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- [00:00]
Hyun Sung Shin
Your best restaurant location gets five star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab now every location is your best location.
- [00:30]
Tracy Alloway
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- [02:03]
Joe Weisenthal
And I'm Joe Weisenthal.
- [02:04]
Tracy Alloway
Jo, There are so many huge stories that you could pull out of this year, but I mean like some actually really, really big ones. So we had Liberation Day and the market crash. We had the continued weakness in the US dollar which has been this sort of slow burn crash across the year. And we're recording this. Let's see, October 17th and dollar down.
- [02:28]
Joe Weisenthal
Yet again, although it is down but however there's been a little, you know, we hit as low in mid September.
- [02:34]
Tracy Alloway
Don't make apologies for the dollar, Joe.
- [02:36]
Joe Weisenthal
No, you know, I just like keep going and then I'm all right, keep going. Then I might add something.
- [02:43]
Tracy Alloway
Fall in the dollar.
- [02:44]
Joe Weisenthal
The fall in the dollar is very big so far this year, but this.
- [02:48]
Tracy Alloway
Huge ramp up in the price of gold which seems to hit a new record all the time. And then we've had the continued Strength, slash, resilience, whatever you want to call it, enthusiasm about AI and the stock market. And it really seems like there's this division at the moment between how people feel about corporate America and how people feel about sovereign America in the form of its currency.
- [03:10]
Joe Weisenthal
You know what I really regret doing, Tracy? I really regret.
- [03:15]
Tracy Alloway
Did you have like a hoard of gold that you got rid of?
- [03:17]
Joe Weisenthal
No, I took out a gold denominated mortgage. You know, I feel so stupid. I feel so stupid. Why did I do that? I could have. I get paid in dollars and I took out a gold denominated mortgage. What was I thinking? No, I didn't. But had I done that would have been a very bad trade.
- [03:31]
Tracy Alloway
Yes.
- [03:32]
Joe Weisenthal
Remember those stories from like, you know, a little bit of a tangent. Remember all those stories from like the Hungarians, they took out those Swiss denominated mortgages back in the 2000.
- [03:43]
Tracy Alloway
That was very much a Europe thing for a while.
- [03:45]
Joe Weisenthal
Yeah, that was a really funny. We don't have to talk about that. But one thing I was just the only reason I caveated the dollar fall, which I do think it is quite a bit down from the beginning of the year. All that being said, it is striking in the last several weeks the degree to which a few of the very popular consensus ideas for this year are turning a little bit. And I say that to 10 year treasury is the time we're recording this. October 17th has fallen below 4%. How many times did you hear about the steepener trade this year? How many times did you hear about fiscal dominance losing control at the long end? The dollar, it stabilized a little bit. So it is a very interesting moment for markets in many respects right now.
- [04:30]
Tracy Alloway
There's definitely a lot to talk about. Congrats on managing your personal FX liabilities.
- [04:35]
Joe Weisenthal
Yeah, I'm doing a good job.
- [04:37]
Tracy Alloway
Yeah, Getting paid in dollars and paying.
- [04:39]
Joe Weisenthal
Your mortgage in dollars.
- [04:40]
Tracy Alloway
Well done, Joe. All right, well, you know, this is the kind of thing that a lot of big investors are thinking about at the moment and we should definitely think about it too. And who is the one person that we really like to talk to?
- [04:52]
Joe Weisenthal
It could only be one.
- [04:53]
Tracy Alloway
When we talk about these big trends.
- [04:55]
Joe Weisenthal
And who is the one person that is always in town because we're in Washington D.C. right now. When we go to a new town, who is the other guy who always is probably going to be there at.
- [05:04]
Tracy Alloway
The same time the person that we run into on the street in various out. Although this time you're wearing a suit. So there we go. The last time we ran into you Randomly, you were wearing hiking gear and so were we. Anyway, we are here in dc. We have the perfect guest. As always. We are speaking once again with Hyun Sun Shin. He is the economic advisor and head of the Monetary and Economic department at the bank for International Settlements, the bis. We love talking to him and it's so great to have him here to talk about something that's really been on the minds of a lot of market participants, a lot of policymakers right now. So, Hyun, thank you so much for coming back on all thoughts.
- [05:41]
Hyun Sung Shin
Thank you, Tracy. Thank you, Joe. It's great to be back.
- [05:44]
Tracy Alloway
Since Joe doubts my entire premise for.
- [05:47]
Joe Weisenthal
This episode, the entire premise at all.
- [05:49]
Tracy Alloway
No, let's just start with how unusual would you say this year has been? And I feel like so much has happened. We kind of have to cast our minds back to April, when we did have Liberation Day and when we did see the dollar fall as the market was selling off, which was something that's not really supposed to happen. You're supposed to have investors reach for the safe haven of the greenback in times of turmoil and stress. And now, you know, fast forward to October. I think we've gotten a little bit more used to that particular dynamic. But how surprised were you at that time?
- [06:22]
Hyun Sung Shin
Well, it was a very unusual combination of events in, in April. So what we saw was the so called triple decline where you had stocks, bonds and the dollar falling in unison. And that's very unusual because in a risk off episode, which April was typically, the dollar would rally, there would be a kind of safe haven flow. And back then there was of course a lot of news and you saw a lot of stories back then about possibly the dollar losing its international status and so on. I think in retrospect that was, you know, quite hasty. And I think now that we have the data, we can piece together in a more kind of coherent way what was going on. And in short, I think it was a kind of hedging story where investors who had lots of exposures to the US dollar were trying to reduce some of those exposures. And we can get into some of the details on how that kind of trade might transpire. It just so happens that this is also the year that the BIS conducts its triennial survey of FX markets. And we've just published the results. And I think we can also shed some more light on the events in April.
- [07:49]
Joe Weisenthal
Let's keep it big picture still. And then we'll drive down into specific months and weeks. If people work for the bis, they probably must take out mortgages And Swiss franc that living there in Basel. Anyway, sidetracked. What are some of the big takeaways from this year's survey?
- [08:04]
Hyun Sung Shin
Yeah, yeah. So I think. Well, actually before we go there, Joe, I mean, it's worth thinking about how FX markets really figure in the investment strategy. So if you're a long term investor, let's say that you're a euro area pension fund, what you have are obligations to your local in euros. Yeah, beneficiaries in euros. But you have a very large balance sheet and so you need to have a very broad exposure to global assets, including those in non euro denominated assets. So what tends to happen is some of the euros are then converted into dollars to invest in dollar assets. But of course what you want to do is to make sure that you hedge that currency risk. And this is where this instrument called an FX swap really comes into its own. And it's an operation where essentially the euro area investor pledges some euros and then borrows dollars and then with those dollars then go into dollar denominated assets. And as you do that, you also promise to unwind that transaction at a known exchange rate at a fixed moment in the future. So essentially once you've gone through that transaction, your currency risk is hedged. Now, exactly how much of your foreign portfolio you hedge in this way, that varies over time. I mean, it depends, for example, on how high the hedging costs are because you're typically doing this fairly short term and you're rolling over these hedges. What's important is the short term dollar interest rate because you're borrowing dollars in order to invest in dollar assets. So when the short term interest rate is very high, that's typically a time when hedging costs are very high. And so what had happened over the last few years was that these so called hedge ratios, the proportion of your assets that you actually hedge, had been really trending down to the extent that some investors didn't hedge at all. And why would you, if the dollar is surging and the hedging cost is so large? And so when the turbulence broke earlier in the year, a lot of investors were basically caught with very large dollar exposures having not hedged. And I think one piece of evidence that the events of April was very much an ex post hedging story, hedging after the fact, was that we saw a lot of the telltale signs of swaps being taken out and dollars being sold happening in the market. So what would happen is if an investor is holding dollar assets without a hedge but you're concerned about the dollar falling, then what you would do is you would put on a hedge ex post. You would put on a hedge after the event. And you could do that, for example, by actually then engaging in an FX swap right there, but then selling the dollars that you've acquired. So rather than investing those dollars into dollar assets, you simply sell it in the spot market. What that kind of dynamics would imply is that there would be lots of downward pressure in those situations where institutional investors are trying to raise their hedge ratios. But exposed back to the triennial. What do we see there that puts additional light on this episode? Oh, by the way, on the triennial, this. It just so happens that the sampling period was April this year.
- [11:50]
Joe Weisenthal
Amazing.
- [11:51]
Hyun Sung Shin
So it may be slightly distorted by the events of the April episode. On the other hand, the silver lining is that we have some great data, I bet on really the events of the April episode. But the headline numbers are really quite notable. It's $9.6 trillion daily flow. This is something like almost 30% higher than the previous survey. In 22, the dollar is still very much the dominant currency. It's 90% of all of the transactions have the dollar on one side. It's even higher than what we saw in 22. So in spite of the survey being affected perhaps by these stress events in April, we think we've got a very, very good sort of take. One of the things that we noticed this year is, of course, as well as the FX swaps, which is by far the largest segment of the transactions, we also see a lot of a big increase in the spot transactions and also outright forwards. So let me just explain that for your listeners. When you engage in an FX swap, the investor would borrow dollars by pledging euros. And then there's also a promise to reverse that. Now that promise is called a forward. And of course, you can get that without going through the swap. You can just go to a dealer and say, look, just sell me outright forward, so called. And then I would actually then have a dollar obligation.
- [13:31]
Joe Weisenthal
A swap is like a spot trade plus a forward.
- [13:33]
Hyun Sung Shin
Exactly. It's that combination. And what we see is, as well as the swaps, we see the two components, the spot and the forward, being very, very large this year. And we think that the events of April must have had an impact because as well as getting the swap and selling the dollars in the spot market, you can also just ask a dealer for a forward contract. But then of course, the dealer has to hedge. So there's going to be a spot sale anyway. And so that combination would actually lead you to a situation where both the spot and the forward transactions go up a lot. And that's exactly what we see.
- [14:16]
Joe Weisenthal
Interesting.
- [14:16]
Hyun Sung Shin
So this is another piece of the evidence that this was very much ex post hedging. And let me mention just two other things on this. We put out a bulletin earlier in the summer. We lay out all the other pieces of evidence that we could gather. But it's also notable that if you look at the actual portfolio flow numbers, the international portfolio flow numbers, there was no real selling in April. So you know, there was a very, very small outflow, but on the scale of things it was really tiny. There were certainly no concerted portfolio outflows from the us. So that's really the, I think perhaps the most compelling evidence that the so called Sell America trade was not, you know, was not the story behind the 8Pol episode your best restaurant location gets 5 star reviews how do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water. How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location.
- [15:48]
Express Employment Professionals Announcer
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- [16:48]
Joe Weisenthal
Join Bloomberg in Houston or via livestream on November 4th for the Future Investor Finding the Opportunity Opportunities this 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovating their products and services and improving the customer experience. This series is presented by Invesco Q. Q. Q. Register@bloomberglive.com futureinvestorhouston that's bloomberglive.com FutureInvestorHouston why should.
- [17:18]
Tracy Alloway
We care either qualitatively or quantitatively, if this was a Hedge America story and not a sell Americ outright?
- [17:26]
Hyun Sung Shin
Over the long term, it is possible that long term investors would then reassess their global exposures. And you hear a lot of anecdotal evidence that these conversations are going on, but so far that hasn't really been translated into actions. But I think what does flow very clearly from the actions in the spring is that when we look at the various pieces of the global financial system, every part depends on other parts. And there is this network effect where provided that everyone else is doing what they're doing around the US dollar, then it's also in my interest to actually be part of that ecosystem. So if you have this kind of neural network effect, it's very difficult to have this wholesale shift away.
- [18:20]
Joe Weisenthal
One of the things that I think is unusual, and Price said this in a few other episodes, but what I think is striking about this environment is that if you look at the us it can come up with a long list of reasons to be concerned which we don't need to come down recapitulate. Now, on the other hand, the most profitable, impressive, cutting edge companies in the world that everyone would love to have exposure to in some way are in the US. And it strikes me as that's the unusual situation, which is we don't typically associate volatile sovereigns with being the home of the most dynamic companies in the world. And so to my mind, I would love to have more exposure to Nvidia and Microsoft and all of these companies that are making money hand over fist without having exposure to the US itself. And hence I might want to hedge.
- [19:13]
Hyun Sung Shin
I mean, certainly the equity market story, I mean that really is in a class of its own. And as you say, that's really been a very, very strong theme. But more broadly, capital markets, if you think about how capital markets operate, there's a whole ecosystem behind that. And you have the underlying securities, obviously, but then you have the hedging instruments and then you have a whole set of investors who are actually taking part. And the banking system is absolutely crucial in providing those hedging services. And I think when we last discussed this back in Jackson Hol, we talked about how the FX swap market makes money fungible across currencies. Money is ultimately something to do with banks. So the central bank issues high powered money. Commercial banks are there also to issue money that the other users will take advantage of. And fxswaps are there basically providing this service of making Money fungible across currencies. So, you know, every piece fits into every other piece in that sense. And so, you know, we should think about this in terms of the mutually reinforcing pieces of this, you know, this network.
- [20:32]
Tracy Alloway
What have you observed in terms of the actual trends in FX hedging costs? Because as you described it in April, suddenly it all starts kicking off. A lot of large investors who are not that used perhaps to having to hedge their dollar exposure suddenly scrambled to do it ex post, as you described. Did the cost of actually doing so actually increased or was it still relatively cheap?
- [20:57]
Hyun Sung Shin
Well, actually it's primarily about how high the short term interest rates are actually. And in particular, if you're a non US investor investing in dollar assets, it's really how high the short term dollar interest rate is. Because essentially what we're doing is you're pledging euros, let's say, and then borrowing dollars short term and then investing in dollar assets. And so it's really about how high that short term interest rate is relative to the yield you're getting on the asset itself. And so if you have a flat yield curve, which is what we've had, or even inverted yield curve, then hedging costs are very high. And so in fact, investors have typically hedged and hedge ratios have fluctuated. There's no systematic survey, but it's fluctuated between 40 and 60%. I mean, there are some pockets of official data, like the Japanese life insurance companies, but typically this is really quite anecdotal. But what had happened in the last year or so was the hedge ratios had gone down gradually. Some firms were not even hedging at all. They were trying to win both on the stronger dollar, but also on the high yields. Actually, let me just mention a very interesting point here, actually. It's actually worth thinking about the parallels between this story about advanced economy investors holding US dollar assets with the story about local currency emerging market bonds. That's actually a very, very important asset class that really grew up after the gfc. And that's typically an asset class where the investor would not hedge. So if you want to enter into a large emerging market sovereign bond trade, you would actually buy the instrument on an unhedged basis. And you do that because you think the emerging market currency will appreciate as well as the yield fall. And so you win twice. You gain both on the yield as well as on the exchange rate. But of course, when the tide turns, that's when you scramble to hedge ex post. And that's exactly the same type of thing that we saw in this episode and there were actually emerging market investors, especially from Asia, who were caught with very low hedge ratios and there was this ex post hedging going on. So there's actually a very interesting parallel between what was going on this April and the much older trade, which is the emerging market trade.
- [23:37]
Tracy Alloway
So Joe, on the plus side, people aren't necessarily selling dollar assets. On the downside, the negative side, we're basically treating dollar assets the way we would a local emerging market bond.
- [23:50]
Joe Weisenthal
People are like, I think I'm going to buy some local currency USD.
- [23:53]
Tracy Alloway
That's right.
- [23:56]
Joe Weisenthal
Actually. But like, so what was it about April then that caused the like what? I mean we know there was the launch of trade war and there were massive tariffs, et cetera, but what was it about that such that people's impulses to hedge more ex post facto as you've described it, what was the thing that said, oh, we want to change our exposure to US Dollars even if we don't want to sell them?
- [24:23]
Hyun Sung Shin
I think it's probably a combination of several things. But where the, you know, where the investors found themselves in terms of the hedge ratios had a lot to do with this. Actually. If you look through your Bloomberg News database, you'll find plenty of stories from 2324 where let's say life insurance companies announced that they will not be hedging, so they will be holding, let's say US dollar assets but without a hedge. And as I said, there were some firms that didn't hedge at all. In a risk off environment, what typically happens that you want to take some chips off the table and that just means reducing your exposure. And if you're exposed in this double whammy fashion, you would actually try and either hedge exposed or reduce your exposure. It looks like from the evidence that it was very much the ex post hedging story.
- [25:25]
Tracy Alloway
So if people are hedging their dollar exposure more than perhaps some of them at least used to do, we have to worry about things like rollover risk or some sort of, I guess duration mismatched, where you have a short term hedge, whether it's a forward or a swap or whatever mismatch to a longer term asset. I mean this is, this is what the BIS does on a day to day basis is worry about potential risks. So are you worried here?
- [25:55]
Hyun Sung Shin
That's a really great comment, Tracy. And I think this was where I was going to go next. Of course you have this. Once you hedge, you've hedged the currency risk at least until the maturity of the swap which is typically one month to three months, but it's a short term liability that you need to roll over. And from time to time you might get caught in a liquidity stress episode where it's difficult to source the dollars to actually repay. And this was for example, what happened during the GFC. It's also what happened during March 2020 when there was also a scramble for dollars. And when you're a long term investor, you've hedged using a short term FX swap, but you're holding long term securities, you have a maturity mismatch. So either you have to somehow sell your long term assets, which is going to be very difficult at a fair price, or you have to join the scramble for dollars with all the other borrowers of dollars in the market. And so this is the paradox where you're a long term investor, but actually you have this short term dollar obligation. And so we are swapping one. Well, we are actually exchanging one type of risk for another. We're actually changing currency mismatch for maturity mismatch. And empirically, if you look at the evidence over the years, it's when the dollar is falling for a long period of time that these hedge ratios become very, very high. So a good example is the period before the GFC when dollar was really falling quite considerably. But then what happened at the GFC was of course dollar really spiked because there was a scramble for dollars. So there's always this trade off. You either have to bear some currency risk or you bear this maturity risk and then bear this maturity mismatch risk, I should say. And so we, you know, it's really, you know, changing one type of risk for another.
- [28:29]
Express Employment Professionals Announcer
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- [29:27]
Hyun Sung Shin
There are two kinds of people in the world.
- [29:29]
Joe Weisenthal
People who think about climate change and.
- [29:31]
Tracy Alloway
People who are doing something about it. On the Zero podcast we talk to.
- [29:35]
Joe Weisenthal
Both kinds of people.
- [29:36]
Hyun Sung Shin
People you've heard of, like Bill Gates.
- [29:38]
Joe Weisenthal
I'm looking at what the world has to do to get to zero, not using climate as a moral crusade and.
- [29:45]
Hyun Sung Shin
The creative minds you haven't heard of yet. It is serious stuff, but never doom and gloom. I am Akshat Rati. Listen to Zero every Thursday from Bloomberg Podcast on Apple, Spotify or anywhere else.
- [29:56]
Tracy Alloway
You get your podcasts.
- [29:58]
Joe Weisenthal
Tracy really loves currency markets because she loves the fact that when the line moves, you can never tell whether it's the numerator or denominator that's at fault.
- [30:08]
Tracy Alloway
But this is sarcasm, by the way, for those who don't know I hate.
- [30:12]
Joe Weisenthal
Currency, she hates currency markets because you never know whether we should be it's the numerator.
- [30:16]
Tracy Alloway
You say the dollar is going down, someone's going to be like, oh no. But it's up against like some obscure currency that no one's ever heard of.
- [30:23]
Joe Weisenthal
But em and you mentioned many EM bond funds, EM indices and currencies doing very well. And so this gets to the question of is this a numerator story? Is it about dollar weakening or is it about so we've been talking a lot about financial flows. Has something changed though, in the sort of underlying economic fundamentals of a lot of ems? I've heard some rumblings about this. People excited about ems in a way that I don't think they were excited about to the same degree during the 2010s at all. And while we were chatting, I pull up a bunch of lines of EM related funds currency all doing very well. In your research, are there fundamental changes in the EM world that people are excited about for reasons other than the fact that the dollar is weak?
- [31:10]
Hyun Sung Shin
So this is very timely, Joe, and as it happens, on Monday we published a bulletin exactly on this question. Are the emerging markets doing well because of better policy, better fundamentals, or is it really about the global financial market trends? And the short answer is it's a bit of both. Tracy loves this answer and you would not think of otherwise. Why is it better fundamentals? Well, I think it's certainly there's been much better policy, especially monetary policy. And also the emerging markets have really been buoyed by actually the weaker dollar. The weaker dollar has been a tailwind for much of the year. This is why emerging market assets have really rallied quite hard. And there's a parallel with credit spreads as well, because when credit is doing well, we also tend to See emerging market assets also doing well. And if we break it down. So why would a weakening dollar be a tailwind for emerging markets? Well, in the simplest possible case, if a borrower has borrowed dollars but then has invested in local currency assets, there's this currency mismatch. But then there's a windfall when the dollar weakens. That's a very simple story. It's probably not the most important. But there's another very interesting element here which has to do with the so called risk taking channel. And the idea here is if you have a very diversified portfolio of the loans to all of these currency mismatched borrowers, the improved credit risk on these borrowers really shrinks the tail risk in the credit for the lender. So if you like, the value at risk goes down and that really opens the door to more credit. So this is very, very strong relationship between a weaker dollar and faster growth of dollar denominated credit. And because of how important dollar credit is for supply chains, if there's any product, if there's any good that out there that relies on very complex supply chains, global value chains, those products will tend to do very well. And what you've seen is actually, in spite of the weaker dollar, exports have gone up in these very highly sophisticated goods, and much more so than the goods that are much more affected by just the simple trade effect and the exchange rate. So semiconductors, for example, I mean, this has been one of the surprises. Clearly there's the AI boom. But it's not just that. If you look at semiconductor trade exports from Asia, that's really been very, very resilient this year. And anything that has to do with global supply chains, you will also see. But there's a, you know, there's a sting in the tail here because as we talked about earlier, emerging markets increasingly are becoming net creditors to the rest of the world. And there was very little hedging going on. And so when you're caught in one of these downdrafts, you get hit both from the weaker dollar and also the high yields. And so we saw a lot of this scrambling back in April. So it's primarily a tailwind, and it has been a tailwind for a long time. But there is this third element, this new element which I think we need to keep an eye on.
- [34:52]
Tracy Alloway
What do you see when you look at the price of gold? So we are recording this on October 17th. It's coming down a tiny bit this morning. But still above $4,000 an ounce. What is that telling you about how investors are feeling about various global currencies at the moment?
- [35:09]
Hyun Sung Shin
Well, Tracy, I mean we, we hear a lot about the so called debasement trade, but I think that's probably overdoing things. You know, debasement is really about the value of money relative to goods and services. We don't really see a surge in inflation. We don't see surge in the price of even commodities. I mean, look at oil, look at other commodities, everything other than gold. So I think we should probably look for a more tailored explanation for gold other than simply this broader sense of flight from fiat currencies. And I think one thing which goes back to our initial conversation on the role of the dollar and the global financial system. Certainly central banks have been big buyers of gold and there has been that set of very firm backdrop to the market and other people have jumped on the bandwagon. In a way. It's actually behaving like a risk asset. It really is. And the events today and last week as well, rather than there being a flight to gold during stress times, what we're seeing is it's behaving a bit like Bitcoin and the risk assets. So it sort of tells you that there's been a little bit more of a speculative element here, but it's certainly behaving in a way that's very different from the historical norms.
- [36:41]
Joe Weisenthal
For a long time. Tracy has talked about this for a long time. You could sort of model the price of gold via real rates. And when they're very low or suppressed or whatever, Gold went up. Kind of seemed like it changed not long after Putin had a bunch of his money seized. And when you talk about central banks accumulating gold, being woken up to the fact that your money is never really your money if it's in a bank, that seems like it could be part of it.
- [37:08]
Hyun Sung Shin
Well, Joe, I mean, certainly there are very few assets which are not the liabilities of someone of someone. And typically, whether it's a fixed income instrument or an equity, it's someone's liability. So someone has the obligation to pay you. And gold is one of those, which is not the liability of any particular individual. Now, I think when we look back, we can see these sort of broad swings in the price of gold. After the breakdown of Bretton woods In the early 70s, there was a brief spike, but then we had a very, very long period when gold wasn't doing very much. I think it's probably something even before the Russian invasion of Ukraine. Joe. So, you know, we've seen the trend where Something like this has also happened actually a few years back, even before the Russian invasion of Ukraine in 22. But I think it's, you know, this element, this attribute, where it's not the liability of any particular, particular legal entity or individual I think is giving this a particular.
- [38:17]
Tracy Alloway
Yeah, so I'm looking at the top menu on Bloomberg right now and it's feeling a little bit nervy at the moment. So the number one story is bank's trio of alleged fraud sparks fear of broader issues. So this is the idea that this is Jamie Dimon's cockroach idea, that we're starting to see some losses emerging, emerge from either outright frauds or just bad investments and people are starting to get a little bit nervous. Do you see any sorts of, I guess, credit oriented concerns out there at the moment?
- [38:54]
Hyun Sung Shin
Well, Tracy, I mean, certainly this week is a very news rich environment.
- [39:01]
Tracy Alloway
That's one way of putting it.
- [39:02]
Joe Weisenthal
We love it.
- [39:03]
Hyun Sung Shin
We love it. You are contributing to that and I think it's great. You know, we hear a lot of these comments, you know, on credit. Certainly credit standards have been eroding for a long time and we have been one of the many voices, you know, even before this week, you know, just pointing out that credit spreads have fallen to historical lows. But if you look at the trajectory of credit to the private sector and compare that to what's been happening to government debt, there really isn't a comparison. So certainly before the gfc, the big growth was in the credit to the private sector, especially in the form of mortgages. But after that, what we've seen is credit to the private sector has really been very subdued and instead it's really been the government bond market, which has grown tremendously. Now what we're seeing now is some signs of the erosion of credit standards coming back to bite. But if you're worried about something very systemic, if you're worried about systemic risk, the first thing to ask is how fast has this grown in the recent past? And typically something that's grown very rapidly will give you some cause for concern. In this case, the really rapidly growing element has not been credit to the private sector, it's been credit to the government and in particular the government bond market. So we should of course worry about these events and of course the headlines create, as I said, it's a very news rich environment and we hear the same stories in the panels. If it's really a concern about is this the precursor to the next systemic crisis, it's probably not the case.
- [41:03]
Joe Weisenthal
Actually, this brings to mind something that I don't think I've really asked in such a way before. But another thing that's grown a lot is the stock market or equity markets. There was actually a really good article in the Wall Street Journal several days ago about the degree to which equity exposure, at least in the US has spread demographically. So a lot many more working class households own stocks than they own used to. When I think about people who are in the business of being worried about financial stability, I don't think the stocks are high on their radar. They're called risky assets. We all know they're risky. And usually crises don't emerge from assets that we all agree are risky. The crises emerge from assets that we think are gonna be redeemed from a dollar's worth, we're gonna get a dollar's back or whatever, or we're worried about getting back at all. But I'm curious, from the perspective of someone who professionally maybe worries, how do you and your colleagues think about equity exposure, especially given the widespread view that equity exposure is fueling consumption in the United States, a driver of the economy, that there is a lot of speculative exit. Is there much modeling work being done on equity and risky assets, specifically as a source of broader risk?
- [42:21]
Hyun Sung Shin
Absolutely. I think the main channel would be through the real economy, through real economic activity, rather than through, let's say, a deleveraging episode or a liquidity episode. I think it's worth thinking back to the dot com bubble of 2000. That was a period, of course, when the valuations were even more extreme. And when the stock market fell in 2000, of course we did see some effect. And of course a lot of investors lost money. But there was nothing like the same kind of impact on the real economy that we had with the gfc. And very simplistic way of putting this is whenever you have debt of various kinds, that's when you should be worried. Because, Joe, as you said, it's when you're promised $1, $1, but then you don't deliver. That's when there are sort of repercussions throughout the economy. Now, clearly with the equity markets, there are wealth effects. So if you have a very large portfolio, you feel richer and then you spend more. And so there is a real economy effect of the stock market. So if we see a pullback in the stock market, very sustained pullback, we will see some effect like that. Now, the estimates of the wealth of effect on consumption, for example, has varied over the years. But given the, if you like, the democratization of stocks, we could expect a slightly larger magnitude. But on the scale of things, that effect tends to be very small compared to the kinds of effects that are associated with deleveraging episodes.
- [44:03]
Tracy Alloway
Do you see any pockets of leverage out there that aren't getting enough attention at the moment?
- [44:08]
Hyun Sung Shin
Well, I think you're very good at shining a light on those. All those pockets, actually. Thank you, Hien. I don't think I can really say anything here that you haven't heard of, but I think it's certainly worth bearing in mind the broad magnitudes. One of the things that we've talked about a lot this year in our various official publications is the fact that even safe assets can be a source of stress in the market. Because it's not default that propagates stress, it's more the deleveraging. I think if, let's say long rates were to shoot up, and therefore mortgage rates also shoot up, that would be a really big deal for the real economy and that would happen even without any defaults.
- [44:57]
Joe Weisenthal
By the way, when we started this conversation, the 10 year was below 4%. It's above it now. So keeping our listeners up to date on what's going on in the Treasury Market on October 17, 2025.
- [45:08]
Tracy Alloway
Very good. I mean, the other interesting thing is if gold is acting like a speculative asset now, what happens when all of that starts reversing? And you know, the thing that you thought was worth $4,000 is no longer worth $4,000 and gold is typically used as collateral, right?
- [45:23]
Joe Weisenthal
Well, I always say, you know, it's really scary when you see people like intensely buying gold because, like, what's up? Like why? But what's really scary is why they start selling, right? Because again, no, it's true, right? Because actually no one has. You have to be a real psycho to have a gold denominated mortgage. You have dollar denominated mortgages, etc. And so when you see like usually one of those things you notice is that in a real credit event, when you really get that VIX spike and people are really worried about making that payment on their mortgage and they're really worried about paying their monthly subscription to their Bloomberg terminal, they need dollars and then they sell gold and you're like, oh, things are getting really rough. All right, I'm just throwing things out here.
- [46:02]
Hyun Sung Shin
I think that was a comment, Joe, rather than a question.
- [46:05]
Joe Weisenthal
Not even a question.
- [46:06]
Tracy Alloway
Thank you, Joe, for your comment, Hyun. It's always lovely catching up. This has been fantastic. Thank you so much for coming back on the show.
- [46:13]
Hyun Sung Shin
Thank you very much, Tracy. And thank you, Joe.
- [46:16]
Joe Weisenthal
Thank you so much.
- [46:30]
Tracy Alloway
Joe. I always enjoy catching up with Hyun. He has a fantastic way of explaining things in a very soothing, calming manner. I do think so. I. Nuance is important. Absolutely. And technicalities in the market are important. So if the dollar going down is being exacerbated by hedging versus people selling dollars outright, that an important thing to talk about and to capture. However, I still feel like the direction of travel is not fantastic for the dollar itself. If people are treating dollar assets the way they used to treat local EM bonds, in terms of hedging, that exposure.
- [47:06]
Joe Weisenthal
Yeah.
- [47:06]
Tracy Alloway
That doesn't seem great necessarily for the U.S. i mean.
- [47:10]
Joe Weisenthal
No, I mean, look, it's sort, you know, I think of a currency as sort of like being the token at Chuck E. Cheese, you know, and you want to play the games. But it was really nice if the token is going up and you can play the games at the same time.
- [47:23]
Tracy Alloway
You can play more games or eat more pizza.
- [47:25]
Joe Weisenthal
Or eat more pizza. But I think we're in this situation where people want to keep playing the games. They just don't really like the whole arcade. Yeah. This is the way I think about it. The games are still fun. It's just that you're worried about the direction of the arcade.
- [47:42]
Hyun Sung Shin
Yeah.
- [47:43]
Joe Weisenthal
And so I think, because this is why, you know, like, how are you, what, you're not gonna, like, do business in the United States? Give me a break. That's completely unrealistic, even if you don't like, as you put it, the direction of travel. And so I think sort of intuitively you could sort of understand why I don't want to leave town. I just don't want to have arcade exposure.
- [48:03]
Tracy Alloway
Absolutely. I guess what we kind of need, we need another big crisis so that we can observe what gold does during that time and also what the dollar does during that time.
- [48:13]
Joe Weisenthal
I think I'm going to run with this arcade, actually. I'm going to run with this.
- [48:15]
Tracy Alloway
It's a really good analogy because if.
- [48:17]
Joe Weisenthal
You think, like, Chuck E. Cheese has a lot of fun games, but also, I don't really think the business model of Chuck E. Cheese is that good. How dare you? Well, a lot of them have closed down, but it doesn't mean the games inside were less fun. So I don't want to hold those tokens in my pocket forever. I want to have exposure in case they go out of business or something like that. You doesn't make the games less fun in the meantime. And you've solved this Problem of wanting to play the games but being worried about the future of Chuck E. Cheese by hedging them.
- [48:45]
Tracy Alloway
I'm going to restart Chuck E. Cheese and roll it out across the country. Just to ruin your analogy, your preferred market analogy. No, I think it's a good one. It makes sense.
- [48:54]
Joe Weisenthal
Thank you. Thank you. Finally. Thank you.
- [48:56]
Tracy Alloway
All right.
- [48:56]
Joe Weisenthal
But I will not be taking out Chuck E. Cheese denominated.
- [48:59]
Hyun Sung Shin
Well, no.
- [48:59]
Joe Weisenthal
So that would be the great thing. If you could imagine getting a Chuck E. Cheese token denominated mortgage, and then he goes out of business. You don't even have to pay him back.
- [49:06]
Tracy Alloway
You know, I'm pretty sure somewhere in like a box somewhere, I still have a bunch of like, Chuck E. Cheese tickets or something like that. Maybe I should dig them out.
- [49:15]
Joe Weisenthal
Anyway, so this is another interesting question, because what is the exchange ratio between a token and a ticket?
- [49:21]
Hyun Sung Shin
Right.
- [49:22]
Joe Weisenthal
And they're fundamentally different.
- [49:23]
Hyun Sung Shin
Yeah. And that I don't know.
- [49:23]
Joe Weisenthal
This is sort of like one of those communist countries. Chuck E. Chi. This is a paper that someone write. Chuck E. Cheese is the dual circulation economy in which they have tokens for the games and tickets for the prizes. And how they manage that exchange ratio is very similar to a planned economy.
- [49:42]
Tracy Alloway
Do you think I could find someone to provide like a swap on a token versus a ticket or something?
- [49:47]
Joe Weisenthal
I think there's something here. I think we're hitting on something important.
- [49:51]
Tracy Alloway
Okay. I think we should end. We should leave it there.
- [49:53]
Joe Weisenthal
We can leave it there.
- [49:54]
Tracy Alloway
All right. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at tracyallaway.
- [50:00]
Joe Weisenthal
I'm Joe Weisenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez Ermenarman, Dashiell Bennett at Dashbot and Kalebrooks Alebrooks. For more odd lots content, go to bloomberg.com oddlots with a daily newsletter and all of our episodes and you can chat about all of these topics 24. 7 in our Discord Discord GG oddlots.
- [50:20]
Tracy Alloway
And if you enjoy oddlots, if you like it when we talk to Hyun Sung Shin about upcoming risks in the market, 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.
- [50:51]
Hyun Sung Shin
Sam.