Why The World Started Hedging Its US Dollar Exposure의 전체 녹취록

00:02:49 Speaker 2: There's definitely a lot to talk about. Congrats on managing your personal FX liability. 00:02:54 Speaker 3: I'm doing a good job. 00:02:57 Speaker 2: Getting paid in dollars and paying your mortgage dollars. Well done show, All right, Well, you know, this is the kind of thing that a lot of big investors are thinking about at the moment, and we should definitely think about it too. And who is the one person that we really like to talk to when we talk about these big trends, And. 00:03:14 Speaker 3: Who is the one person that is always in town Because we're in Washington, DC right now, when we go to a new town, who is the other guy who always is probably going to be there at the. 00:03:23 Speaker 2: Same time, the person that we run into on the street in various outfits, Although this time you're wearing a suit, So there we go. The last time we run into randomly, you were wearing hiking gear and so were we. Anyway, we are here in DC. We have the perfect guest. As always, We are speaking once again with Hun Sunction. He is the economic Advisor and head of the Monetary and Economic Department at the Bank for International Settlements the BIS. We love talking to him and it's so great to have him here to talk about something that's really been on the minds of a lot of market participants, a lot of policymakers right now. So Hun, thank you so much for coming back on our thoughts. 00:04:00 Speaker 4: Thank you Tracy, thank you Joe. It's great to be back. 00:04:03 Speaker 2: Since Joe doubts my entire premise. 00:04:05 Speaker 3: For this episode, the entire premise at all. 00:04:08 Speaker 2: Now, let's just start with how unusual would you say this year has been? And I feel like so much has happened. We kind of have to cast our minds back to April when we did have Liberation Day and when we did see the dollar fall as the market was selling off, which was something that's not really supposed to happen. You're supposed to have investors reach for the safe haven of the green back in times of turmoil and stress. And now, you know, fast forward to October, I think we've gotten a little bit more used to that particular dynamic. But how surprised were you at that Well, it. 00:04:41 Speaker 4: Was a very unusual combination of events in April. So what we saw was the so called triple decline where you had stocks, bonds, and the dollar, yeah, falling in unison. And that's very unusual because in a risk off episode, you know, which April was, typically the dollar would rally. You know, there'll be a kind of safe have and flow. And you know, back then, there was of course a lot of news and you saw a lot of stories back then about you know, possibly the dollar, you know, losing its international status and so on. I think in retrospect that was, you know, quite hasty, and I think now that we have the data, we can piece together in a more kind of coherent way what was going on. And in short, I think it was a kind of hedging story where investors who had lots of exposures to the US dollar, we're trying to reduce some of those exposures. And we can get into some of the details and how you know, that kind of trade might transpire, and it just so happens that this is also the year that the BIS conducts its triannual survey of f X markets, and we've just published the results, and I think we can also shed some more light on the events in April. 00:06:08 Speaker 3: Let's keep it big pictures still, and then we'll drive down into specific months and weeks. What people work for the BIS, they prey must take out mortgages and Swiss Frank there living there in bars anyway, sidetrack, what are some of the big takeaways from this year service? 00:06:23 Speaker 4: Yeah, yeah, so I think well, actually before we go there, Joe, I mean, it's worth you know, thinking about how FX market is really a figure in the investment strategy. So you know, if you're a long term investor, let's say that you're a Euro area pension fund, what you have are obligations to your you know, local euros beneficiaries in euros, but you have a very large balance sheet and so you need to have a very broad exposure to global assets, you know, including those in non euro denominated assets. So what tends to happen is some of the euros are then converted into dollars to invest in in dollar assets. But of course what you want to do is to make sure that you hedge that currency risk. And this is where this instrument called an FX swap really comes into its own, and it's an operation where essentially the Euro Area investor pledges some euros and then borrows dollars and then with those dollars then go into dollar denominated assets. And as you do that, you also promise to unwind that transaction at a known exchange rate that affixed in a moment in the future. So essentially, once you've gone through that transaction, your currency risk is hedged. Now exactly how much of your foreign portfolio you hedge in this way that varies over time, I mean it depends, for example, on you know, how high the hedging costs are. Because you're typically doing this fairly short term and you're rolling over these hedges. What's important is the short term dollar interest rate, because you know, you're borrowing dollars in order to invest in dollar assets. So when the short term interest rate is very high, that's typically a time when hedging costs are very high. And so what had happened over the last few years was that these so called hedge ratios. You know, the proportion of your assets that you actually hedge had been really you know, trending down. And you know to the extent that some investors you know, didn't hedge at all, And why would you if the dollar is surging and the hedging cost is so large. And so when the turbulence broke earlier in the year, a lot of investors were basically caught with very large dollar exposures, you know, having not hedged. And I think one piece of evidence that you know this was that the events of April was very much

an expost hedging story, you know, hedging after the fact was that, you know, we saw a lot of the telltale signs of swaps being taken out and dollars being sold happening in the market. So what would happen is, you know, if an investor is holding dollar assets, you know, without a hedge, but you're concerned about the dollar falling, then what you would do is you would put on a hedge X post. You would put on a hedge after the event. And you could do that, for example, by actually then engaging in an FX swap right there, but then selling the dollars that you've acquired so rather than investing those dollars into dollar assets, you simply sell it in the spot market. What that kind of dynamics would would imply is that there would be you know, lots of downward pressure in those situations where institutional investors are trying to you know, raise their head ratios. But expost So back to the triannual, what do we see there that to you know, puts additional light on this episode. By the way, on the triangle, you know this, it's just so happens that the sampling period was April this year, amazing, so you know, it may be slightly distorted by the events of you know, the April episode. On the other hand, the silver lining is that we have some great data on really the you know, the events of the of the April episode. But the headline numbers are really quite you know, quite notable. It's nine point six trillion dollars daily flow. This is like something like almost thirty percent higher than the previous survey in twenty two. The dollar is still very much the dominant currency. It's ninety percent of all of the transactions have the dollar on one side. It's even higher than what we saw in twenty two so you know, in spite of the survey being affected perhaps by these you know, stress events in April, you know, we think we've got a very very very good sort of take. One of the things that we noticed this year is, of course, you know, as well as the FFX swaps, which is by far the largest segment of the of the transactions, we also see a lot of a big increase in the spot transactions and also outright forwards. So let me just explain that for your listeners. You know, when you engage in US in an effect swap, you know, the investor with borrow dollars by pledging euros, and then there's also a promise to reverse that. Now that promise is called a forward, and of course you can get that, you know, without going through the swap. You can just go to a deal and say, look, you know, just sell me a outright forward so called, and then I would actually then have a dollar obligation. 00:11:50 Speaker 3: A swap is like a spark trade plusure forward exactly. 00:11:53 Speaker 4: Okay, it's that combination. And what we see is as well as the swaps, we see the two components, the spot and the forward being very very large this year. And we think that the events of April must have had a you know, had an impact because you know, as well as getting a swap and selling the dollars in the spot market, you can also just ask a dealer for a forward contract, but then of course the dealer has to hedge, so you know there's going to be a spot sale anyway, and so that combination would actually lead you to a situation where both the spot and the forward transactions go up a lot. And that's exactly what we see. 00:12:35 Speaker 3: Interesting. 00:12:35 Speaker 4: So this is another piece of the evidence that this was very much exposed hedging. And let me mention just two other things on this. We put out a bulletin earlier in the summer we you know, lay out all the other pieces of evidence that we could gather. But it's also notable that if you look at the actual portfolio flow numbers, the international portfolio flow numbers, there was no real selling in April, so you know, there was a very very small outflow, but on the scale of things, it was really tiny. There was certainly no you know, concerted portfolio outflows you know from the US. So that's really the i think, perhaps the most you know, compelling evidence that the so called sell America trade was not, you know, was not the story behind the eight episode. 00:13:36 Speaker 2: Why should we care, either qualitatively or quantitatively if this was a hedge America story and not a sell America's story outright. 00:13:45 Speaker 4: Over the long term, it is possible that you know, long term investors would then reassess their global exposures. And you see and you hear a lot of anecdotal evidence that you know, these conversations are going on, but so far that hasn't really you know, translated into actions. But I think what you know does flow very you know clearly from you know, from the actions in the spring, is that when we look at the various pieces of the global financial system, every part depends on other parts, and there is this network effect where provided that everyone else is doing what they're doing around the US dollar, then it's also in my interest. So actually, you know, be part of that ecosystem. So if you have this kind of need network effect, it's very difficult to have this whole sale shift away. 00:14:38 Speaker 3: One of the things that I think is unusual, and I probably said this in a few other episodes, but what I think is striking about this environment is that if you look at the US it can come up with a long list of reasons to be concerned, which we don't need to come down recapitulate now. On the other hand, the most affitable, impressive, cutting edge companies in the world that everyone would love to have exposure to in some way or in the US. And it strikes me is that's the unusual situation, which is we don't typically associate volatile sovereigns with being the home of the most dynamic companies in the world. And so to my mind, I would love to have exposed more exposure to in Video and Microsoft and all of these companies that are making money hand over fist without having exposure to the US itself, And hence I might want to hedge.

00:15:32 Speaker 4: I mean, certainly, you know the equity market story, I mean that really isn't a class of its own, and as you say, that's really been a very very strong theme. But more broadly, you know, capital markets. If you think about how capital markets operate, that there's a whole ecosystem behind that, and you have the underlying securities obviously, but then you have the hedging instruments, and then you have a whole set of investors who are actually you know, taking part and the banking system is absolutely crucial in providing those hedging services. And I think when we last discussed this back in Jackson Hole, you know, we talked about how the FX swap market makes you know, money fungible across currencies. And you know, money is ultimately something to do with banks. So you know, the central bank, you know, issues high powered money. Commercial banks are there also to issue money that the other users will will take advantage of. And FX swaps are there, you know, basically providing this service of making money fungible across currencies. So you know, every piece fits into every other piece in that sense. And so you know, we should think about this in terms of the mutually reinforcing pieces of this you know, this network. 00:16:51 Speaker 2: What have you observed in terms of the actual trends in FX hedging costs, because, as you described it in April, suddenly it all starts kicking off a lot of large investors who are not that used perhaps to having to hedge their dollar exposure suddenly scrambled to do it x post as you described. Did that mean that the cost of actually doing so actually increased or was it still relatively cheap? 00:17:16 Speaker 4: Well, actually, it's primarily about how high the short term interest rates are actually, and in particular, if you're a non US investor investing in dollar assets, it's really how high the short term dollar interest rate is, because essentially what we're doing is, you know, you're pledging euros, let's say, and then borrowing dollars short term and then investing in dollar assets. And so it's really about how high that short term interest rate is relative to the yield you're getting on the asset itself. And so if you have a flat yield curve, you know, which is what we've had, or even inverted yel curve, then hedging costs are very high. And so in fact, you know, investors have typically hedged, and hedge ratios have fluctuated. There's no system matter survey, but it's fluctuated between forty and sixty percent. I mean, there are some pockets of official data, like the Japanese life insurance companies, but typically this is you know, really quite quite anecdotal. But what had happened in the last year or so was the hedge ratios had gone down gradually. Some firms were not even hedging at all, you know, they were trying to win both on the stronger dollar, but also on the high yields. Yeah, actually they just meant mentioned a very interesting point here. Actually, it's actually

worth thinking about the parallels between this story about you know, advanced economy investors holding US DOT assets with the story about local currency emerging market bonds. You know, that's actually a very very you know, important asset class that really grew up after the GFC. And that's typical asset class where the investor would not hedge. So if you want to enter in to a large emerging market sovereign BONDERNT trade, you would actually buy the instrument on an unheedge basis. And you do that because you know, you think the emerging market currency will appreciate as well as the YEL four and so you win twice. You know, you gain both on the yield, you know, as well as on the exchange rate. But of course when the tide turns, that's when you know scramble to you know hedge ex post and that's exactly you know the same type of thing that we saw you know, in this in this episode. And you know, and there were actually emerging market investors, especially from Asia, who were you know, caught with a very low hedge ratios and there was this ex post hedging going on. So there's actually a very interesting parallel between you know, what was you know going on this April and the much older trade, which is the emerging market trade. 00:19:56 Speaker 2: So Joe, on the plus side, people aren't necessarily selling dollar assets. On the downside, the negative side, we're basically treating dollar assets the way we would allow emerging market. 00:20:08 Speaker 5: Pond were like, I think I'm going to buy some local currency US day. That's right, actually, but like, so what was it about April then that caused the like what I mean, we know there was yeah, the Launcher trade war and there were like massive tariffs, et cetera. But like, what was it about that such that people's impulses to hedge more expost factor as you've described it. What was the thing they said, Oh, we want to change our the our sort of our exposure to US dollars, even if we don't want to sell them. 00:20:42 Speaker 4: I think it's probably a combination of several things. But where the you know, where the investors found themselves in terms of the hedge ratios had a lot to do with this. Actually, if you look through your you know, Bloomberg news database, you'll find plenty of stories from twenty three for where let's say life insurance companies announce that they will not be hedging, you know there, so you know they would be holding let's say US dollar assets but without a hedge. And as I said, you know, there were some firms that didn't hedge at all. And in a risk of environment, what typically happens that you want to take some chips off the table, and that just means reducing your exposure. Yeah, and if you're exposed, you know, in this double whammy fashion, you know you would actually try and you know, either hedge ex post or reduce your exposure. It looks like from the evidence that it was very much the expost hedging story. 00:21:43 Speaker 2: So if people are hedging their dollar exposure more than perhaps some of them at least used to do, we have to worry about things like rollover risk or some sort of I guess duration mismatched where you have a short term hedge, whether it's a forward or a swap or whatever, mismatch to a longer term asset. I mean, this is this is what the BIS does on a day to day basis, is worry about potential risks so are you worried here? 00:22:14 Speaker 4: That's a really great comment, Tracy, And I think this was you know where I was going to go next. Of course, you have this. You know, once you hedge, you've hedged the currency risk at least until the maturity of the swap, which is typically you know, one month to three months. But it's a short term. It's a short term liability that you need to roll over, and from time to time you might get caught in a liquidity you know, stress episode where it's difficult to source the dollars to actually repay. And this was, for example, what happened during the GFC. It's also what happened during March twenty twenty when there was also a scramble for dollars. And you know, when you're a long term investor, you've hedged using a short term effect swap, but you're holding you know, long term securities, you have a maturity mismatch. So either you have to somehow, you know, sell your long term assess which is going to be very difficult at a fair price, or you have to join the scramble for dollars with all the other borrowers of dollars in the market and so this is the paradox where you know you're a long term investor, but actually you have this short term you know, dollar obligation. And so you know we are swapping one well, we are actually you know, exchanging one type of risk for another. We're actually changing currency mismatch for maturity mismatch. And you know, empirically, if you look at the evidence over the years, it's when the dollar is falling for a long period of time that these head ratios become very, very high. So you know, a good example is the period before the GFC when a dollar was you know, really falling, you know, quite considerably. But then what happened at the GFC was of course in a dollar really spiked because there was a scramble for dollars. So you know, there's always this trade off. You either have to beart some currency risk or you bear this maturity risk, and then the bear this maturity mismatch risk, I should say, and and so we you know, it's really you know, changing one type of risk or another. 00:24:47 Speaker 3: Tracy really loves currency markets because she loves the fact that when the line moves, it's you can never tell whether it's the numerator or denominator that's at fault. 00:24:57 Speaker 2: But this is sarcasm, by the way, for those who don't. 00:25:00 Speaker 3: No, I hate you hate currency markets because you never know whether we should be telling it's the numertor. 00:25:05 Speaker 2: Do you say the dollar is going down. Someone's going to be like, oh no, but it's up against like some obscure currency

that no one's ever heard of. 00:25:11 Speaker 3: But EM and you mentioned EM and many EM bond funds indices and in currency is doing very well. And so this gets to the question, is this numerator story is it about dollar weekening or is it about so we've been talking a lot about financial flows. Has something changed though in the sort of underlying economic fundamentals of a lot of ems. I've heard some rumblings about this. People excited about EMS in a way that I don't think they were excited about to the same degree during the twenty tens at all. And I just while we were chatting, I pulled up a bunch of lines of EM related funds currency all doing very well. In your research, are there fundamental changes in the EM world that are like people are excited about for reasons other than the fact that the dollar is week. 00:25:59 Speaker 4: So this is right timely Joe and as it happens. On Monday, we published a bulletin exactly on this question. Are the emerging markets doing well because of better policy, better fundamentals or is it really about the global financial market trends? And the short answer is it's a bit of both. And you would and you would you know, not think of otherwise. Why is it better fundamentals? Well, I think it's certainly there's been much better policy, especially monetary policy, and also the emerging markets have have really been buoyed by actually, you know, the week of dollar, the week ofd dollar has been a tailwind for much of the year. This is why emerging market assets have really, you know, rallied quite hard. And there's a parallel with credit spreads as well, because you know, when credit is doing well, we also tend to see emerging market as it's also doing well. And if we break it down, so why would a weakening dollar be a tailwind for emerging markets? Well, you know, in the simplest possible case, if a borrower has borrowed dollars but then has invested in local currency assets, you know, there's this currenty mismatch. But then there's a windfall when the when the dollar weekends. That's a very simple story. It's probably not the most important. But there's another very interesting element here, which has to do with the so called risk taking channel. And the idea here is if you have a very diversified, you know, portfolio of these of the loans to all of these current sy mismatch borrowers, the improved credit risk on these borrowers really you know, shrinks the tail risk in the credit for the you know, for the lender. So if you like, the value at risk goes down, and that really opens the door to two more credit. So this is very very strong relationship between a week of dollar and faster growth of dollar denominated credit. And because of how important dollar credit is for supply chains, if there's any product, if there's any good that out there that relies on very complex supply chains, global value chains, those products will tend to do very well. And what you've seen is actually, in spite of the week of dollar, exports have gone up in these very highly sophisticated goods, and much more so than the goods that are much more affected by just a simple the simple trade effect and exchange rate. So semiconductor for example. I mean this has been one of the surprises. Clearly there's the AI boom, but it's not just that. If you look at semiconductor trade exports from Asia that's really been very, very resilient this year, and anything that has to do with global supply chains you would also see. But there's a you know, there's a sting in the tail here because, as we talked about earlier, emerging markets increasingly are becoming net creditors to the rest of the world, and there was very little hedging going on, and so when you're caught in one of these down drafts, you get hit both from you know, the wiki dollar and also the and also the high yields. And so we saw a lot of this you know scrambling, you know, back in April. So it's primarily a tailwind, and it has been a tailwind for a long time. But there is this third element, this new element, which I think we need to keep an eye on. 00:29:41 Speaker 2: What do you see when you look at the price of gold. So we are recording this on October seventeenth. It's coming down a tiny bit this morning, but still above four thousand dollars an ounce. What is that telling you about how investors are feeling about various global currencies at the moment. 00:29:58 Speaker 4: Well, Tracy, I mean, we we hear a lot about the so called debasement trade, but I think that's probably overdoing things. You know, Debasement is really about the value of money relative to you know, goods and services. We don't really see a surge in inflation. We don't see surge in the price of you know, even commodities. I mean, look at you know, look at oil, look at other commodities, you know, everything other than gold. And so I think we should probably look for a more tailored explanation for gold other than simply the you know, this broader sort of sense of you know, you a flight from you know, fiard currencies, and you know, I think one thing which goes back to our initial conversation on the role of the dollar in the global financial system. Certainly central banks have been big buyers of gold, and there has been you know that sort of you know, set of very sort of firm you know backdrop to you know, to the market, and other people have jumped on the bandwagon in a way it's actually behaving like a risk asset. And the events today and you know, last week as well. Rather than there being a flight to gold during stress times, what we're seeing is it's behaving a bit like bitcoin and the risk asset, So it sort of tells you that there's been a little bit more of a speculative element, you know, here, but it's certainly behaving in a way that's very different from the historical norms. 00:31:29 Speaker 3: You know, for a long time, Trace has talked about this. For a long time. You could sort of model the price of gold via real rates, and

when they're very low or suppressed or whatever, gold went up. It kind of seemed like it changed not long after Putin had a bunch of his money seized. And when you talk about central banks accumulating gold, being woken up to the fact that your money is never really your money if it's in a bank, it seems like it could be part of it. 00:31:57 Speaker 4: Well, Joe, I mean, certainly, there are very few assets which are not the liabilities of someone of someone, and you know, typically whether it's a fixed income instrument or an equity, it's someone's liability, so someone has the obligation to pay you. And gold is one of those which is not the liability of of of of any particular individual. I think, you know, when we look back, we can see these sort of broad, you know, swings in the price of gold. After the breakdown of Bretton Woods in the early seventies, you know, there was a brief spike, but then we had a very very long period when you know, gold wasn't doing very much. I think it's probably something even before the Russian invasion of Ukraine, Joe. So you know, we've seen the trend where something you know, like this has also happened actually a few years back, even even before the Russian invasion of Ukrainian twenty two. But I think it's you know, this this element, this this attribute where it's not the liability of any particular uh, you know, legal entity or individual. I think you know is giving this a particular Yeah. 00:33:07 Speaker 2: So I'm looking at the top menu on Bloomberg right now, and you know, it's feeling a little bit nervy at the moment. So the number one story is banks trio of alleged frauds, sparksphere of broader issues. So this is the idea that this is Jamie Diamond's cockroach idea that we're starting to see some losses emerge from either outright frauds or just bad investments, and people are starting to get a little bit nervous. Do you see any sorts of I guess credit oriented concerns out there at the moment? 00:33:43 Speaker 4: Well, Tracy, I mean, certainly this week is a very news rich environment. We love you are you are you know, contributing to that, and I think it's great. You know, we we we hear a lot of these comments, uh, you know, on credit. Certainly, credit standards have been eroding for a long time, and we have been one of the many voices, you know, even before this week, you know, just pointing out that credit spreads have fallen to historical lows. But if you look at the the trajectory of credit to the private sector and compare that to what's been happening to government debt there, that really isn't a comparison. So it's certainly before the GFC, the big growth was in the credit to the private sector, especially in the form of mortgages. But after that, what we've seen is credits the private sector has really been very subdued, and instead it's really been the government in a bond market which has grown tremendously now what we're seeing now is you know, some signs of the erosion or credit standards, you know, coming back to bite. But if you're worried about something very systemic, if you're worried about systemic risk, the first thing to ask is how fast has this grown in the recent past. And typically something that's grown very rapidly, will you know, give you some course for concern. In this case, the really rapidly growing element has not been credit to the private sector. It's been credit to the government and in particular the government bond market. So we should have you know, we should of course worry about you know, these you know, these events, and of course the headlines you know create you know, as I said, it's a very news rich environment. We hear that, yeah, and we hear the same stories in the panels. If it's really a concern about, you know, is this the precursor to the next you know, systemic crisis, it's probably not the case. 00:35:51 Speaker 3: Actually just brings a mind something that I don't think I've really asked in such a way before. But another thing that's grown a lot is the stock market or equity equity markets. 00:36:03 Speaker 4: There was actually a. 00:36:03 Speaker 3: Really good article in the Wall Street Journal several days ago about the degree to which equity exposure, at least in the US has spread demographically, so a lot many more like working class households own stocks than they used to. When I think about people who are in the business of being worried about financial stability, I don't think the stocks are high on their radar. They're called risky assets. We all know they're risky, and usually crises don't emerge from assets that we all agree are risky. Crises emerge from assets that we think are going to be redeemed from a dollar's worth we're going to get a dollars back or whatever, or worried about getting back at all. But I'm curious, from the perspective of someone who professionally maybe worries, how do you and your colleagues think about equity exposure, especially given the widespread view that equity exposure is fueling consumption in the United States, a driver of the economy, that there's a lot of speculative acts, Like is there much modeling work being done on equity and risky assets specifically as a source of broader risk? 00:37:10 Speaker 4: Absolutely, I think I think the you know, the main channel would be through the real economy, through through real economic activity, rather than through let's say a de leveraging episode or an equidity episode. I think it's worth thinking back to the dot com bubble of two thousand. You know, that was a period, of course when the valuations were even more extreme, and when the stock market fell in two thousand, of course we did see some effect, and of course a lot of investors lost money, but there was nothing like the same kind of impact on the real economy that we had with the GFC. And very simplistic way of putting this is whenever you have debt of various kinds, that's when you should be worried, because, as you said, it's when

you're promised one dollar but then you don't deliver. That's when you know there are sort of ripercussions throughout the economy. Now, clearly with the equity markets, there are wealth effects. So you know, if you have a very large portfolio, you feel richer and then you spend more, and so there is a real economy effect of the stock market. And so if we see a pullback in the stock market, very sustained pullback, we will see some effect like that. Now, the estimates of the wealth effect on consumption, for example, has varied over the years, but given the if you like, the democratization of stocks, we could expect a slightly larger magnitudes. But on the scale of things, that effect tends to be very small compared to the kinds of effects that are associated with de leveraging episodes. 00:38:52 Speaker 2: Do you see any pockets of leverage out there that aren't getting enough attention at the moment? 00:38:57 Speaker 4: Well, I think you're very good at shining a light on those all those pockets. Actually, I think probably, I don't think I can really say anything here that you haven't heard of, but I think it's certainly worth bearing in mind the broad magnitudes. Yeah, in one of the things that we've you know, we've talked about a lot this year in our various official publications is the fact that even you know, safe acets can be a source of stress in the market, because it's not default that you know, propagates stress. It's more than de leveraging. I think, you know, if let's say, long rates were to you know, shoot up, and therefore mortgage rates also shoot up, you know, that would be a really big deal for the real economy, and that would happen even without any defaults. 00:39:45 Speaker 3: By the way, when we started this conversation, the tenure was below four percent. It's above it now. So keeping our listeners up to date on what's going on in the treasury market. October seventeenth, twenty twenty. 00:39:56 Speaker 2: Five, very good. I mean, the other interesting thing is if all the acting like a speculative asset, Now, what happens when all of that starts reversing and you know, the thing that you thought was worth four thousand dollars is no longer worth four thousand dollars, and gold is typically used as collateral. 00:40:11 Speaker 3: I always say, you know, it's really scary when you see people like intensely buying gold because like what's up? 00:40:16 Speaker 4: Like what? 00:40:17 Speaker 3: But what's really scary is why they start selling, right, Because again, no, you's true, right, because actually no one has you have to be a real psychic have a gold denominated mortgage, you have dollar denominated mortgages, et cetera. And so when you see like usually one of those things you notice is that in a real credit event, when you really get that vic spike and people are really worried about making that payment on their mortgage, and they're really worried about paying their monthly subscription to their Bloomberg terminal. They

need dollars and then they sell gold and you're like, oh, things are getting really. 00:40:48 Speaker 2: Rough, all right. 00:40:49 Speaker 3: I think that was a comment, that question comment not even a question. 00:40:55 Speaker 2: Thank you Joe for your comment. And it's always lovely catching up. This is been fantastic. Thank you so much for coming back on the show. 00:41:02 Speaker 4: Thank you very much, tra Sick, and thank you Jeff, Thank you so much. 00:41:05 Speaker 3: As us. 00:41:18 Speaker 2: Joe, I always enjoy catching up with him. He has a fantastic way of explaining things in a very soothing, calming manner. I do think so. Nuance is important, absolutely, and technicalities in the market are important. So if the dollar going down is being exacerbated by hedging versus people selling dollars outright, that is an important thing to talk about and to capture. However, I still feel like the direction of travel is not fantastic for the dollar itself. If people are treating dollar assets the way they used to treat local em bonds in terms of hedging, that exposure, Yeah, that doesn't seem great necessarily for the US. 00:41:58 Speaker 3: I mean no, I mean, look, it's sort of you know, I think of a currency as sort of like being the token at Chuck E Cheese, you know, and you want to play the games. But it was really nice of like the token is going up and you can play the games at. 00:42:12 Speaker 2: Play more games, or eat more pizza. 00:42:14 Speaker 3: Or or eat more pizza. But I think we're in this situation where people want to keep playing the games, they just don't really like the whole arcade. 00:42:23 Speaker 2: And yeah, yeah, this. 00:42:25 Speaker 3: Is this is the way I think about it. The games are still fun, it's just that you're worried about the direction of the arcade. 00:42:31 Speaker 4: Yeah. 00:42:31 Speaker 3: And so I think, because this is why, you know, like how are you getting You're not going to like do business in the United States, give me a break. That's completely unrealistic, even if you don't like if you put it the direction of travel. And so I think sort of intuitively you could sort of understand why I don't want to leave town. I just don't want to have arcade exposure. 00:42:52 Speaker 2: Absolutely. I guess what we kind of need. We need another big crisis so that we can observe what gold does during that time. Yeah, and also what the dollar does during that time. 00:43:01 Speaker 3: I think I'm gonna run with this our actually I'm gonna win. 00:43:04 Speaker 2: It's a really good analogy because like, if. 00:43:06 Speaker 3: You think like or you know, Chuck E Cheese has a lot of fun games. But also I don't really think the business swallow Chuck E Cheese. It's like that good like how dare you? 00:43:15 Speaker 4: Well? 00:43:15 Speaker 3: A lot of them have closed out, but it doesn't mean the games inside were less fun. So I don't want to hold those tokens in my pocket forever. I want to have exposure in case they go they go to business or something like. That doesn't make the games less fun in the meantime. And you've solved this problem of wanting to play the games but being worried about the future of Chuck E Cheese by hedging them. 00:43:33 Speaker 2: I'm going to restart Chuck E Cheese and roll it out across the country, just to ruin your analogy, your preferred market analogy. No, I think it's a good one. 00:43:42 Speaker 3: Thank you. Finally all right, but I will not be taking out Chuck E Cheese denominated well, no, so that would be the great thing. If you could imagine getting a Chuck E Cheese token denominated mortgage and then it goes out of business. You don't even have to pay back. 00:43:55 Speaker 1: You know. 00:43:55 Speaker 2: I'm pretty sure somewhere in like a box somewhere I still have a bunch of like Chuck E Cheese, these tickets or something like that. Maybe I should take them out anyway. 00:44:04 Speaker 3: So this is another interesting question because what is the exchange ratio between a token and a ticket? 00:44:10 Speaker 4: Right? Yeah? 00:44:11 Speaker 2: And I don't know. 00:44:12 Speaker 3: This is sort of like one of those communist countries, Chucky. This is a paper that someone write, Chuck E che is the dual circulation economy in which they have tokens for the games and tickets for the prizes, and how they manage that exchange ratio is very similar to us a planned economy. 00:44:30 Speaker 2: Do you think I can find someone to provide like a swap on a token versus a ticket or something. 00:44:36 Speaker 3: I think there's something here. I think we're I think we're hitting on something important. 00:44:39 Speaker 2: Okay, I think we should end. We should leave it there, all right. This has been another episode of the Authoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. 00:44:48 Speaker 3: I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carman armand dash Ol Bennett at dashbot and Kelbrooks at Kelbrooks. From where odd Laws content, go to Bloomberg dot com slash odd Lots with the daily newsletter and all of our episodes, and you can chat about all of these topics twenty four to seven in our discord discord dot gg slash lots. 00:45:09 Speaker 2: And if you enjoy odd Lots, if you like it when we talk to Hymnsumtionin about upcoming risks in the market, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.