YouSaid · the spoken record

Brett Scott

lines on the record: 52
first: 2022-02-01
most recent: 2022-02-01
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Yeah, so it's kind of what I've been talking about with your audience here. So what happens when the Fed hikes rakes and how is that mechanically impact the financial system? Mechanically, you're getting haircuts, you're imposing losses throughout the financial system. The level of that losses is in proportion to the level of dead outstanding. And those losses sometimes get allocated in ways where maybe it's allocated to someone who is highly levered, and so that forces them in the cell. And I think that's the mechanics behind what happened in 2018, so in 2018 was hiking, equity markets just kind of melted away, forcing the Fed to do a 180. I expect something like that to happen as we go forward.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“So yeah, banks go bust all the time. How does it happen? So if you have, well, I think first of all, let's say if you are a one bank system, right, you create deposits and you have loans. Those deposits have to be redeemable for currency. So let's say that you create a whole bunch of loans that are bad, never get paid off, and everyone who was using that money that you created comes to you and asks for a currency, then you won't be able to meet that because the loans you have won't be repaid back and you definitely don't have enough currency in the vaults. So you have to be able to have good loans on your balance sheet. If your loans don't pay off, you're going to have to take the loss. And if you take too many losses, you go bust. And that happens throughout history all the time.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“during the march twenty twenty there are about $450. So that's a tremendous amount of money that the Fed is there backstopping the Global Dollar system. So without that things would be very, very disorderly. But if you have the Fed there standing out willing to support the global dollar system, I think it's hard to have distorted conditions. It's not in anybody's interest, including the Feds, because if you have distortedly conditions in the dollar world outside of the US, that reverberates in the US. So it seems like tail risk scenarios are off the table as long as the Fed is willing to backstop the system, and they've repeatedly shown that they're willing to do that.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Link Brett makes a really interesting point in that he notices that there's a lot of dollar debt outside of this country, but they don't have access to Linda Vouchort facilities like Binks in the US do. So if you're a bar abroad and you have dollar loans and you can't pay them back, then your bank gets in trouble and if your bank gets in trouble, they don't have access to a central bank to backstop them. So you have a potential for something that's very disorderly. If without FX swaps, that would definitely materialize. You would have just the dollar shooting to uncontrollable heights. You saw that already last March, and that could go much, much higher if there weren't dollar FX swaps. But when you have the Fed there, basically acting as lender of last resort, not just to the US, but the entire world through the FX swap lines. And during the GFC, the FX swap lines were over five.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Joseph, I got to ask you, because you've talked about dollar swap lines, you had a huge squeeze in the dollar, but that was tame somewhat by dollar swap lines. The huge squeeze in the dollar relates to the dollar milkshake theory made very popular by Brent Johnson. What are your thoughts on that theory? Do you think, do you believe in the dollar milkshake in a world without FX swap lines, but you just think that FX swap lines sort of tame wild price action? And then what do you think happened with March 2020? Do you think that there would have been a huge, huge dollar squeeze that even bigger than it was had not the Fed intervened?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. So I'm afraid to tell you that they're probably not going to do how the correlation probably won't be the same going forward. Monetary policy is trying to, you know, Hurt bond prices, right? That's what raising rates is. That's what selling bonds QT is, increasing supply of bonds to the private sector. So, you know, bond prices are probably not going to do well going forward as long as we're still in this tightening regime. And if the stock prices go down as well, then you might not have that, the correlation that you had before, that regime might be different.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“October 2020, let's say October 2021, I don't really care the correlation between bonds and stocks is, oh, negative 0.2, it's plus 0.2, depends on how the periodicity of how When stocks sell off, which they finally are doing in January of 2021, they have one of the worst Januaries ever, that's when I want my bonds to perform well. And they didn't do it in March and they didn't do it then. You know what I mean?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Right. It wasn't a scramble out of the dollar. It was a scramble out of long-term, very interest rate-sensitive products. But I should note that they had rallied so hard, and I'm just reading Alex Gurvich's book, which really opening my mind. And I'd say Alex Gervich's book pairs really well with the knowledge that people can get Joseph from your site, fed guy.com, as well as your book, Central Banking 101. And I think that, God, man, like I think the 30-year bonds, if you look at the futures price, they went out of their long-term trend channel. So they were very rich, which they almost never are based on the long-term trend channel, based on March 9th. So it's kind of expects that they would sell off. So to say, oh, for March 9th to March 23rd, they had poor performance, that's kind of a cheap shot. However, Joseph, this is my thing. You said they go back to regime. The regime only matters during times of stress. Like from October.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“As the foreign central banks start buying again, so they try to rebuild their cash buffer. So it doesn't seem like there was a regime change. It just seems like it was a panic into dollars. And if anything, it just shows that when bad things happen, people still trust the dollars more than other things. Just a different form of dollars, though, though. Not so much treasuries, but let's say bank deposits and currency.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, but depends on who you are. And what you think of his money depends on who you are. If you're in giant investment manager, that's fine. But if you're the retail investor or maybe a small business owner, maybe you want to have dollars in your bank. Maybe you want to hold it in your hands. So there is this strong demand for currency for dollars, and you see that in the currencies currency that the Fed on the Fed's chart, and you see it globally in just this huge demand from farm bank selling. And you can also see it in the FX swap lines, of course. People who don't have FX swap lines have to rely on selling treasuries to get dollars. If you have an FX swap line, though, you can just use that and demand for FX swaps with the Fed was up to like $450 billion in 2020. So just a global dash for cash. That was the reason. And that's further heightened by the fact that after the panic passed.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“This really cool graph about currency outstanding that the Fed puts out current salting just kind of just goes higher. During the GFC you had a small bump upwards during the COVID pandemic you got this huge surge in currency outstanding. So people just want to hold dollars when they're worried. And so where do they get their dollars even if they're a foreign foreigner they ultimately have to get it from their bank and their bank gets it from the foreign central bank? So you had foreign central banks throughout the world selling their dollars selling their treasuries to get dollars to give to their banks to give to their people. So it was a huge”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“the nature of the crisis. So in the GFC there was a crisis in the private financial sector. A lot of people weren't sure if the banks were solvent or if their dealers were trustworthy or if the money funds would go bust. So they were suspicious of the private financial sector and so they took all their money and they ran into treasuries. So that's what happened in the GFC. But in the 2020 pandemic though, that wasn't the case. What happened was that there was kind of a real economy stress and people were worried and they wanted cash. So what did they do? They went and they withdrew their money from all their investment managers. Believe it or not, in many places in the world US dollars are safer than their domestic currency if you go to Argentina, for example. People want to hold dollars. So there's actually”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“because the Swiss National Bank. So the sovereigns They're mostly very conservative, but some of them act differently. So that's really, that report was really interesting, and just as you noted, so we think of treasuries as a risk-off asset. So when everything comes crashing down, everyone runs the treasuries. That's what happened during the GFC. There's huge stress in the markets. Everyone hid in treasuries. But in March 2020, the complete opposite happened. There's a huge distress, and everyone basically sold their treasuries. And that was kind of a regime shift, and that caught everyone off guard. That had never happened before. And some people were thinking that maybe treasuries were losing their safe asset value. So what this new post from the Fed shows, though, is that yes, people were selling their treasuries during march twenty twenty, but if you look at their behavior afterwards, they started buying them back again, so it wasn't a regime change. And I think what distinguishes what happened in march twenty twenty from the GFC.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“And he was like one of the people who he's a macro hedge fund manager who a lot of the treasury positions are financed. They borrow a certain amount of money and they leverage that to buy bonds. So I get why macro hedge fund managers had to sell their bonds because there's a huge run on cash. But your report, if I gather correctly, it seems like countries were selling their bonds. Why would countries have to sell their bonds? Are they subject to the same funding limits? I don't think the Saudi Arabian sovereign wealth fund is borrowing 100x in the repo market, right? Or maybe it is.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Joseph, my final question for you is you posted a recent report showing that foreign investors sold treasuries during the march twenty twenty panic. This is something that I've just been obsessed over the fact that bonds are supposed to be a risk on asset. They are a hedge when the stock market crash bonds should do well. And they did up until, I don't know, like March 9th of 2020. But for March ninth, twenty twenty to march twenty third, they behaved as a risk on asset. They sold off alongside stocks, alongside commodities and everything else. I'm actually interviewing Alex Gurvich later today, and he wrote a book called The Trades of 2020. Yeah. The play on the IDES of the trades of March 2020, a play on the Ides of March, like Julius Caesar.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“And that's not the fellow who chooses it, that's the US Treasury. So let's say we have five-year debt that rolled off today. How is the Treasury going to repay the Fed? They can go and they issue Treasury bills, which expire, let's say, in a few months, or they can go and issue a 10-year Treasury, which expires in 10 years. So it's the U.S. Treasury that has the power that decides the maturity profile that replaces the Fed's portfolio. And so what a lot of people are watching right now is the quarter refunding announcement, which will happen, I think, tomorrow. What they'll do is they'll talk about how they're going to go about issuing their debt, and that will tie into how the new supply to the private sector will look after the Fed gets out of its treasure position. So Zoltan's point is that this is too passive for the Fed. The Fed should actually actively choose. So it's not just treasurer that goes about”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so overall in the longer term the Fed wants to have a portfolio of assets that's pure treasuries. So I think from their perception that if the Fed owns some MBS, they're basically in a way allocating credit to the private sector and they don't really want to be in that. But I think the question has to do with how does the Fed, so when you're doing quantitative tightening, you're increasing the supply of treasuries to the private sector. My impression of the question was how do they go about doing that? Well, they actually don't decide. So in the past, and that was actually Zolton's point as well. So in the past, what would happen is that, like you mentioned, an asset has a life, it expires, and then the treasury pays back the Fed. Now, how does the Treasury pay back the Fed? They go out and they borrow from someone new. So that's how the balance sheet gets rolled off. Now, the question, though, is what tenor does the due debt is?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Okay, got it. And just that's just to clarify quantitative tightening is reducing shrinking the Fed's balance sheet. And it can do that in two ways. It owns assets that have a life cycle. The life cycle of a tortoise is 100 years, life cycle of a cat is nine years. You have different maturities, different life cycles of bonds. And if they own as they constantly remind us, if they own a lot of short-term bonds, notes, bills, whatever, then those expire and they don't buy them back. So that has a quick, so that has a quick redemption phase. However, the extreme, and as you know, and I believe your penultimate post, what's it called, quantitative tightening step by step, we can put a chart up. There's a natural limit on how much the Fed can tighten because there only so much expires month by month. The more extreme solution, which I believe the question asker is referring to, is actually selling assets.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“some form of soft yield curve management that it's going to be more precise than let's say QE was which was purchasing everything proportionately it's an extra tool they have but I don't think that's the base case right now It could be later on but in the option is there, but by their own principles that's not the base case.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“I think by his own omission that doesn't seem to be the base case because the Fed at its last meeting also announced its balancing normalization principles stating that primarily it's going to be balancing runoff. They're not going to sell. And that's my impression as well because selling just, it's a lot more hawkish, I think, than the Fed would like to do. I know that the Fed wants to have an impact on Long-Des, but that's what Kiwi is all about. But I don't know if they actually want to actually shape the curve and roll out some form of soft YO curve control at this moment, which is kind of what you would do if you actually start deciding what the cell. I mean, let's say the Fed actually started selling their treasuries, they would have to actually consciously decide where among the curve, where, which point in the curve should I be selling, right? So in a sense, that would be”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“I think Zoltan is recommending that the Fed actually sell some assets. Now, the Fed has never done that before in the last QT, but it's not something that it can't do. If you look across the pond at the Bank of England, they've also muttered that, you know, maybe we'll sell some assets too. My understanding from Zolton's note is that the Fed might want to raise longer dead rates because right now inflation is high, economic growth is slow. So rather than putting things on autopilot, maybe they'll get more involved. They get to be able to choose where on the curve they want to make higher. So having that optionality, selling might make sense.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“They were saying that it would be transitory, it's not enormous indications that it's probably going to persist for some time. Now in this context though, the forward guidance is a lot more difficult, so you would have to widen your confidence bands. You have to include in that possibility of a fifty basis point height sometime. I think that base case is still 25 basis points. If we get some data, maybe for example, let's say oil continues to rise and energy is a big input into consumer prices, into everything really. You could see the mapping more aggressively. But at the moment, it's just on the table. It's not the base case.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“I think your instinct is right they want to keep it on the table, and that in of itself is a huge difference from the last hacking cycle. I mean, the Fed hasn't done twenty-five basis hike in a really long time. Now, even willing to do that, I think just shows there's a fundamental regime change in how the Fed is looking at things. Now, I don't know about Bostic. He's been saying a lot of things. He's the guy who said, I'm going to do at least $100 billion in QT, right? Now he's like, yeah, maybe we'll do 50 basis points. I don't know. Looks like he wants to have more media attention. But his base case, though, is still three hikes this year. So Ford guidance, I think, if you remember what Chair Powell said in his conference last time, we're going to be nimble and we're going to be humble. So I think Ford guidance in this context is going to be very different simply because the Fed by its own admission doesn't really know how things are going to evolve.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“At least one hike is going to happen in the March FOMC meeting. The current target rate is zero to 25, so that would raise it from 25 to 50. But a two rate hike would be 50 to 75. Powell kept the 50 basis point thing on the table. He didn't say, no, no, no, no. That's not going to happen. And then we have Bostic of Atlanta saying that's possible. How are you sort of weighing the forward guidance, if you will, that the Fed is saying? Because they put one Fed person out. They say this thing. Then they put another, they say that thing. Do you think the Fed, do they want the optionality of a 50 basis point hike? Are they keeping it on the table?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Post GFC you have Basel III, you have a global central bank world where rates are zero in some places or negative, enormous amounts of quantitative easing. So I think the structure of the market and of course the rise of passive investment. So you really have a structural change in how the markets behave. So I think a lot of people who are trading pre-GFC may not fully realize that maybe the world is not as different. Another way is different now. Another way to think about it is that there's less private sector involvement, more public sector involvement. So if you have more public sector involvement, the prices are not going to be reflective so much of fundamentals, but part of it's going to be reflective of policy choices because the government, they're not there to make money.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“No, Joseph, I don't think you're right. I think it has nothing to do with Basel III regulating that banks have to own treasuries. The 30-year treasury yield is and always will be an accurate representation of forward growth and inflation expectations. How dare you? Boomer economics.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“They're not going out and buying the stuff that we buy, computers, cars, CDs, food or something like that. They buy what banks buy safe assets. And so you see tremendous, I guess, inflation in safe assets are, I would say, you know, one point eight, one point seven, but inflation is five, six percent, right? So part of the reason is because banks have a lot of reserves and things that banks buy, their prices go higher.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, yeah. I think that you're right. I think that's what people think about a lot. So they see that the reserve levels are very high. So maybe the Fed created a lot of reserves. Why is it inflationary? Well, the thing is that a bank is not a consumer like you and I. A bank can't go out and buy a whole bunch of cars and stuff like that. Banks have a lot of regulation that constrain what they can buy and what they can sell. So when the bank has a lot of money, what it goes and does these days is that it goes and buys treasury securities or agency MBS. And that's what you see them do to the tune of $1.5 trillion over the past couple years.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“I get this question a lot whether or not reserves of money and for me it's a very surprising question because if you if you're at the Fed or if you're in a big commercial bank I mean it's not even something you think about well I mean where dollars come from what's the purest form of dollars it's it's printed by the government right so by the Federal Reserve Bank reserves suggest digital cash if a bank, let's say, wants treasuries, well, they can just settle that payment with reserves. If they wanted to have cash on hand, they could swap that for currency. I don't really understand why that people don't think that as money. It's very much just the CBDC. It's the original CBDC. It's just that you have to be a bank to hold. A bank. Yeah.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“On our previous show last week last Friday, you said that bank deposits aren't really money, but treasuries are money, and bank reserves, federal reserve bank reserves, which are liabilities for the Fed and assets for commercial banks, that is real money because if your Bank of America, you have a billion dollars in bank reserves, you can call a Fed and say, I need $1 billion in cash. Can we just, we've received so many questions about your view on that. So this is a question from Byron, the writer of our newsletter at Blockworks, former equity trader, really smart guy. Recommend that everyone follow, subscribe to the Blockworks newsletter. We can put a link in the description. Byron asks, and by the way, Byron, huge fan of your work, Joseph. He says, Joseph says bank reserves are money because banks can have them delivered as physical cash money, but they only do that to fill ATM machines and stuff, right? So saying bank reserves are money.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Really glad you brought up bank lending, a lot of critics or critics of quantitative eating or just people who comment on monetary policy note that quantitative easing is not that inflationary or in fact inflationary at all. Some people can go say it's deflationary and that the true engine of inflation holds your critic, hold your critique the true engine of economic growth and inflation is bank lending.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“and Winnabank creates alone it's creating money out of thin air so that of course is supportive of demand and growth in inflation so I think fundamentally I think when the Fed says the economy is strong I think I think there's a lot of indicators that suggest that they're right but the financial markets and the real economy are connected but not the same thing so we might have you know some risk off moments, but nothing that's terminal that would lead to a multi year cycle, in my view, just maybe just a though. Overdue correction.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“with higher rates quantitative tightening. It's going to reduce reverse lower rates in quantitative easing. So I don't think it's like a major bear market or anything like that because we know the policy response. Eventually, when something breaks, these will reverse, right? Fed start maybe becoming a little bit less hawkish and so forth. And if you look at the underlying economy, it's pretty strong. Wages are going higher. There is a recent loan survey that just came out yesterday from the Fed. It was saying that commercial banks are lending a lot because there's loan demand. Now, loan demand, that's a very good indicator of economic strength.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Or let's say treasuries issued, fewer people buying. Let's say getting one or two percent in a two-year treasury. So that, I think, is very risk negative. We are on a synchronized path where everyone in the world seems to be tightening at the same time, and that could have compounding effects. So when we did synchronize global stimulus in 2020, we have global inflation, like the most we've seen in decades. Now that we have synchronized tightening, that might also have synchronized effect across risk assets and we're kind of seeing that already. So we had this hiccup in the US markets last week, but if you look around globally, you see the same thing playing out. You see it in the Nikkei, you see it in Shanghai index, and so forth. So Australian stocks as well. So it seems like there's a global risk golf thing, and it makes a lot of sense mechanically.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Of course, I think it does put pressure on long radiated rates. It's not the only thing that matters. But if you have someone who's going to buy five trillion dollars of something that's going to have an impact. Now that's the first level effect. The second level effect, of course, is that it creates a lot of, let's say, money in the banking system that gets rebalanced. So somebody somewhere had $100 in treasuries, now they have $100 out of bank and they have to go and they buy long-dated assets or they go and buy IG, move up the risk curve or Apple stock and so forth. So we're going to have less of that. So that's less of risk assets. But what I really worry about is when we have quantitative tightening because when you have quantitative tightening what you actually are is that you're reducing the amount of deposits in the banking system so there's less money to buy and on the margins when rates go higher because there's less”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“I think quantitative just slowing down quantitative easing is okay, but when you get the quantitative tightening, I think that's when things really hurt. So when you think about quantitative easing, I think it does a couple things. One is that it puts a bid for longer dated assets, right? So a lot of people think that maybe QE doesn't do anything about interest rates. But listen, the Fed goes and buys $5 trillion of something. It has to impact its price somehow, right?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so that's Ukraine. And then we talked a lot about rates. That's one channel of monetary policy. Let's now talk about the balance sheet, quantitative easing, quantitative tightening. Let me just pull up the numbers. So the group of seven central banks added eight trillion dollars to the balance sheet during the pandemic in a bid to ease markets, contain borrowing costs per demand, you know, yada, yada, yada. This year they're going to add just $330 billion to their balance sheet. So that phrase, just $330 billion, it's a tiny amount compared to the $8 trillion that they've added, but it's still a net level of quantitative easing. How do you think that that is going to impact? This is extremely broad question, but how do you think the change of adding eight trillion to only adding 330 billion, how is that going to impact the whole panoply of assets, bond yields, risk premium, stocks, commodities, growth, inflation, everything?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“It's always about austerity, right? Austerity. I think they've learned I mean they kind of ruined a lot of countries in their long and painful history so hopefully they're learning that maybe austerity and just strict policy is not always the right way. If you recall I think just last week they were talking about how the Fed should not raise rates too much. A lot of emerging markets can't bear that so I think they've learned they actually have a long history of I think not doing a very good job, especially with what they did to let's say Greece the past 10 years. So maybe they're learning and becoming a little bit more thoughtful.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“You know, you can see the euro has been depreciating a lot. I think that surely has influence, that interest rate differential, that could become very wide if the Fed continues on this path. So a lot of people are going to want to move out of the Eurozone and get a little bit of interest in their dollars in the US. The political lead, I think there's some geopolitical aspects as well that might be weighing on this. We have what's happening in, let's say, Ukraine and Russia. And usually what happens is that Capital wants to get a little bit farther from the geopolitical hotspots, and that would be to the US for some people.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“He touched upon something really important. So the ECB, for better or worse, is playing a very key political role in keeping the union together. So if there was no ECB, then I think the borrowing rates for Italy and Portugal would be very different from Germany. And that creates political fragmentation because some of these smaller countries will not be able to fund themselves in the markets without the help of the ECB. So they would have a motivation to leave the union and maybe devalue. And the ECB is really important in keeping the union together because it makes sure all the funding costs across the union are within a range. So that probably plays a role too in constraining what the ECB can do. It's probably hard for the ECB to ever get out of QE since that's such the glue that's gluing together the union at the moment.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“So, Christine Lagarde, head of the European Central Bank. And if I gather what you're saying about the union problem, it's kind of like in the United States, in New York City, the average income is a certain level, a slice of pizza costs a certain level. In Montana or Alabama, the average income is lower. And accordingly, the price of slice of pizza is less. And it's like that in Europe, except that instead of New York and Alabama, it's Germany and Greece or Spain. And these are literally different countries. So it's very fraught. And of course, a key motivator behind the European Union is it's a political union, not just an economic union. Can you talk about, you know, so in like 2011, 2012, you had huge spikes in the sovereign debt crisis on Portugal, Spain, Greece. Can you talk about how the European Central Bank keeping rates low and doing a lot of”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“These interest rate policy decisions are ultimately have a political aspect. In the US, we have a federal government, we're kind of unified, but when you're talking about the ECB, it's a whole bunch of different countries there. So the political landscape is different. And the economic situations among each sovereign is very different as well. I mean, you have, let's say, the more developed core and maybe the struggling periphery. And they have different fiscal situations, different political calculations, and so forth. So that might play a role in how the ECB decides. And I'm not super aware of how the politics affect it, but there's a situation, their context is very different from many other countries. So that might affect their decision-making.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Now that's less the case in places like Europe where they have their own currency system, right? They're not so much doll-ized as a lot of other places are. They're doing something really strange there, and I'm not sure if they're just slow or not. But if you look at the inflation data in France or And yet their interest rates are at negative 50 basis points. They're still doing some QE. So I think it's an interesting situation they have there. I think I've heard Lagarde basically tell you that don't think about rates this year. She may be sure to change her mind. But I think one thing to note, though, is that”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“And a lot of these companies are outside the country. What happens though when the dollar strengthens is that the dollar debt, dollar liabilities these countries have become more expensive. So essentially their net worth decreases. So when their net worth decreases then the people who loan the money, their banking system has higher risk. So a stronger dollar impacts the balance sheets of foreign banks which makes them less likely to create more credit. And if they can't create more credit, then that hurts economic conditions. So you have a pretty good relationship between strong dollar and poor economic growth, especially in the emerging markets.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“That's a great question, and I really think that distinction you make between developed players and emerging markets is really crucial. So on a broad scale, Overall, a strong dollar is a huge problem for the world, and that again has to do with how the financial system is structured. In many countries, emerging markets in particular, their companies borrow a lot of dollars. And so this has to do with the fact that the dollar is the currency of global trade. So if you're, let's say, China or if you're Japan, if you're Brazil and you do a lot of trade, you're going to have to have a lot of dollars to buy stuff. globally about half of trade is invoiced in dollars. And that's not just between the US and let's say another country, it's between foreign to foreign as well. So if your company”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“The dollar over the past month has been on the rise, and when I say the dollar, when most people say the dollar, they're referring to the DXY index, the Dixie. I believe 56, 57% of which is the euro. That's the European Central Bank. So how significant a threat to global central banks is the dollars rise? And when we think about the dollars, should we just be talking about the Dixie, or is it more important for emerging markets? And can the ECB afford to keep rates this low because it's sort of a developed player?”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“hiking as well. So it's just as you mentioned it's almost somewhat competitive in a sense, but the reality is the dollar is a lot more important than other currencies so other central banks have to react to it.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think you can just look at what rids are today about what the market is pricing and the path of path arates. So I think it does matter for capital flows, especially if you're talking about the dollar. So let's say you fed hikes five hikes this year, rates, let's say I get to 1.5%. I think if you're in the Euroland or if you're in Japan and you're facing negative rates, it makes so much more sense to just move your money to the US where you can collect some interest. And so that has implications on currency. And like you mentioned, for emerging markets in particular, currency is a policy tool. So their central banks actually target their currency to some extent. So the interest rate differential between the US and their own interest rate has to be taken into account. When the Fed hikes, a lot of people might move money from emerging markets to the US, and so the emerging markets have to react to that.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Right, and I'm glad that you brought up the dollar. I think it's important to lay out a theoretical framework for emerging markets non-US developed markets and how they interact with the dollar. So when the Fed raises rates, that can kind of act like a sucking in all global liquidity. So in order to respond, foreign countries, especially emerging market currencies where there are inflation fears, have to raise rates. And we saw that with the Great Depression, whereas the US raised rates and then Germany had to raise rates, then France had to raise rates. And it was this sort of deflationary death spiral under the gold standard. But more recently, you can point to the Asian financial crisis in the late 90s when emerging market currencies were forced to defend their currency by raising rates. That didn't work. And then they devalued their currencies. So that's a theoretical framework. And it sort of easy to understand.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT
“Brazil and Argentina and China and so forth. So what may be appropriate for the US may not be appropriate for the emerging markets. So when the Fed was keeping interest rates very low in the US, that was probably causing inflationary pressures abroad because if you were, let's say, a business in Brazil, you could look at your interest rates at home or you can just go borrow dollars from the US, right? So effectively, they don't have as much control over their policy as the Fed would. So that forces emerging markets to kind of counteract that loose policy in the Fed by raising rates. So we saw them do that last year and now the developed market is joining them.”
2022-02-01 · Forward Guidance · Will The Dollar’s Rise Crush Central Banks’ Plans? · IDENTIFIED FROM THE TRANSCRIPT