Why Interest Rates Are Shooting Up All Around the World

Summary

Odd Lots Podcast Summary
Episode Title: Why Interest Rates Are Shooting Up All Around the World
Host/Authors: Joe Weisenthal and Tracy Alloway
Release Date: May 22, 2025

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Introduction

In this episode of Bloomberg's Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway delve deep into the global surge in interest rates. The conversation is enriched by insights from their guest, Steven Englander, Global Head of G10FX Strategy at Standard Chartered. Together, they explore the multifaceted reasons behind rising interest rates, the interplay between fiscal policies, currency fluctuations, and the broader economic implications worldwide.

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Global Interest Rate Movements

Tracy Alloway opens the discussion by highlighting significant movements in global bond yields. Specifically, she notes that as of May 20th, the 20-year Japanese Government Bond (JGB) yield surged by approximately 15 basis points to reach around 2.5%, the highest since 2000. Similarly, in the U.S., the 10-year Treasury yield has climbed back to 4.48%, and the 30-year yield is approaching 5% ("03:04").

Joe Weisenthal adds that while markets have generally quieted compared to April, substantial shifts in rates and currencies indicate ongoing volatility. He remarks, "These markets are not boring at all" ("01:34").

Notable Quote:

"You have to look at the path that's traced by US Interest rates and the exchange rates, as well as sentiment and seeing what people are saying to understand whether the financing is coming easily or with difficulty going."
— Steven Englander at 17:56

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Factors Driving Rising Interest Rates

Steven Englander explains that the increase in U.S. yields has a global ripple effect, pushing up yields worldwide. However, Japan's situation is unique due to uncertainties surrounding its quantitative tightening (QT) policies and the Bank of Japan's (BoJ) struggles with maintaining low yields despite a strong yen (05:04).

Key Points:

• U.S. Fiscal Policy: Expectations of continued budget negotiations leading to a widening deficit contribute to elevated rates.
• Global Influences: European and Asian fiscal challenges, including defense spending in Europe, are influencing global interest rates.
• Currency Dynamics: The weakening U.S. dollar is a significant factor, affecting trade balances and investment flows.

Notable Quote:

"I think that the market's not thinking that it's an unalloyed plus. But I'd say that most of the time if the dollar goes down, it's for bad."
— Steven Englander at 10:20

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Currency Fluctuations and Trade Policies

The hosts discuss the interplay between a weakening dollar and rising yen yields. Steven Englander points out that the yen's yield surpassing that of Germany's 30-year bonds indicates a broader global trend where yields are generally increasing, influenced by fiscal policies in major economies (06:06).

Tracy Alloway probes the relationship between a strong yen and a weak dollar, questioning if the latter is the primary driver of the former's appeal. Englander responds by emphasizing that currency negotiations and trade deficits, particularly between the U.S. and Japan, play pivotal roles (07:03).

Notable Quote:

"The idea that you can fix your economic problems by doing something on the international side I think is an illusion."
— Steven Englander at 10:20

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Impact of Tariffs and Trade Barriers

A significant portion of the discussion centers on the effects of tariffs and non-tariff barriers. Englander argues that while tariffs have an inflationary impact, their immediate economic disruption has been overstated. He differentiates between price-based adjustments (tariffs) and quantity-based restrictions, warning that the latter can lead to unpredictable market dynamics (26:07).

Tracy Alloway raises concerns about the long-term implications of reduced global trade efficiency, suggesting that decreased trust among trading partners could lead to higher inflation and interest rates globally (44:53).

Notable Quote:

"If you depreciate that way, something's going wrong. Either the market says hey, the real interest rates are too low and they're not going to be able to push them up, so there's no point to holding their paper or they say risk premium should be higher or something's not going that."
— Steven Englander at 10:01

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Fiscal Policies and the Role of the Federal Reserve

The conversation shifts to the role of fiscal policy in the U.S. and its implications for the Federal Reserve's (Fed) ability to manage inflation. Englander highlights the challenges posed by increased government spending and the difficulty in reducing deficits without significant policy shifts. He suggests that if fiscal deficits continue to rise, the Fed may find itself as the primary agent responsible for controlling inflation through monetary policy alone (21:14).

Joe Weisenthal discusses the market's expectations for Fed rate cuts, questioning whether the window for such moves is narrowing. Englander believes that while the Fed may respond to slowing economic data with rate adjustments, the interplay of fiscal stimulus and tariff-induced inflation complicates the outlook (23:07).

Notable Quote:

"The Fed might see themselves as having an issue in terms of saying, well, if we cut in Q2 or Q3, can we take it back in Q4 and Q1 with the President over our shoulder saying, don't do that."
— Steven Englander at 23:07

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Stagflation and Central Bank Strategies

Tracy Alloway inquires about the central bank's approach to stagflation, a challenging economic condition characterized by stagnant growth and high inflation. Englander reflects on historical central bank responses, noting the difficulty in addressing stagflation without exacerbating either inflation or unemployment. He underscores the lack of effective long-term solutions, emphasizing the tough decisions central banks must make regarding the pace of tightening monetary policy (25:09).

Notable Quote:

"Dealing with stagflation is really tough and there's no good answer, you know, in the longer term that you can't accommodate a negative productivity shock or negative output shock because you'll just have persistent inflation."
— Steven Englander at 25:09

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Economic Specialization and Productivity

The hosts explore the notion that modern economic specialization, with countries focusing on specific sectors, complicates traditional mechanisms like currency adjustments for trade balancing. Englander disputes the idea that there was ever a period when economic specialization was more evenly distributed, arguing that capital flows and market confidence now play more significant roles than academic models like Purchasing Power Parity (PPP) suggest (37:04).

Notable Quote:

"I think that if you're focused on the US and this is something I can't emphasize enough, that just about for every major, even medium sized country, 90% of the policy solution is going to be domestic."
— Steven Englander at 10:20

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Investor Sentiment and Market Positions

Discussing current investor behavior, Englander notes a general reluctance to take new positions in the currency markets, suggesting that many market participants have moved to the sidelines following recent volatility (35:30). He anticipates that while there is cautious optimism regarding rate movements, widespread hesitancy persists in bond markets due to expectations of higher rates by year-end (36:23).

Tracy Alloway observes a trend of investors being fully allocated, with limited cash reserves to deploy into new trades, increasing market nervousness (35:30).

Notable Quote:

"I think we'd welcome some of that cash in the FX market because I don't think that positions are very heavy one way or another."
— Steven Englander at 35:30

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Academic Economics vs. Wall Street Practices

A fascinating segment addresses the disparity between academic economic theories and practical applications on Wall Street. Englander, holding a Ph.D. in economics, emphasizes the importance of questioning established models and data assumptions. He advocates for a critical approach, asserting that merely adhering to academic theories without scrutiny can hinder effective economic analysis and decision-making (37:04).

Notable Quote:

"You have to learn to question things and the assumptions that everyone makes."
— Steven Englander at 37:04

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Concluding Insights

As the episode wraps up, the hosts and Englander reflect on the interconnectedness of global fiscal policies, trade dynamics, and monetary strategies. They underscore the complexity of the current economic landscape, where traditional tools and theories are often insufficient to navigate the unprecedented challenges posed by geopolitical tensions and shifting economic alliances.

Joe Weisenthal summarizes the overarching theme by linking the degradation of trust among trading partners to the global rise in interest rates, suggesting that decreased productivity and increased spending are contributing to an inflationary environment worldwide (43:30).

Notable Quote:

"If every country suddenly needs to start building its own things because their trading partners are unreliable, that means, A, you get less productivity and B, you just need more spending, whether it's private spending or public spending."
— Joe Weisenthal at 43:30

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Conclusion

This episode of Odd Lots provides a comprehensive analysis of the rising global interest rates, dissecting the roles of fiscal policies, currency fluctuations, and geopolitical tensions. With expert insights from Steven Englander, listeners gain a nuanced understanding of the intricate economic forces at play and the challenges faced by policymakers in stabilizing economies amidst uncertainty.

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Notable Quotes with Timestamps:

• "These markets are not boring at all." — Joe Weisenthal (01:34)
• "The idea that you can fix your economic problems by doing something on the international side I think is an illusion." — Steven Englander (10:20)
• "Dealing with stagflation is really tough and there's no good answer..." — Steven Englander (25:09)
• "You have to learn to question things and the assumptions that everyone makes." — Steven Englander (37:04)
• "If every country suddenly needs to start building its own things because their trading partners are unreliable..." — Joe Weisenthel (43:30)

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Note: This summary focuses solely on the content-rich sections of the podcast, omitting advertisements, intros, outros, and unrelated segments to provide a clear and concise overview of the episode's key discussions and insights.

Transcript

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[Joe Weisenthal]

Power.

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[Joe Weisenthal]

News.

[Tracy Alloway]

Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal.

[Tracy Alloway]

Joe, how about them JGB yields?

[Joe Weisenthal]

So this is the thing which is that in some sense the markets have quieted down, certainly compared to early April or mid April. But there are some major moves still happening, particularly in rates, some currency stuff if you know where to look. These markets are not boring at all.

[Tracy Alloway]

I don't even think you have to like actively go looking for interesting moves. So we're record this on May 20th and the 20 year JGB yield was up something like 15 basis points to about 2.5%. That's the highest since 2000. So basically back when I was living in Tokyo going to high school, were you how I measure, that's what were.

[Joe Weisenthal]

You borrowing from local Japanese banks or were you buying JG was when you were in high school?

[Tracy Alloway]

Sadly, sadly not. Although, well, they wouldn't have been a great investment.

[Joe Weisenthal]

Well, you should know, you should have bought some JGBs back then. You get great price appreciation, you get great yields. But yes, there's a lot going on. It's a global thing. So in the US we're also seeing fairly elevated rates lately and to some extent that might be a story of expectations that the current budget negotiations are gonna continue, widening the deficit. You know the sort of moody story. But there's clearly global factor here that cannot simply be explained by say, like the willingness or unwillingness of members of Congress to like expand the salt deduction. There is a bigger macro story unfolding that I don't think I have my head fully wrapped around.

[Tracy Alloway]

Right. So as we're recording this, the 10 year is back at 4.48% and perhaps more importantly, the 30 year is creeping back towards 5%. The dollar is falling again. So the Sell America theme is kind of getting another airing. There are concerns over the fiscal trajectory and the big beautiful bill that you know, you just kind of literally called that, isn't it?

[Joe Weisenthal]

I know, it's literally called the big beautiful bill. I love that.

[Tracy Alloway]

And so the worry is that that will push up the deficit and possibly inflation. Plus of course, we have tariffs. Meanwhile, as rates appear to be going up, there are plenty of people still out there who are talking about the prospect of the economy, the US economy actually slowing down and getting rate cuts later this year and the market is still pricing those in. So we're at this really interesting juncture in the bond market where we're getting a lot of conflicting signals, a lot of confus signals, as you mentioned. And it seems like maintaining stable prices, low inflation and trying to fight all these different cross currents is going to fall almost entirely on the Fed. So I think we should talk about all of this.

[Joe Weisenthal]

Absolutely. Let's jump right into it. We have a great guest today.

[Tracy Alloway]

We have the perfect guest, you might say. We're going to be speaking with Steven Englander, the global head of G10FX strategy at Standard Chartered. And to be honest, Joe, I cannot believe we haven't had Stephen on the podcast before.

[Joe Weisenthal]

I've been reading Steven's notes for years and years and years. I was actually really surprised to realize he's never been on before.

[Tracy Alloway]

I know, our oversight major.

[Joe Weisenthal]

Our oversight. Lately his emails have become a must click for me. I always open them and so yes, he's here with us in studio.

[Tracy Alloway]

Steven, welcome to the show.

[Steven Englander]

Thank you very much. I'm honored to be here with the best interviewers in the world.

[Joe Weisenthal]

That's right. We are going to clip that and save it for our highlight reel.

[Tracy Alloway]

That's very kind. So why don't we start with JGBs and also USTs. Is there a common theme running through that sell off or are they being driven by entirely different things?

[Steven Englander]

I think it's mostly different. There is a common element in that if U.S. yields are going up, everybody's yields are going to be going up. But I think in the case of JGBs there's particular dynamics, there's uncertainty about what they're going to do. On the QT side they had this very kind of painful 20 year auction which was pretty close to failing. The BoJ published that there was some debate as to what pace of quantitative tightening they should be going at, if any. I think there's a general view in the world that yields are too low and they're going to be going up. However, it's puzzling because the market seems to like the yen and normally that would be associated with lower yields.

[Joe Weisenthal]

Well, you're getting paid a lot to buy y, I mean, right? Isn't that part of the story? Like yields are going up so it's like I'll buy some yen because at least they're paying me a lot more yen to hold them.

[Steven Englander]

Well, remarkably today there have been times when the yen 30 year yield has been higher than the German 30 year yields.

[Joe Weisenthal]

Well, so just on this point I'm looking so far anticipated. I literally on my terminal had just pulled up a chart of German 30 year yields as well, which are above 3%. That's crazy. They were at zero at the start of 2022 and that's the 30 year, that's they're over 3%. So there must be a global factor.

[Steven Englander]

Well, some of it is fiscal, especially in Europe and the U.S. europe had like 10, 12 years of debt crisis in which they didn't want to expand fiscal deficits. The pressure was to do the opposite and now they've discovered that defense spending is the key to economic growth. But the market I think is looking at it and they're looking at the fiscal prospects in the US and kind of guessing that we're not going to see zero on German yields again, just.

[Tracy Alloway]

Going back to the yen and people buying it. How much of that is a strong yen story versus a weak dollar story? This is why I hate currencies by the way.

[Steven Englander]

Well, they're good because you have two chances to be wrong. I think that much of it is a weak dollar story. And looking to see in terms of the negotiations on tariffs and in terms of how off base the currency is, which currencies are most likely to move, which ones will face the least resistance in appreciating against the dollar. And I think Japan wins on several counts that the tariff negotiations will be tough because they still have a very big trade deficit with the U.S. trade surplus. Yes, trade surplus with the U.S. the non tariff barriers, even if you really can't quantify them, they're pretty significant. And the US Has a point in complaining about some of them. There's a sense in the market, and I think correctly, that once you get past the 10% baseline tariff that the US needs for fiscal purposes, that they may be willing to trade some of the reciprocal tariffs, the tariffs beyond that 10% for currency appreciation. And there have been a number of currencies under discussion, but the yen is one of the prime currencies, given that it's so weak relative to any kind of PPP type of basis.

[Joe Weisenthal]

Right. This is sort of a general East Asian story. Obviously, we talked about the Taiwanese dollar and the South Korean won and so forth. And there is this view that maybe some sort of difference in currency policy could be part of the packages here. Before we get more to that, you know, one of the things that you heard maybe six months ago or a year or even a few months ago, they're like, oh, if we impose tariffs, it will be offset because that will be a strengthening of the US Dollar. And we've seen literally the opposite. But that was a common meme, a common conventional wisdom among a lot of economists, both Wall street academia or the ones who appear on tv, et cetera. What is the simple story for why the dollar has been so weak since April 2? Even at a time when stocks have rebounded, interest rates have stabilized a little bit, the one major move that hasn't really reversed is the dollar. What's the simple story there or the complex story?

[Steven Englander]

Well, it's a medium story, but it basically goes something like this. I might choose to pick your pocket if I thought you wouldn't respond. But if you did respond, the consequences might not be as much fun for me. And I think that if you start with the assumption that the US can tariff everybody and the market's not going to say, well, wait a second, if they do tariffs, what about that mar a lago stuff? What about foreign policy? What is the limit to which they can expand that policy envelope? You add risk premium to U.S. assets. So the offset to that is that the market is looking at US Assets and kind of saying, well, safe haven. Maybe not so much reliability, maybe not so much as it used to be.

[Tracy Alloway]

Is there good dollar depreciation and bad dollar depreciation? And I remember in one of your notes you talked about this idea that, you know, you could get a weaker dollar that supports competitiveness, but you could also get a weaker dollar that reduces the amount of capital coming into the U.S. how would you measure those two things?

[Steven Englander]

Well, in a sense we're getting some of that measurement. Now when we look at the dollar weakening and interest rates going up, I think it's a pretty good sign that notwithstanding the greater competitiveness on paper at least of the US that investors aren't that enthusiastic about holding US assets. So I think that's one real signal that the market's not thinking that it's an unalloyed plus. But I'd say that most of the time if the dollar goes down, it's for bad. The basic good story would be something like this, that the rest of the world for whatever reason does fiscal policy and kind of expands consumption and they start buying U.S. assets. U.S. foreign yields go up relative to the U.S. never mind what their debt picture is over 5, 10, 15 years and they say, okay, instead of buying U.S. treasuries, we're going to buy German and European and Asian because they're all expanding their fiscal deficits and their rates are going up, the return is higher and you can search, yeah, the dollar's weaker, but it's okay for the US they can do their own thing. I'd say that if you're focused on the US and this is something I can't emphasize enough, that just about for every major, even medium sized country, 90% of the policy solution is going to be domestic. The idea that you can fix your economic problems by doing something on the international side I think is an illusion. If you did the right thing on the domestic side, you might get good stuff happening on the international side. But it's really, really hard to get around domestic issues by saying, oh well, we'll just depreciate 10 or 15% most of the time. When you depreciate that way, something's going wrong. Either the market says hey, the real interest rates are too low and they're not going to be able to push them up, so there's no point to holding their paper or they say risk premium should be higher or something's not going that. Even though there's a route by which you can say that a weaker dollar reflects good stuff, that's not the most common route most of the time a weaker currency reflects bad stuff happening on the domestic side.

[Joe Weisenthal]

No, I think this is a really good point. I wrote a thing in the newsletter, I called it One Weird Trichonomics. Cuz we have all of these things that we can all talk about that sort of ail or plague the US economy. It's difficult to build here. We seem to have lost our capacity to.

[Tracy Alloway]

Joe, if you do the whole list. We're going to be here for like 30 minutes, right?

[Joe Weisenthal]

We seem to have gotten worse at building airplanes, which is one of the things that we actually still do export to the world in much of the ways. These are really tough problems to solve. And it strikes me as sort of fantasy that suddenly we can revive all of these things just by coming to an agreement with our foreign partners about some difference in currency or trade policy.

[Steven Englander]

I completely agree. The other fantasy I would add to that is the implication all we got to do is depreciate 5 or 10% and that's going to be enough. If you take a look at the way the dollar has moved against the euro, the yen, the range over the last 10 years for the euro I think is 95 to 125. And the US has run a trade deficit, significant trade deficit against Europe, both at 95 and at 125. I think there's too much faith that a weak currency is going to bail you out of your problems, but it's the easy thing to do and it kind of sounds nice in principle.

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[Joe Weisenthal]

Ever an era in economic history in which economies did stabilize more directly in more linear fashion? You know now when I think of like, okay, specialization. Taiwan makes the chips, Europe makes the engines. The US makes soybeans and complex financial products. I get why currency adjustments don't have this stabilizing effect. Was there a period when economic specialty was more distributed that there was a more clear link between exchange rate fluctuations and trade balancing?

[Steven Englander]

The simple answer I think is no. I think that there was a time maybe when you had the gold standard. But there's also an issue that the movements of gold reflected the confidence of markets, that the economy was sustainable. There were no imbalances. So if you ran a trade deficit in the 19th century, yes, it would have to be settled in gold eventually. But it wasn't a problem until everyone decided that maybe you wouldn't be able to do it. And then you would have these kinds of crunches. Most of my career. It's sort of funny because when you go to school, all you learn is PPP and trade balances and adjustment of exchange rates and so on to get trade into equilibrium. Once you're sitting at a trading desk, all you see are capital flows. And that's kind of the driver. And the issue is, does the market have enough confidence to keep lending you the money? And if you look at the US say for the last 20 years or so, through thick and thin till recently, the market was pretty confident that the risk adjusted returns in the US would be positive. And yeah, the US ran a trade deficit, but it didn't seem to harm US welfare.

[Tracy Alloway]

What do you see in the capital flows now? Because this seems to be one of the difficulties of the current moment, which is there are a lot of people talking about the Sell America idea. But if you look at some of the data and a lot of it comes out on a lag, you don't really see a lot of selling. For instance, foreign accounts selling a lot of U.S. treasuries. Are you seeing any evidence of the Sell America theme emerging?

[Steven Englander]

Well, I think you see it in the weaker dollar. And my best friend is the balance of payments identity. And I talk to it every day.

[Joe Weisenthal]

A little sad, but charming.

[Steven Englander]

The thing is that when the market decides that it's not going to lend you money at yesterday's interest rates and exchange rate, there are two ways of getting that adjustment. Either your demand for credit can go down, which we sometimes see with emerging markets when they hit the wall with respect to foreign funding and the economy crashes because basically they have to get into trade balance or surplus even in order to meet their obligations in G10. Mostly and historically with the US the adjustment has been via the currency occasionally, like in 78 and April, with the currency and interest rates. But there's no big demand shock. There's no big shock to output because the money's not there. The money's there, but it's at a different price than you expect it to pay. So I think you have to look at the path that's traced by US Interest rates and the exchange rates, as well as sentiment and seeing what people are saying to understand whether the financing is coming easily or with difficulty going.

[Joe Weisenthal]

Back to Europe for a second. So Germany has suddenly, maybe briefly, but suddenly found this willingness to spend more money, and that's going to benefit German defense companies. We see higher rates, so maybe a longer term more inflationary temperature in the European economy. Is Europe actually a desirable destination, though, for global capital? I mean, it doesn't have really an alternative to US Treasuries. The fundamental growth prospects still don't look great. Do you see any changing perspective in the pure desirability of capital to enter Europe?

[Steven Englander]

Some, but I'd say most of what we're seeing is the market beginning to debate whether the US Is going to fall back into the pack in terms of being attractive. I don't think it's really that is Europe pulling away from the pack in terms of attractiveness? And going back to the first principle that I mentioned, when you list the issues limiting growth in Europe, there's been energy policy, which hasn't worked out. There's the overregulation, there's taxation, lack of incentives, the labor market inflexibility, all the issues that we've discussed for 20 or 30 years. It would be remarkable if defense spending was the answer to all of those problems. And I'm a bit skeptical in the short term, it might make a difference in the long term. It's not as if we study Attila the Hunt's textbook of economics to see how preparing for war is going to give you a better economy.

[Tracy Alloway]

Yeah, that's another one weird trichonomics thing, the belief that defense spending is going to change everything. I mean, it is a big. It is a big change, but the idea that it's going to really reverberate across the European Union, going back to US Problems for a second. So if we can't count on a weaker dollar to save us, and meanwhile it seems like we're going to get probably more fiscal spending, a bigger deficit. Does the job of reining in inflation now fall entirely to the Fed?

[Steven Englander]

Pretty much. There's a hope that some spending can be reduced because if you look at the share of government spending in GDP, it's way higher than it was in 2018, 2019, for the decade before we hit Covid. And the Republicans kind of got snookered by Biden when they did the debt deal in that they accepted a higher baseline level of spending that was way above the historical norm for the US So the question is, can they get that back down? Can they do that in a way that's fair, equitable, that's not really going to be on the backs of one segment of the population or the poorest or the weakest or whatever? If they can, it would be remarkable. If Doge can get rid of wasteful spending, if they can actually find waste, fraud and abuse, that would be terrific. But if they can't, and we know the history of these fiscal bills, which is that the easiest thing to do is to kind of say, well, we'll have a lot of supply side effects, or we're counting on this revenue or that revenue, which may or may not come. If it turns out that it's kind of steepening the deficit path and the path of debt accumulation, the Fed may be the only story in town.

[Joe Weisenthal]

You wrote an interesting piece earlier this week talking about the sort of short to medium term outlook for the Fed, and it sounded like, you see, the window for rate cuts is being sort of narrow and shallow, that basically in 26, 2027, we're going to be getting a stimulative impact, assuming this tax bill goes through and something that it looks like. Talk to us about what the market is pricing in for rate cuts versus what realistically the Fed might be able to do here.

[Steven Englander]

Yeah, I guess I'm kind of at odds with the market both in the short term and in the longer medium term.

[Joe Weisenthal]

This is what makes an interesting conversation.

[Steven Englander]

In the short term, I think. Look, every survey you get tells you that everybody's concerned about growth. They expect growth to slow down. How many weak payroll numbers do you need to say, oh, wait a second, people have been telling us that nothing's happening, that things are slowing down. Now we get evidence. Do you need three, do you need six? Or do you just say, well, yeah, that just confirms what everybody's been saying. So I actually think that they will do the right thing, which would be to ease in response to incoming economic data. Having said that, I would see that as an insurance policy because the fiscal bill is likely to introduce net stimulus. We're going to get some uncertain inflation. We'll get certain inflation effects from the tariffs. What's uncertain is whether they're one off or persistent. So between the combination of tariff induced inflation and fiscal stimulus, it's not clear to me how they're going to cut. I think that the Fed might see themselves as having an issue in terms of saying, well, if we cut in Q2 or Q3, can we take it back in Q4 and Q1 with the President over our shoulder saying, don't do that. But if you were running a model, you'd probably say, given all the data that have come in, if you get confirmation that the economy is slowing, you should cut and then you should keep your eyes open to see what's happening at the end of the year to turn into 2026 and see if you have to take it back because the inflation picture has deteriorated.

[Tracy Alloway]

Can I ask a basic question which I've always wanted to ask someone and given your experience in the market, I think I should ask you what is the central bank playbook for stagflation prey?

[Steven Englander]

Look, in some ways when you look at the history, Arthur Burns got dealt a very bad deck. He probably didn't play it well, but he, he didn't have a good deck to play with. Greenspan, Bernanke, even Yellen to some degree. Greenspan and Bernanke actually had pretty strong productivity growth when they were there. So unit labor costs were soft. Yellen had low inflation. So she could be everybody's friend because they were trying to get to their targets. And even Powell in his first term was faced with that issue. But dealing with stagflation is really tough and there's no good answer, you know, in the longer term that you can't accommodate a negative productivity shock or negative output shock because you'll just have persistent inflation. The only question is how quickly do you try and wring it out of the system? That's a very hard decision to make.

[Joe Weisenthal]

Speaking of having views that are out of consensus, you wrote an interesting note a couple of weeks ago. I think it was before the quote, detente with China. But actually you were of the view. Yeah. And you've been talking about this. Tariffs will have an inflationary impulse. We'll see how far it goes. But that actually the sort of short term disruption from the tariffs you sort of thought have been overstated. And I think the markets increasingly come around to this view. I mean if we were talking to you in April, early April, people were sudden stop to the economy. They pulled the plug on the economy, so to speak. But at least in the short term, your view is that it's not quite as big of a deal from a sheer economic activity standpoint.

[Steven Englander]

Yeah, look, 10% shocks the competitiveness. We get those all the time via exchange rates and life goes on. In the last 10 years, the Eurodollars moved 10% in a relatively short period of time, three or four times. It's not fun for the business people on the wrong side of that move, but they managed to deal with it. And China was different. But the imports from China in 2024 were like 1.6% of GDP of US GDP. Of US GDP. Correct. And even at the worst of the sort of, when we saw no boats there, we're probably running at about 50, 60% of normal. So you talk about 0.8% shock and you say, okay. You look at other shocks that the US gets either via the exchange rate when you have a big move, or via energy prices, which is like 7 or 8% of the CPI. They can easily move 20 or 30%. That's something that everybody has to deal with. It's never comfortable, but the economy can deal with it. Where I did see a potential issue which I think is really important is that if we move from tariffs, which is a way of adjusting relative prices, to start saying now we just don't want X, Y or Z from China or we're going to limit imports of stuff, using quantities to regulate trade rather than prices potentially has a much deeper effect because you really don't know how far prices will have to move in the event of a shortage to clear the market. So with that, you'd be playing with fire. But 10% tariffs, it's not that I'm endorsing it, I just don't. I don't think that they are as big a deal as they were made out to be.

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[Tracy Alloway]

Me like one of the complications of the current environment other than uncertainty, which you know, we've been joking on the podcast that we cannot get through through a single interview at the moment without mentioning the word uncertainty. But one of the complications is you potentially have the economy sort of moving in different directions, or maybe the impacts of the tariffs are moving at different speeds. So you could have an impact on inflation, you know, relatively soon as prices start going up, but you could have an impact on the labor market later on because it takes a while for reduced demand to work its way through the economy. And that strikes me as something that's difficult to deal with for the Fed and also means they have a sort of limited window to operate in. How realistic do you think that timing scenario is?

[Steven Englander]

It's pretty realistic, although I think that the effects on labor show up sooner.

[Tracy Alloway]

Oh, okay.

[Steven Englander]

Because the say, imports from China crash, are we going to build stuff in the US and the answer is probably not. The US is probably not. Even with 10% tariffs on a bunch of countries, the US is probably not the second lowest cost producer for most of the stuff that China was producing. So we would get the price effects from China. I don't see that there would be any significant increase in employment. So I think we'd get them both at about the same time that demand was getting squeezed because this is a decline in real wages because of the price effect. But I think that they are very hopeful in terms of the quantity effects, the output benefits that they expect to get in the short term from the tariffs. And I suspect we're going to see the downside of that quicker than any kind of upside is likely to emerge.

[Joe Weisenthal]

Before I forget, you said something at the beginning. There actually are real non tariff trade barriers employed by Japan. Apparently it's not true that they have a bowling ball test where they drop a bowling ball on a car and if it dents, you're not allowed to sell the car there. Apparently that is something of an urban legend. But whether it's Japan or anywhere else, what substantive non tariff trade barriers do you see out there that the administration has a legitimate case should be modified in some way?

[Steven Englander]

Well, trade in agriculture is very limited in most countries. You know, there's certain health, you know, with more processed food, there are health regulations which may or may not be completely justified. And there are sort of barriers that you've seen documented over time. It's not that they're wrong. I mean, the US Put out this very thick book documenting non tariff barriers, but I think the importance is probably overstated. They should be gotten rid of, but it's not like cataclysmic type of thing. I mean, look, I think US Demand has been stronger than that in the rest of the world. So we've imported more and that's most of the trade story.

[Tracy Alloway]

I got distracted looking up the bowling ball test. Jeff?

[Joe Weisenthal]

Yeah. Did you find anything interesting?

[Tracy Alloway]

It seems to be something that Donald Trump talked about and is probably not true.

[Joe Weisenthal]

By the way, I know we already had that agreement with the UK but I think they should let cars drive on the right side of the road and would probably make it a lot easier for Americans to sell into that market.

[Tracy Alloway]

Joe, why do you feel the need to say these things?

[Joe Weisenthal]

Keep going.

[Tracy Alloway]

All right, Steven, I'm going to ask a very basic question. Typical question for you, I imagine, but what are your clients asking you about at the moment? What concerns are you seeing out there? What are the questions that you're getting? Repeatedly?

[Steven Englander]

I think corporate clients, people who are in real businesses, make things, sell things. I hate to use the word uncertainty as much as you do.

[Tracy Alloway]

It's okay. It is allowed.

[Steven Englander]

The question for them is if I want to increase capacity, where should I do it? Should I do it in the US Should I do it elsewhere? How is this going to play out? Is it going to play out for four years or is it going to play out for eternity? I think that they're having a very hard time getting their hands around it. To them, that's the biggest issue. I think if you're investors, people who manage portfolios or trying to eke out gains in the market, the question about where the dollar is going, where rates are going, how fast they're going, and especially nobody wants to be the sixth person on a trade because that makes you vulnerable. So they're very obsessed with understanding whether any trade that they want to do is say a steepener trade in the rates market. Has everybody else done it already or is there still room to get in and be able to do well on that trade.

[Tracy Alloway]

Yeah, on this note, I was out last night, I was talking to a couple investors, one of whom is involved in a very large family office. But he was saying that it feels like everyone is basically fully allocated at this point and there's a lot of nervousness about putting on new trades and there's not a lot of cash actually sitting on the sidelines anymore.

[Steven Englander]

I think we would welcome some of that cash in the FX market because I don't think that positions are very heavy one way or another. Given the moves that we've seen say in the dollar, the end of last year, then the beginning, then Liberation Day, then post Liberation Day and after the semi accord with China, I think a lot of people have actually headed to the sidelines as far as FX goes. Maybe more positioning in equities given the way it's moved the last month or so. And on fixed income as well. Our view that rates will probably be higher at the end of the year is shared by a lot of people. It doesn't mean it's wrong, but I think that the caution about say buying bonds right now is very widespread.

[Tracy Alloway]

What is your end of year target for the 10 year?

[Steven Englander]

I believe we're just under 5%, so we'll be closer to 5 then to 4.5% by the end of the year.

[Joe Weisenthal]

I want to go back actually to something you said, which is that when you were in school you're sort of taught that purchasing power, parity, these are the things that help determine the fair value of currencies and that once you became on Wall street, you realize it's all about capital flows and investment and things like that. What else have you Talk to us a little bit more about the gap between academic economics, you have a PhD in economics from Yale, Academic economics, and then the type of economics that's actually useful and that people pay money for on Wall Street. What did you learn or what did you have to unlearn?

[Steven Englander]

Ooh, that's a hard one. I think that you have to learn to question things and the assumptions that everyone makes. And you mentioned one of the pieces we did on how exposed is the U.S. actually, you sort of look at what everyone's saying and you're saying, can I find some data that will either support it or oppose it? So the questioning of the data, being willing to question central banks and their policies and even their policy framework, I think that that's something that's really important and it's something that is respected in the market I mean, you don't have to be right all the time, but your arguments have to be well crafted. And being able to formulate those arguments, I think is very important.

[Joe Weisenthal]

What was your PhD thesis about?

[Steven Englander]

Oh, my goodness, it was about agricultural development, how transferable technology was from one country to another.

[Joe Weisenthal]

And when you think about, like, when you look at your career in finance, like, how helpful is this sort of like core academic macro, all those equations and all that stuff, if it gives.

[Steven Englander]

You the confidence to question what people are saying, if it's enormously helpful, if you're just another brick on the wall sort of repeating the models that you got taught in graduate school and thinking that they're right, I think you're going to have a tough time. And I still use some of the techniques that I used in my dissertation. But I think the key thing is to walk away from this and being able to say, okay, I know the model says this. Is the model robust enough to actually capture what's essential in the real world? And if not, how can I do better? And that's the value, I think, of the PhD. It enables you to question what everybody else is saying.

[Joe Weisenthal]

It's like an arms race. Right? The PhD doesn't necessarily help, but without the PhD, you don't have the confidence to question the PhD. Everybody just needs to unilaterally agree, no more PhDs.

[Tracy Alloway]

That's right. And then everyone will be on even footing.

[Steven Englander]

That works for me, but I know a lot of people without PhDs who are very, very sharp. And even Powell, whom I respect a lot, no PhD, but he gauges the weaknesses. Oh, R. What's the standard error? Maybe plus or minus 20. Sort of. Understanding that having the intuition to know when something is really well founded versus something that sounds nice but is all over the place only works on a blackboard. That's really important.

[Tracy Alloway]

I know we touched on a few areas where your theories differ from the market stance at the moment. But just on the note of the usefulness of theoretical academic economics versus real world, what's the biggest assumption that the market or policymakers or investors are getting wrong at the moment?

[Steven Englander]

I think policymakers everywhere should pay a lot of attention to the risk premium of having erratic policies and policy uncertainty. You read some of the stuff that's written, and sometimes it's written almost as if it's in a vacuum. I can do this and it will affect this market, which is the one I'm trying to affect, but nobody else is going to pay attention to it in the real world. Everybody else pays attention to it. I think that that's an issue that you want to take into account. I think more generally, especially central bank policymakers, they're sometimes wedded to academic models. And if they don't have an alternative model that's viewed as respectable in academics, it's hard for them to say, well, it doesn't matter. That's not respectable. It works. Whereas the one that is respectable doesn't work.

[Joe Weisenthal]

It strikes me that part of the reason that there's so much uncertainty or confusion is that a lot of the big topics being discussed right now to some extent precede economics because they're really about, like, you know, we're getting to sort of like core questions about institutional structure and politics, the quality of our political discourse, et cetera, and like, the quality of elected leaders all around the world and so forth. And as such, it seems like you sort of like, run into a hard limit of, like, how far you can go in understanding anything simply by looking at the economic lens, which is no knock to economics. I love talking to economists such as yourself, but at some level, the tools in the economist toolkit are just not going to get you very far in sort of like discerning which way some of these questions are going to go.

[Steven Englander]

Well, I think at a significant level, you don't need a high school degree to understand the issues. If you don't trust your trading partners to be reliable suppliers.

[Joe Weisenthal]

Yeah.

[Steven Englander]

So much so that you're willing to forego the benefits of trade, the benefits of economies of scale and efficiency. That's a real pity. And there's a real cost to it. And if we have to make all the stuff that is made elsewhere, there's a cost. And a bit of my own background, I come from Canada. There are parts of Canada that make very good wine, and there are parts of Canada that make very bad wine. If you've ever had the bad wine, you're a free trader in wine for the rest of your life.

[Joe Weisenthal]

Where's the bad wine? Region?

[Steven Englander]

I will not denounce the country of my birth.

[Tracy Alloway]

All right.

[Joe Weisenthal]

I have a guess, actually.

[Tracy Alloway]

Oh. What do you think?

[Joe Weisenthal]

Well, I was recently.

[Tracy Alloway]

You can say it.

[Joe Weisenthal]

So I was recently talking to someone actually, while we were in Atlanta, and I randomly heard someone talking about how there are some really good wine tours that you can take in the sort of Finger Lakes region of New York. With the only caveat, it's very beautiful and you can take boats around from one winery to another. The only caveat is that the wine isn't very good. And so my guess is that it would be somewhere on the other side of that New York, Canada border around there where the wine is not good. But that's just my. That's my hunch.

[Steven Englander]

You can get a lot worse wine than the finger legs.

[Joe Weisenthal]

All right, that's good to know.

[Tracy Alloway]

We'll have to do a wine episode with Stephen, but for now, we have to leave it there. Stephen, thank you so much for coming on the show. I'm so glad we finally got a chance to talk with you.

[Steven Englander]

Thank you both. It's a great pleasure. And you lived up to your awesome reputation.

[Joe Weisenthal]

You lived in the interview. Thank you so much.

[Tracy Alloway]

Joe. That was great. I'm so glad we finally had Stephen.

[Joe Weisenthal]

On Steven's great, you know, on that last point where he is talking about the sort of the degradation of the comfort that countries have with their trading partners, it strikes me that this has to be a big part of the global rate story. Because if every country, and it fits into an episode we recently did with Scott Bach about the risks of deglobalization, if every country suddenly needs to start building its own things because their trading partners are unreliable, that means, A, you get less productivity and B, you just need more spending, whether it's private spending or public spending. And so you get this story where every country sort of logically feels it has to to spend more into an environment of less productivity, which means higher inflation, which means higher rates.

[Tracy Alloway]

Right. And the irony, I guess, is that that happens at the same time that a lot of countries, to Steven's earlier point, think that they can solve all their domestic problems through international trade policies.

[Joe Weisenthal]

Yeah, you know, I remember like, you know, it was a popular thing to talk about, like currency wars in the wake of 2009, 2010, 2011, and this sort of fantasy that countries can revive their economic fortunes simply via the exchange rate. And I'm sure within any country, there are sectors of the economy for which that is true. I suspect that a weaker currency for the US is, as always, going to benefit our soybean farmers and our corn farmers to some extent. But it is not going to magically put us at the front of the line when it comes to the high value exports or the high value products period that typically characterize an advanced economy.

[Tracy Alloway]

Just one more depreciation, bro.

[Joe Weisenthal]

One more depreciation. One more depreciation, bro. We're going to match TSMC's Taiwan semiconductor prowess.

[Tracy Alloway]

That's right. All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

[Joe Weisenthal]

And I'm Joe Weisenthal. You can follow me at the Star Wars Follow our producers Carmen Rodriguez at Carmen Erman, dashiell Bennett at Dashbot, and Kale Brooks at Kalebrooks. For more Odd Lots content, go to bloomberg.comoddlots where we have a daily newsletter and all of our episodes and you can chat with fellow listeners 24. 7 in our Discord Discord GG oddlots.

[Tracy Alloway]

And if you enjoy Odd Lots, if you like it when we talk to economists like Stephen Englander, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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