Speaker 1: Blow and Welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Away. So Tracy obviously
Speaker 1: still in the middle of this ongoing crisis. And I
Speaker 1: think like one of the big questions that I've wondered about,
Speaker 1: or something I've we've been talking about for a while
Speaker 1: and thinking about, is whether it would lead to any substantive,
Speaker 1: meaningful economic policy changes going forward that causes the economy
Speaker 1: to look at different than it did pre crisis. Yeah,
Speaker 1: I think that's right. I think there's a sense or
Speaker 1: a desire that after the worst economic crisis in decades
Speaker 1: or possibly in modern history, you would want to see
Speaker 1: some sort of change something to happen to the global
Speaker 1: economies of that the next time something like this occurred,
Speaker 1: you wouldn't see as big of a knock on effect
Speaker 1: on the economy. But do you ever do you ever
Speaker 1: get the sense that things sort of become more entrenched
Speaker 1: rather than change. Yes, it does feel like that. And
Speaker 1: I have to say, like, like I don't know like
Speaker 1: what the future holds, but you know, today we're recording
Speaker 1: this June four, I'm less I think it's you know,
Speaker 1: I feel less confident today than I would have say
Speaker 1: in early April that this crisis will lead to some
Speaker 1: sort of major change in policy, you know, some sort
Speaker 1: of major demand side change or major change in how
Speaker 1: the world trades. Like it's not over and we still
Speaker 1: don't know the lingering effects at all, and unemployment remains
Speaker 1: sky high still. So they're like incredibly serious issues. But
Speaker 1: at the moment, the sort of policy momentum that maybe
Speaker 1: we it looked like we might see in late March
Speaker 1: or early April, it feels less strong today. And it
Speaker 1: feels like, just as you say, the sort of inertia,
Speaker 1: the entrencheness of the existing system may yet survive. Yeah,
Speaker 1: I feel like that's always a risk after a big crisis, uh,
Speaker 1: and tends to happen quite often. I should just mention that,
Speaker 1: you know, this is the week we're seeing a lot
Speaker 1: of social unrest and mass protests in the US, so
Speaker 1: the policy conversation is sort of drifting further away from economics. True,
Speaker 1: and and also it just you know, the within the
Speaker 1: context of the social unrest, and think I'm important to
Speaker 1: point out just like how incredibly difficult it is to
Speaker 1: predict anything in the future lit alone. You know, two
Speaker 1: weeks ago. Not many people were anticipating this, so things,
Speaker 1: as they say is kind of a cliche, are very
Speaker 1: fluid and anything that happened. Yeah, um okay, yeah, I agree,
Speaker 1: So all right, I'm glad we agree. So they big said,
Speaker 1: like we're going to talk about plausible changes or what
Speaker 1: could change, it's worth discussing what the regime, what the
Speaker 1: system was like before, And of course we've done a
Speaker 1: lot of that with like our recent interview with Matt
Speaker 1: Klein Adam Two's sort of brand censor. A lot of
Speaker 1: these discussions have centered around this question what could change,
Speaker 1: but also understanding the set of conditions that we saw
Speaker 1: before we got into this crisis that created the economic
Speaker 1: and market backdrop that we saw. Yeah. I think that's right,
Speaker 1: And certainly one of the big focuses for us in
Speaker 1: recent episodes has been, in particular the dynamic between the U.
Speaker 1: S economy and the Chinese economy as well. And you
Speaker 1: mentioned Matt Klein there. That was a great episode where
Speaker 1: he really dug into it. But we've also discussed that
Speaker 1: relationship in the context of the financial system, UH savings
Speaker 1: and balances and that sort of thing, and it is
Speaker 1: it is basically a bedrock of the way the global economy,
Speaker 1: the global financial system works, but I don't know, I
Speaker 1: feel like people forget it sometimes totally. So I think
Speaker 1: it's worth again continuing to dive deep into this into
Speaker 1: what this system currently looks like, and in particularly this
Speaker 1: combination that we've seen for a while of very mediocre
Speaker 1: growth rates UH in terms of just in terms of GDP,
Speaker 1: very mild inflation everywhere, despite this sort of effort among
Speaker 1: central bankers to get it going almost no effect, extremely
Speaker 1: low nominal policy rates the FED hiked a few times
Speaker 1: and then head to backtrack on them uh. And then
Speaker 1: also the boom and asset prices and the fact that stocks,
Speaker 1: despite a lot of stuff prior to the crisis being
Speaker 1: just sort of mediocre, just this incredible tenurable market with
Speaker 1: a huge concentration of acid uh asset inflations so to speak,
Speaker 1: among growth stocks and tech stocks. So I think today
Speaker 1: we're going to try to pick apart what that set
Speaker 1: up was like, because I think it's important for people
Speaker 1: to understand the connection between all these things as they
Speaker 1: think about what could change or what could go back
Speaker 1: to normal, and what that would mean for markets. Yeah,
Speaker 1: although I have a feeling this is going to be
Speaker 1: one of those things where we come out the other
Speaker 1: side thinking just about how difficult it is to actually
Speaker 1: unpick that entire system that you just described. Okay, let's
Speaker 1: do it. Okay, So today our guest, um, he wrote
Speaker 1: a great blog post in the middle of May called
Speaker 1: the Global Savings Glut a modern policy failure that really
Speaker 1: connected a lot of these dots. I want to bring
Speaker 1: in John Turk. He's a student and a macro trader
Speaker 1: and the author of the Cheap Convexity blog. Definitely a
Speaker 1: must read, and he's going to help us sort of
Speaker 1: put all these pieces together. So John, thank you very
Speaker 1: much for joining us. Hey, guys, thanks for having me on.
Speaker 1: Let's appreciate a big fan. Thank you. So let's are
Speaker 1: you know we're the title of your post is a
Speaker 1: modern policy failure, But we're not even This wasn't even
Speaker 1: in reference to the massive crash that we've seen or
Speaker 1: the massive unemployment that we see right now. You're just
Speaker 1: talking essentially about the conditions that we saw in terms
Speaker 1: of global growth and global demand pre crisis. What is
Speaker 1: the policy failure in your view? Yeah, So I think
Speaker 1: that the policy failure is definitely more of a macro
Speaker 1: backdrop that kind of stems from the fact that we
Speaker 1: had this era before the Great the Financial Crisis, where
Speaker 1: you know, there was a lot of global integration. China
Speaker 1: sends the w t O and kind of globe there's
Speaker 1: a global trade boom and that worked um until really
Speaker 1: two thousand nine, and it had a brief re emergence
Speaker 1: after the London G twenty meeting and China promise to stimulate,
Speaker 1: but it's really a trick. It's really a trip that
Speaker 1: kind of fizzled out as as the global demand impulse
Speaker 1: from China structurally weakened. UM. I think someone you've had
Speaker 1: on the podcast before, Human Function for the b I
Speaker 1: S has done an amazing chart of goods exports relative
Speaker 1: to world GDP and basically showed that that kind of
Speaker 1: it's topped out in two thousand and nine and since
Speaker 1: two thousand and eleven has been into steady decline. And
Speaker 1: kind of the interesting thing in that backdrop is is
Speaker 1: that major economies like East Asian economies in Europe have
Speaker 1: still had exports as percentage of GDP um at their highs.
Speaker 1: So in Europe it's still in East Asia's and that
Speaker 1: structurally disinflationary when so much of your growth composition is
Speaker 1: you know, tied to something that's really in decline, and
Speaker 1: then I think this is kind of factored into the
Speaker 1: policy response has not been how do we change the
Speaker 1: growth composition? The policy responses how do we reinvigorate the
Speaker 1: thing that we're kind of betting on, which has been exports,
Speaker 1: Which is why you've kind of in this weird bifurcation
Speaker 1: between monetary and fiscal policy in places like Europe, UM
Speaker 1: and Asia where they're running fiscal surpluses and uh and
Speaker 1: pretty expansionary monetary policies, because monetary policy is much more
Speaker 1: exchange rate driven. And if you're really if your emphasis
Speaker 1: is to kind of stimulate um external demand, then the
Speaker 1: way is that is like to improve your terms of
Speaker 1: trade by waiting your exchange rate. And it's been like
Speaker 1: kind of an ever chase lower as this you know, this,
Speaker 1: this the structural impulse of demand that kind of weakens
Speaker 1: has been met by just steadily declining you know, exchange
Speaker 1: rates and even negatives and from negative interest rates in
Speaker 1: a lot of jurisdictions, um, and it's kind of been
Speaker 1: the wrong response. I'm not saying that monetary policy shouldn't
Speaker 1: have acted, because that would have the assumption that fiscal
Speaker 1: policy is always a irrational actor. But I think that
Speaker 1: there's kind of been this overlay of that countries are
Speaker 1: very focused on being able to port aggregant demand instead
Speaker 1: of creating it themselves, and that's kind of been on
Speaker 1: this bias that they had um from the turn of
Speaker 1: the two thousands and China's assensions to other they could
Speaker 1: always import aggregate demand, and that really hasn't been true
Speaker 1: for a while. So I want to dig into this,
Speaker 1: and especially the way that currencies actually um factor into this,
Speaker 1: and especially the US dollar. But before we do, I
Speaker 1: have a sort of backup question, which is, why did
Speaker 1: you decide to take up this particular topic? Like it's
Speaker 1: sort of as big picture as you can possibly get
Speaker 1: when it comes to markets are the financial system um,
Speaker 1: And it's unusual to see someone go like I'm gonna
Speaker 1: wake up today and write about the global savings glut. Yeah. Well,
Speaker 1: I think there are a couple of things that were
Speaker 1: really like kind of jarred my interest. One was Brad
Speaker 1: Setser's work at Counsel for Relations has been like very
Speaker 1: eye opening and terms of like kind of these imbalances.
Speaker 1: And then I think my original point, which I really
Speaker 1: struggled with, was kind of from the monetary policy side,
Speaker 1: especially in two thousand nineteen, when the FED was seemingly
Speaker 1: cutting rates preemptively like they were. They were very low unemployment,
Speaker 1: inflation wasn't exactly a target, but and they were cutting
Speaker 1: rates and the curve was flattening even though the economy
Speaker 1: is doing reasonably well. So this kind of all jarred
Speaker 1: my interest is kind of like trying to understand what
Speaker 1: was going on. I guess that it more more meta level.
Speaker 1: So um you mentioned one of our previous guests, Professor
Speaker 1: shin Um. He's been on talking about why, um, the
Speaker 1: dollar obviously matters for the global economy and in particular
Speaker 1: why a strong dollar is so painful for the global economy,
Speaker 1: and there are shades of that in your blog post
Speaker 1: as well. Can you walk us through what role currencies
Speaker 1: play in your argument. One of the interesting things is
Speaker 1: that there's this kind of in this duality in the
Speaker 1: global economy between the financial markets and the real economy,
Speaker 1: and I think actually the dollar is exactly what encapsulates
Speaker 1: that because the dollars kind have been okay, So now
Speaker 1: we have this world where policymakers around the world are
Speaker 1: trying to reinvigorate this external demand, but everyone's doing and
Speaker 1: there's no They're seemingly a structural laps in in aggregate
Speaker 1: demand and they can't see an export um their deflationary conditions,
Speaker 1: so there's a lot of their Naturally there's a higher
Speaker 1: propensity to save when nominal GDP is not really going anywhere.
Speaker 1: And as we've seen kind of as these like kind
Speaker 1: of two positions UM coexist where you have lower nominal GDP,
Speaker 1: weaker exchange rate and kind of UH and no real
Speaker 1: fiscal impulse, you get very high savings rates from public
Speaker 1: and private sector. And what happens, specially in a lot
Speaker 1: of these economies UM is that these get exported UM
Speaker 1: and they get exported basically to the place that's able
Speaker 1: to absorb them. I think Matt Klein and in his
Speaker 1: new book, which has been excellent, called it the sink,
Speaker 1: and that's really been and that's really been what happens.
Speaker 1: So what happens is you get places like Japan where
Speaker 1: they're trying to basically weaken the end to grow exports,
Speaker 1: even though you know that hasn't been winning strategy. But
Speaker 1: what happens is is that the b o J buys
Speaker 1: up to the g GB market, they don't around it,
Speaker 1: and then there's not that much corporate impulse and saving
Speaker 1: rates are high there, so you end up having for
Speaker 1: a big saving sector, you end up having um domestic
Speaker 1: assets on life and sure balance each there are twenty
Speaker 1: five times the size of the investment grade bomb market.
Speaker 1: So you kind of get these factors that basically say
Speaker 1: that are that are short kind of global trade because
Speaker 1: there's a high savings um and that kind of gets
Speaker 1: exported when it's too big for the local market. And
Speaker 1: then that kind of This is when I really found
Speaker 1: it got interesting, is is that this kind of had
Speaker 1: this explorting of financial assets to the US, who is
Speaker 1: the most able to absorb bit um either for growth
Speaker 1: reasons or they were expanding corporate and public sector balance sheets.
Speaker 1: Is is that it had an economic cost. Because the
Speaker 1: economic cost was that the US brought back onto the
Speaker 1: world a stronger dollar, which kind of reinforced these dynamics
Speaker 1: of lower global trade, lower nominal GDP growth, lower you know,
Speaker 1: neutral interest rates and things like that. And then there's
Speaker 1: the other side of the dollar is also a reflection
Speaker 1: of global lack of global trade because the dollar has
Speaker 1: much less bade in North American UH exports as a
Speaker 1: percentage of GDP are like four pent where it's in
Speaker 1: Asia in ar so the dollars kind of become a
Speaker 1: reflection of a lower nominal GDP, lower global trade world.
Speaker 1: But it's also a culprit in it in that like
Speaker 1: in the work of professor Shin and and and get
Speaker 1: open after the I m F for that, it's um
Speaker 1: the dollar inflicts pain on the globe, on the global economy.
Speaker 1: They're via tightened credit channels or as a global invoice.
Speaker 1: So I want to get to the connection between all
Speaker 1: of this and asset prices, particularly the boom in the
Speaker 1: stock market. Before we do that, I want to talk
Speaker 1: about dessert and the ultra sort of low nominal policy
Speaker 1: rates that we've seen, most notably out of the FED.
Speaker 1: And everyone hates it, right like gold people, they complain
Speaker 1: about it. Bond investors are always complaining about it. Bankers
Speaker 1: are always complaining about it. It's like that nobody seems
Speaker 1: to really be a fan of super low interest rates
Speaker 1: for whatever, for whatever reason. We don't necessarily need to
Speaker 1: get into that, but it's like people hate the FED
Speaker 1: and we all know that kind of like one of
Speaker 1: your points in that in this piece, and I think
Speaker 1: it's one of the most subtle things, is that the
Speaker 1: FED is a passive player that essentially these policies of
Speaker 1: export led growth, over production, weak demand really just don't
Speaker 1: give the FED many options, and so the feds zerpness
Speaker 1: is really a consequence of policies that perceived it. Yeah. Absolutely, um.
Speaker 1: I think one of the things was when Berneke like
Speaker 1: kind of introduced the idea of the global savings called
Speaker 1: in two thousand three, and there was the and he
Speaker 1: was kind of explaining the flow of funds and why
Speaker 1: money comes into the US, and and it was the
Speaker 1: same time that Greenspan was kind of struggling why with
Speaker 1: like why we we have escape velocity why his term
Speaker 1: premium compressing, and he called it what Greenspan called at
Speaker 1: the time as the conundrum is pretty easily explained by
Speaker 1: these by these slows. I mean, one of the one
Speaker 1: of the things that's been pretty remarkable in this in
Speaker 1: the decade is that if you kind of just aggregate,
Speaker 1: you know, surplus net international investment positions, they kind of
Speaker 1: just even out with the US deficit. They're both about
Speaker 1: you know, each Germany, Japan, Switzerland, Korea, Singapore, and it
Speaker 1: basically I wanted it equals out to the US deficits
Speaker 1: um so, and the way that kind of factors in
Speaker 1: is that it's monetary policy. Is that there's two ways
Speaker 1: for the global art star community in the law back
Speaker 1: Williams estimate, there's two big components. There's the demands for
Speaker 1: safe assets, which factors into our star, and as we
Speaker 1: know based on this back shop there's been a lot
Speaker 1: of that, so that is a compressor of our star.
Speaker 1: And then the other part is is like we live
Speaker 1: into like a very interconnective global economy. Um if Europe
Speaker 1: and Japan are experiencing very low growth, there's only a
Speaker 1: certain level that the US can can kind of feel.
Speaker 1: So this is kind of this is basically repressed neutral
Speaker 1: interest rates, which is basically how the FED kind of
Speaker 1: gauges where it is. I mean, we don't know it
Speaker 1: in real time, what the level, what the you know,
Speaker 1: what our star is, but the FEDS level of accommodation
Speaker 1: is only relative to where it is relative to neutral
Speaker 1: interest rates. So we I always here and you've highlighted
Speaker 1: on Twitter A lot is that all the Feds, like
Speaker 1: you know, going like especially in twenty nineteen when the
Speaker 1: FED was cutting for quote unquote seemingly no reason. Is
Speaker 1: is that they were cut that you could almost make
Speaker 1: the argument that if our star was falling as it
Speaker 1: was last year, which we do know in retrospect, that
Speaker 1: the FED was cutting to stay to avoid hike. And
Speaker 1: this is kind of something that I've been thinking about
Speaker 1: a lot, especially in um Christian Forbes from the x
Speaker 1: Bank in England, um MPC member has done a lot
Speaker 1: of work that's like a lot of these factors have
Speaker 1: become global. I she does it in terms of the
Speaker 1: global Phillips curve. But basically and then this this was
Speaker 1: a very prevalent topic of Jackson Jackson Hole this year
Speaker 1: where they basically did a paper and they decomposed the
Speaker 1: variants in uh A neutral interest rates, and a large
Speaker 1: component now as opposed to the seventies and eighties is
Speaker 1: that global our stars is just as prevalent as you know,
Speaker 1: your domestic factors. So yeah, the US had three and
Speaker 1: afters and unemployment rate and inflation not far from target,
Speaker 1: but so many countries didn't. And their demand for safe
Speaker 1: assets were pulling our our started down that you could
Speaker 1: almost make the argument. I think the BED was correctly
Speaker 1: making the argument that they were cutting to avoid tightening,
Speaker 1: and this is why they couldn't get the yel curves
Speaker 1: deeper even though they were cutting into a relatively benign economy.
Speaker 1: M I have, um, what's possibly a dumb question, but
Speaker 1: you mentioned demand for safe assets. So obviously, if you
Speaker 1: have a glut in global savings, people are going to
Speaker 1: want to put those savings into assets which aren't going
Speaker 1: to default or suddenly disappear. So that's where the demand
Speaker 1: comes from. I've written previously about a shortage of safe
Speaker 1: assets in the financial system. I'm just wondering if you
Speaker 1: suddenly had more safe assets, you know, and we're probably
Speaker 1: heading that way because lots of countries are are issuing
Speaker 1: government debt at the moment. But could you solve this
Speaker 1: problem by impacting the supply rather than trying to impact
Speaker 1: the demand side? Yeah, I think I think it is.
Speaker 1: I think it is possible, But I think the demand
Speaker 1: side also has a lot of you know, feedback loop
Speaker 1: elements to it that if you know, if the corporate
Speaker 1: sector was more comfortable that they would issue more investment
Speaker 1: grade product at home, and that would kind of incentivize
Speaker 1: The thing is that I'm not I'm unsure about how
Speaker 1: you know, this round of abolition, its effects um you know,
Speaker 1: demand for safe assets and maybe kind of localizing um
Speaker 1: excess savings is is that a lot of the you know,
Speaker 1: government stimulus so far has been kind of we want
Speaker 1: to do this, but we're also not letting term premium
Speaker 1: go anywhere. So there's been a lot of you know,
Speaker 1: countries doing y C C or um you know, massive
Speaker 1: keewee programs kind of implicitly to keep the shape of
Speaker 1: the eel curve the same or explicitly. So it's possible.
Speaker 1: I think it is possible, and but I think a
Speaker 1: lot more of it will come from the demand side
Speaker 1: than you know, the supply of safe assets. So one
Speaker 1: of the let's get I want to talk about the
Speaker 1: mark like markets and Tracy opened it up to that
Speaker 1: in terms of this demand for various assets. And one
Speaker 1: of the striking things about the last decade is this
Speaker 1: sort of like some people call it a barbell, in
Speaker 1: which we saw incredible demand for extreme safe assets. So
Speaker 1: Treasury is obviously with youlds just going lower and lower
Speaker 1: and other sort of equivalent, but also a tremendous demand
Speaker 1: for risky assets at the same time, and in particular
Speaker 1: sort of tech companies and company incredible valuations on companies
Speaker 1: with like uh sort of secular growth opportunities. Talk to
Speaker 1: us about that split, because it's not intuitive that people
Speaker 1: are buying the riskiest stuff and also buying the safest
Speaker 1: stuff at the same time. How is it all connected?
Speaker 1: So I think that it is because a lot of
Speaker 1: this safe supply has kind of had two impacts on
Speaker 1: financial markets in the way that the safe supply is
Speaker 1: reduced because there's either this there's this excess savings that
Speaker 1: wants to soak it up that's pretty much price and sensitive.
Speaker 1: And then there's also governments, you know in central banks
Speaker 1: who are basically you know, doing policies like quantity of
Speaker 1: easy that are also kind of taking the supply out
Speaker 1: of the market. And this was very prevalent um when
Speaker 1: countries like you know, Germany and East Asia and even
Speaker 1: the US really until eighteen, we're running pretty tight fiscal policies,
Speaker 1: and I think that that kind of naturally moved these
Speaker 1: um these players Taiwanese life insurance companies, Japanese life insurance companies,
Speaker 1: big pools of excess savings out the risk curve. Um. Now,
Speaker 1: most of them were still you know, like even if
Speaker 1: they were moving into investment grade bad markets or clos
Speaker 1: or even yield to some extent um, they still were
Speaker 1: kind of in you know, relatively safe assets. And but
Speaker 1: the way I think it ties into this surge invaluation,
Speaker 1: especially for like U S tech companies, is is that
Speaker 1: this kind of force, these disinflationary pressures of excess savings
Speaker 1: as that results from you know, lower nominal GDP and
Speaker 1: demand for safe assets, is that it basically allows all
Speaker 1: these natural growers who are kind of you know, I
Speaker 1: wouldn't say insensitive to you know, real economic activity, but
Speaker 1: are definitely have much less beta to it than you know,
Speaker 1: traditional cyclical companies. Is that they're based they find themselves
Speaker 1: kind of cannibalizing the world with you know, three percent
Speaker 1: borrowing rates, and when the discount rate for them gets
Speaker 1: that low relative to how they can naturally grow, it
Speaker 1: can you can get these massive expansions of multiples and
Speaker 1: they're probably end up somehow getting justified just by kind
Speaker 1: of how love the discount rate gets. And then that
Speaker 1: it's I think these factors have kind of fed on
Speaker 1: each other, and it's the same thing like these you
Speaker 1: know these you know, tech versus um Russell or tech
Speaker 1: versus E M or whatever. All these things they kind
Speaker 1: of chart against the level of the dollars, and the
Speaker 1: level of the dollar is almost charted with the level
Speaker 1: of you know, the average neutral average global neutral interest rate.
Speaker 1: So I think a lot of these factors are interconnected,
Speaker 1: and it kind of comes from this this world of
Speaker 1: low nominal GDP excess savings, and then how tech kind
Speaker 1: of benefits from that either in terms of flows or activity.
Speaker 1: So we have this phenomenon in a low nominal GDP world.
Speaker 1: People like companies that are sort of growth and sensitive,
Speaker 1: and so a company like Netflix, which probably doesn't need
Speaker 1: a booming economy to get people to subscribe to get
Speaker 1: onto it, they can borrow really cheaply. They there's a
Speaker 1: huge demand for their earning stream. One of the conversations,
Speaker 1: and it's less of macro than some of these conversations.
Speaker 1: But one thing that we talked about from time to
Speaker 1: time is the so called like the death of value
Speaker 1: stocks and people who are looking for cheap opportunities in
Speaker 1: the market. Why they're always disappointed. In your view, does
Speaker 1: it come down to, essentially, value isn't going to work
Speaker 1: as a strategy until we have policies that actually boost
Speaker 1: nominal GDP that as long as there's this growth shortage
Speaker 1: out there, then you have this advance, you have this
Speaker 1: love for an asset like Netflix, and until we get
Speaker 1: meaningful macro change than some of these just sort of
Speaker 1: more cyclical companies that may trade at sort of seemingly
Speaker 1: cheap price to earnings ratios just aren't going to be
Speaker 1: in favor. Like, is that basically a macro question in
Speaker 1: your view? Yeah? Absolutely, Um, I really, I really do
Speaker 1: think it is this kind of growth value. All these things, uh,
Speaker 1: interest rates have kind of all the dollar about kind
Speaker 1: of all become lump sumed a little. And I think
Speaker 1: it does make sense because a lot of these value
Speaker 1: companies are much more you know, depending on the level
Speaker 1: of economic activity. But I do think that like there
Speaker 1: are kind of first signs of promise that a lot
Speaker 1: of these dynamics will begin to change not by choice,
Speaker 1: but more by four um. And we can get into that,
Speaker 1: I guess. But yeah, I definitely think that the growth
Speaker 1: value that those kind of dynamics are very rooted in
Speaker 1: this kind of UM high asset prices, low nominal GDP world. Well,
Speaker 1: let's talk about that, like, because what you're basically describing
Speaker 1: is the sort of feedback loop where you have low
Speaker 1: economic growth that generates a bunch of savings, and all
Speaker 1: those savings go into US financial assets and that sort
Speaker 1: of keeps the dollar high, which then generates lower growth
Speaker 1: and the cycle begins again. When you have that kind
Speaker 1: of doom loop, I guess it's it's hard to get
Speaker 1: out of it. So do you see the prospect of
Speaker 1: change on the horizon. Yeah, the doom loop is really
Speaker 1: the best way to describe it. UM, And I do
Speaker 1: think it is possible. They're definitely early signs. I'm not
Speaker 1: gonna I wouldn't say it's all systems go UM. But
Speaker 1: it's one of the things that is interesting about this
Speaker 1: crisis is that it's made actors who have been very
Speaker 1: hesitant and reticent to kind of, you know, use bazooka
Speaker 1: as it's made them kind of forced to UM and
Speaker 1: I think it's kind of I think one of the
Speaker 1: main factors of the you know, the past five years
Speaker 1: has been that the response to weakness and demand has
Speaker 1: been so bifurcated between you know, Europe, Asia versus the US.
Speaker 1: Is in the US has been able either on the
Speaker 1: monetary side and more importantly, like to do a massive
Speaker 1: physical expansion at you know what at times we thought
Speaker 1: was levels of close to full employment, whatever that means.
Speaker 1: So there was kind of this this kind of added
Speaker 1: to the divide if not only was the US able
Speaker 1: to absorb this excess savings, but it was also kind
Speaker 1: of justified on relative growth rates. And this also really
Speaker 1: impacted the dollar feedback loop because it was also it
Speaker 1: was just a reflection of you know, the relative growth dynamics.
Speaker 1: But what's happening now, which is kind of interesting, is
Speaker 1: is that countries who would have been very hesitant to
Speaker 1: kind of change their you know, economic structuring in terms
Speaker 1: of their composition of growth are kind of being forced
Speaker 1: to now. So we kind of start hearing things like
Speaker 1: you know, Moon and Prime Minister moved in Korea is
Speaker 1: kind of talking about this new deal. Where Korea has
Speaker 1: previously been running you know, budget surpluses and exports are
Speaker 1: still you know GDP, and now they're talking about ways
Speaker 1: how do they generate aggregate to men post covid um,
Speaker 1: and we we seem to have some you know, green
Speaker 1: shoots in terms of European politics and Germany passing you know,
Speaker 1: another round of stimulus, and these are all things that
Speaker 1: kind of two years ago you would say it would
Speaker 1: be the US doing them only and you know, Korea
Speaker 1: and Europe and Japan figuring out out a way to
Speaker 1: get how to get their currency mower. And that really
Speaker 1: hasn't been the case this time around, kind of because
Speaker 1: there's no terms of trade advantage when no countries can
Speaker 1: trade with each other. So that's been uh in terms
Speaker 1: of a structural development, unfortunate as it is, has kind
Speaker 1: of been welcomed in terms that like trees now really
Speaker 1: because there's global trade broke down, not only for structural reasons,
Speaker 1: just you know, practically when there's a pandemic. So the
Speaker 1: only way to kind of generate demand is internally. And
Speaker 1: that's kind of focused people, um, you know, policymakers. I mean,
Speaker 1: it was not that long ago when you know, Olaf Schultz,
Speaker 1: the finance minister in Germany, was saying that, you know,
Speaker 1: there's no needs for fiscal there's you know, the economy
Speaker 1: is fine. And now you know Germany is tripping over
Speaker 1: themselves to past additional fiscal measures. They're looking, you know,
Speaker 1: they're looking to prevent European fragmentation in terms of bond yields.
Speaker 1: It's like, so I think there are positive developments and
Speaker 1: this is kind of where this you know, what I've
Speaker 1: called the the Imperial Circle Part two kind of breaks down.
Speaker 1: Is where countries are investing in domestic demand and then
Speaker 1: the world kind of can as it exits you know,
Speaker 1: this horrible period, is it kind of exits on on
Speaker 1: on even footing because you know, South Korea is investing
Speaker 1: into stick demand, Japan's investing in domestic demand, Europe is,
Speaker 1: Australia is. So it's kind of that we all kind
Speaker 1: of had a popular up. Sorry, we all kind of
Speaker 1: had a proper demand impulse that kind of allowed us,
Speaker 1: the the global economy to exit on even footing. And
Speaker 1: it hasn't been on an even footing pretty much since
Speaker 1: the financial crisis. So the disappearance and you used mad
Speaker 1: Klient's term earlier of the sink, the demand sinc and
Speaker 1: the US was kind of the consumer of last resort
Speaker 1: for all of these export oriented nations. That's going away.
Speaker 1: I mean, we'll see if and when uh if and
Speaker 1: when the US returns as a consumer of last resort,
Speaker 1: depending on the robustness of the recovery. But it's essentially
Speaker 1: that condition, the disappearance of robust external demand, that forced
Speaker 1: all these countries to address their own internal demand, and
Speaker 1: they could. It allowed them to do it simultaneously because
Speaker 1: they didn't have to worry about undermining each other on
Speaker 1: a currency front. Um. They actually they can all sort
Speaker 1: of jump at the same time, right. And one of
Speaker 1: the things that's really interesting now is and it's still early,
Speaker 1: of course, is that because so much of the policy
Speaker 1: response now is more focused on the fiscal side, and
Speaker 1: monetary policy is much more so become more just an
Speaker 1: enabler of fiscal expansion, is that that's positive for the currency.
Speaker 1: So these guys are not saying, you know, they're not saying, oh, well,
Speaker 1: you know, you're really worries me at one twelve and
Speaker 1: a half or wherever it is it is today. Is
Speaker 1: is that like, because this response, the monetary response, we
Speaker 1: know where that what that does for the currency, But
Speaker 1: usually fiscal response actually strengthens the currency because you're you know,
Speaker 1: improving your medium terms prospects for growth or potential growth.
Speaker 1: So that's kind of been an interesting element that's very
Speaker 1: new because really what we were seeing and especially after
Speaker 1: after Chinese evaluation in trade war, is that the only
Speaker 1: response was kind of currency based. I mean, you're basically
Speaker 1: was saying, you know, we'll cut further negative and you
Speaker 1: have that Ali Ren speech in August of where he's
Speaker 1: basically saying there's no you know, there's no reversal rate,
Speaker 1: don't worry about it. And the only point of that
Speaker 1: to say is you're just trying to get your currency
Speaker 1: weaker to adjust to, you know, the external demand environment,
Speaker 1: and that's kind of been where policy was for the
Speaker 1: last few years. We've had this negative rates to me,
Speaker 1: is just a trade off between internal and external demand.
Speaker 1: You're basically sacrificing your credit channel, your domestic credit channel,
Speaker 1: so that you can have more in terms of trade competitiveness.
Speaker 1: And now we're kind of seeing basically by force, I'm
Speaker 1: not going to give these guys that much credit. Um
Speaker 1: is that they've had to focus on their domestic demand
Speaker 1: impulse and they know that they're not going to get
Speaker 1: out of this even post the the health care part
Speaker 1: of the crisis. Is they're not going to get out
Speaker 1: of this by you know, China just importing a bunch
Speaker 1: of goods. So the focus now is becoming much more strategic,
Speaker 1: and whether it lasts, I guess we'll see. But there are,
Speaker 1: you know, promising signs that there's kind of this global
Speaker 1: fiscal impulse that seems to be here to stay. So
Speaker 1: just that last point, I mean, I said in the
Speaker 1: beginning that I was kind of losing a little bit
Speaker 1: of I felt less confident that there was going to
Speaker 1: be some big structural change post crisis. But you're saying,
Speaker 1: but maybe it was maybe that was too pessimistic and
Speaker 1: that you think it. Uh, maybe we really are saying
Speaker 1: it and I'm being sort of blind or taking for
Speaker 1: granted or maybe have a two US centric focus where
Speaker 1: there it's not clear that anything is going to change,
Speaker 1: but hey, you say it's there. In terms of the shifting,
Speaker 1: you think it could be this is start, Like what
Speaker 1: are the what would you look for to see if
Speaker 1: this is the start of a sustainable change in how
Speaker 1: global economic policy operates? Like how would you when would
Speaker 1: you feel like, wow, this is really different? Yeah, I mean,
Speaker 1: I think one of the things that's definitely starting to
Speaker 1: see is that the relative weakness in the dollar because,
Speaker 1: as we said, kind of the dollar has been the
Speaker 1: folk from instrument for pricing all of these kind of
Speaker 1: you know, external backdrops and dynamics. So I think the
Speaker 1: dollar is definitely is definitely one of them. And I listen,
Speaker 1: I don't I'm not. I'm not convinced either. I'm but
Speaker 1: I am starting to be a bit more optimistic that
Speaker 1: a lot of these kind of more who were relatively
Speaker 1: prudent actors are kind of starting to embrace um more
Speaker 1: physical expansion, which is really needed in the world where
Speaker 1: you know, global trade isn't gonna bail anyone out. Whether
Speaker 1: it lasts or not, I don't know, but you know,
Speaker 1: it's it's because of how you know, because of how
Speaker 1: big it could be. As long as the expected value
Speaker 1: keeps moving, right, then it'll have a significant price effect.
Speaker 1: So yeah, it's it does seem that the seeds are there.
Speaker 1: Whether it lasts or not, I don't know. Well, this
Speaker 1: will be the thing to watch, John Turk. Really great
Speaker 1: to get your perspective. Ali. My only complaint is I
Speaker 1: wish you'd write more, because I really do think your
Speaker 1: blog and your Twitter feed is some of the best
Speaker 1: stuff out there right now. More people should read it.
Speaker 1: So thanks for joining us. Thank you so much for
Speaker 1: having me. Thanks. That's great, Tracy, I really liked Obviously
Speaker 1: I like that conversation, but I like the sort of
Speaker 1: clear marker that John laid down, which is that we
Speaker 1: are seeing any sort of early signs of governments around
Speaker 1: the world Europe overall, Germany in particular, Japan, Korea do
Speaker 1: more aggressive actions on the demand side, which they have
Speaker 1: been reluctant to do for a long time. And I
Speaker 1: feel like that is going to be something very like
Speaker 1: meaty that we can continue to watch, Like maybe they'll
Speaker 1: by December they'll be like, Okay, we did enough fiscal
Speaker 1: fiscal expansion and we need to go into retrenchment mode,
Speaker 1: because that's often how these governments operate, they get nervous
Speaker 1: or whatever. Um. But it definitely feels like that is
Speaker 1: just a huge storyline to watch, whether this starts to
Speaker 1: shape their focus on the sort of pure export led
Speaker 1: growth model. Yeah. I was gonna say, like what we
Speaker 1: tend to see is as economic recovery actually starts, uh,
Speaker 1: the impetus for that sort of fiscal expansion starts to away.
Speaker 1: So it'll be interesting to see whether or not that
Speaker 1: happens this time, or whether or not an unemployment crisis
Speaker 1: of the scale has maybe changed the conversation around that.
Speaker 1: I don't know. I tend to think that people get
Speaker 1: easily distracted, and you know, new problems will come up,
Speaker 1: and has basically been a lesson in our inability to
Speaker 1: predict what's next on the horizon and what's next on
Speaker 1: the sort of global news agenda. So who knows what
Speaker 1: people will be talking about? Then, yeah, no, who knows.
Speaker 1: I think probably a lot does depend on the degree
Speaker 1: to which the U S bounces back, And because if
Speaker 1: the US were to have a sort of V shaped recovery,
Speaker 1: and you know, as a recording this the market, the
Speaker 1: soup market increasingly appears to be pricing in something close
Speaker 1: to resembling If the U S has this great recovery
Speaker 1: and we have this demand for goods for the rest
Speaker 1: of the world, it's extremely easy for me to imagine
Speaker 1: the export led countries sort of just going back to
Speaker 1: the model that was I guess working for them up
Speaker 1: until this crisis. But if not, then, you know, then
Speaker 1: it seems very plausible that they will continue to focus
Speaker 1: on cultivating domestic demand. But this is in terms of
Speaker 1: like the big macro questions we're going to be watching.
Speaker 1: To me, this feels like one of the huge ones. Yeah. Absolutely,
Speaker 1: And already you can see a lot of export oriented
Speaker 1: economies sort of betting on the first outcome, the V
Speaker 1: shaped recovery in the US and a bounce back in demand. So,
Speaker 1: for instance, you know, in China, we have a lot
Speaker 1: of factories that are getting back to work and producing
Speaker 1: at the same scale that they were before the coronavirus crisis,
Speaker 1: but of course demand hasn't quite recovered in other parts
Speaker 1: of the world, so it'll be interesting to see whether
Speaker 1: that that pays off, or whether or not they're just
Speaker 1: sort of, you know, it's a knee jerk, habitual reaction
Speaker 1: to the way things have always been. I guess the
Speaker 1: other thing that's kind of nice about this is that
Speaker 1: this is a weird thing to say, But if there
Speaker 1: is not a V shaped recovery in the US, then
Speaker 1: I guess the upside is that potentially we we see
Speaker 1: the first steps um of rethinking attitudes towards fiscal expansion
Speaker 1: and sort of rethinking that the dolop that John was describing,
Speaker 1: maybe that's the very very small silver lining and that
Speaker 1: kind of pressing outcome. Yeah. Absolutely. I mean, look, I
Speaker 1: wanted to see a v shape recovery in the US
Speaker 1: from the perspective of getting people back to work. But
Speaker 1: I do agree that, look, if there's gonna be a
Speaker 1: moment where things change, um, this could be it to
Speaker 1: have some sort to go on a new sort of
Speaker 1: more sustainable growth path. The other thing, you know, we
Speaker 1: didn't the one thing we didn't really talk about much
Speaker 1: with John actually is China's own uh sort of skipped
Speaker 1: around China itself, which is of course at the center
Speaker 1: of a lot of this tension analysis. And I've seen, like,
Speaker 1: you know, folks like Michael Pettis pointing out that, um,
Speaker 1: so far it's not clear and maybe you have a
Speaker 1: better perspective than I do, Like they're not really reven
Speaker 1: yet on the domestic demand side, like they're obviously the
Speaker 1: industrial production that's come back, but in terms of demand
Speaker 1: still feels like very much like credit oriented relo just
Speaker 1: to go too heavy on fiscal etcetera. Like that's got
Speaker 1: to be a big part of this question of whether
Speaker 1: they will they themselves will sort of retailt their economy
Speaker 1: towards more domestic demand or not. Yeah, Well, I mean,
Speaker 1: I think Matt Klein made the argument quite convincingly that
Speaker 1: China has always had a demand problem and if anything,
Speaker 1: the coronavirus crisis just sort of accentuates it. It is
Speaker 1: pretty interesting too to watch what's going on with the
Speaker 1: economy right now, and all signs at the moment are
Speaker 1: pointing towards a supply driven recovery. Um, if there is
Speaker 1: much of a recovery at all, but again, interesting, wanted
Speaker 1: to be watching at the moment. Okay, well, this has
Speaker 1: been another episode of the Odd Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Wisnthal. You can follow me at The Stalwart
Speaker 1: and definitely follow our guest John Turret. He's at j
Speaker 1: Turk eighteen. Follow our producer Laura Carlson at Laura M. Carlson.
Speaker 1: Follow the Bloomberg head of podcast, Francesca Leavi at Francesca Today,
Speaker 1: and check out all of our podcasts under the handle
Speaker 1: at podcast. Thanks for listening.