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The Great Bond Car Wreck — in Slow Motion · Trumponomics

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 2: I'm definitely Flannder's the head of governments and economics at Bloomberg.
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Speaker 2: And this is Trumponomics, the podcast that looks at the
0:22
Speaker 2: economic world of Donald Trump, how he's shaking the global
0:25
Speaker 2: economy and what on earth is going to happen next. Well,
0:28
Speaker 2: this week, I'm sorry, but we need to talk about bonds,
0:31
Speaker 2: government bonds, because investors have turned against them in a
0:34
Speaker 2: big way in the major developed economies in the past week,
0:37
Speaker 2: in what's been called a slow motion car wreck that
0:40
Speaker 2: could affect us all, especially anyone looking to take a
0:43
Speaker 2: loan out or refinance their house. Now, remember that a
0:46
Speaker 2: sovereign bond is an IOU that a government sells to
0:49
Speaker 2: investors when it hasn't raised enough money in taxes to
0:51
Speaker 2: pay for all their spending, which these days is all
0:54
Speaker 2: the time. There's a lot that affects the price of
0:56
Speaker 2: that debt, but broadly, when investors are keen, the value
1:00
Speaker 2: of the iou goes up and the yield the interest
1:02
Speaker 2: rate the government has to pay, goes down. That happened
1:05
Speaker 2: for many years after the global financial crisis, governments found
1:09
Speaker 2: borrowing cheaper and cheaper, but yields have been rising off
1:12
Speaker 2: and on since COVID, and last week years went up
1:16
Speaker 2: everywhere all at once in a way that made even
1:19
Speaker 2: the more gray haired Bloomberg types pay attention. We're recording
1:23
Speaker 2: this on Tuesday morning, US time, and the yield, the
1:26
Speaker 2: interest rate on the very long term thirty year US
1:29
Speaker 2: treasury has just risen to its highest level since the
1:32
Speaker 2: eve of the global financial crisis in two thousand and seven.
1:35
Speaker 2: And it's not just the US. In Japan and the UK,
1:38
Speaker 2: for example, the thirty year yield is the highest it's
1:41
Speaker 2: been this century. Now this matters, obviously for government's funding costs.
1:47
Speaker 2: Taken together, the past week could mean tens of billions
1:49
Speaker 2: in interest payments by governments that could otherwise have been
1:52
Speaker 2: spent on other things. But it also matters for markets
1:55
Speaker 2: as a whole, because of what it might tell us
1:57
Speaker 2: about the impact of the war in a rack on
2:00
Speaker 2: the global economy, the future rate of inflation, and also
2:04
Speaker 2: what it might tell us about the basic standing of
2:07
Speaker 2: the so called advanced economies. Because you can't help noticing
2:11
Speaker 2: many emerging market governments have not seen investors running for
2:15
Speaker 2: the hills in the past week. In fact, many of
2:16
Speaker 2: their currencies have been going up. Well, there's so much
2:21
Speaker 2: to discuss, and my two guests have already written some
2:24
Speaker 2: excellent commentary on it that I thought was worth sharing
2:27
Speaker 2: on the show. Robin Brooks, a senior Fellow now at
2:30
Speaker 2: the Brookings Institution, was formerly chief Economist at the Institute
2:33
Speaker 2: for International Finance and chief FX strategist at Goldman Sachs.
2:37
Speaker 2: He writes a lot of good stuff on his substack,
2:40
Speaker 2: but one piece this week, entitled Liz Trust Bond market
2:44
Speaker 2: blow Ups particularly caught my eye. Robin, thanks very much
2:47
Speaker 2: waking up early on the West Coast for us.
2:50
Speaker 3: Thanks for having me on.
2:51
Speaker 2: And John Author's a senior editor for Markets and Bloomberg
2:54
Speaker 2: Opinion columnist, long time Financial Times journalist, Welcome back to
2:59
Speaker 2: the show.
2:59
Speaker 1: John, Thanks for having me.
3:02
Speaker 2: I did steal in my quote earlier. I stole the
3:05
Speaker 2: title of your column today, the Great Bond car Wreck
3:08
Speaker 2: in slow Motion, without going into everything all at once, briefly,
3:14
Speaker 2: are we right to be taking the last week pretty
3:16
Speaker 2: seriously what's going on in bond market?
3:19
Speaker 4: Yes, you should always take what's going on in the
3:23
Speaker 4: treasury market very seriously, indeed, because it ultimately is the
3:27
Speaker 4: closest approach.
3:28
Speaker 5: We have to a risk free rate.
3:31
Speaker 4: Yes, there's no such thing as a risk pre rate,
3:33
Speaker 4: but for any number of different financial calculations, the closest
3:36
Speaker 4: approach to it, for one, that is assumed to be
3:38
Speaker 4: the risk pre rates of the.
3:39
Speaker 5: Ten year treasury yields.
3:40
Speaker 2: So it's a base for everything.
3:42
Speaker 4: It's a base that finds its way into an awful
3:45
Speaker 4: lot of financial calculations that you would not connect in
3:49
Speaker 4: any way intuitively to the treasury market. So it's a
3:53
Speaker 4: very big deal, obviously primarily for US mortgages, for the
3:57
Speaker 4: US companies trying to raise finance, or Uncle Sam trying
4:01
Speaker 4: to finance itself. I think the other point to make
4:05
Speaker 4: is that there is perhaps a greater, more important meaning
4:09
Speaker 4: when global bond markets move together. So there are very
4:13
Speaker 4: specific local factors in Japan with Sanatakaichi, with France with
4:19
Speaker 4: the great difficulties there that Macron is having, with the
4:23
Speaker 4: legislature there, with the UK and all the ructions at
4:27
Speaker 4: the top of the labour parts, and there are certainly clear,
4:30
Speaker 4: different idiosyncratic things going on in all of those countries.
4:33
Speaker 4: But it's still has to be pointed out that it's
4:36
Speaker 4: difficult if you look at a chart to tell the
4:38
Speaker 4: difference between their bond markets.
4:40
Speaker 5: They have all started surging.
4:43
Speaker 4: Bond yields have started surging upwards at the same time,
4:46
Speaker 4: and that is ultimately because of uniform concerns.
4:50
Speaker 5: About fiscal space and about inflation.
4:54
Speaker 6: Robin.
4:54
Speaker 2: I did see a nice kind of quote in one
4:56
Speaker 2: of the many Bloomberg pieces about this was that the
4:58
Speaker 2: developed world has too much debt, little fiscal discipline, and
5:01
Speaker 2: no political appetite for fixing either. Do you think that's
5:05
Speaker 2: been driving the last week and why has it happened
5:08
Speaker 2: so quickly in such a short time.
5:11
Speaker 3: Well, I think that's the key question, Stephanie, And let
5:14
Speaker 3: me just add to what John said the three points.
5:18
Speaker 3: The first is that COVID saw fiscal stimulus globally of
5:24
Speaker 3: a magnitude and a global coordination that we've never really
5:28
Speaker 3: seen before. I remember talking to a policy maker at
5:31
Speaker 3: the time and they said, you know, we don't know
5:36
Speaker 3: what the long term consequences of this are going to be.
5:39
Speaker 3: So many countries issuing so much debt simultaneously, and I
5:43
Speaker 3: think part of what we're seeing in recent months, including
5:47
Speaker 3: this week, is the bill is coming due for that.
5:51
Speaker 3: The second thing is that the decade before COVID, we
5:56
Speaker 3: were all convinced that inflation would be low forever, that
5:59
Speaker 3: interest rates would be low forever. We were all telling
6:02
Speaker 3: ourselves that we were in a new paradigm and output
6:06
Speaker 3: gaps were big, and so that meant you could issue
6:10
Speaker 3: lots of debt without interest rates going up very much.
6:15
Speaker 3: And that caused governments to run deficits that even after COVID,
6:22
Speaker 3: even with COVID long gone, are way wider than they
6:25
Speaker 3: were before. So if you look at the US government,
6:27
Speaker 3: the deficits running around six percent of GDP, other governments
6:31
Speaker 3: are running deficits, they're way wider before COVID. So not
6:34
Speaker 3: only did we do a huge debt issuance binge during COVID,
6:39
Speaker 3: but we continue to run really loose fiscal policy. And
6:43
Speaker 3: then the third thing is that inflation, which we thought
6:47
Speaker 3: was always going to be low, has turned out to not.
6:49
Speaker 5: Always be low.
6:50
Speaker 3: We had the post COVID inflation surge and now we
6:54
Speaker 3: have a run on oil prices and what that means
6:56
Speaker 3: for inflation. So I think, Stephanie, to come back to
6:59
Speaker 3: your question, all of what's going on in debt markets
7:03
Speaker 3: has been brewing for many years. Long term interest rates,
7:08
Speaker 3: which in particular capture risk premium and expectations among investors
7:15
Speaker 3: for what governments might do, and of course the big
7:17
Speaker 3: bugbearers that governments will be tempted to inflate away debt,
7:21
Speaker 3: right to print money, to lean on central banks to
7:25
Speaker 3: make debt go away. I think all these fears have
7:28
Speaker 3: been coming to a head over the past year, and
7:32
Speaker 3: it's not a surprise that in connection with that we've
7:36
Speaker 3: seen the debasement trades. So precious metals go through the right.
7:40
Speaker 2: To expect the debasement trade for those who might get
7:44
Speaker 2: panicked even more by.
7:45
Speaker 3: Hearing that people buying any kind of safe haven asset
7:51
Speaker 3: that will protect them from governments inflating away debt. So
7:55
Speaker 3: that is gold, silver, platinum, palladium, you name it. But
8:00
Speaker 3: it's also currencies and debt of countries with very low
8:04
Speaker 3: debt levels. So for example, Switzerland is kind of the Sinoquannon,
8:08
Speaker 3: but Sweden all the Scandies are part of that too.
8:12
Speaker 2: You make the point, John, I was struggling with last
8:14
Speaker 2: week actually because in the UK, obviously there was a
8:16
Speaker 2: lot of noise coming out of Westminster, and in Britain
8:20
Speaker 2: we like nothing better than to say that we're in
8:22
Speaker 2: the worst possible state relative Doughty body else, and everyone
8:25
Speaker 2: wanted to look at the bonds and say, the reason
8:28
Speaker 2: why yields have gone up so much is because this
8:30
Speaker 2: government is terrible and this government is a mess. And
8:33
Speaker 2: I found myself in a rether difficult position saying, well,
8:35
Speaker 2: this is that is true, but actually there's a lot
8:37
Speaker 2: going on, And in fact, the biggest factor that's increased
8:40
Speaker 2: the cost of government was these other things going on.
8:42
Speaker 2: And as you say, you can't necessarily tell the difference
8:44
Speaker 2: between their political crisis and the things going on in
8:47
Speaker 2: the US. But we've just been talking about long term things,
8:52
Speaker 2: structural things affecting the way that investors would look at
8:57
Speaker 2: bond yields. So you still might say, okay, but why
9:00
Speaker 2: has it all happened in the last week. I mean,
9:01
Speaker 2: is it sort of people suddenly realizing that the straight
9:05
Speaker 2: of horror moos is going to be shut for a
9:07
Speaker 2: long time because they can't be suddenly realizing that governments
9:10
Speaker 2: don't want to cut borrowing.
9:12
Speaker 4: There is I mean, Malcolm Gladwell got rich with this
9:15
Speaker 4: infuriating concept of the tipping point without ever explaining exactly
9:20
Speaker 4: when or why a tipping point will happen. There are
9:22
Speaker 4: such things as tipping points. Plainly, this happens in markets
9:25
Speaker 4: when some kind of a weird psychological chourn or some
9:27
Speaker 4: point in mass psychology is reached and things start to
9:32
Speaker 4: move very fast. It would be ridiculous to say this
9:36
Speaker 4: is all about the straight of Horne Moos.
9:38
Speaker 5: However, plainly that's the trigger at the moment. If you
9:41
Speaker 5: want to.
9:42
Speaker 4: Talk in the short term about why particularly this was
9:45
Speaker 4: a trigger, my best guess is that there was some
9:49
Speaker 4: hope out of Beijing last week that there would be
9:53
Speaker 4: some pressure from China on Iran to reopen the strait,
9:58
Speaker 4: and it didn't happen, evidently, And if you look at
10:02
Speaker 4: prices for Brent prices for December, they continue to reach
10:06
Speaker 4: a new high for the crisis. We're now above ninety
10:09
Speaker 4: dollars for Brent at the end of the year. That
10:11
Speaker 4: is followed by people in bond markets. They are being
10:16
Speaker 4: told by the oil market that yes, this isn't a
10:20
Speaker 4: transitory thing, this is going to last for a while,
10:24
Speaker 4: and therefore the risks for creating an inflationary impulse have risen. Ultimately, again,
10:31
Speaker 4: it's an irritating glad well, it's happened to happen last week.
10:36
Speaker 4: If you wanted a specific moment last week that helped
10:40
Speaker 4: things run, maybe let's try to make ourselves feel important
10:45
Speaker 4: as Brits. Maybe the guilt's market helped. But the main
10:48
Speaker 4: thing is oil. If we're really expecting crew to be
10:52
Speaker 4: above ninety dollars by the end of this year, which
10:55
Speaker 4: we weren't even a few weeks ago, there does come
10:58
Speaker 4: a point of view just have to act on that.
11:01
Speaker 2: We tend to say as economists, well, if you have
11:03
Speaker 2: these long term structural changes, and inact our economists, you
11:06
Speaker 2: think that there's a kind of long term increase in
11:08
Speaker 2: interest rates in the sort of neutral real interest rate
11:11
Speaker 2: globally from lots of big tectonic forces. But you tend
11:15
Speaker 2: to say that's manageable. If it happens over time, slowly,
11:20
Speaker 2: a big increase like we've seen in the last week,
11:22
Speaker 2: and certainly the big increase in borrowing costs we've had
11:24
Speaker 2: since the start of the Iran crisis, then you start
11:27
Speaker 2: to worry. US treasuries are the kind of central common
11:31
Speaker 2: denominator for the whole global financial system, and there have
11:35
Speaker 2: been worries at various times in recent past about the
11:38
Speaker 2: short term liquidity in those enormous markets that you would
11:41
Speaker 2: have thought would never happen. Are you nervous about unexploded
11:45
Speaker 2: sort of grenades that could go off just from this
11:48
Speaker 2: move having happened so fast.
11:51
Speaker 4: Yeah, if you remember that to long term capital management,
11:54
Speaker 4: or particularly to two thousand and seven two thousand and eight,
11:56
Speaker 4: you always have to be concerned about that. I think
12:01
Speaker 4: this Robins piece covered some of our own analytics at Bloomberg.
12:05
Speaker 5: That I mean Japan and the UK.
12:09
Speaker 4: You can see some signs of stress, but still nothing
12:12
Speaker 4: like the very serious financial accent that happened with Liz Truss.
12:17
Speaker 4: There's no really clear sign of stressed trading here in
12:25
Speaker 4: particularly here in the US.
12:26
Speaker 5: Obviously there was that.
12:27
Speaker 4: Would be a reason for very great concern. This looks
12:33
Speaker 4: more even if we've reached some kind of a tipping point,
12:37
Speaker 4: more like a healthy as far as it goes, a healthy.
12:42
Speaker 5: Adjustment, a healthy realization.
12:45
Speaker 4: Then the concern obviously has to come into other markets.
12:48
Speaker 4: Are they really going to deal with what the bond
12:52
Speaker 4: market is telling them?
12:54
Speaker 5: Which soap? Are they? In many cases are not.
12:57
Speaker 4: The other thing is, if you've lived through two thousand
12:59
Speaker 4: and seventy two, you can get it.
13:01
Speaker 5: You can get into this thing as that. So it's fine.
13:04
Speaker 2: It's true we have we have too many terrible things
13:07
Speaker 2: to compare it to.
13:08
Speaker 1: It's true.
13:08
Speaker 4: Yes it's not in that territory at all, but but
13:13
Speaker 4: it is it ought to be healthy. There is no
13:15
Speaker 4: clear sign of really dangerous instability or liquidity to this state.
13:20
Speaker 2: Well, John, you're not a central banker, but I suspect
13:22
Speaker 2: you know we could in a few weeks time, depending
13:24
Speaker 2: on what happens, we can come back to you with
13:26
Speaker 2: healthy the way people came back to came back to
13:28
Speaker 2: j Powell with transitory.
13:30
Speaker 6: Robin.
13:30
Speaker 2: I quoted your substack about the Liz Trusts bond market
13:33
Speaker 2: blow ups, and I think when people hear that phrase,
13:35
Speaker 2: they will think, oh, he's talking about great drama and
13:39
Speaker 2: crazy politicians doing things. But actually you made a specific
13:43
Speaker 2: point that actually relates to this healthiness thing. Because what
13:46
Speaker 2: we might call in a developed economy, a healthy adjustment
13:49
Speaker 2: in bond markets wouldn't usually come with a fall in
13:53
Speaker 2: the currency. So that was the thing that you'd highlighted,
13:55
Speaker 2: and I just wanted to dig into that.
13:57
Speaker 3: A bit in the g So, in advanced economies, typically
14:02
Speaker 3: higher yields mean a stronger currency, right, it increases the
14:06
Speaker 3: yield that you get a holding that currency, So it
14:10
Speaker 3: is very unusual to see yield spike and the currency fall.
14:17
Speaker 3: That is kind of what happens in emerging markets, and
14:21
Speaker 3: it is a symptom usually of policy credibility being relatively low,
14:27
Speaker 3: so that when you have a shock, people aren't confident
14:32
Speaker 3: that the policy framework is stable, and so they are
14:36
Speaker 3: worried about central bank credibility being undermined, the central bank
14:40
Speaker 3: being pushed into printing money, and therefore a loss of
14:43
Speaker 3: value across the board, and so they bail on the country,
14:46
Speaker 3: They sell all assets, and so the currency falls in
14:50
Speaker 3: addition to government bond prices falling and yields going up.
14:54
Speaker 3: The biggest example of this that we've had in the
14:57
Speaker 3: G ten, or I should say the most volatile and
15:02
Speaker 3: kind of the loudest, was the UK in the LDI
15:05
Speaker 3: blow up in twenty twenty two in September and October.
15:08
Speaker 3: But the thing is we're seeing more and more of
15:12
Speaker 3: these instances across the G ten, and I think that's
15:17
Speaker 3: symptomatic of US converging in the G ten down to EM,
15:23
Speaker 3: and of course that also means EM converging up to
15:27
Speaker 3: the G ten. And another example of a similar blow
15:31
Speaker 3: up is the US in April twenty twenty five when
15:35
Speaker 3: Trump rolled out reciprocal tariffs and everyone was wondering what
15:39
Speaker 3: was going on. The dollar fell as yield spiked. That
15:44
Speaker 3: was a very scary episode. And as you know, the
15:48
Speaker 3: US treasury market has major vulnerabilities because of the basis
15:51
Speaker 3: trade and the swap spread trade. Those are high pockets
15:54
Speaker 3: of leverage which wobbled at the time. And then the
15:59
Speaker 3: thing that I highlight in my substack piece is Japan.
16:03
Speaker 3: Japan is the mother of all of this has been
16:06
Speaker 3: in a Liz Trust style sell off for two years.
16:11
Speaker 3: It's crazy and it doesn't really get the attention that
16:14
Speaker 3: it should. But yields, especially at the long end, have
16:18
Speaker 3: been rising continuously in any G ten currency setting. You
16:24
Speaker 3: would think that that would boost the yen, but the
16:26
Speaker 3: yen has been falling and it is really really worrying.
16:31
Speaker 3: And it basically to me says, if I think about
16:35
Speaker 3: what should the yield for Japan be, then with gross
16:40
Speaker 3: debt of two hundred and forty percent of GDP, basically
16:42
Speaker 3: markets are saying, well, I would like a yield that's
16:45
Speaker 3: much higher. I want to be compensated for all the
16:47
Speaker 3: risks that come with such a high debt level, what
16:51
Speaker 3: we're getting is a far lower yield, and so I'm
16:55
Speaker 3: going to sell the currency. And so all the shenanigans
16:59
Speaker 3: that Japan currently is trying, and I'm referring specifically to
17:03
Speaker 3: official effects intervention, you know that.
17:05
Speaker 1: Stuff, it just doesn't work.
17:06
Speaker 3: It's basically just signaling a government in denial.
17:26
Speaker 1: Robin.
17:26
Speaker 2: The way you sort of particularly cross my radar when
17:28
Speaker 2: I was sort of first involved in this world was
17:30
Speaker 2: as chief economists the Institut International Finance. That's the institution
17:34
Speaker 2: that sort of has particularly gathers a lot of good
17:36
Speaker 2: information on what's going on with investment flows across the world.
17:40
Speaker 2: And I just wonder, as someone who sat for a
17:41
Speaker 2: long time looking at both emerging market economies and the
17:45
Speaker 2: big G ten economies, are we getting to the point
17:49
Speaker 2: that or at least the trends that you're talking about,
17:52
Speaker 2: does that mean that you're going to start not being
17:54
Speaker 2: able to tell the difference? You know, if you're not
17:55
Speaker 2: given the name of a country and you look at
17:58
Speaker 2: their bond market, they're currency done, and it's that you're
18:00
Speaker 2: going to start not being able to tell the difference
18:02
Speaker 2: between them. Are we already at that point.
18:04
Speaker 3: We're already well on the way to that. If you
18:08
Speaker 3: think of Eastern European economies, some of which are now
18:11
Speaker 3: in the EU, you know, back in the nineties they
18:13
Speaker 3: were considered emerging markets. I think they on most metrics
18:17
Speaker 3: these days surpass some of the older members of the
18:21
Speaker 3: EU in terms of their fundamentals and debt levels. But
18:25
Speaker 3: let me give you a concrete example of an emerging
18:29
Speaker 3: market that really stood out positively after COVID. G ten
18:34
Speaker 3: central banks were trapped in kind of this pre pandemic
18:39
Speaker 3: think bubble, which was inflation will always be low, and
18:42
Speaker 3: so they dismissed the inflation surge that happened after COVID.
18:46
Speaker 3: And then you look at a central bank in Brazil
18:49
Speaker 3: which basically said, yeah, no, we're going to hike, and
18:52
Speaker 3: they hiked early and much quicker than G ten central banks.
18:57
Speaker 3: So we are seeing a shift, of course, has been
19:01
Speaker 3: a long time coming, as you say, and I think
19:04
Speaker 3: emerging markets if you look at their currencies against the dollar.
19:08
Speaker 3: One of the things that I've been highlighting is that
19:11
Speaker 3: emerging work currencies are on a big trend appreciation against
19:16
Speaker 3: the US dollar, and that's really about convergence of em
19:20
Speaker 3: Central Bank and other policy making decision making and credibility
19:26
Speaker 3: to the G ten.
19:27
Speaker 2: It does make me think, John, we tend to talk
19:29
Speaker 2: about the US having an exorbitant privilege because of its
19:33
Speaker 2: the dollar status, and obviously that's still the case in
19:35
Speaker 2: many ways. But in a way, these G ten economies
19:39
Speaker 2: have been trading on a kind of exorbitant privilege that
19:41
Speaker 2: somehow they felt they could get away with having these
19:43
Speaker 2: very high debt levels and they could do everything that
19:45
Speaker 2: emerging market economies do. But somehow, because they were developed
19:50
Speaker 2: and advanced and they've been around for a long time,
19:52
Speaker 2: they could get away with it. And people would specifically
19:54
Speaker 2: point to Japan as the example of that. Well, they
19:56
Speaker 2: still don't have to pay very much to borrow despite
19:59
Speaker 2: having these extraordinarily high debt rates. I mean, is that
20:02
Speaker 2: just now very rapidly going into the past.
20:07
Speaker 4: Yes, it is, but there are still some very important
20:10
Speaker 4: market effects of that dawning realization. The one way to
20:16
Speaker 4: measure this that I think is fascinating is that is
20:19
Speaker 4: the carry trade, which for the uninitiated is a very
20:23
Speaker 4: popular way of playing the foreign exchange markets, where you
20:26
Speaker 4: borrow from a currency that has a low rate such
20:31
Speaker 4: as most obviously the yen and parket in a currency
20:36
Speaker 4: with a much higher where you can get much higher rates,
20:39
Speaker 4: such as at the moment, the Mexican peso, and you
20:43
Speaker 4: pocket the difference between those two interest rates, known as
20:46
Speaker 4: the carry and providing there isn't a sudden turn in
20:49
Speaker 4: the interest rate in the exchange rate against you, you
20:52
Speaker 4: make money. The Japanese yen Mexican peso carry trade has
20:57
Speaker 4: made a higher total return in this decade than the
21:00
Speaker 4: S and P five hundred. All it is is just
21:03
Speaker 4: leveraging the fact that Mexico knows it's got a problem
21:07
Speaker 4: with inflation and will hYP rate as soon as it
21:10
Speaker 4: sees there's a risk of inflation rising because it's an
21:13
Speaker 4: emerging market that's been hit several times in living memory
21:16
Speaker 4: by terrible financial crises because of this, while Japan is
21:20
Speaker 4: a country where you need to be about sixty years
21:24
Speaker 4: old to remember there being any problem with inflation at all,
21:28
Speaker 4: and behave differently, and you can simply make that kind
21:31
Speaker 4: of that kind of money you can do better than
21:34
Speaker 4: buying the US stock market, just by leveraging that difference.
21:38
Speaker 5: Now that that cannot go on much longer, it seems
21:41
Speaker 5: to me.
21:42
Speaker 2: So you've mentioned the equity market, and I did want
21:45
Speaker 2: to ask you maybe this is sort of the last
21:46
Speaker 2: bit of our conversation, but you know, anyone listening to
21:49
Speaker 2: this would think, wow, the world's quite scary place. I mean,
21:51
Speaker 2: not only have we got the obvious Iran war, but
21:55
Speaker 2: actually the market's telling us that inflation is going to
21:57
Speaker 2: stay higher, that the governments credibility across the advanced economies,
22:03
Speaker 2: the economies that still play an enormous role in the
22:05
Speaker 2: global economy, their credibility is shot. They're not able to
22:10
Speaker 2: convince investors that they're really going to do the difficult
22:12
Speaker 2: things to reduce their deficits. And we know that the
22:17
Speaker 2: voters in those countries don't want to do anything, don't
22:19
Speaker 2: want to face up to that reality. Particularly. But despite
22:22
Speaker 2: all of those long term fears that are supposedly represented
22:26
Speaker 2: embodied in this big increase in the cost of borrowing
22:29
Speaker 2: for governments, the equity markets don't seem to have really
22:32
Speaker 2: noticed or cared.
22:33
Speaker 1: How does that work?
22:35
Speaker 4: To be fair to equity markets, As many of my
22:38
Speaker 4: readers kindly point out, that they have a strong tendency
22:41
Speaker 4: to be incorrectly bearish.
22:42
Speaker 5: About stock bucket, so to be fair to stop markets.
22:45
Speaker 4: There is something genuinely exciting happening in the earnings that
22:48
Speaker 4: are being generated by companies building out for AI, and
22:53
Speaker 4: the earnings that are being generated by semiconductors in particular
22:56
Speaker 4: recently have certainly been that would always give you a
23:01
Speaker 4: reason in an impulse to buy stocks. That's what you
23:04
Speaker 4: buy when you buy a stock at the future, a
23:07
Speaker 4: cash flow from the from their future earnings.
23:10
Speaker 5: That's that said.
23:13
Speaker 7: Yeah, I agree, it seems to me they ought to
23:18
Speaker 7: care a well. I mean, the classic Alan Greenspan rule
23:23
Speaker 7: of thumb is to compare the earnings yields the inverse
23:26
Speaker 7: of the pe your earnings per share as a proportion
23:29
Speaker 7: of the share price with the ten year treasury yield.
23:33
Speaker 7: But the general idea being that when you can get
23:37
Speaker 7: a better yield from bonds where the only risk you're
23:40
Speaker 7: taking is that Uncle Sam doesn't repay you than on stocks,
23:43
Speaker 7: that probably means stocks are a bad deal. At the moment,
23:48
Speaker 7: the gap in favor of bonds is its widest since
23:51
Speaker 7: two thousand and two, and it's not having any effect
23:56
Speaker 7: thus far on enthusiasm for stocks.
24:00
Speaker 5: Like I said, there are good reasons. There are two
24:03
Speaker 5: at least two huge shocks.
24:05
Speaker 4: Going on at the moment with oil and with their
24:09
Speaker 4: ai in the semiconductor trade, But all other things equal,
24:13
Speaker 4: you would think a move like this in the bond
24:15
Speaker 4: market would be.
24:17
Speaker 5: A serious problem.
24:18
Speaker 1: You stop.
24:19
Speaker 3: I just want to add something, which is that you know,
24:22
Speaker 3: equity markets can be forgiven for thinking that governments will
24:27
Speaker 3: put central banks under pressure to intervene if things get
24:30
Speaker 3: really bad. Think back to COVID in March twenty twenty.
24:35
Speaker 3: I think the FED in the space of two months
24:38
Speaker 3: bought one and a half trillion dollars worth of treasuries
24:42
Speaker 3: when the treasury market was going crazy and yields were
24:45
Speaker 3: spiking during the pandemic in the summer of twenty twenty two,
24:50
Speaker 3: the ECB intervened to cab Italian and Spanish yields.
24:55
Speaker 1: And introduced new tools to keep.
24:57
Speaker 3: Those yields down. So there's a lot of intervention in
25:02
Speaker 3: government bond markets. What we see is kind of a
25:05
Speaker 3: parallel universe.
25:07
Speaker 2: But if you're trying to sort of balance the optimism
25:10
Speaker 2: in the equity markets, some of which is based on
25:13
Speaker 2: a lot of which is based on potentially quite sort
25:15
Speaker 2: of real positive developments in the real economy from AI,
25:19
Speaker 2: but also this loss of credibility potential challenges for governments
25:26
Speaker 2: and governments financing. I mean, you'd have to at least
25:29
Speaker 2: conclude that we're going to have more inflation than we have,
25:33
Speaker 2: because that's even the kind of intervention you're talking about, Robin,
25:36
Speaker 2: eventually means a bit more inflation because you've effectively got
25:40
Speaker 2: some government central banks kind of buying up debt, which
25:43
Speaker 2: is pretty close to monetary finance. John, It does seem
25:47
Speaker 2: like a bit more inflation than we might have expected
25:50
Speaker 2: if we add up all the things that Donald Trump
25:53
Speaker 2: is doing, all of the things we've been talking about
25:56
Speaker 2: on this program. That seems a fairly safe bet, doesn't it.
26:00
Speaker 4: Yes, And we came into the year expecting several FED
26:04
Speaker 4: funds rate cuts. That has an effect because it's highly
26:10
Speaker 4: difficult to see how we're going to get them any longer.
26:13
Speaker 4: Any shift like that in expectations for talking in the
26:16
Speaker 4: short term. In the longer term, there's always any number
26:20
Speaker 4: of demographic reasons to think that inflation will return this
26:24
Speaker 4: effective life. But in the short term, yes, there has
26:27
Speaker 4: been a clear turn, and people who were expecting rate
26:31
Speaker 4: cuts and not to go to get them, that will effect.
26:34
Speaker 2: All right, Well, we will see how it plays out
26:37
Speaker 2: in a sort of trumponomic world and more generally. But
26:40
Speaker 2: I'm glad I started with a bit of explainer at
26:42
Speaker 2: the beginning because this has been a bit more technical
26:44
Speaker 2: on the market front than we usually are. But I
26:46
Speaker 2: think everyone will have stayed with us. Thanks to you,
26:48
Speaker 2: to Robin and John.
26:50
Speaker 1: Thank you very much, Thank you, thanks for having us,
27:09
Speaker 1: Thanks for.
27:09
Speaker 2: Listening to Trumponomics from Bloomberg. It was hosted by me
27:12
Speaker 2: Stephanie Flanders. I was joined by Robin Brooks, a senior
27:15
Speaker 2: Fellow at the Brookings Institution, and John Author, senior editor
27:19
Speaker 2: and columnist for Markets at Bloomberg. Trumponomics was produced by
27:23
Speaker 2: Summer Sudi and Moses and I'm with help from Amy
27:25
Speaker 2: Keen and sound design was by Blake Nples and Kelly Garry.
27:30
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Speaker 2: please rate and review it highly.
27:36
Speaker 6: Wherever you listen.
28:03
Speaker 5: Nothing spends parental in spence, intent, extending and expence