semi
permanent condition over the next several years as part of
this sort of Bretton Wood's three point zero vision.
Speaker 3 (27:07):
Yeah, so, you know, to be intellectually honest to ourselves
and to the listeners, yes, we did talk about you know,
commodities creating a bigger goal in you know, reserve management practices.
Speaker 4 (27:18):
And whatnot, among many other teams. So I would say that.
Speaker 3 (27:23):
For me, what survives that commodity aspect of the Breton
would three pieces is that I think gold is definitely
something that's coming back as a theme. I mean, just
to give you a very good example, when I saw
I think Barry Ikagreen was a co author on that paper.
The IM published a paper about gold and the title
(27:46):
I think was a barbarous relic no More and it
was co authored by Barry Ikongreen. So I'll hide behind
it a little bit, but I think it's noteworthy when
someone like Barry ikongreenews probably the official biographer of the dollar,
rites of paper like that, and I think we are
seeing the more and more in the data that especially
(28:07):
the countries that are not geopolitically aligned to the US
are shunning treasuries and shunning the dollar and they are
buying gold instead. I think there is also a number
of other headlines which I think are important to keep
an eye on because individually they might not sum up
too much. But I think in the fatality of these
things probably point a trend. You know, Ghana and Russia
(28:32):
basically had an oil for gold deal whereby Russia ships
oil to Ghana and Ghana pays gold for.
Speaker 4 (28:41):
The oil that they receive.
Speaker 3 (28:42):
I mean, the basic idea was that a country that
has prepidy and offex reserves US dollars mostly that also
minds a lot of gold is going to pointless for
them to spend their precious dollars on oil when they
can just swap gold for oil and kind of get
their oil de band and they have you know, effects
reserves left for other stuff pharmaceuticals for example. Again, geopolitics
(29:06):
is at the angle here, but you know, Russia and
Iran are establishing a special economic zone along the CASP
and c where the trade is going to be settled
in a gold act digital token. Forget which country it was,
but you know there's another gold rich African country which
is playing with this idea of a gold bag digital token. Again,
(29:27):
I think these are interesting developments, but again some of
the last ones that I mentioned are probably on the fringes.
But again you know in the IMF data and in
the data Gold Council, we see this massive increase in
foreign central banks purchases of gold, so that gold aspect
definitely survives. And yes, you know, energy markets have gone
up and they have come down, but again I think
(29:48):
it's just hard to escape the reality that you know,
Saudi Arabia is not exactly falling over backwards to increase
oil production, but in fact that there is this stug
of war where I think the Cran Prince has the
stic economic agenda. It needs oil prices to trade between
one hundred dollars a barrel for them to pull up
that quite ambitious domestic and regional and also geopolitical agenda.
(30:11):
And I think there is a stug of war between
the oil consumers and the oil producers where you know,
things haven't really breaken out into either side, but I
think that pullback is basically given us a body language
where you know, if there's not enough demand for oil
and oil prices are falling, we need our revenue, so
we're just going to not supply such that prices don't
pull too much. So again I think the commodity shortage
(30:33):
and this, you know, I think the team that I
used was our commodity your problem. I think it's definitely
there in oil again, you know, Russian oil. Surprisingly, I
think it all found a way to alternative markets. So
you know, tanker rates are up. You know, we talked
about this a year ago, that tanker rates being the
balance sheet for you know, the real economy balance sheet
(30:53):
equivalents in the oil market, and the tanker rates are
through the rule because these shadow fleets had to be
a sampled to find those pternative markets.
Speaker 4 (31:00):
For Russian oil. And I think, you know, the supply
chains are probably.
Speaker 3 (31:04):
Getting more caught up in this team involving you know,
energy transition, you know, getting the lifting and all these
things that are.
Speaker 4 (31:10):
Needed for that. So I would say that the commodity
aspect is a mixed bag, except for goal.
Speaker 1 (31:16):
That other African country I think it was Zimbabwe doing
all digital token So I guess make of that what
you will.
Speaker 5 (31:23):
But I wanted to go back, well, make makeup well,
I just wanted to say, you can make up that,
but you Bill and perhaps a lot of countries that
people mention on this conversation are going to be the
sanctioned countries.
Speaker 4 (31:33):
Let's put it that way. But I think that's precisely
I mean, you know, these are not not.
Speaker 3 (31:37):
The countries that you think about when you're talking on
the financial press about things. But I think the underlying
team here is very much one where if you look
look at this unicorn or world that we are, you know,
talking about whether it's supply chains or whether it's the
monster regimes, whether it's you know, foreign policy alignments between
East and West, you know, two great powers and a
(31:59):
bunch of on a life, non alive countries. I think
it's important to pull in these fringe countries because you know,
there is powering numbers and like, yeah, one country's GDP
is not much, but you know when you kind of
plump them all together and they kind of sign into
one system as opposed to another system, these things are
going to be meaningful on the market. So I think
(32:19):
that's why it's important to think about best case countries,
so to speak. But that's why that's why we mentioned Yeah.
Speaker 1 (32:26):
And I mean US dollar transactions I think are a
pretty big thing in Zimbabwe, so you know the fact
that they're experimenting with a new type of thing to
try to maybe get away from that is interesting. But
I wanted to go back to what we saw in
the banking system because everyone who knows your origin story,
(32:47):
probably knows that you know, started out working at the
New York FED. There was the famous shadow banking chart
that you did before the financial crisis, sort of laying
out how this is entire system actually worked. What do
you make of the most recent banking crisis? And I
know some people take issue with actually labeling a crisis.
(33:10):
We can call it a banking drama or whatever. But
is the drama over for now?
Speaker 3 (33:16):
Well, it feels like, let me tell you this, It
feels very different from two thousand and eight. Obviously, I
mean there it was an existential moment and you know,
the central nervous system of the global dollar system was
at risk, you know, the big banks, So the big
banks were a source of strength this time rapping. I
would say that we basically have three institutions that became
(33:40):
collateral damage either to crypto or the tech inclosion or
you know, your inability to make to underpride you know
mortgages intelligently, so you know, signature bank is crypto related.
SPB I think is a very unique case because what
it kind of tells you is that it is important
for a bank to be diversified both in terms of
(34:02):
its lending portfolio and also.
Speaker 4 (34:04):
Its deposit mixed. You know, when I was following the
SVV the backle the.
Speaker 3 (34:12):
Thing that came to mind for me was, I don't
know if you remember his tracy, but bear Sterns used
to have to hatch funds, which were the first hetch
funds to.
Speaker 4 (34:20):
Blow up in Yeah.
Speaker 3 (34:23):
I forget what they were called, but they had I
think the bear Sterns Enhanced Leverage fund or whatever they
were called. You know, those hedge funds were the first
ones to blow up because they had the worst assets
imaginable and they had the worst live of the structure imaginable.
Speaker 5 (34:39):
Yeah.
Speaker 1 (34:39):
I think they were like really high yield structured credit
or something like that.
Speaker 3 (34:44):
Yes, high yield structure credit, you know cdo so that
stuff on the asset side, you know, overnight funding, so
pickled funding.
Speaker 4 (34:53):
You know.
Speaker 3 (34:53):
SVB, I would say, is a case where on the
liability decide. I mean, we know who the big deposit
the school, the clients were. They were reading about some
of them in the financial press. But basically, you know,
if you think about the tech sector, venture capital sector,
where all the valuations have basically taken a big nose
dive after tech stocks corrected. You basically had a depositor
(35:16):
base that was liquidity constraints. So they basically pulled money
from one bank where a lot of tech entrepreneurs kept
their cash and so that's a liquidity drain and it
wasn't diversified on the asset side. SVB had a lot
of duration. I mean, you know, you guys know that
my bread and butter is you know, going through all
(35:37):
the cold reports of the biggest institutions and you know,
I mean, very few banks have as big a share
of their agebre a portfolio in strips stripped port respect
securities as they did. But you know, they had a
lot of coupon explore, they had a lot of principal
exposure there. They had a lot of duration in these
portfolios and they didn't hedge them properly. They also had
(35:57):
a lending book where they were lending to the same
you know, customers that were pulling funds away from them.
But again, the collaboral on that landing book was tex related,
so you had valuation issues. So that was just kind
of a perfect storm. Systemic absolutely not, but it's hurt them.
And you know, first Republic, I mean, I have to
say I. I have a friend in New York who
once texted me when First Public was going under, saying,
(36:20):
I didn't realize I got such a great deal on
my mortgage that it's the end the first problem. And
I said, you know, I told him that, Well, next
time you get a mortgage that's too good to be true,
you should also short the bank. Maybe the mortgage is
going to pay it stuff up faster then you anticipate.
So so again, I think this is basically the story
of these three the three banks that got into difficulties.
(36:42):
The solution that the FAT crafted for some of these
licurity problems, I think they were extremely powerful. I was surprised,
even shocked when I saw the terms of the BDFP.
When I talked to my context. You know, there were
two types of responses to this BDFP program. Number one, yes,
that's the right move, because the letter and spirit of
Basal Tree says that treasuries and Genie Maison reserves are
(37:05):
level one assets, no haircut.
Speaker 4 (37:08):
But again that assumes that you also have the brains
to hedge the interstraight exposure there.
Speaker 3 (37:13):
And also, I mean, you know, you can put some
of these bonds that are underwater into a whole maturity
portfolio where if you are sitting on huge market market losses,
it doesn't hit your bank's activity and you don't have
to book those losses.
Speaker 4 (37:24):
And it doesn't hit your capital.
Speaker 3 (37:26):
But again, that assumes that your deposit base is sticky
and so you're not going to lose deposits in the
aggregate to the point where you actually have to liquidate
these underwater bonds. And you know, it was not the
case for SVV, its case for other banks like Bank
of America for example. You know, and the other response
to the BTFB is that you know this is this
(37:48):
should not have happened because it basically euthanizes the need
for interest rate risk management in bank portfolio. So it
was a kind of a polar response. But again, what's
done is done. I think it's a part of the system.
Speaker 4 (38:01):
Now.
Speaker 3 (38:01):
I think the BTFB is going to be there as
a standard feature of the system, much like standing people
facility and spoplanes are there. So you know, these facilities
tend to be born and slip around. But it's again
it's the part of the scaffoldings that we have. I mean, imagine,
imagine the treasury market coming under strain because some of
these banks have to meet, you know, bitterly short balls,
(38:23):
and then instead of pledging to the fat off market
to be at liquidity, you basically have to dump it
on the dealers. And imagine what that would have done
the treasury market. Nothing, So we just basically kept this
treasure is off the great so to speak.
Speaker 2 (38:39):
When when SVB failed, there were sort of two conversations
that sprung up right afterwards. One had to do with
like the sort of like, okay, all deposits in the
US are do we just accept that they're all implicitly
guaranteed regardless of what the formal FDI C cap is.
And then there's also a conversation about, you know, five
thousand banks in the US would which is like I think,
(39:00):
probably the most banked country in the world. Do we
just sort of, you know, does anything change with the
business model of banking or do we just sort of
accept that there are these contradictions and these tensions but
we sort of we don't talk about them, and we
just sort of let these issues go on and occasionally
we have to clean up a mess. But by and large,
(39:22):
there's some of these structural questions about the banking system.
We just sort of kicked the can and let them persist.
Speaker 3 (39:28):
Well, look, I mean I don't think the blanket deposit
insurances in the cards, but I think again, you know,
other than the BTFB, we have this other tool, which
is the FDIC steps in between the PLAT and the
troubled institution.
Speaker 4 (39:41):
And so there's a capital buffer.
Speaker 3 (39:43):
So you know, it's some of the it's some of
the same playbooks in a different fashion that we have
seen in two thousand. You know that that always has
to be secure through its satisfaction that it's planting, you know,
but always wants to eliminate credit risk. And you know,
the FDIC standing has it been plus a special loan
that the FAT extends. Trouble institutions serve exactly that purpose.
(40:03):
So I think we will be dealing with whatever problems
we will be dealing with on a case by case basis.
Speaker 4 (40:09):
Again, I think SVB. You know, the conceptually, the problem.
Speaker 3 (40:13):
Of underwater security portfolios we kind of dealt with commercial
real estate is going to be a slow burning problem.
Perry Merton likes to say a bank can be insolvent
but liquid, but it cannot be solvent, and in liquid
you know, for as long as the pass don't run,
we will be able.
Speaker 4 (40:32):
To deal with these issues.
Speaker 3 (40:34):
You know, interest on reserves is manna from heaven. You know,
it's providing banks to steady stream of interesting income. So
if you have capitalization issues, that's going to be a
back door way of kind of refilling your capital base.
You know, back during the early nineteen eighties when the
bulbul curve was in charge and we had Latin American
death crisis and Thanks for underwater and had their capital issues,
(40:56):
you know, the FED had to generate the steep yield
curve in the system, which was a way to recapitalize
the banks, you know, with interest from deserves. You know,
that's no longer necessary, so it's actually easier. So I
think the banking system is fine for now. I think
we had a scare and you know, we are definitely
going to be dealing with issues in credit portfolios. We
(41:19):
are going to be dealing with cr lending books. There
will be consolidation across the banking system. But there are
many levers that the that can who to help clean
things up.
Speaker 4 (41:31):
You know.
Speaker 3 (41:31):
JP Morgan, for example, was an institution that came in
as a healthy hand because I'd like to remind people
haven't written about as far agoing.
Speaker 4 (41:40):
A long time.
Speaker 3 (41:40):
But you know, don't forget now, You can't thank now.
I can you know that bank is still under an
asset cap. You know, it has a ton of unused
balance sheet capacity, So you know, that's a lot of
balance sheet capacity to want chain if you need a
healthy private hand to clean up some stuff in I mean,
some of the banks that are already very big, and
(42:02):
we're big beneficiaries of dislocations and banking crisis in recent times,
are probably not going to be able to add much
to their balance because they are already too big. But
you know, I think Wells Fargo is another kind of
case in the back pocket of the TAT that could
be pulled out if need be.
Speaker 4 (42:20):
So I think the system is fine.
Speaker 3 (42:22):
I think we're just going to be dealing with these
microL dislocations here and there, you know, regional bank here,
regional bank there, treasury market. But again, people will be
dealing to these things. But you know the name of
the game is to anticipate this and the appropriate positions.
Speaker 1 (42:39):
Well, can I ask one more question, just going back
to your sort of shadow banking origins, but the expectation
now seems to be that, you know, if banks maybe
have to hold even more capital or maybe d lever
in one way or another, that a lot of that
activity is going to end up being pushed into shadow
(43:01):
banks essentially, so private equity perhaps or some sort of
non bank lender. And to some extent, this is what
we've seen since the two thousand and eight financial crisis
by design of the financial regulators. There is some concern
that even more starts to get pushed out now and
maybe if you have interest rates that remain substantially higher,
(43:24):
that's going to be a big hit for both corporate
credit and commercial real estate. Should we worry about exposure
to those sectors in non banks.
Speaker 3 (43:36):
Yes, because I think credit has yet to have its
threckoning and commercial real estate has yet to have its thckoning.
But again, it's better to suffer those losses in non
banks that banks, because you know, banking crises are very
nasty things. But if these losses get booked and absorbed
in balance sheets that are I don't want to say
(43:58):
not levered, because they all are. But you know that
leverage doesn't really have much to do with money markets.
That's orders of magnitude better to deal with than dealing
with a lot of these concentrated exposures in the banking system.
Speaker 4 (44:14):
Regarding that shuttle banking question that you also asked, Tracy,
I think.
Speaker 3 (44:19):
Where we started this conversation that you know, world trade
trading of commodities is going to get invoiced in currencies
other than just the dollar, you know, rent fee and
all these central bank digital currency market making and EFX markets,
you know, migrating to the balance sheets of central banks
and instead of correspondent banks, you should be imaginating correspondent
(44:41):
central banks. If that pisis is true, I think over
time that's going to provide balance sheet lead to all
the jesuves because e FX market making credit lines exclusively
provided into US dollars to oil and cover and other
commodities around. You know, that's the bread and butter to
main of JP, Morgan, Bank of American and City Bank.
(45:03):
You know, if you kind of moved to this world
that I'm describing, you know, that's going to provide balangy
really for the big US banks on the market. You
can use that for other things, you know, as the
shot banks are licking their wounds because they are suffering
their credit and real estate problems. You know, the banking
system is going to be potentially a source of strength
in a sense that not only do you have the
(45:25):
capital to land, but you also have the balent sheet
to do so. I think so, I think things are
going to work themselves out. I think it's a good
thing that things are happening in the shadow banking system.
The shadow banking system we are talking about today, it's
very different from the shadow banking system I have. I
didn't come up with the sexy definition of shadow banking.
That's very early who said that shadow banking is money
(45:47):
market funding of capital market landing. And I think the
general understanding about shadow banking these days is that anything
that happens outside of a bank that involves credit is
shadow banking.
Speaker 4 (45:58):
That's not true too to me, at least, because you.
Speaker 3 (46:01):
Know, you have to have a very strong mind market component,
which is what appifies things, and so that shuttle banking
is fine and if you will, you know, basically a
lot of traditional bread and butter Western financial market making,
credit provisioning, financing functions migrating to the balance sheet of
(46:22):
central banks cbdc's different currencies. I think that's the new
shuttle banking terrain that we need to be focusing that
I will be focusing on, and I will be mapping
and thinking about because I think that's the frontier that's
going to drive rate some Tonic markets going forward.
Speaker 2 (46:39):
All Right, Sulton, I have one last, very tiny question,
and I'm only asking this really because I need to
know it for the outro of the episode.
Speaker 1 (46:48):
Are you going to join Twitter?
Speaker 4 (46:50):
I will not be doing Twitter, really, I will not
do social media. Really. Maybe we can say this at
the end. I will say the name of my website
where people can go and look.
Speaker 2 (47:00):
Wow, incredible. That's an incredible restraint. It's an incredible restraint.
I'm very impressed by.
Speaker 4 (47:09):
Is that a good thing? I think it's a good thing.
Speaker 2 (47:12):
I mean, it would make you very scarce, but it's
an incredible restraint, So I'm impressed.
Speaker 3 (47:18):
No, I will be strictly behind the payball, and probably
this would be my last public appearance and then I
would just disappear.
Speaker 2 (47:30):
Okay, well, this is a gift.
Speaker 3 (47:32):
Thank you.
Speaker 2 (47:33):
It was, thank you, it was it was a pleasure.
Speaker 4 (47:36):
Thank you very much for having me.
Speaker 1 (47:37):
All Right, well, thanks so much, Sultan, and the website,
the new website is expluris dot h U. You should
definitely check that out, Joe. I love talking to Sultan
(48:01):
me too. That's such a treat. The quote about like
we are in the ante room of something. I'm going
to steal that, yeah, for coverage, but I thought, I mean, look,
every time we talked to him, there are a number
of really interesting big picture points. The one thing I
would say is, I remember when the Breton Woods three
thesis came out last year. Yeah, there were a lot
of people saying that this was never going to happen,
(48:24):
and many of those people now have sort of tweaked
that statement to oh, you know, it may happen, but
not for a long time.
Speaker 4 (48:33):
You Know what I think is a.
Speaker 2 (48:34):
Really interesting point that I don't think gets discussed enough
in this which I appreciated Sultan bringing up, was you know,
people look at this from a very sort of like
financial angle, or they talk about China specifically. But I
liked that he brought up you know, all these other countries,
the sort of non aligned countries, they matter to a
(48:55):
significant degree, particularly when added up and sort of the
politics of on theline countries who don't necessarily see the
world through the same lens as the US, or have
the same perspective on many of these global trends. Obviously,
some of the bricks nations, et cetera, like I just
the pure like you know, geopolitics sort of gets trotted
(49:15):
out too much, but they're sort of like the sovereignty
and the impulses and desires of all these other countries.
Speaker 1 (49:21):
They really matter.
Speaker 2 (49:22):
And as their wealth grows and there as their need
to grow, what they do economically and who they trade
with is going to sort of be determinative to some
extent about who rises and fall.
Speaker 3 (49:35):
Well.
Speaker 1 (49:35):
The other thing I thought was really interesting was this
idea of maybe outsourcing more dealer functions to the central bank. Yes,
and if you were to do that, it could potentially
solve some of the concerns that you just outlined, but
also free up some balance sheet for big banks to
do other types of activities, maybe more like non market
(49:57):
making activities, more loans like that. I hadn't really considered that.
Speaker 2 (50:02):
Yeah, that's a really it's a really interesting point, and
no one else has really talked about that. But you know,
we do sort of live in this era in which
sort of like state capitalism or state directed capitalism is
such a big thing, right, and so the extent to
which central banks become bigger sort of active dealers rather
than just sort of behind the scenes supporters of private
(50:24):
banks is something to takes seriously. And maybe there is
a context there in which the sort of the CBDC
or digital currencies could sort of have like a natural
fit in that framework.
Speaker 1 (50:35):
Yeah, we need a new map, Yeah we really do,
don't we. Well, maybe Sultan will publish at his new
research firm. Shall we leave it there? Let's leave it there?
All right? This has been another episode of the All
Thoughts podcast. I'm Tracy Alloway. You can follow me on
Twitter at Tracy Alloway.
Speaker 2 (50:51):
And I'm Joe Wisenthal. You can follow me on Twitter
at the Stalwart. Our guest, Sultan Poster, is not on Twitter,
but you should go check out his brand new website
xunopluris dot hu. I certainly will be follow our producers
Carmen Rodriguez at Carmen Arman and dash Ol Bennett at
(51:11):
dashbot and check out all of our podcasts under the
handle at podcasts and for more odd Laws content, go
to Bloomberg dot com slash odd Lots, where we have transcripts,
a blog, a new newsletter, and you can chat twenty
four to seven with fellow listeners about all of these topics.
I'm sure there's going to be a lot of discussion
about this one in there on the odd Lots discord
(51:33):
at discord dot gg slash odd Lots. It's a lot
of fun.
Speaker 1 (51:37):
I go in there a lot and aud lots listeners.
If you enjoy these podcasts, if you like listening to
the guests that we have on, like Sultan Posear, please
go and leave us a review on any of the
big podcast platforms. If you like us, please let us know.
Thanks so much, thanks for listening
Speaker 4 (52:01):
In
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