YouSaid · the spoken record

Patrick Saner

lines on the record: 53
first: 2024-02-22
most recent: 2024-02-22
sittings or episodes: 1
sources: podcast

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“Is often that the resources are scarce and you need to focus on what is most pressing for a company or your strategic initiatives and you need to try and deliver that. So I think it's just a slightly different mindset, but I do think that you can learn a lot having been at the public sector in terms of how to think about certain things, how to think about rigor, and how to think about the implications of your actions, if you like.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, there is, and hopefully, there is because they serve different purposes. Look, at the end of the day, if you're thinking about a public sector institution like the Swiss Central Bank or the World Bank, then you are serving the people. Now, of course, in the private sector, you're also serving the people, but your decisions are extremely influential for a lot of different stakeholders. And that can be households, that can be corporates and so on. So you need to be extremely rigorous and thoughtful in terms of how you approach the data and what the implications of your actions could be on a huge variety of stakeholders. I can't speak for other central banks, but the people at S&B that I met are extremely sharp. They're very intellectually curious. And they also look at a lot of things in really great and fantastic rigor. And the reality in the private sector.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“And again, market pricing has been reasonably erratic, and analysts have been swerving between all these different descriptions. So I think it's just important to keep that in mind. How do you react from one thing to the other? And there's also a difference between what's going to happen in the next couple of weeks versus what's going to happen in half a year or a year and so on. And I think it's also important to not let the immediate data and the immediate price action determine and cloud your longer-term thinking all too much. But of course, we will, and I will update my views as we get more information.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“The base case is a soft landing in the US, but I think the two primary alternative scenarios are obviously a stagflation type of outcome, as well as a recession. And I do think that at the current juncture, actually, you can make a pretty decent case for both. Because on the one hand, you see some sort of re-acceleration. You see inflation picking up and you see actually wage growth increasing. On the other hand, if you adjust for seasonal adjustments, if you look at delinquency rates that are actually from a level as well as from a momentum perspective, picking up pretty quickly, then you can also take the other view and say, look, you know, this can easily go the other way. I think it's important to be open-minded and have an action plan for when you realize that you are going to shift with an increase in confidence into one scenario versus the other.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“You know, if you have a forecast and analysis, then it's important to think through what the yardstick is, but it's also important to think through what are the mechanics so that your prescribed forecast actually comes to fruition. And that is why I really think that scenario thinking and so on is just extremely valuable to constantly question yourself, you know, this is my view, but I might be wrong or most likely I'm wrong. So what could the alternative reality really look like? Yeah, and I think once you manage to have a balance across all of that, then I think you will ultimately become a better analyst and hopefully you can translate also to better strategic decision making, portfolio outcomes, and so on.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“That's Actually, a profound question. I think there are a couple of points. First of all, I think mistaking correlation for causation. I understand why people do that, but it requires a lot of effort to better know what is the actual root cause of something, because that then allows you to think through the ultimate outcomes could be. The other one is often groupthink. Obviously, people are influenced by what a reputable institution says and so on. And even though they see it differently, they might not be able to voice that or don't want to voice it for a variety of reasons. And I think the other one too is to, you know, just be open-minded enough. Again, think about scenarios. Forecasts are useful as an anchor, but they are not the absolute end result. So I think”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“You don't think the term recession itself is misguided? You think that two consecutive quarters of negative real GDP is not a slowdown if you don't have subsequent severe adjustments in the labor market? In other words, it's all about the labor market and consumption. And the national accounts, there's a lot of wonky math in there that can make things look weaker than they are or stronger than they actually are.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Not the end of the world. I think at the end of the day, it really depends on you can have a pullback in economic activity in one industry and that can then distort the aggregate figures and so on. But I think as long as households are doing well, as long as the labor market is holding up well, I think the label of a recession is a bit misguided. Doesn't mean it can't intensify. And I think one should be open to that. But just because an economy has two quarters of negative growth rates that are just barely below zero without an associated breaking up of labor markets and these types of things, yeah, I think it's just misguided to label data recession.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“The label of a recession 0.2% growth in two quarters overall, then first of all, we need to recognize that national accounting has a lot of noise. So maybe it'll get revised away anyway. Secondly, if you don't grow for half a year,”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Well, but I think the proof lies in the pudding, and we haven't landed yet. So I think it's also premature to declare all as well. We just need to see. But we all know that in many instances in the Eurozone, particularly the southern countries now more in Germany, the pressures can arise pretty quickly. So at this point, I am surprised by how well on a relative basis actually the Eurozone has managed to eke out some growth. But again, I mean, this totally pales in comparison to what you're seeing in the US. So, you know, I would say some cautious optimism, hopefully.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Actually, almost like a continued stagnation, to be honest. I mean, if again, the last five quarters were overall barely positive. And so I think it's not super helpful in my view to talk about two consecutive quarters and therefore a country or a region is in recession and so on. Labor markets are still pretty tight. And I think when we talk about recession prospects and so on, we really need to think through what are the implication of a recession on the labor market adjustment mechanism overall. And I think right now, personally, I thought the Eurozone was going to be in much more dire shape if I had known how strong the monetary policy cycle is going to be and so on. I thought there was going to be a much deeper setback in euro area growth momentum. So from a relative point of view, I think actually the eurozone has”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Totally out of whack. So I think where we are right now is probably okay. But where a lot of this will ultimately boil down to whether the acceleration in inflation and PPI and so on that we have seen very recently, whether that is a bit of a data fluke and driven by seasonal adjustments, January effect where a lot of prices are re-indexed and so on, or whether actually there's something more going on. And actually, you know, the fundamental inflation process is gaining momentum and so on. But yeah, we'll just have to see over the next couple of months how that plays out. But yeah, given the precarious situation of the Eurozone, I do think that there is scope for a bit of euro weakness going forward.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“First of all, by the way, at Swiss3, currency is something that, or the currency risk is something that we try to minimize. So ideally, we don't have active currency risk on our books. So that is not something that we have, besides obviously hedging activities and so on, have an outspoken view on. In terms of the currency and your US dollar, now again, if I look at the relative momentum in economic growth and in inflation and so on, I do think that there is scope for a bit more dollar strength relative to Europe. But if you look at the last year or so, then a lot of the changes have actually been driven by the real differential between the US and, for example, Germany and so on. And right now, it seems like the differentials are not.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Allocation is pretty conservative because the allocation serves the underwriting strategy that a company pursues. I think from an insurance perspective it should be okay from an asset management perspective, but again, I think the question is how do you react to the claims inflation that ultimately you need to pay out? And how do you mitigate that and what can you do, including from the asset side, to safeguard that?”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, that could be. Now, from an insurance investor point of view, because most of the rates exposure is basically used to match the underwriting cash flow on the liability side, that is not that big a deal. If you look at the average insurance portfolio, then a lot of the credit exposure that many insurers have is investment grade. And therefore, if you see large volatility in either inflation, in rates, in economic outcomes, then typically that hits the weakest part of the capital structure the most, which is high yield or other non-rated debt, maybe emerging markets, if that spills over there. I can't speak for every insurer, obviously, but by and large, an insurance asset.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Makes sense, but in terms of correlations between credit risk and duration, where normally if the risk-free rate falls, spreads do X, but in an inflation volatility regime where inflation volatility is high, they don't do that. Can you give us some specifics on that or anything between, I don't know, maybe the if inflation volatility is high and rate volatility is higher, I imagine convexity risk is higher. So that figures into like mortgage-backed security products and stuff like that.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“At inflation and the potential implications, of course, from an asset side, but also what can we do on the underwriting side and what are the underwriting and asset side implications that you need to kind of marry and merge in order to kind of look at this topic in a pretty holistic way.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's a really great question. I mean, the way we look at this is from a total balance sheet perspective. So our assets support our underwriting efforts, right? So the question for us is whether, for example, structurally higher inflation and higher inflation volatility, what does that mean, of course, for assets in and of themselves, but also how do they interplay with the underwriting activities that we have seen? And that is what I mentioned before when you have an inflation spike, then what ultimately trickles down into the books of an insurer depends on what the underwriting exposure is, whether you are mostly focused on motor insurance or property and these types of things. So that just really depends. And so from our perspective, we look a lot”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Isolates them from inflation swings going forward. But whether that realizes or not, we'll have to see. But I do think that it's good to prepare and think through what the implications could be.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“The net zero transition, which requires a lot of copper, and actually it's not even clear whether the copper supply can resolve all the demand that should come out of the net zero transition, then you do see that there are a lot of potential triggers to force such inflations by X going forward. And I think that has been obviously some of these aspects were already prevailing before COVID, but I do think that COVID has intensified this overall. If you look at how portfolio construction works, then I do think that a lot of insurers, as well as other investors, really need to think through whether they are able to withstand in their asset allocation large swings in inflation and not only a structurally higher inflation level and whether their diversification approach right now actually, you know,”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think there are a couple of structural factors and aspects, right? So when you think about a lot of things that have come out of COVID, a lot of manufacturers and a lot of companies are thinking about how can we future-proof our supply chain. So how can we make sure that supply bottlenecks and so on don't become a more recurring feature similar to what we had seen in 2020 and 2021? And that in and of itself could create some inflation bursts going forward. If you look at the geopolitical tensions that we are seeing, the Red Sea disruptions where you look at the Middle East tensions that occasionally flare up again, then you do see that also from a commodity perspective, a lot of commodity markets are actually susceptible to higher spikes. If you think about”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“So, how are you thinking about where inflation volatility will be? You referenced earlier that the market is pricing much higher inflation volatility in terms of options, prices on the CPI. We can show that actually you showed me this, that now the range for CPI pricing is actually wider now, greater volatility than it was in June of 2022 when the price of oil was very, very high and inflation was very, very high. That is interesting to me. And so we talked about what the market is pricing in implied volatility for CPI. What do you think it will realize and why?”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“You had a positive relationship between the bond prices and equity prices and therefore the diversification potential of going into stocks and bonds and other asset classes is pretty severely weakened. And I think if you have different levels of inflation and again different inflation volatilities, I think you face an environment where these types of correlation, the relationships just change and flip much more frequently and therefore make the diversification process just a lot more challenging.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“The difference primarily comes through whether you can diversify risk across assets. So basically usually when you have falling inflation, particularly from a higher level and you have a rally in bonds, then that provides some sort of diversification potential for other asset classes. Now, typically in a recession, you have a rally in bonds and you have a sell-off in, for example, credit and other risk assets like stocks. And that naturally hedges part of your portfolio. But if you have an acceleration of inflation, as we had seen over the last couple of years, then what happens is that yields increase in government bonds. That means the prices decline. And at the same time, you do, at least during that period, we also saw that, for example, stocks declined and therefore”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Thanks, and that's on the insurance front when it comes to assets and correlations. What do correlations look like when inflation volatility is very low? And what does it look like when inflation volatility is high? For example, when in the US, inflation went from 0% to 9% and back to 3%. What's different about that correlation regime between assets?”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Well, you know, I've protected the balance sheet because the inflation that you have on the balance sheet as an insurer is one that is linked to motor insurance, again, replacement costs. It can be construction costs if you're more in other areas of property insurance. It can be linked to wage inflation. And these are to some extent linked to the overall inflation profile, but they are only proxies. And therefore, if you want to try and insulate the inflation sensitivity of an insurance balance sheet, then you need to pull a lot of different levers in order to be ready to react to somewhat higher inflation volatility should that occur.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Well, for example, simple stock bond correlations, right? But also correlations of alternative assets and so on. And the reason why this matters a lot for insurers is because insurers are through the nature of what they do quite inflation sensitive. So when you think about, for example, motor insurance, right, then you pay a motor claim that can be a repair cost, that can be a replacement cost of a car. And if you have, for example, used car price inflation going a lot higher, then that is price inflation that you need to pay out as an insurer. And the difficulty is that this type of insurance related inflation is not something that you can hedge on capital markets because you cannot go out and buy, for example, inflation options or an inflation swap and say,”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Even two years ago. And so when you think about portfolio construction, right, the very basic principle of portfolio construction with the efficient frontiers, basically you have an expected return, you have expected volatilities, but you also have expected correlations, which are typically informed by past correlations and so on. And if you do have higher inflation. At Swiss”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Well. So, if we think about what is going on right now with inflation, recession risks, and so on, I think that is really important to think through what the implications could be. And I think one of the things that is really important for insurers to think about is not only whether inflation is going to be structurally higher going forward, but also whether inflation is going to be more volatile going forward. And actually, this is not even a hypothesis because that is what is priced into medium to longer dated CPI options right now. It's really interesting that if you compare medium-term CPI options right now in the US, then the median expectation has come down, so towards two and a quarter percent, but the distribution of outcomes that is priced right now is actually a lot wider than”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, totally. So as mentioned, I and the team established a longer term capital market assumptions that flow into the strategic asset allocation of the group. And we also provide the economic and interest rate assumptions that are used in the asset liability management process and also flow actually into the pricing of insurance and reinsurance contracts. So the views and the forecasts that we provide, they actually matter quite a bit for the balance sheet. We also provide alternative scenarios that can be strategic in nature, if you like. So we use them to evaluate our own business strategy and these types of things, but they can also be regulatory in nature where we look at stress tests, what would our liquidity and solvency position be like if such stress tests were to become reality and would we still be doing”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“A reason to have a recession. Having said that, I obviously recognize that it has a pretty decent track record in the past. And so I'm not discarding it either. But I think it's just another indicator that you need to keep an eye on.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Think it's probably a bit of both, to be honest. But then again, the yield curve inversions they have had several false positives in the past. So for me, that's just, it's just another indicator, like many other indicators. So I think one needs to evaluate the totality of indicators to make a better judgment of where we see things. But it is interesting that if you look at typical lead times of the inversion to when a recession happens, then we are still in that time frame. Now, again, if I look at the totality of indicators in the labor market, ISMs, a lot of different data aspects on the economy and on inflation, it doesn't look like we are in a broad-based recession at least, although certain segments of consumers probably do feel quite a bit of economic pressure right now. But the yield curve inversion in and off itself is not”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“And it often has preceded a recession, at least in the US. I mean, the track record is actually pretty good if you look at the three month, the 10-year. Is that worrisome to you? In other words, that's short-term rates. The long end of the curve is telling you rates should be lower, but the central banks are keeping rates higher, and that is too restrictive. Or, and maybe one sort of escape route is if central bank balance sheets are so large, it's actually sending a distorted signal because the real tenure rate should be higher. It's just that they're suppressed because central bank balance sheets own so much of the bond market.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“I would say so. I do think even if things go well and we do see a little bit of a bottoming in European growth momentum, then there's also scope to price out a bit more, almost maybe not to the same extent as what we're seeing in the US right now. But I think it's roughly fair. And at the end of the day, whether you hike or you cut rates by 25 basis points or more, that really doesn't move the dialogue all that much.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“So clear that they will change their minds as the data develops. And I think should we see cracks in the labor market, then the central bank won't continue to say the inflation threats are so large and they will try and provide at least less restrictive stances going forward.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“OIS curve right now for the ECB prices around 105 basis points of cuts until the end of the year given how precarious the economic outlook of the euro area is I think that's roughly fair and I also think it's roughly fair that there are more cuts being priced out in the US simply because there appears to be on an absolute level more strength but also on the relative level in terms of momentum that the economy has so i think that's roughly fair what we are seeing right now and of course you know once labor markets start to loosen if they do i think we also need to recognize that labor market adjustments are are often non-linear and i think we also need to respect that when we think about the rates outlook you know longer dated yields but also the central bank policy rate central banks obviously when they provide forward guidance then they do that taking everything into account but i think it's also”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Course, that's part of a negotiation tactic, and typically what is demanded initially is not what gets settled and so on. But even if we assume that they get 5%, 6%, 7%, then of course that in and of itself is not necessarily representative of other sectors, but if other sectors also see 5%, 6% wage increases, then it just becomes very difficult to make a case that you'll be able to return inflation to close to but below 2% on a sustainable basis. Negotiation outcomes over the next couple of months will show.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Well, I also believe the reaction function of the ECB has changed, and there were several governing council members coming out in the recent months, including some of the more hawkish members that have said that the next step is going to be a rate cut and therefore have tried to tee up markets to price in such an expectation. And so the reaction function, I do believe, has changed on the back of what the ECB thinks is pretty meaningful progress on the inflation front. I do think that whether they are ultimately able to follow through with the rate cuts really depends on the labor market and the wage outcomes that we will see over the next couple of months. In Germany, for example, the construction unions, the union for construction workers is demanding pay rises of slightly above 20%.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Think at the margin, yes, I think it's too easy to just say, well, you know, it's a big stimulation because, as you say, it's a question of the level as well as the rate of change. And as we discussed before, it depends on the fiscal deficit, corporate capac spending, and these types of things. It's too easy to just say, well, central banks as a result are stimulative. But at the margin, yeah, I do think that that's stimulative overall.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“My current read of the Federal Reserve is that that seems unlikely. If anything, I mean, they're trying to stop quantitative tightening, do go back to reducing quantitative tightening and then having a flat balance sheet. So if that is true, and you tell me about the ECB, is that a stimulative force for the economy? If central bank balance sheets are to remain somewhat large?”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, look, no need to overcomplicate it. To be fair, the ECB was and has been and continues to be actually quite aggressive on the QT front if you look at how they are approaching a lot of different things. But there are also many estimates that suggest that reserve scarcity in the Eurozone would only start to bite if you decrease the balance sheet by at least another trillion and potentially two trillion or so from here. So there's still quite a bit of leeway because again, I mean, we have seen just an amazing expansion of balance sheet even pre-COVID and then even more so after COVID with all the combined fiscal rescue packages. But yes, I do think that central banks should make an effort to try and reduce their balance sheets further.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Right, there's a huge binge of quantitative easing in the prior decade. A lot of central banks now are doing quantitative tightening, as you say, QT in order to reverse that. They are letting their balance sheet shrink, not expand. I guess there are two philosophies. One is that it's the size of the balance sheet that matters. And second is that it's the rate of change of the balance sheet that matters. Wouldn't you say Federal Reserve's balance sheet is so large, the ECB's balance sheet is so large that is the absolute size, but they are attempting to shrink it. So what is the solution then? Just to shrink it more, they need to go faster.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“ECB is looking into the operational framework of monetary policy, and therefore it needs to think about the size, the structural size of the reserves going forward and the size of the balance sheet. And Fed Governor Barr, I believe, earlier this week also came out saying that the details and the specifications of QT are going to be under more scrutiny going forward. So I do think that central banks should really think long and hard around about whether this size of the balance sheet and owning 20% in the BOJ's case, 45% of the entire free float of the domestic sovereign is really conducive to financial market functioning ultimately because it distorts the price of risk.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Bank of Japan actually had a paper in 2021 that showed that the stock of its balance sheet suppresses 10-year JGB yields by more than 100 basis points, maybe up to 150 basis points. A lot of investment banks have done research on this also on the Fed side. They come actually to a similar conclusion. A policy paper from the Bundesbank at the end of last year actually also suggested that the way that lending standards and tighter lending standards are passed on to the real economy actually changes in a higher structurally higher reserves regime. And they have argued that that is actually an explanation for why the tightness of monetary policy in the euro area may not be as significant as you would think given how quickly the tightening cycle has played out. And I think this is a live conversation right now at central banks right now because”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Factors are there, but I do think that when we come back to the influence of the balance sheet, if you have, for example, a Fed or an ECB that has clearly communicated that their reaction function has changed and that they have become more worried about the left tail growth risks as opposed to the inflation outlook, which in their view has had or has shown meaningful progress. And whilst the economy isn't slowing down sufficiently at that point in time, you effectively provide another financial conditions thrust that actually allows the inflation momentum to reinvigorate. And if you think about the balance sheet, I mean, there are many estimates that actually suggest that the size of the balance sheet that we are seeing right now contributes to a suppression of longer dated yields by at least 100 basis points. In other words, even the”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Think it's a key question, and I think one of the shortcomings or the caveats of financial conditions is that ultimately they're endogenous in the sense that they drive growth, but growth also drives them. So if you have a nominal GDP,”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Which is extremely sizable in many areas and many advanced economies of the world, that does suppress artificially suppress where longer dated yields should be. And as a result, that inhibits the monetary policy transmission mechanism. And I think that's something where a lot of central banks will have to do a bit of soul searching going forward, whether this type and this size of balance sheet and the composition of the balance sheet is really warranted going forward and whether the footprint that central banks have in markets is really adequate and whether that actually doesn't complicate their conduct of monetary policy further.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Fiscal deficits are roughly 3% or so. That explains a bit of the gap also in relative growth momentum that we are seeing. And compared to last year, actually, the fiscal thrust is pretty significant in the US and that has contributed to the growth environment there. Now, in addition, you have a lot of terming out of the debt. So, you know, there's just a pass-through and a time lag whereby higher interest rates then really eat into the refinancing activities of corporates and so on. And you know that there is quite a bit of a corporate debt maturity wall coming towards us over the next two years or so where corporates will have to refinance actually currently pretty benign loan terms that significantly higher rates so that that is just a matter of time but i think the third aspect and i believe that is something that is commonly a bit overlooked is the central bank balance sheet”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“A lot of these indicators would suggest that monetary policy is pretty tight. Now, when you look at standard measures of financial conditions and you can look at a whole bunch of those, there is not necessarily one that's right and the others are wrong. But when you look at a lot of them, then they do suggest that conditions right now are reasonably loose actually. And so the question is, well, how can that be? How can you have what appears to be pretty tight monetary policy stance whilst at the same time having relatively accommodative financial conditions, particularly in the US? And I think there are a couple of aspects to this. First of all, of course, and you know and many of your listeners know that the US is running an 8% fiscal deficit this year. The IMF estimates that actually the fiscal deficit is going to remain at roughly 7% for the foreseeable future. In the Eurozone, that's a bit different.”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, exactly. Yeah, I think that's a key question that is on top of a lot of different people's minds and asset allocators. So first of all, I do think that the neutral rate has risen after the pandemic for a variety of different reasons. The neutral rate, I think, is a helpful academic concept, but I'm not sure that it is all that useful in a practical sense. And that is actually why I look a lot at financial conditions to better understand how loose our conditions, how benign is the financing environment that corporates and households face. And if you look at traditional measures of monetary policy tightness, so where the policy is compared to estimated neutral rates, where real yields are, where the real yield curve is, where the Fed funds rate or the ECB rate is compared to inflation run rates, then”
2024-02-22 · Forward Guidance · Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility · IDENTIFIED FROM THE TRANSCRIPT