Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Joe. I was going
Speaker 1: to start with a really long intro for this one,
Speaker 1: but I think we can actually make it really short.
Speaker 1: What is it? I'm all for that, I'm all for
Speaker 1: We don't need We were past the era of throat
Speaker 1: clearing an intros. There's no time for that anymore. Yeah, exactly. Okay, So,
Speaker 1: anyone who's been listening to All Thoughts knows there's been
Speaker 1: volatility in the market. There's been a lot of drama
Speaker 1: in the repo market, specifically, a lot of things going
Speaker 1: on with money market funds as well. Who do we
Speaker 1: turn to in times of repo market madness? I can
Speaker 1: only think of one person when the when, the when,
Speaker 1: the phrase repo market madness comes to mind. Yeah. Um,
Speaker 1: and you would be absolutely right if you said Sultan Posar,
Speaker 1: the strategist over at Credit Sweets. He is with us
Speaker 1: once again. But to make this episode even better, we
Speaker 1: also have Perry Merling, who we've had on All Thoughts
Speaker 1: before as well. He's a professor of international political economy
Speaker 1: at the Party School of Global Studies at Boston University,
Speaker 1: and he's worked with Sultan. They've co authored some papers
Speaker 1: a long time ago, and in fact, Sultan referenced one
Speaker 1: of Perry's famous quotes in one of our original episodes
Speaker 1: with him. So basically, we have two heavy hitters who
Speaker 1: are going to walk us through what just happened in
Speaker 1: money markets. Well, I think furthermore, I mean, obviously you
Speaker 1: mentioned Ripo and Sultan's work on this, but I think
Speaker 1: part of what is so extraordinary about this moment is
Speaker 1: just the degree to which the entire monetary system is
Speaker 1: coming under strain and of course passed. We had Perry
Speaker 1: not long ago talking about this idea of the money
Speaker 1: view and how everything, all of our interactions are this
Speaker 1: this sequence and series of meeting financial obligations that we've
Speaker 1: put a uh that we've set forth, credits, debits, deficits,
Speaker 1: and so forth, everyone every aspect of it feeling the
Speaker 1: strain right now. So I think this is the perfect
Speaker 1: set of guests to help us understand this storm that
Speaker 1: we're right in the middle of. Yeah, a lack of
Speaker 1: liquidity kills you quick, as Perry would say, and we're
Speaker 1: seeing a lot of that now. So without further ado,
Speaker 1: we're going to jump right into it. Sulton and Perry,
Speaker 1: welcome to the show again. Thank you so much for
Speaker 1: coming on. Nice to be here, Nice to be here,
Speaker 1: all right, Maybe just to begin, Sultan, one of the
Speaker 1: things that you always do in your research is, I
Speaker 1: know you call up a lot of the market participants
Speaker 1: and try to get lots of color on what's been
Speaker 1: going on. Can you walk us through what you've actually
Speaker 1: heard over the past couple of weeks. Well, you know,
Speaker 1: the past couple of weeks has been um, say the lea.
Speaker 1: But you know when when all this uh fallout from
Speaker 1: the outbreak started to happen. You know, when you talk
Speaker 1: to bank treasurers in various parts of the world, and
Speaker 1: initially you would call up you know, the Japanese treasurers
Speaker 1: had treasures in Hong Kong, and you know, ask them
Speaker 1: what they would see. You would get conflicting color from them,
Speaker 1: right because depending on your business model, you were either
Speaker 1: swimming in dollars or you were losing dollars. So if
Speaker 1: you talk to Japanese banks, who are very big in
Speaker 1: trade finance, shipping finance, UM and commodities finance, you know
Speaker 1: they would say, well, we actually see a big drop
Speaker 1: off in demand. When you talk to banks in in
Speaker 1: Hong Kong or or mainland China, that's a clear dollar
Speaker 1: payments for corporations, they would say that, well, we see
Speaker 1: a lot of corporate customers bleed a lot of cash,
Speaker 1: and so the money is slipping away from them, and
Speaker 1: because it's slipping away from them, it's slipping away from us.
Speaker 1: So you know, dollars are a bit type and so
Speaker 1: it was very hard to to kind of come up
Speaker 1: with a with a with a unified team about whether
Speaker 1: this is going to be in that positive or a
Speaker 1: negative for funding. So it was a bit a bit confusing.
Speaker 1: And then I think it was the second week of January. Um,
Speaker 1: you know James Spinney, the chief economists that credit steals
Speaker 1: are third Musketeer Musketeer meeting, you know, Perry Result and James,
Speaker 1: you know, he tumbles into my office and it just says, well,
Speaker 1: you know this, I p shock that we are going
Speaker 1: through um and your stuff. I mean, this is where
Speaker 1: the two things meet because and I think this this
Speaker 1: meme from him is going to go down and you
Speaker 1: know as one of those heavy hitting means that and
Speaker 1: he said, the supply chain is a payment chain in reverse.
Speaker 1: So that's set off a certain set of sparks in
Speaker 1: my head, thinking, okay, so that's that's useful to kind
Speaker 1: of frame everything that I hear from from all these
Speaker 1: bank treasurers and these conflicting colors, because certainly, I mean,
Speaker 1: you know, if you're not producing, you don't need to
Speaker 1: finance the flow of goods commerce. So that's why some
Speaker 1: people have dollar surpluses. But then um, if you're not producing,
Speaker 1: you know, some people are not getting payments, and so
Speaker 1: that's the that's the the payment deficit of other players.
Speaker 1: And then if you think about it, you know, that
Speaker 1: kind of makes sense because in a shock like this,
Speaker 1: you know, and this became obvious at a call, you know,
Speaker 1: early February with Hong Kong clients who were you know,
Speaker 1: joking that, well, we just got our credit card statements
Speaker 1: and it's a big fat zero because nothing to spend
Speaker 1: money on. So you know, it's natural that when something
Speaker 1: like this happens, you have a bunch of deficit agents
Speaker 1: as Perry would call them. You know, these are the
Speaker 1: guys that you know lose dollars, and then you have
Speaker 1: a bunch of surplus agents, you know, entities and households
Speaker 1: that can spend because there's nothing to spend on. You
Speaker 1: can't try to do much in your apartment. And you know,
Speaker 1: the banking system's role is to basically clear these imbalances
Speaker 1: between surplus and deficit agents. The problem now is that
Speaker 1: these deficits are becoming so deep and their duration is
Speaker 1: becoming so uncertain that no bank in its right mind
Speaker 1: is going to be willing to kind of land into
Speaker 1: this you know, growing black hole so to speak. Um,
Speaker 1: you know, and then the stresses came from that in
Speaker 1: inter bank markets, and then the sets that then but
Speaker 1: we can we can get to that later on in
Speaker 1: the conversation. But basically that's that's how I would frame it,
Speaker 1: and that's how that's how these colors are are fitting
Speaker 1: together that you get from back Treasurers Harry, Harry, how
Speaker 1: would you sort of in your big big picture framework
Speaker 1: describe what you see is going on? Um? Well, Zolton
Speaker 1: has given a good lead in about the last several months.
Speaker 1: Um uh. And we had some conversations about this before. UM.
Speaker 1: What I particularly would draw attention to is what's happened
Speaker 1: in the last two weeks, okay, which is clearly um,
Speaker 1: some market breakdown and and specifically this dash for cash
Speaker 1: that has been going on that there's an attempt to
Speaker 1: liquidate the treasury bonds UM and turn them into spendable
Speaker 1: cash UM and the dealers weren't taking the other side
Speaker 1: of that, and so there was some some dislocation UM there.
Speaker 1: And also corporations that have credit lines are drawing them
Speaker 1: down in order to have that cash on hand. UM.
Speaker 1: So this dash for cash, it's a dash for dollar cash.
Speaker 1: That's another thing to say that this is a global
Speaker 1: dash for cash. And so you see that in terms
Speaker 1: of the Ford exchange movements UM as well and the
Speaker 1: intervention of the Fed week though Sunday okay was a
Speaker 1: response to all of that, UM, the kind of breakdown
Speaker 1: of the private dealer system meant the FED stepped in
Speaker 1: basically as dealer of last resort UM and UH and
Speaker 1: put a floor on the core of the of the
Speaker 1: dollar funding system. Yeah. And and what I would add
Speaker 1: to that is, you know, the dollar is always the
Speaker 1: orphan child of these funding market crisis, right because you
Speaker 1: know the the countries where these stresses flare up, and
Speaker 1: there have been a bunch of countries where where you
Speaker 1: have dollar funding stresses over the past couple of weeks.
Speaker 1: You know, they don't have any control over it, and
Speaker 1: the fed UM historically has been very slow and very
Speaker 1: reluctant kind of stepped in to to do the right thing.
Speaker 1: I think what makes this episode very special is that,
Speaker 1: you know, the set has been extremely impressive in how
Speaker 1: much they have done in how little time. Um. And
Speaker 1: you know, I'm not not just talking about you know,
Speaker 1: activating the swap lines that already existed and pulling out
Speaker 1: a lot of the you know, oh eight crisis measures,
Speaker 1: but also you know, expanding the swap lines to ten
Speaker 1: new countries that was a very big step, and um,
Speaker 1: you know, launching some new new facilities that were not
Speaker 1: launched back in two thousand and eight. So you know,
Speaker 1: the set is has done a heroic job in in
Speaker 1: back stepping this entire system. Yeah, it's kind of crazy
Speaker 1: to think that all those measures have been unveiled in
Speaker 1: just the past couple of weeks. And if we compare
Speaker 1: it back to the two thousand eight financial crisis that was,
Speaker 1: I mean, it seems achingly slow compared to what we
Speaker 1: just witnessed. Actually, just to back up for a second,
Speaker 1: both of you have mentioned the dash for cash and
Speaker 1: specifically the dash for dollars. Can you talk to us
Speaker 1: why dollar funding is so important here? Why don't we
Speaker 1: worry about local currency funding? Well, maybe I'll start there.
Speaker 1: So local currency funding we don't worry about because again,
Speaker 1: every country has a central bank, and every central bank
Speaker 1: can print local currency no problem. You know, local currency
Speaker 1: is used locally. What makes the dollar special is that
Speaker 1: everybody uses it, but the one central bank that can
Speaker 1: print it is only the set right. So you know,
Speaker 1: it's true that a bunch of countries have FX reserves,
Speaker 1: but you know, when we think about FFX reserves, people
Speaker 1: often overlook the fact that FEX reserves are basically investment
Speaker 1: portfolios that are not sitting in cash um And you know,
Speaker 1: when you need to tap into those f FEX reserves,
Speaker 1: you either are taking your money back from the fax
Speaker 1: spot market. So instead of lending dollars there, you kind
Speaker 1: of pull it back and you give it to your
Speaker 1: local banks, or if it's treasuries and mortgages, you just
Speaker 1: liquidate them. And then you liquidated them, you basically leaning
Speaker 1: on the dealer community here in in New York who
Speaker 1: then put it in the report market. And that's where
Speaker 1: that's where the stresses would would show up. But the
Speaker 1: FED and the spot lines are helpful in that regarding that.
Speaker 1: You know, they can put dollars into the system without
Speaker 1: without there being any kind of step where you would
Speaker 1: liquidate assets. And you know the fact of someone raising
Speaker 1: liquidity is stressing out money market rates just kind of
Speaker 1: not be a part of that picture. But um, that's
Speaker 1: that's why the dollar is is is so special in
Speaker 1: metricald yes. So maybe a little potantic point there. Basically,
Speaker 1: what is happening is the FED is expanding it's balance
Speaker 1: sheet on both sides, so the the desire that people
Speaker 1: have for cash okay can be met by creating more
Speaker 1: cash okay. That's what's happening um on the balance sheet
Speaker 1: of the FED. Basically because the banks themselves, the farther
Speaker 1: down the hierarchy UM have been tapped out by these
Speaker 1: clients who are tapping their their credit lines and so forth,
Speaker 1: and they're the risk of making markets in these in
Speaker 1: these instruments has made the private dealer community not so
Speaker 1: keen on absorbing the treasuries and and and and and
Speaker 1: works back securities that are being that are being liquidated um.
Speaker 1: And so the FED is doing it, and so the
Speaker 1: feed is doing it instead. So the that combination of
Speaker 1: a kind of perfect storm where there's a dash for
Speaker 1: cash and there's and and the dealer community is feeling
Speaker 1: itself constrained. UM in meeting those demands has meant that
Speaker 1: it has it has fallen upon the FED, and I
Speaker 1: would absolutely agree it has moved incredibly quickly. UM. And Tracy,
Speaker 1: you said the last couple of weeks, let us just
Speaker 1: remember it was a week ago Sunday. Okay, it was
Speaker 1: a week of Sunday. It feels so much longer. I'm sorry.
Speaker 1: I was just gonna say. One thing we forgot to
Speaker 1: do that we've been doing lately is reminding listeners the
Speaker 1: date and time that we are recording all of these episodes,
Speaker 1: because it's important to have their context because things are
Speaker 1: moving so fast. So just a reminder, we're recording this
Speaker 1: March and we started at eight am Eastern time. We're
Speaker 1: at the point where we're specifying the hour because again
Speaker 1: of how fast things changed. So Perry, continue with what
Speaker 1: you're continue with your thoughtless UM. So we've just really
Speaker 1: talked about this UM liquidity problem, and and we've talked
Speaker 1: about the way the FED has stepped in to basically
Speaker 1: enable people to switch out of their their their you
Speaker 1: know there their best assets, um, treasuries and so forth. Okay,
Speaker 1: into cash okay, Um, But it's a much larger market
Speaker 1: than that at And the deeper problem okay, that the
Speaker 1: dealer community is facing, or I would say, I'm imagining
Speaker 1: I'm going to ask Zoltan about this, is that basically,
Speaker 1: this whole shock to the global supply chain is causing
Speaker 1: a repricing of assets all over the world. And that
Speaker 1: repricing is itself a big challenge. Um. Nobody knows what
Speaker 1: value is. And the disruption of the dealer community means
Speaker 1: that that price discovery, okay, is is impaired. Um. That
Speaker 1: prices are moving because of liquidity problems. Um, that people
Speaker 1: are mistaking for value for valuation problems. Um. And it's
Speaker 1: hard to sort those things, sort those things out. Yes, yes,
Speaker 1: it's it's hard to sort them out. I mean certainly
Speaker 1: you have you know, you have you have an industrial
Speaker 1: production shock, you have a service sector shock. You know
Speaker 1: what makes this episode of special is that usually services
Speaker 1: is very a cyclical lengths table. You know, there's a
Speaker 1: bunch of IP cycles all the time. But you know,
Speaker 1: the two never coincide, and uh, you know, we've never
Speaker 1: had anything as deep as what we are going through now.
Speaker 1: You know certainly that is hitting the valuation of credit
Speaker 1: because you know, in this time around, it's not mortgages
Speaker 1: that are the problem, it's not treasuries that are the problem,
Speaker 1: but it's credit because it's the corporate sector that is
Speaker 1: basically bearing the brunt of this fallout, and so you know,
Speaker 1: that makes it very difficult to value things. Um then
Speaker 1: when you when you come to the actual market making
Speaker 1: and price setting mechanism that the dealers usually provide, you
Speaker 1: know they contribute that function either because you know, it's
Speaker 1: not only the case that everybody is trying to kind
Speaker 1: of protect itself and making sure that you're there for
Speaker 1: your corporate customer. You have promised the corporate credit linen,
Speaker 1: so you have contractual obligations to kind of need that.
Speaker 1: But also, you know, keep in mind things have been
Speaker 1: moving very fast. You know, the government is now asking
Speaker 1: the banks to show forbearance to small businesses, households, everybody
Speaker 1: in your in your in your home country, and you
Speaker 1: know in English that means basically that you know, the
Speaker 1: banks are not going to be getting interest payments. They
Speaker 1: are not going to be getting principal payments. Because you
Speaker 1: are extending the time at which you will get those inflows,
Speaker 1: you're basically increasing your loan books. So all these forbearance
Speaker 1: and all all the corporate credit lends getting drawn down
Speaker 1: is basically inflating banks and dealers balance sheets. It's adding
Speaker 1: a ton of risk graded assets. And you know, balance
Speaker 1: sheet is like an a four sheet of paper that
Speaker 1: you know, you start to scribble on when you go
Speaker 1: to the green market. I'm gonna buy this, and I'm
Speaker 1: going to buy that, and then you run out of space.
Speaker 1: You know, you can't write anymore. So balance sheet is finite.
Speaker 1: And because the balance sheet is finite and you're being
Speaker 1: asked to do the right thing locally, for people in
Speaker 1: businesses on the ground, there's a lot less balance sheets
Speaker 1: for you know, less balance sheet for making markets in repo,
Speaker 1: less markets, less balance she didn't making markets in the
Speaker 1: FX spot market less balance sheet to take on you know,
Speaker 1: credit assets as on your inventory to kind of smooth
Speaker 1: the pricing mechanism. So in all this market making stuff
Speaker 1: is becoming luxury. Uh as I said in a recent note,
Speaker 1: and uh you know. That's why it was so important
Speaker 1: and so good that the FED stepped in, as I mean,
Speaker 1: I would even say they are like dealer, a first
Speaker 1: resort because you know, no one is going to have
Speaker 1: the the the ability to kind of make markets on scale,
Speaker 1: so they stepped in and they are taking on some
Speaker 1: of this market making and price setting process. And you
Speaker 1: know what, what Perry would say is that the FED
Speaker 1: is not making the outside spread. But that's basically what
Speaker 1: this is about. That that private market making mechanism is
Speaker 1: I wouldn't say broken, it's just probably taking a little
Speaker 1: bit of a back seat because you have to provide
Speaker 1: so much on the ground. Yes, I would I would
Speaker 1: say that it is making the outside spread. That's right, okay,
Speaker 1: but it but it's important to note that it's making
Speaker 1: it's making this spread. It's making these markets in very
Speaker 1: specific core area of the market, okay, not the not
Speaker 1: the whole thing. Um. And that that will keep the
Speaker 1: wheels from falling off the entire wagon, right, But there
Speaker 1: is still going to be a lot of disruption. And
Speaker 1: that's because valuate value discovery. It's not so hard in treasuries, okay,
Speaker 1: because um, we know that the US government is going
Speaker 1: to survive this crisis, um, even if it has to
Speaker 1: borrow another two trillion dollars or whatever. Um. This is
Speaker 1: war finance. It's war. The US will still be around.
Speaker 1: Whatever industries recover will pay taxes to the federal government.
Speaker 1: And that is that means that treasuries are are are
Speaker 1: good assets. Were not, however, sure that all these industry
Speaker 1: industries are going to survive um, or that they will
Speaker 1: emerge from this crisis in in the same form as
Speaker 1: they went into it, Okay. The the natural feeling is
Speaker 1: to imagine that somehow we'll just restart the economy like
Speaker 1: it was before. That seems to me improbable, okay. And
Speaker 1: so the the price discovery mechanism is also about the
Speaker 1: reallocation of capital um. This is a very big real
Speaker 1: side shift, um. And it's important to use the apparatus
Speaker 1: of government to facilitate that real side shift. That's not
Speaker 1: about the FED. Okay. That that's the FED is just
Speaker 1: providing liquidity in core markets. Okay. Uh, that's that's a
Speaker 1: bigger problem. And and the fiscal side of this is
Speaker 1: where that's going to be dealt with. I would imagine, Perry,
Speaker 1: I wanna just act both of you start with Perry
Speaker 1: on this point a little bit further, because I think
Speaker 1: it's key. We've seen, as you mentioned, Okay, the FED
Speaker 1: can easily make a market in treasuries. We've seen an
Speaker 1: expansion of the FEDS role in other sort of private
Speaker 1: credits money markets, uh, high quality investment grade company credit.
Speaker 1: And so far, how far can the FED go in
Speaker 1: this realm before it becomes clearly outside of anything that
Speaker 1: the FED is equipped to do in terms of back
Speaker 1: stopping and keeping the flow of credit going to industries that,
Speaker 1: as you point out, um, you know, may not exist
Speaker 1: post crisis. Well, it's important to the details of these
Speaker 1: facilities are still coming clear. But but so far as
Speaker 1: I can see, they're following the playbook of two thousand
Speaker 1: and eight, which is it's very important to appreciate that
Speaker 1: the FED is basically not taking credit risk, Okay, Um,
Speaker 1: the it is that it is the Treasury or some
Speaker 1: other body okay, that is going to be taking credit risk. Um.
Speaker 1: The FAT can expand its balance sheet. There is essentially
Speaker 1: no limit. I mean, you could put the entire financial
Speaker 1: system on the FATS balance sheet, and that's sort of
Speaker 1: what we do in wartime. Um. But I don't think
Speaker 1: we're we want to do that because getting it back
Speaker 1: off the balance sheet is not so easy. Um uh.
Speaker 1: And so that's what we're trying to do, is to
Speaker 1: be selective um and uh and and and and think
Speaker 1: about what comes after. Yeah, I mean, maybe I can
Speaker 1: I can share a little anecdote that it's just it's
Speaker 1: just remarkable how you know, the reflexes of the market
Speaker 1: don't really change because a lot of a lot of investors,
Speaker 1: you know that they are buying you know, that are
Speaker 1: buying credit um from the world over in a hedge basis.
Speaker 1: You know, credit is cheap now because the fat cut
Speaker 1: rates zero hedging costs are wayeep er. So this is
Speaker 1: a great opportunity to to kind of load up. And
Speaker 1: you know, old habits die hard. But I but I
Speaker 1: would agree that there will be some long term implications
Speaker 1: from you know, what death is viable and and and
Speaker 1: what is not. And you know, when you look at
Speaker 1: corporate credit de thoughts over over time, you know what
Speaker 1: you notice is that you always have sectors that were
Speaker 1: hit by something unexpected. Uh and that was their undoing.
Speaker 1: So like Kodak in Rochester, New York, and the cigarette
Speaker 1: companies and and and all this stuff, right, so you
Speaker 1: always have these things. And I think COVID nineteen is
Speaker 1: is another one of those where if you have some
Speaker 1: long lasting changes to the ways people live, I mean,
Speaker 1: maybe no one's gonna go to you know, not to
Speaker 1: take concertain sectors, but you know, you can you can
Speaker 1: let your your imagination run free. So you know, and
Speaker 1: you know, there's going to be a lot of sectors
Speaker 1: within the i G universe, the investment grade universe that
Speaker 1: are are going to be subject to these changes, and
Speaker 1: maybe some of that that is not going to be viable.
Speaker 1: The set is following this dictum of you know, land
Speaker 1: freely against what normally is good collateral and so in
Speaker 1: the current circumstances, now that that includes credit. But again,
Speaker 1: what we have so far is a one page term sheet.
Speaker 1: You know, it's unclear who can issue into it. It's
Speaker 1: unclear at what price they will take, you know, the
Speaker 1: primary issuance, it's unclear what price they will buy the
Speaker 1: secondary paper. It's helping the liquidity and to kind of
Speaker 1: make sure that people are not having cash flow problems,
Speaker 1: assuming in a way that you know, this stuff is
Speaker 1: going to go away in six months and if it doesn't.
Speaker 1: I think that's a completely different conversation and I'm much
Speaker 1: more complicated. So since we're talking about credit risk and
Speaker 1: timelines here, I wanted to ask about thinking relations in
Speaker 1: the current scenario, because even though we've seen this massive volatility,
Speaker 1: we haven't really seen the banks necessarily strained, or at
Speaker 1: least not strained in the way they were back in
Speaker 1: two thousand eight. Lots of people are talking about how
Speaker 1: this is vindication for the regulators. For instance, you know,
Speaker 1: all the banks have to hold high quality liquid acid
Speaker 1: portfolios now that cover I think it's a month's worth
Speaker 1: of outflows or something like that. So how have those
Speaker 1: measures helped in the current crisis, and also how have
Speaker 1: they sort of played a role in what we've seen
Speaker 1: over the past few weeks as well. Oh, they have helped.
Speaker 1: They have held a lot. So you know, I get
Speaker 1: that question. A lot, you know should direct the ease,
Speaker 1: and I would say absolutely not. You know, that would
Speaker 1: be a mistake, just for context. In two thousand and eight.
Speaker 1: You know, the way the the you know, the game
Speaker 1: used to work is you know someone it's called the
Speaker 1: ft on Friday saying well, we don't have money, we
Speaker 1: can't open up on Monday, and then everybody had to
Speaker 1: go in, you know, on the weekend to kind of
Speaker 1: figure stuff out for the Monday open and so, you know,
Speaker 1: in my mind, you know, the whole purpose of basil
Speaker 1: tree is to kind of elongate that responds time to
Speaker 1: thirty days, you know. So the reason why we managed
Speaker 1: to get this far without the banking crisis is because
Speaker 1: the banking system has been fortified by the curity buffers,
Speaker 1: by capital buffers, by limits on balance sheets, limits on
Speaker 1: you know what banks can carry on their on their books,
Speaker 1: all these all these things, and so that is a
Speaker 1: very important part of the picture. And that's why we
Speaker 1: don't have a viral outbreak with a banking crisis. You know,
Speaker 1: if we had this outbreak in oh wait, we would
Speaker 1: have had a banking crisis because of this, because of
Speaker 1: this outbreak. So you know, that's a that's a good thing.
Speaker 1: You know, when you go into the finer detail, you know,
Speaker 1: you will you will realize that some jurisdictions already required
Speaker 1: their banks to match outflows in one currency with liquid
Speaker 1: assets in the same currency, and some jurisdictions have not.
Speaker 1: So that's why, you know, when these dollars started to
Speaker 1: sleep away in certain parts of the world. Um, you know,
Speaker 1: the liquidity problems showed up very quickly because you know,
Speaker 1: you had your hq A, your liquid asset in local currency,
Speaker 1: but your outlaws were happening in dollars, so you have
Speaker 1: to go into the x pop markets kind of which
Speaker 1: the difference. But but so you know, the regulations were
Speaker 1: a good thing in in the current context in terms
Speaker 1: of this luxury thing that you talk about, right, the
Speaker 1: banks have finite amount of balance sheets, you know, because
Speaker 1: you're being asked to provide more for the real economy,
Speaker 1: you don't have as much package. Market making should be
Speaker 1: easy the rex for that, No, because again you know,
Speaker 1: the first and foremost goal of the regulator and the
Speaker 1: set in this count in this and and other central
Speaker 1: banks too in this environment is to make sure that
Speaker 1: you know, people don't take money out of the bank, okay,
Speaker 1: So so that's very important to keep all these things
Speaker 1: in place. And again, you know, the technology exists for
Speaker 1: central banks to become market makers in the report market, um,
Speaker 1: and in the fx spock market, I mean the report market,
Speaker 1: and everybody can kind of landing on the margin and
Speaker 1: the set is doing it. It's now on the MINT
Speaker 1: repos and now we have the spop lines with fifteen
Speaker 1: central banks, and you know those central banks are basically
Speaker 1: swapping currencies between each other just like banks and dealers.
Speaker 1: Would you know, whatever currency or banks in the local
Speaker 1: jurisdiction need, you can just give it to them through
Speaker 1: repo operations, you know, so so that the infrastructure is
Speaker 1: there to kind of back sed up this market making
Speaker 1: mechanism that private banks normally do. And so I think
Speaker 1: that would be the preferred path that you see some
Speaker 1: extension in central bank balance sheets, central banks becoming more
Speaker 1: active as market makers, and then you kind of preserve
Speaker 1: the banking system and the existing book of business that
Speaker 1: they have in this you know, protective casing of basil
Speaker 1: tree and then over and above that, you know, when
Speaker 1: you think about how how the banks should be kind
Speaker 1: of enlisted to kind of uh finance the war efforts,
Speaker 1: as very uh I mentioned before, I don't know. I
Speaker 1: mean it's going to be a combination of probably you know,
Speaker 1: government guarantees on loans that you make in this environment,
Speaker 1: and you know, central bank funding of those loan books
Speaker 1: and whatnot. But I think you should you should conceptually
Speaker 1: think about that as a separate book of business, you know,
Speaker 1: your COVID nineteen book of business that you will be
Speaker 1: building over and above, you know, whatever your pre existing
Speaker 1: book of business was. But again, you know, don't touch
Speaker 1: the rags because because that's would be more harm and good.
Speaker 1: You know. One of the things that you hear people
Speaker 1: say in terms of getting through this crisis, and it
Speaker 1: goes to what you were just talking about with forbearing
Speaker 1: ald Town. But I think it's important is they say, like,
Speaker 1: why can't we just put applause on everything? All payments stop?
Speaker 1: Nobody pays it has to pay their mortgage for the
Speaker 1: next three months, nobody has to pay their rent, etcetera.
Speaker 1: That keep cash in people's pockets while they're not working,
Speaker 1: and so forth. Talk to us, um about either of you,
Speaker 1: but result and maybe you can start and Perry please
Speaker 1: then add in your thought, Yeah, well I'll take that one.
Speaker 1: I'll take that And this is a this is a
Speaker 1: high level point. Yes, So here's the here's the thing
Speaker 1: from the money view, okay, that one person's cash outflows
Speaker 1: or another person's cash inflows. So that um, when you
Speaker 1: when you say, well, um, one way for me, okay
Speaker 1: to build up my cash balances to to make to
Speaker 1: match my my uh diminished inflows to my uh is
Speaker 1: in fact just to stop stop paying, you know. But
Speaker 1: that of course spreads the virus, right because then somebody
Speaker 1: else is going to have a diminished cash inflow. So uh,
Speaker 1: that's that's that's a concern, okay. And it's sort of
Speaker 1: that's what Alton was hinting about about this forbearance, right
Speaker 1: that so you want to make sure that you you
Speaker 1: don't have a multiplier effect that comes from that. And
Speaker 1: you can do that if you're using the government's balance
Speaker 1: sheet more generally, not not the Fed here, you know that.
Speaker 1: So it's that, yes, I'm not paying my mortgage, but
Speaker 1: the government's paying the mortgage, you know, so then you
Speaker 1: then you stop that spread. Um. And that seems to
Speaker 1: be sort of what the idea is behind this fiscal
Speaker 1: package um. And in multiple areas of the of the economy,
Speaker 1: the Fed is trying to keep the short term money
Speaker 1: markets operating. Okay, Notice you know it is it is
Speaker 1: important what's Alton said to distinguish between that kind of
Speaker 1: thing and this fiscal operation the longer term war finance
Speaker 1: though that's a different story. Okay. But but putting you know,
Speaker 1: putting out these liquidity swaps at at twenty five basis
Speaker 1: points that that's a very tight spread. Okay, so that's
Speaker 1: tighter than it ever was in two thousand and eight,
Speaker 1: I think, you know, So this is the central bank
Speaker 1: saying forget this cross currency basis swap thing, okay that
Speaker 1: you've been desperately trying to do, you know, to facilitate
Speaker 1: global dollar funding. Will do it. The central banks are
Speaker 1: are stepping up big time. That's that's a very strong message.
Speaker 1: And so I just want to underline underline that, and
Speaker 1: and the commercial paper facility UM as well. You know
Speaker 1: what we haven't talked about what's been happening in the
Speaker 1: in the money market mutual funds, okay, and the way
Speaker 1: the way that this is really backstop for the money
Speaker 1: market mutual funds, where there's this shift out of prime funds.
Speaker 1: Why because there's concern that the that the bank credit
Speaker 1: and the and the and the corporate credit that are
Speaker 1: the assets of these funds UM may not be what
Speaker 1: we thought they were. And and and these prime funds
Speaker 1: are marked to market, so you have shifting around. You
Speaker 1: are a bit of a run on these prime money
Speaker 1: market mutual that's not happening in banks. It's not happening banks,
Speaker 1: That's what Alten was saying. And I'm just observing that
Speaker 1: it is happening to some extent in prime money market
Speaker 1: mutual funds, and it's being back stopped by banks. So
Speaker 1: just on that note, another thing that's sort of come
Speaker 1: up once or twice is the notion of whether or
Speaker 1: not the FED has the right tools to solve something
Speaker 1: that's sort of happening on the I hesitate to use
Speaker 1: the word shadow banking side of things, but you know,
Speaker 1: we are talking about money market mutual funds. We're talking
Speaker 1: about some of the big buy side players who are
Speaker 1: suffering in all of this. We're talking about the repo
Speaker 1: market as well. Um, does the FED have the right
Speaker 1: tools or is the FED sort of hamstrung by having
Speaker 1: to deal with banks as intermediaries. Well, you know they have,
Speaker 1: they had the right tools, I would say, but this
Speaker 1: is like you know, a sword, it's just a matter
Speaker 1: or of high wielding. You know, everybody can pick up
Speaker 1: and again, you know, the scaffolding is in place. Um,
Speaker 1: and I think what needs to be done now is
Speaker 1: basically just you know, calibration and making sure that the
Speaker 1: things fit a little bit better together. You know, this
Speaker 1: shuttle banking point that you mentioned, carry trading is basically
Speaker 1: what got us into trouble in two thousand and eight.
Speaker 1: You know, Perry's description of carry trading and shadow banking
Speaker 1: is money market funding of capital market landing. And you
Speaker 1: know we've talked about some of this stuff on on
Speaker 1: earlier episodes. But you know when we talked about the
Speaker 1: curve inversion and the foreign has buyers, hedging costs and
Speaker 1: all that stuff, I mean, that's carry trading and that's
Speaker 1: money market funding of capital market landing. Because whoever comes
Speaker 1: to the US to buy dallar assets that are relatively
Speaker 1: better yielding than zero interest rates in a bunch of
Speaker 1: jurisdictions and then you hedge it back that dallar the
Speaker 1: hedge that at a set back to local currency. That's
Speaker 1: basically borrowing dollars and rolling those dollars you borrow every
Speaker 1: three months in the affe spot market. So you know,
Speaker 1: when you when you're looking for the rain coronation of
Speaker 1: the shadow banking system, that's what it is. You know,
Speaker 1: it's uh, it's not sieves, and it's not found to its,
Speaker 1: and it's not credit hedge funds that invest in mortgages.
Speaker 1: But rather it's basically the post fee theme, which is
Speaker 1: that in a bunch of jurisdictions, you know, Europe, Japan, Scandinavia,
Speaker 1: you had the negative interest rates and pension funds with
Speaker 1: positive liabilities in those jurisdictions. Came to the US, which
Speaker 1: was the highest shielding G seven economy where you could
Speaker 1: buy stuff, and you know, you bought treasuries, uh, you
Speaker 1: bought mortgages, you bought investment great stuff. You know a
Speaker 1: lot of that stuff has basically companies issuing that to
Speaker 1: buy back. There's doctor paid dividends, you had financed a
Speaker 1: large private equity, boom clos, all these things, and he
Speaker 1: has it back to local currency. So you know, the
Speaker 1: FED is essentially back stopping the shadow banking system. Again.
Speaker 1: The only thing that's missing in this whole edifice is
Speaker 1: probably has less to do with the set I think
Speaker 1: for the FEED. The big step was to extend the
Speaker 1: spot lines to jurisdictions other than the original five, which
Speaker 1: were Canada, the UK, Europe, Switzerland and Japan. The responsibility
Speaker 1: now is with the local central banks that were given
Speaker 1: the new local central banks that were given access to
Speaker 1: these spop lines, the new and the old central banks
Speaker 1: that that have access to the spot lands, which is
Speaker 1: to kind of take the big step and go around
Speaker 1: banks and lend those dollars to end users directly, right
Speaker 1: because what I mentioned about banks being has to show
Speaker 1: forbearance to local businesses and households. You know, that's a
Speaker 1: team in every country where where where we have an outbreak,
Speaker 1: and so the banks are not really going to have
Speaker 1: the balance sheets to take the dollars from the central
Speaker 1: bank at oislaswenty five, which is Verry mentioned is very cheap,
Speaker 1: very tight um even compared to to to de all
Speaker 1: its prices and pass it on at the same price
Speaker 1: to the end users, because the banks don't have the
Speaker 1: balance sheet to do that. Right, So when you commit
Speaker 1: balance sheet to be an intermediary, the prices which you
Speaker 1: will end those dollars on is going to be way higher.
Speaker 1: And those precidesly what you see in the FX spot market,
Speaker 1: where you know implied yields are way bigger than oys
Speaker 1: plenty five. When we were talking about stuff like OI
Speaker 1: plas a hundred or as pass a hundred and fifteen
Speaker 1: some jurisdictions, and that big spread is going to exist
Speaker 1: for as long as the central banks that get the
Speaker 1: dollars from the set make the big step and and
Speaker 1: start lending those dollars onto end users direct being that
Speaker 1: could be local tension funds, local life insurance companies, you know,
Speaker 1: asset managers that run separate accounts for these life insurance companies,
Speaker 1: and intention funds. So you know, a theme that we've
Speaker 1: been emphasizing all these years in in some joints work
Speaker 1: with Perry and James Sweeney is that, you know, the
Speaker 1: central bank should be back stopping markets, not institutions. And
Speaker 1: so for now we are still a very institution specific
Speaker 1: in that everything we're trying to do we're trying to
Speaker 1: do through the balance sheet of a bank. But again,
Speaker 1: I think this is the time to to probably consider
Speaker 1: broadening the entities that to do operations. I want to
Speaker 1: ask a question, Perry, to you about what the post
Speaker 1: crisis landscape looks like, because I remember, I think I
Speaker 1: was watching one of your lectures on YouTube and you
Speaker 1: described in one of them how the economy essentially consisted
Speaker 1: of all of us making these big taking these big risks,
Speaker 1: these uh promising future obligations. I think you're compared it
Speaker 1: to sort of building a bridge if we don't really
Speaker 1: know where the bridge is going. And anyone who has
Speaker 1: a mortgage has committed to making a month police payment
Speaker 1: for the next thirty years of their live despite the
Speaker 1: fact that they really have no idea what's going to
Speaker 1: happen over the next thirty years of their lives between
Speaker 1: their employment and the stock market and everything else. After
Speaker 1: we have this incredibly sharp, severe shock to everyone's cash
Speaker 1: flows all at the same time. It's truly like traumatic
Speaker 1: global episode. You have a lot of economists are like, Okay,
Speaker 1: we're gonna have some sort of V shaped recovery after
Speaker 1: we get the virus beat in Q two, then we're
Speaker 1: gonna get this Q three rebound as everyone goes back
Speaker 1: to work and spending. But what does this look like
Speaker 1: to you when in terms of the future of people
Speaker 1: being willing to commit themselves to making long term financial
Speaker 1: obligations after coming through an experience like this, Well, that's
Speaker 1: the big one, isn't it. Okay, And this gets back
Speaker 1: to this gets back to what we were talking about
Speaker 1: twenty minutes ago. Okay, about that this is a shock
Speaker 1: that is that is changing the landscape. Okay, And so
Speaker 1: as you're that that in terms of building this bridge,
Speaker 1: you know, we were building this bridge toward the future,
Speaker 1: and the last mile of that bridge is just all collapsed, okay.
Speaker 1: And the shore that we thought we were building towards
Speaker 1: is not It turns out it's not there, and so
Speaker 1: we need to build in another direction, okay. And what
Speaker 1: that direction is will emerge from millions of decentralized decisions
Speaker 1: or guesses or or or views about that. There will
Speaker 1: be some you know, government guidance. But just go back
Speaker 1: to two thousand and eight, okay, and observe that what
Speaker 1: what happened in terms of the expansion of credit since
Speaker 1: two thousand and eight, it's really mostly a story about
Speaker 1: the periphery, about the emerging market economies, okay, expanding dollar borrowing. Okay.
Speaker 1: Sultan said, how you know these pension funds in Europe
Speaker 1: are coming and buying assets in the United States, They're
Speaker 1: buying dollar assets in Brazil. Okay, They're buying dollar assets, um,
Speaker 1: all over all over the world. Um. It's a it's
Speaker 1: it's the offshore ding system. Uh. It really expanded and
Speaker 1: was the locomotive of the world economy. Um after two eight.
Speaker 1: I don't know that anyone expected that. Okay, that was
Speaker 1: driven by the negative interest rates in the in in
Speaker 1: Europe um and the very positive interest rates you know
Speaker 1: in the periphery. This is a dollar crisis, yes it
Speaker 1: is okay. But what will emerge out of this? I
Speaker 1: think we don't know, and uh it will. It will
Speaker 1: be helpful to have some idea um at some point
Speaker 1: because once you see distantly the shore, then you can
Speaker 1: start making promises right that you you know where you're
Speaker 1: building toward, you know what you're building toward. Right now,
Speaker 1: I think we don't know what we're building toward. We're
Speaker 1: imagining that particular industries. Industries are definitely on hold. You know,
Speaker 1: all the restaurants are shut, all the theaters are shut,
Speaker 1: you know, talking about New York City. But presumably that's
Speaker 1: not forever um, it's that's just a virus thing. But
Speaker 1: there are the supply chains, the rebuilding of the supply chains,
Speaker 1: or the dismantling of them. You know this story about
Speaker 1: on showing are all of our all of our pharmaceutical
Speaker 1: production or things like that. These these take time. It's
Speaker 1: dismantling part of the bridge that had been built, and
Speaker 1: building the bridge in a different in a different direction.
Speaker 1: M Re Sulton, I'd love to hear your thoughts on
Speaker 1: the long term implications for the way the financial system works,
Speaker 1: specifically since um you've been writing about basically the lingering
Speaker 1: impact of what happened in two thousand and eight on
Speaker 1: how the rebolt market works and and what it means
Speaker 1: when it clashes with the winding down of the Federal
Speaker 1: reserves balance sheet. How do you see this playing out
Speaker 1: over the longer term. Well, it's it's probably too um
Speaker 1: too early to say. I mean, obviously, you know some
Speaker 1: of the base questions is you know, how long is
Speaker 1: this going to persist? This is going to be recurring? Um,
Speaker 1: are we kind of going to have to reorganize our
Speaker 1: economies and and way of lives and ways of finance
Speaker 1: around this? But I think I think the regulations are
Speaker 1: going to be still in place. Probably the regulations are
Speaker 1: going to be a bit tougher because you know, this
Speaker 1: is now This is no different from global warming and
Speaker 1: what it means of finance and standard assets. And you
Speaker 1: know all the good work that the Bank of England
Speaker 1: under under Governor Carny has has highlighted in the past.
Speaker 1: You know, this is just this is just a variation
Speaker 1: on that team, where like we have this viral outdate
Speaker 1: that's causing havoc across the financial system. Global warming could
Speaker 1: be that issue in a couple of years. So I
Speaker 1: guess one thing that can come out of this is,
Speaker 1: you know all these tale risks that we talk about,
Speaker 1: it don't happen. They are very real. They can happen.
Speaker 1: So should we do anything over and above basil three
Speaker 1: to kind of fortify things? That's number one. Number two,
Speaker 1: I think longer term supply chains are going to be
Speaker 1: rethought because whether this is a one in a hundred
Speaker 1: year or one in twenty year, or one every two
Speaker 1: years or twice every year event. I think it was
Speaker 1: becoming very apparent is that the way we have organized
Speaker 1: the world around us doesn't really work. I mean, you
Speaker 1: can't have just one country produce everything and everybody being
Speaker 1: exposed to to that link in the chain. You know,
Speaker 1: what we issue debt for is going to be thought about. Um.
Speaker 1: I think even the government can think about ways to
Speaker 1: kind of put caps on I don't know, stock buy
Speaker 1: back stuff like that, because you know, corporations should be
Speaker 1: taking a share of of of making sure that when
Speaker 1: things like this happen. You know, they can they can
Speaker 1: they can read two more efficiently. You have spare factory
Speaker 1: capacity and all these things. And then third, I think,
Speaker 1: you know, when it comes to so we talked about
Speaker 1: the banks to talk about you know what what company,
Speaker 1: how companies are gonna be running their supply chains. But
Speaker 1: they can issue that for you know, what's a reasonable
Speaker 1: amount of debtload that you can run with? Right? I
Speaker 1: mean a part of the reason why we have to
Speaker 1: you know, back stuff the i G market is because
Speaker 1: a lot of death that was issued was basically there
Speaker 1: to do financial engineering, you know, buy back stocks and
Speaker 1: pay dividends and all that stuff. So maybe our tolerance
Speaker 1: for that going forward is going to be less. Then
Speaker 1: a third thing, you know, portfolio investing. I mean, the
Speaker 1: only the only then that's been driving those cloths is
Speaker 1: where is the yield the best? You know A Sperry said,
Speaker 1: you know, all issuing dollars because my local yields are
Speaker 1: even higher. And then I'll buy dollars because my local
Speaker 1: yields are zero. You know. So So I think when
Speaker 1: you when you are a portfolio investor and and you
Speaker 1: know your government can very easily put its foot time
Speaker 1: and say all right, all this you know, yield chasing,
Speaker 1: cross border stuff. Let's put an end to it. And
Speaker 1: how about we, you know, issue more sovereign that you
Speaker 1: buy that stuff and we spend the money on building
Speaker 1: more hospitals, more dams. I don't know, you know, use
Speaker 1: your imagination, but basically, at a time of worthy ends,
Speaker 1: which is a theme we referred to earlier, I think
Speaker 1: the emphasis is going to be on financing stuff locally
Speaker 1: and and less less on the global themes. And so
Speaker 1: I think this is just going to fracture the world
Speaker 1: of finance for share, it's going to change it. And
Speaker 1: I think it's going to make the world one too,
Speaker 1: you know, a little separate islands floating in ocean, but
Speaker 1: you're not going to be as connected and as global
Speaker 1: as as we do. So both of you have mentioned
Speaker 1: this idea of maybe reorganized thing supply chain so that
Speaker 1: one country isn't responsible for making one critical item, and
Speaker 1: Sultan you previously described the supply chain as basically a
Speaker 1: payments chain. So I'm wondering what happens to the status
Speaker 1: of the dollar in the international financial system. Do you
Speaker 1: think we might see a concerted effort to sort of
Speaker 1: move away from it a little bit. Uh, Perry, I'd
Speaker 1: love to hear your thoughts and then maybe Sulton, well,
Speaker 1: it's it's the the My view on these things is,
Speaker 1: watch what markets are doing in at the moment. Everyone
Speaker 1: wants dollars. You know that if they don't want gold,
Speaker 1: they don't want You know that this is this is
Speaker 1: what money is internationally. Um So. I think that it is,
Speaker 1: and that the dollar is strong, not not weak. So
Speaker 1: I don't see a move to a multi currency system.
Speaker 1: Sultan story about breaking up the global global system into
Speaker 1: individual nation states, I hope that doesn't go too far, okay,
Speaker 1: because there's a lot of productivity games that come from
Speaker 1: uh distribution division of labor internationally um And it's a
Speaker 1: big productivity shock to to the globe if you if
Speaker 1: you break all that down um so. But I do
Speaker 1: think there's a there's a challenge to the globalization. Um.
Speaker 1: I think that financial globalization could continue um even if
Speaker 1: even if real side globalization is pulled is pulled back.
Speaker 1: There are big efficiencies in having a single world currency
Speaker 1: for trading and for and for finance. And I think
Speaker 1: that we were we're seeing that it does require somebody
Speaker 1: to manage it. Um. And that is if there's a
Speaker 1: particular if there's a particular country that's issuing that currency. Um.
Speaker 1: That's what we're seeing that the US is sort of
Speaker 1: managing that and that's a responsibility. And uh it is uh,
Speaker 1: it's it's a good thing. It's a good thing. Yeah,
Speaker 1: I mean to two things I would add to that. Um.
Speaker 1: I mean, I certainly agree with the productivity games we've
Speaker 1: had from you know, specialization and all that. But I
Speaker 1: guess that's precisely the problem that we were too efficient
Speaker 1: and specialized. And you know, if you went to business school,
Speaker 1: you would learn about you know, synergies and this and that,
Speaker 1: and we can eliminate duplications and we can have one
Speaker 1: company that makes breeding machines in the world. So I
Speaker 1: would I would disagree with you, Perry. So I think
Speaker 1: that is going to come under review. But hopefully we
Speaker 1: are going to keep a lot of the good things
Speaker 1: about globalization in in in place. We just kind of
Speaker 1: recalibrate it. So let's put it that way. In terms
Speaker 1: of the dollar, again, you know, I would have worried
Speaker 1: if the FED doesn't do the writing in terms of
Speaker 1: the spot lines. But again they did and so, and
Speaker 1: so I think the dollar is going to probably come
Speaker 1: out stronger from all this because of it, um and
Speaker 1: and so that was that was a good thing that defended. Okay, well,
Speaker 1: absolutely fascinating conversation. It was so good to have both
Speaker 1: of you on. And I guess the next episode we do,
Speaker 1: We're going to have to get James Sweeney on and
Speaker 1: we'll have all three of you, the Money Market Trio,
Speaker 1: the Three Musketeers, Let's do it. Let's I'm already looking
Speaker 1: forward to that. It is really a treat and an
Speaker 1: honor to get to talk to about the views. So
Speaker 1: thank you for taking the time. Great, stay safe, So, Joe,
Speaker 1: I thought that was absolutely riveting conversation. We touched on
Speaker 1: so many of the sort of smaller technical themes, but
Speaker 1: also some of the big picture themes. And what I
Speaker 1: really like about talking to Sulton and Perry is that
Speaker 1: they always bring that real world perspective. This is what
Speaker 1: they're actually observing in financial markets at this moment in time,
Speaker 1: or in the case of Perry, this is how real
Speaker 1: world behavior can actually affect the flow of money. Yeah,
Speaker 1: it's that really was a treat getting to talk to
Speaker 1: both of them at the same time like that, I
Speaker 1: don't have too much to add because I think they
Speaker 1: said at all. I love um Perry's analogy of this idea.
Speaker 1: We were building a bridge somewhere and that last mile
Speaker 1: of the bridge has been destroyed. And until we know
Speaker 1: what the end of the what the what the new
Speaker 1: shore looks like? No wonder how things are so chaotic
Speaker 1: and unstable and financial markets because until we have some
Speaker 1: view of what that looks like, how can you do anything? Yeah,
Speaker 1: And I think the conversation really crystallized the idea that
Speaker 1: what we're seeing in markets right now is this cash
Speaker 1: shortage or a run on cash and a non dollars specifically.
Speaker 1: So it really highlights the centrality of the dollar, which
Speaker 1: is something that we've discussed in a bunch of previous
Speaker 1: All Thoughts episodes now, and it also highlights the power
Speaker 1: of the FED right like the Federal Reserve right now
Speaker 1: is basically responsible for keeping the entire global financial system
Speaker 1: afloat uh. And I take Sultan's point that what they've
Speaker 1: done so far has been great, But I guess my
Speaker 1: question is if this were to happen again in you know,
Speaker 1: four years time or a longer horizon, would the FED
Speaker 1: do the same thing. Can we always rely on this
Speaker 1: one body to sort of inject as many dollars as
Speaker 1: needed into the financial system. Yeah, you know, thinking about
Speaker 1: past episodes we've done, one that I would recommend people
Speaker 1: listen to is David Beckworth. We talked to him last
Speaker 1: summer regarding that Mark that Mark Partney speech at Jackson
Speaker 1: Hole last summer. We've got a lot of attention because
Speaker 1: he identified this exact issue, which is that you know,
Speaker 1: we don't have a gold standard anymore, but we do
Speaker 1: have a dollar standard, and essentially that everybody has to
Speaker 1: all around the world. I love I think it was
Speaker 1: as Perry put it, it's like European investors going to
Speaker 1: Brazil for dollar investments, Like that is the world we
Speaker 1: live in, which is that no matter where you are,
Speaker 1: essentially you're scrambling and looking for ways to acquire dollars
Speaker 1: or make money in dollars. And we're really seeing that
Speaker 1: that sort of that need and demand on sort of
Speaker 1: hyper speed over the last few weeks. Yeah. And the
Speaker 1: other one has got to be here and Sumption from
Speaker 1: the Bank for International Settlement. Yeah, he's done so much
Speaker 1: research on this about specifically how a stronger dollar sort
Speaker 1: of feeds into the rest of the world, and that's
Speaker 1: certainly something that we're seeing again at this moment in time.
Speaker 1: But and that would occur. I would encourage anyone if
Speaker 1: you're at home, pull up a chart of the dollar
Speaker 1: over the last three months and just look at the
Speaker 1: straight lineup. It is really one of the most jaw
Speaker 1: dropping charts. The stock market crashy is a jaw dropping chart,
Speaker 1: but the straight line up in the dollar is the
Speaker 1: sort of purest crystallization of this incredible demand for what
Speaker 1: is essentially the sole global currency. Yeah, if you're stuck
Speaker 1: at home, pull up the dollar chart and listen to
Speaker 1: a couple of All Thoughts episodes all about the dollar.
Speaker 1: That's that's a good use of time. I'd say that's
Speaker 1: a good way to pass the quarantine. Yeah, exactly. All right, Well,
Speaker 1: this has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway. And I'm Joe Wisenthal. You could follow me
Speaker 1: on Twitter at the Stalwart. Zolton isn't on Twitter, but
Speaker 1: Perry is on Twitter, although he doesn't tweet enough, and
Speaker 1: I he tweets a bit. You should follow him on
Speaker 1: Twitter at P Maryland, and of course you should follow
Speaker 1: our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Followed the Bloomberg head of podcast, Francisco Levie at Francesca Today,
Speaker 1: and you can check out all of the Bloomberg podcasts
Speaker 1: on Twitter under the handle at podcasts. Thanks for listening.