October 6, 2023 • 17 mins
In this episode, Abdul delved into the intriguing world of bond markets, where historic shifts are shaking the foundations of traditional investment strategies, he explored the factors behind the disconnect between stocks and bonds, from rising Treasury yields to inflation concerns and government funding risks. He also explored the recent surge of the US dollar and its potential impact on global economies. To cap it off, he provided an update on the trial of Sam Bankman-Fried.
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Episode Transcript
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(00:02):
Good afternoon, ladies and gentlemen.Welcome back to the Investor's Diary podcast,
where we help you work smarter andharder by providing weekly market updates and insights.
Today, I want to dive deeperinto some points raised in the last
episode that do deserve their own segments. Are they're the bond markets that have
been acting unusual in recent times,the strengthening dollar and its implications. I'll
(00:22):
finish off with updates from the SBFSand bankun Freeds. Trile Misjus started a
few days ago the founder of FTX. So something we pointed out last week
was the ten year treasure yield hitits highest level since two thousand and seven,
and the same goes for the thirtyyear treasury. We're in the middle
of a historic change in the USbond pricing markets, and these stories remained
(00:45):
the biggest this week. Last week, bonds and stocks even moved in the
same direction down, which is notsupposed to happen. It's not good for
investors, and we're gonna try andbreak down what happened. So the US
government bond market is the single mostimportant market in the world, and what
happens there has ripple effects through toevery market on Earth. Now. Generally
(01:06):
speaking, when bond deals rise,that's a sign that people are selling bonds
and the price of these bonds arefalling. You have to remember that these
things move in opposite directions. Generally, that means people aren't so keen on
holding safe acids, and you knowthat's and they're very happy to hold onto
stocks instead because they think they'll gethigher returns out of them. So normally
(01:30):
the two things are like a seesaw, So your bonds go down and your
stocks go up, and it allbounce out and everyone's happy. However,
that's not happening right now. Whatwe've got at the moment is that there's
a there's a bit of like alittle chill in these markets going. And
right now we have our stocks arein trouble and bombs are also in trouble,
(01:51):
and it really feels like there's beena bit of a shifting gear in
markets and people are getting a lotmore nervous about almost everything. And in
the last couple of months there's beena shift in the way stocks and bonds
have been moving. It's not prettyat all. I mean, you know,
this negative correlation with stocks and bondsfalling is what led to some of
the worst returns we've ever seen fordiversified investors in twenty twenty two. When
(02:16):
you have this big inflation scare drivingstocks and bonds down at the same time,
it's really tough to be in thesemarkets and you don't know where to
invest, and it's very easy togo wrong. And there are several reasons
for this. One of them isthe oil price. Yes, it did
back under ninety dollars a boot,but it's still pretty elevated. And the
(02:38):
only reason it's fallen, I thinkis because people are starting to think that
these yields are now getting high enough, barring costs are getting very high,
and that this recession that we've allbeen scared about this last year and a
half is really almost a reality.And the other notion is the idea that
(02:59):
the US Federals are is not done. I put out an idea where I
felt that the that the that thetop for rates was in, but what
if it's not. You know,what if they've still got more in the
tank. What if they still havemore to do. And we've had a
couple of FED governments over the pastcouple of days, say that hey,
(03:19):
look that we might need to domore, and what it looks like that
these energy prices are really undoing allthe progress that the FED has done to
manage to bring inflation down. Theyalso have the FED Chairman Powell, who's
on a small tour of small businessowners in Pennsylvania the other day, and
it sounds like you got a rightright earflow from business owners saying, you
(03:42):
know, I can't get labor,I can get the parts tank at the
staff prices are going up, andreally does saying hey, you need to
do more because inflation is hurting ourbusiness. So the pressure is really massively
on the FED. Even though inflationhas come down, it needs to go
down even more and more. Andthat just means yields had to keep going
higher. And you know, Ithought we were done. It looks like
(04:04):
we are not. But let's goto the demand side. Right. This
includes a little a few things Isaid earlier, but one of them is
the FED defense rate increase. Right, are they done? That's number one
that we just said here. Numbertwo is inflation risk. Has it gone
away? And three, which alittle more trivial, but the idea of
the government, if the government,if with the government default in the future
(04:28):
at some point in the future.Right, And let's take this one by
one. So we just talked aboutthe possibility of the FED increase in rates
in the future, which is almostpossible, very possible that in December,
perhaps that the FED in the FEDmeeting they might do another quarter percentage point
rate increase, which is very possible. And then there's a question of how
(04:49):
long does this stay. Right,markets care a lot about the timing of
when rates cut happened, and andit matters if rate cuts happened in March
versus in December versus in twenty twofive. I mean, those are very
different worlds in financial markets. Andso I think as the additional rate increase
increase becomes more of a probability andmore possible, and the extent of it
(05:10):
lasting for hire for much longer,yields is going to go out. And
it's really talxic combination. And sothat's rates, which is pretty straightforward.
Let's go on to inflation risk.So let's say you are a person You're
interested in tenure year treasuries, right, you care a lot about the average
inflation rate and what it's going tobe over the next ten years. There
(05:32):
are multiple layers to this, ofcourse, and you know inflation is going
to come down, like you wonderis inflation going to come down quickly?
Is it going to come down slowly? Is it going to stay elevated?
Or are we talking about a permitthree percent inflation world? Right? These
are all, I would say,perfectly open questions. And I think the
main thing is we all have learnedfrom the past two years of experience that
(05:54):
we really do not understand inflation.And if you don't understand inflation, you're
going to require a little bit ofpayment on that. On these treasure yields
read to compensate with the risk anduncertainty. Right, so while you demand
higher payments, you know, higherrates return. Inflation is basically cryptonite for
bonds, like bonds just can't standthe stuff, you know, because you
(06:17):
get a fixed rate of coupons ofinterest payments that come through buying these bonds.
But if inflation Russia is higher ata faster pace, then the rate
you're getting on your coupons, thenyour effective is getting less and less money
every year. So again on thebad combo, exactly what opposite of what
you want to see as an investor, a bond investor. So it's been
(06:40):
very humbling if you've been bought investorsthe past couple of years. I remember
the last few months, you know, a lot of big you know uh
investors, you know, the suddenwe're at the peak and these things are
going to come down. And andI really don't know anyone that's publicly gone
an incident that has actually predicted thedescent and descent correctly. Right, But
(07:01):
moving on to something Powell said theother day. He did say that we
are shaking off the effects of COVID, and I think he's right. There's
just so many moving parts in thiseconomy. There are sector shifts, there
are still some supplied disruptions, andso there are just too many variables and
it's very hard to put things intoa traditional model of the economy. So
(07:25):
those are two things u RT increasesand inflation risk. Let's talk about the
possible well, let's worry about thegovernment funding risk, right, what is
the chance of a default? Youknow? And could that pause and missing
payment on a treasure bond? Andthis feels like almost old hat now,
like old news. A couple ofmonths ago we had this default drama,
(07:46):
the dead ceiling and are they goingto reach a last minute deal and so
on and so forth, And oneof the credit rating agencies even downgraded the
US government dead, which is notsomething you want to see. So I
don't think that Devall's gonna happen.The same stance we had on this a
couple months ago. But the bigthing, people are talking about our deficits
now. People used to talk aboutdeficits a long time ago, and these
(08:11):
are these are gaps between the amountof money governments have available to spend and
the amount they have to borrow tomeet their spending requirements. You know,
they're basically gonna hawk to the widemarket. And these are called deficits,
right, and all of a suddenthey're back. There. Used to be
something that people used to assess overfor years and years, but we forgot
about them because interest rates were solow, practically zero, and you can
(08:33):
almost borrow any amount of money,right, and no one really cared,
so everyone was loading up. Butthis kind of this benchmark of borrowing rate,
it has significantly high than it wasbefore, and all of a sudden,
investors are starting to talk about deficitsagain. How can governments keep on
issuing, you know, how muchcan they do? How can they keep
up? How can keep they howcan they keep up their spending promises?
(08:56):
How can they rely on someone beingon the other side to buy these bonds?
And if you can't rely on someonebeing on the other side to buy
these bonds, you're gonna have topay a higher and higher rate to leard
its investors. And now you havea problem because all of a sudden,
whenever you're servicing that debt, soyou know, paying out your regular interest
payments or whatever it is, orpaying back to bonds that is much more
(09:18):
expensive now, and all of asudden, you've got something that smells like
a huge physical problem. And thisis now creeping up in a lot of
conversations where really it's been dormant formany years. And to mitigate this risk
some investors, are you saying tobuy gold as a hedge. Now.
I want you to note that goldis down pretty significantly over the past few
weeks, but the fact that peopleare starting to talk about it again is
(09:41):
pretty interesting. We look at Europeas well, that has got a bit
of a problem with meeting its physicaltargets, and Italy saying it wants to
borrow more than the market had previouslyanticipated. And now yet these bond vigilanties
being back in the market saying no, no, no, We're going to
force a fiscal disciplait on you andactually on the governments. And if you
want us to fund your spending programs, you're gonna have to pay up right.
(10:05):
So that's the demand side, rateincreases, inflation, government funding risk.
Let's talk about the supply side,which is all about deficit. Now,
the treasury market, as Alexander Skaggsput it on Alpha fil, is
the original public private partnerships, andthe government relies on private investors to absorb
(10:26):
the the issuance of treasury bonds.And the problem here is you really have
to issue a lot of treasury bondsbecause you have to keep attracting investors,
and you have some amount of investorswill accept a certain yield on the bonds.
But if you need to issue somethings, you have to double that,
right and or one point five timesthat or whatever, and you have to
keep attracting the marginal investor, andthat marginal investor may otherwise not buy the
(10:54):
bond, and it's going to commandhigher and higher interest rates. And bear
in mind defense is not doing anyquality of easy anymore, so you don't
have you know, that deliberty buydeliberate deliberate buying a bond to push down
the yields. And so you havethis big marginal bius out of the picture.
And there's also some of some overalloverseas central banks that might you know,
(11:15):
look at the experience that Russia hadwhere it had its assets fosen and
I I don't I don't really particularlywant to uh say anything that you know,
only the US in a geopolitical sense, but if you can't get your
dollars to work, I don't wantto get back. Yeah, but there
are still little margins and things thatsuggest that there's going to be weaker demand
(11:39):
and that there's more supply out there. And you know, it doesn't take
a genius to figure out that theUS might need to pay up more to
get these bonds away. So thatjust moves on. That's just you know,
a little recap on what's going onthere. But let's move discussion to
the dollar, which is actually motoringa lot higher. It's up something like
(12:01):
six percent in the past fifty days, dragging down all kinds of currencies,
from the sterling to the euro tothe end, and we're going to figure
out why it's so strong and whyit matters for those who use currencies to
paper things. And so for allmajor economies apart from Japan and China,
which is a different story, butfor most of the economies, we're struggling
(12:22):
with inflation, very high inflation atthe moment, and the last thing we
need is for oil and other commoditiesthat are import that we import that are
denominated in dollars to get more expensive, and that's what's happening as a result
of having a stronger dollar at themoment. So on the margins, it's
not helpful to have inflation profiles inplace at the UK and the Arizone.
But we're not at extreme levels wherepolicymakers are going to make a stand in
(12:46):
G seven meeting saying we really needto do just hunting about this. But
there's nothing you can do about itunless the FED changes its mind and starts
cutting these rates. But it's reallynot a good look for inflation in a
lot of these countries, any economies. Sorry. So there's the idea that
these big economies Uh, these thesemajor economies, interest rates have right have
(13:07):
risen to the point where they're atthe peak or close to the peak,
and they're gonna say there for quitea while. And what the market is
saying, through things like bond yieldsand through the dollar is that we think
this is going to be a morepainful process for other countries than it is
for the US. We think thatthe US can withstand this, whereas we
(13:28):
think big economies of bueras are inthe UK have got a serious growth problem
coming down and are likely to reallyface the impacts a lot more significantly relative
to the you know, other othermajor economies. So I was also reading
a report from the Bank of Americasaying something like the strength of the dollar
that we've recently seen exceeds the fundamentals. So if you kind of map up
(13:50):
what the dollar index does, thedollar index kind of measures the dollar strength
against a bunch of different currencies.If you measure what the dollar index has
done against gaps and interest rates betweendifferent in your economies, against stalks,
energy prices, YadA, YadA,it's still exceeding all of that. So
the dollar is doing better than whatyou would expect from the gap at interest
rates or expected interest rates that we'vegone And for the techno analysts out there,
(14:13):
if you look at the charts,the dollar has formed a golden cross,
so what's the opposite of death cross? But what this indicates is a
short term ascent of the dollar andit's really broken through the pace of the
longer term a cent to you knowdollar, and this kind of indicse that
it's going to break higher, whichcould be a problem. You know,
(14:35):
we already have uh things with somesigns of unease over yen, weakness in
Japan and a weakening of the poundright which bear in mind last week the
pound was in a total free fall. So the bed right now is that
even if you do get a bitof economic weakness from the US early next
year, the Fed will stick itsfingers and its ears and say we can't
(14:58):
hear you. You know, we'renot cutting rates into this mini crisis because
we've got to fully treat the inflationmonster that we have first. So we
have to see what what you knowpower says and what the future holds.
And to wrap up, let's talkabout FTX, sam Banguin freed first,
Big Dang Court a free days ago. Just want to remind the listeners,
(15:22):
you guys, what he's being accusedof, essentially orchestrating a vast, massive
fraud on customers of FTX, whicha cryptocurrency exchange. It became one of
the world's largest platforms on which cryptcurrencies like bitcoin, ethereum and others were
bought and sold and traded on.And essentially, as there's a dip in
(15:43):
the crypto market last year, andduring the downturn, it became apparent that
billions of dogs were allegedly missing fromthe ftics balance sheet. That led to
a big run in exchange for peopletrying to withdraw their money and lo and
behold the money wasn't there right,So out of the attorney saying, you
know what's the fan strategy? Well, this is what everyone's been waiting for.
(16:03):
Opening arguments began in the trial,and first we heard from the government
and then we heard from his lawyers, Mark Cohen, and essentially what he
said was the government had painted hisclient as this kind of cartoon feeling when
in fact he was a math nerdwho didn't drink or parties. And what
go and told the jury was thatmaybe his risk management wasn't perfect, and
(16:25):
he was blindsided by this dip inthe crypto market. But what they were
really honing on is intent, right, and there what we're trying to do,
I mean, what will the government'strying to say, what people prosecuting
him or trying to say, isthat this young entrepreneur I was trying to
build as the empire went all wrongand this was rather a tragedy rather than
a crime. Right. But whatme and alike are looking for as it
(16:47):
unfolds is the broader consequences of atrial like this. Whilst SBF could face
up to a lifetime in prison ifhe's found guilty on all accounts, what
we're looking for is, you know, the court over the course of the
trial is about SBF. You know, he was the public face of cryptocurrency,
and the question here is, asidefrom his personal criminal uh profile,
(17:11):
is there anything in this case thatpoints to the viability of the entire sector
as a whole? You know,do these things ripple to other exchanges?
You know, the integrity of thespace. What were the things that you
know, the people believed in whenwe invested in ft X, and why
do we believe in them? Right. Can these things be you know,
can this Can the same story happenin other exchanges? And the things that
(17:34):
we believed in the past, arethey still true? And I think a
big part of what we will belooking and that's a big part of what
we'll be looking for in the nextfew weeks. So that's a wrap of
today's episode. We had great discussionon bonds and the strength of the dollar,
as well as an update on theSBFK SBF case. Thank you very
much for listening and peace
Good afternoon, ladies and gentlemen.Welcome back to the Investor's Diary podcast,
where we help you work smarter andharder by providing weekly market updates and insights.
Today, I want to dive deeperinto some points raised in the last
episode that do deserve their own segments. Are they're the bond markets that have
been acting unusual in recent times,the strengthening dollar and its implications. I'll
(00:22):
finish off with updates from the SBFSand bankun Freeds. Trile Misjus started a
few days ago the founder of FTX. So something we pointed out last week
was the ten year treasure yield hitits highest level since two thousand and seven,
and the same goes for the thirtyyear treasury. We're in the middle
of a historic change in the USbond pricing markets, and these stories remained
(00:45):
the biggest this week. Last week, bonds and stocks even moved in the
same direction down, which is notsupposed to happen. It's not good for
investors, and we're gonna try andbreak down what happened. So the US
government bond market is the single mostimportant market in the world, and what
happens there has ripple effects through toevery market on Earth. Now. Generally
(01:06):
speaking, when bond deals rise,that's a sign that people are selling bonds
and the price of these bonds arefalling. You have to remember that these
things move in opposite directions. Generally, that means people aren't so keen on
holding safe acids, and you knowthat's and they're very happy to hold onto
stocks instead because they think they'll gethigher returns out of them. So normally
(01:30):
the two things are like a seesaw, So your bonds go down and your
stocks go up, and it allbounce out and everyone's happy. However,
that's not happening right now. Whatwe've got at the moment is that there's
a there's a bit of like alittle chill in these markets going. And
right now we have our stocks arein trouble and bombs are also in trouble,
(01:51):
and it really feels like there's beena bit of a shifting gear in
markets and people are getting a lotmore nervous about almost everything. And in
the last couple of months there's beena shift in the way stocks and bonds
have been moving. It's not prettyat all. I mean, you know,
this negative correlation with stocks and bondsfalling is what led to some of
the worst returns we've ever seen fordiversified investors in twenty twenty two. When
(02:16):
you have this big inflation scare drivingstocks and bonds down at the same time,
it's really tough to be in thesemarkets and you don't know where to
invest, and it's very easy togo wrong. And there are several reasons
for this. One of them isthe oil price. Yes, it did
back under ninety dollars a boot,but it's still pretty elevated. And the
(02:38):
only reason it's fallen, I thinkis because people are starting to think that
these yields are now getting high enough, barring costs are getting very high,
and that this recession that we've allbeen scared about this last year and a
half is really almost a reality.And the other notion is the idea that
(02:59):
the US Federals are is not done. I put out an idea where I
felt that the that the that thetop for rates was in, but what
if it's not. You know,what if they've still got more in the
tank. What if they still havemore to do. And we've had a
couple of FED governments over the pastcouple of days, say that hey,
(03:19):
look that we might need to domore, and what it looks like that
these energy prices are really undoing allthe progress that the FED has done to
manage to bring inflation down. Theyalso have the FED Chairman Powell, who's
on a small tour of small businessowners in Pennsylvania the other day, and
it sounds like you got a rightright earflow from business owners saying, you
(03:42):
know, I can't get labor,I can get the parts tank at the
staff prices are going up, andreally does saying hey, you need to
do more because inflation is hurting ourbusiness. So the pressure is really massively
on the FED. Even though inflationhas come down, it needs to go
down even more and more. Andthat just means yields had to keep going
higher. And you know, Ithought we were done. It looks like
(04:04):
we are not. But let's goto the demand side. Right. This
includes a little a few things Isaid earlier, but one of them is
the FED defense rate increase. Right, are they done? That's number one
that we just said here. Numbertwo is inflation risk. Has it gone
away? And three, which alittle more trivial, but the idea of
the government, if the government,if with the government default in the future
(04:28):
at some point in the future.Right, And let's take this one by
one. So we just talked aboutthe possibility of the FED increase in rates
in the future, which is almostpossible, very possible that in December,
perhaps that the FED in the FEDmeeting they might do another quarter percentage point
rate increase, which is very possible. And then there's a question of how
(04:49):
long does this stay. Right,markets care a lot about the timing of
when rates cut happened, and andit matters if rate cuts happened in March
versus in December versus in twenty twofive. I mean, those are very
different worlds in financial markets. Andso I think as the additional rate increase
increase becomes more of a probability andmore possible, and the extent of it
(05:10):
lasting for hire for much longer,yields is going to go out. And
it's really talxic combination. And sothat's rates, which is pretty straightforward.
Let's go on to inflation risk.So let's say you are a person You're
interested in tenure year treasuries, right, you care a lot about the average
inflation rate and what it's going tobe over the next ten years. There
(05:32):
are multiple layers to this, ofcourse, and you know inflation is going
to come down, like you wonderis inflation going to come down quickly?
Is it going to come down slowly? Is it going to stay elevated?
Or are we talking about a permitthree percent inflation world? Right? These
are all, I would say,perfectly open questions. And I think the
main thing is we all have learnedfrom the past two years of experience that
(05:54):
we really do not understand inflation.And if you don't understand inflation, you're
going to require a little bit ofpayment on that. On these treasure yields
read to compensate with the risk anduncertainty. Right, so while you demand
higher payments, you know, higherrates return. Inflation is basically cryptonite for
bonds, like bonds just can't standthe stuff, you know, because you
(06:17):
get a fixed rate of coupons ofinterest payments that come through buying these bonds.
But if inflation Russia is higher ata faster pace, then the rate
you're getting on your coupons, thenyour effective is getting less and less money
every year. So again on thebad combo, exactly what opposite of what
you want to see as an investor, a bond investor. So it's been
(06:40):
very humbling if you've been bought investorsthe past couple of years. I remember
the last few months, you know, a lot of big you know uh
investors, you know, the suddenwe're at the peak and these things are
going to come down. And andI really don't know anyone that's publicly gone
an incident that has actually predicted thedescent and descent correctly. Right, But
(07:01):
moving on to something Powell said theother day. He did say that we
are shaking off the effects of COVID, and I think he's right. There's
just so many moving parts in thiseconomy. There are sector shifts, there
are still some supplied disruptions, andso there are just too many variables and
it's very hard to put things intoa traditional model of the economy. So
(07:25):
those are two things u RT increasesand inflation risk. Let's talk about the
possible well, let's worry about thegovernment funding risk, right, what is
the chance of a default? Youknow? And could that pause and missing
payment on a treasure bond? Andthis feels like almost old hat now,
like old news. A couple ofmonths ago we had this default drama,
(07:46):
the dead ceiling and are they goingto reach a last minute deal and so
on and so forth, And oneof the credit rating agencies even downgraded the
US government dead, which is notsomething you want to see. So I
don't think that Devall's gonna happen.The same stance we had on this a
couple months ago. But the bigthing, people are talking about our deficits
now. People used to talk aboutdeficits a long time ago, and these
(08:11):
are these are gaps between the amountof money governments have available to spend and
the amount they have to borrow tomeet their spending requirements. You know,
they're basically gonna hawk to the widemarket. And these are called deficits,
right, and all of a suddenthey're back. There. Used to be
something that people used to assess overfor years and years, but we forgot
about them because interest rates were solow, practically zero, and you can
(08:33):
almost borrow any amount of money,right, and no one really cared,
so everyone was loading up. Butthis kind of this benchmark of borrowing rate,
it has significantly high than it wasbefore, and all of a sudden,
investors are starting to talk about deficitsagain. How can governments keep on
issuing, you know, how muchcan they do? How can they keep
up? How can keep they howcan they keep up their spending promises?
(08:56):
How can they rely on someone beingon the other side to buy these bonds?
And if you can't rely on someonebeing on the other side to buy
these bonds, you're gonna have topay a higher and higher rate to leard
its investors. And now you havea problem because all of a sudden,
whenever you're servicing that debt, soyou know, paying out your regular interest
payments or whatever it is, orpaying back to bonds that is much more
(09:18):
expensive now, and all of asudden, you've got something that smells like
a huge physical problem. And thisis now creeping up in a lot of
conversations where really it's been dormant formany years. And to mitigate this risk
some investors, are you saying tobuy gold as a hedge. Now.
I want you to note that goldis down pretty significantly over the past few
weeks, but the fact that peopleare starting to talk about it again is
(09:41):
pretty interesting. We look at Europeas well, that has got a bit
of a problem with meeting its physicaltargets, and Italy saying it wants to
borrow more than the market had previouslyanticipated. And now yet these bond vigilanties
being back in the market saying no, no, no, We're going to
force a fiscal disciplait on you andactually on the governments. And if you
want us to fund your spending programs, you're gonna have to pay up right.
(10:05):
So that's the demand side, rateincreases, inflation, government funding risk.
Let's talk about the supply side,which is all about deficit. Now,
the treasury market, as Alexander Skaggsput it on Alpha fil, is
the original public private partnerships, andthe government relies on private investors to absorb
(10:26):
the the issuance of treasury bonds.And the problem here is you really have
to issue a lot of treasury bondsbecause you have to keep attracting investors,
and you have some amount of investorswill accept a certain yield on the bonds.
But if you need to issue somethings, you have to double that,
right and or one point five timesthat or whatever, and you have to
keep attracting the marginal investor, andthat marginal investor may otherwise not buy the
(10:54):
bond, and it's going to commandhigher and higher interest rates. And bear
in mind defense is not doing anyquality of easy anymore, so you don't
have you know, that deliberty buydeliberate deliberate buying a bond to push down
the yields. And so you havethis big marginal bius out of the picture.
And there's also some of some overalloverseas central banks that might you know,
(11:15):
look at the experience that Russia hadwhere it had its assets fosen and
I I don't I don't really particularlywant to uh say anything that you know,
only the US in a geopolitical sense, but if you can't get your
dollars to work, I don't wantto get back. Yeah, but there
are still little margins and things thatsuggest that there's going to be weaker demand
(11:39):
and that there's more supply out there. And you know, it doesn't take
a genius to figure out that theUS might need to pay up more to
get these bonds away. So thatjust moves on. That's just you know,
a little recap on what's going onthere. But let's move discussion to
the dollar, which is actually motoringa lot higher. It's up something like
(12:01):
six percent in the past fifty days, dragging down all kinds of currencies,
from the sterling to the euro tothe end, and we're going to figure
out why it's so strong and whyit matters for those who use currencies to
paper things. And so for allmajor economies apart from Japan and China,
which is a different story, butfor most of the economies, we're struggling
(12:22):
with inflation, very high inflation atthe moment, and the last thing we
need is for oil and other commoditiesthat are import that we import that are
denominated in dollars to get more expensive, and that's what's happening as a result
of having a stronger dollar at themoment. So on the margins, it's
not helpful to have inflation profiles inplace at the UK and the Arizone.
But we're not at extreme levels wherepolicymakers are going to make a stand in
(12:46):
G seven meeting saying we really needto do just hunting about this. But
there's nothing you can do about itunless the FED changes its mind and starts
cutting these rates. But it's reallynot a good look for inflation in a
lot of these countries, any economies. Sorry. So there's the idea that
these big economies Uh, these thesemajor economies, interest rates have right have
(13:07):
risen to the point where they're atthe peak or close to the peak,
and they're gonna say there for quitea while. And what the market is
saying, through things like bond yieldsand through the dollar is that we think
this is going to be a morepainful process for other countries than it is
for the US. We think thatthe US can withstand this, whereas we
(13:28):
think big economies of bueras are inthe UK have got a serious growth problem
coming down and are likely to reallyface the impacts a lot more significantly relative
to the you know, other othermajor economies. So I was also reading
a report from the Bank of Americasaying something like the strength of the dollar
that we've recently seen exceeds the fundamentals. So if you kind of map up
(13:50):
what the dollar index does, thedollar index kind of measures the dollar strength
against a bunch of different currencies.If you measure what the dollar index has
done against gaps and interest rates betweendifferent in your economies, against stalks,
energy prices, YadA, YadA,it's still exceeding all of that. So
the dollar is doing better than whatyou would expect from the gap at interest
rates or expected interest rates that we'vegone And for the techno analysts out there,
(14:13):
if you look at the charts,the dollar has formed a golden cross,
so what's the opposite of death cross? But what this indicates is a
short term ascent of the dollar andit's really broken through the pace of the
longer term a cent to you knowdollar, and this kind of indicse that
it's going to break higher, whichcould be a problem. You know,
(14:35):
we already have uh things with somesigns of unease over yen, weakness in
Japan and a weakening of the poundright which bear in mind last week the
pound was in a total free fall. So the bed right now is that
even if you do get a bitof economic weakness from the US early next
year, the Fed will stick itsfingers and its ears and say we can't
(14:58):
hear you. You know, we'renot cutting rates into this mini crisis because
we've got to fully treat the inflationmonster that we have first. So we
have to see what what you knowpower says and what the future holds.
And to wrap up, let's talkabout FTX, sam Banguin freed first,
Big Dang Court a free days ago. Just want to remind the listeners,
(15:22):
you guys, what he's being accusedof, essentially orchestrating a vast, massive
fraud on customers of FTX, whicha cryptocurrency exchange. It became one of
the world's largest platforms on which cryptcurrencies like bitcoin, ethereum and others were
bought and sold and traded on.And essentially, as there's a dip in
(15:43):
the crypto market last year, andduring the downturn, it became apparent that
billions of dogs were allegedly missing fromthe ftics balance sheet. That led to
a big run in exchange for peopletrying to withdraw their money and lo and
behold the money wasn't there right,So out of the attorney saying, you
know what's the fan strategy? Well, this is what everyone's been waiting for.
(16:03):
Opening arguments began in the trial,and first we heard from the government
and then we heard from his lawyers, Mark Cohen, and essentially what he
said was the government had painted hisclient as this kind of cartoon feeling when
in fact he was a math nerdwho didn't drink or parties. And what
go and told the jury was thatmaybe his risk management wasn't perfect, and
(16:25):
he was blindsided by this dip inthe crypto market. But what they were
really honing on is intent, right, and there what we're trying to do,
I mean, what will the government'strying to say, what people prosecuting
him or trying to say, isthat this young entrepreneur I was trying to
build as the empire went all wrongand this was rather a tragedy rather than
a crime. Right. But whatme and alike are looking for as it
(16:47):
unfolds is the broader consequences of atrial like this. Whilst SBF could face
up to a lifetime in prison ifhe's found guilty on all accounts, what
we're looking for is, you know, the court over the course of the
trial is about SBF. You know, he was the public face of cryptocurrency,
and the question here is, asidefrom his personal criminal uh profile,
(17:11):
is there anything in this case thatpoints to the viability of the entire sector
as a whole? You know,do these things ripple to other exchanges?
You know, the integrity of thespace. What were the things that you
know, the people believed in whenwe invested in ft X, and why
do we believe in them? Right. Can these things be you know,
can this Can the same story happenin other exchanges? And the things that
(17:34):
we believed in the past, arethey still true? And I think a
big part of what we will belooking and that's a big part of what
we'll be looking for in the nextfew weeks. So that's a wrap of
today's episode. We had great discussionon bonds and the strength of the dollar,
as well as an update on theSBFK SBF case. Thank you very
much for listening and peace
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