The Petro Edition

Summary

Slate Money – “The Petro Edition”

Date: December 9, 2017
Host: Felix Salmon, with Anna Szymanski and Jordan Weissmann
Special Guest: Dave Rolley (Co-Head of Global Fixed Income, Loomis Sayles)

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Episode Overview

This episode of Slate Money, dubbed "The Petro Edition," features a sprawling global tour of major economic and political developments, from U.S. tax plans to Europe’s Brexit conundrum, ongoing turmoil in Latin America, and the wacky notion of Venezuela's oil-backed cryptocurrency, the “Petro.” With Dave Rolley, a seasoned bond market expert, joining the regular hosts, the discussion offers rich, candid commentary, context, and sharp humor on recent financial events and what they mean for global markets.

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Key Discussion Points & Insights

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1. The U.S. Tax Plan and Fiscal Policy

[02:17 - 16:17]

• Economic Context:
  The U.S. is seeing strong economic performance, with sustained GDP growth and full employment. Dave Rolley argues “we don’t need a stimulus… one step at a time, 2% per year, we’re at something like full employment… so the economy is actually doing okay.” [03:12]

• Purpose Behind Tax Cuts:
  Rather than being driven by macroeconomic necessity, the tax plan is depicted as political theater geared to please the Republican donor base.

  “If you don’t pass this, don’t ever call me again.” [03:47]
  This sentiment captures the existential role tax cuts play for the GOP.

• Deficit Worries and Bond Vigilantes:
  Fear of spiraling debt is debated, with Anna pressing on whether higher deficits could awake “bond vigilantes”—investors pushing yields higher over fiscal worries. Dave Rolley feels QE (quantitative easing) has “stunned [bond vigilantes] into a coma.” [07:44]
  The only thing that could jolt markets now is “an inflation surprise.” [09:46]

• Outcome:
  Even if yields spike, it may not spell doom for government finances but could hit investors in stocks and bonds, reinforcing the interconnectedness of asset values, interest rates, and investor sentiment.

  “You can break the stock market either with an earnings disappointment or a yield surprise. Either one… could be very damaging to equities and for real estate, for that matter. Every single thing out there except Bitcoin… has a cash flow.” [12:15]

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2. Brexit and the Future of the United Kingdom

[17:13 - 26:23]

• Sterling’s Resilience:
  Despite Brexit turmoil and the looming threat to London as a financial center, the British pound remains surprisingly strong. Dave sees this as a market underestimating long-term pain for Britain:

  “We just don’t see what the alternative is to their lost financial service revenue right now for us to get comfortable with, with how things are going. And we still think there’s more pain ahead.” [18:56]

• Ireland and the Border Issue:
  The podcast dwells on the threat Brexit poses to the Good Friday Agreement and peace on the island of Ireland, emphasizing how overlooked this issue has been in global coverage.

  “The entire UK-Irish relationship… collateral damage from the Brexit vote. And it doesn’t look like anyone did any thinking about it before the vote.” [21:11]

• Market Complacency:
  They note that markets seem to discount expert warnings after dire predictions post-Brexit and Trump elections didn’t materialize, leading to a sense of false security:

  “We’ve had enough of experts, like, you guys were wrong.” [24:03]

• Disconnect Between Market Timelines and Reality:
  Rolley offers:

  “If you instantaneously discount a bad thing and then nothing bad happens for a while, you kind of conclude you got it wrong. You may not be wrong, you may simply be early because reality takes time.” [24:45]

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3. Latin America: Venezuela’s “Petro” and Brazil’s Political Crossroads

[27:55 - 39:01]

• Venezuela’s Petro:
  Anna and the team delve into Nicolas Maduro’s announcement of a cryptocurrency backed by oil, the “Petro”—calling it both “insane” and a symptom of deeper chaos.

  “Every part of this plan is insane.” [28:21, D]
  “Imagine that all of American fiscal and monetary policy was just run by Donald Trump individually with zero kind of institutional basis or support.” [29:30, B]

• Venezuela’s Collapse:
  Hyperinflation, loss of tax collection, mass emigration, and possibly imminent default are discussed.

  “When you have a hyperinflation, it means that the government has lost its ability to collect taxes. That’s what a hyperinflation is. It’s an inflation tax. I’ll tell you something else, as a bondholder, when you see a hyperinflation, you can kind of figure you’re not going to get paid…” [30:55, C]

• Chinese and Russian Involvement:
  The Chinese suing PDVSA (Venezuela’s oil company) signals fading international patience; only Russian support remains, but even that’s limited.

  “What’s interesting this week is that the Chinese have come out and said that there are some, they’re starting to sue PDESA for nonpayment. That’s different. And suggests the Chinese have exhausted patience…” [32:17, C]

• Brazil and Regional Populism:
  Brazil’s ongoing corruption scandals are discussed as both a market risk and a potential path to healthier politics. Rolley warns replacement of left populists with right populists may not lead to positive outcomes.

  “If we replace a left-wing populist with a right-wing populist who’s sort of a Duterte type and talks about shooting a lot of criminals, that may not be a real market friendly outcome.” [37:32, C]

• Mexico’s Political Risk:
  Warnings about a potential leftward shift if U.S. rhetoric stays aggressive, with possible consequences for markets.

  “The more strident the American criticism of Mexico, the more likely Mexico would go with a local nationalist.” [38:40, C]

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4. Numbers Round: Wonky Facts and Oddities

[39:12 - 48:17]

• Dave Rolley:
  Number: 0.5
  Significance: Estimated “R-star,” the real rate of interest at the Fed that should neither stimulate nor restrain economic growth.

  “It’s basically the Goldilocks interest rate…” [39:39, A]
  “All the cool kids now know what their R star is.” [42:21, C]

• Anna Szymanski:
  Number: 300 million (rand)
  Significance: Amount misappropriated from South Africa’s budget for Nelson Mandela’s funeral; highlights rising awareness and pushback against corruption. [43:03]

• Felix Salmon:
  Number: 814 million
  Significance: The supposed number of “Tether”—a cryptocurrency pegged 1:1 to the US dollar—circulating, raising questions about transparency and true backing.

  “The problem is that no one has seen these $814 million. There is no reason to believe they actually exist.” [44:10, B]

• Jordan Weissmann:
  Number: 10,731
  Significance: Number of times “Space Oddity” could play on Elon Musk’s planned Mars-bound Tesla; a quirky aside on eccentric billionaire ambition. [47:09]

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Notable Quotes & Memorable Moments

• On U.S. Tax Policy:

  “The Republican Party exists to cut taxes. They can do it. If they don’t do it, what are they for? Okay, so it’s almost existential.”
  — Dave Rolley, [04:12]

• On Hyperinflation:

  “When you see a hyperinflation, you can kind of figure you’re not going to get paid because the only way to stop a hyperinflation is with currency reform… So most of the time you look at a situation like Venezuela and you say well this is a default.”
  — Dave Rolley, [31:15]

• On Brexit and Markets:

  “The entire UK-Irish relationship… collateral damage from the Brexit vote. And it doesn’t look like anyone did any thinking about it before the vote.”
  — Dave Rolley, [21:11]

• On Market Psychology:

  “If you instantaneously discount a bad thing and then nothing bad happens for a while, you kind of conclude you got it wrong. You may not be wrong, you may simply be early because reality takes time.”
  — Dave Rolley, [24:45]

• On Asset-Backed Crypto:

  “The problem is that no one has seen these $814 million. There is no reason to believe they actually exist... Now one of the things you want to do… is see third party pricing of all assets and… third party custody of all assets.”
  — Felix Salmon & Dave Rolley, [44:10, 45:11]

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Timestamps of Major Segments

• Opening & U.S. Tax Plan: 00:14 – 16:17
• Brexit & UK Market Response: 17:13 – 26:23
• Latin America, Venezuela, and “Petro”: 27:55 – 39:01
• Numbers Round (R-Star, South Africa, Tether, Space Oddity): 39:12 – 48:17

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Tone and Style

The episode is lively, laced with dry wit and expert analysis. The panel doesn’t shy away from controversial statements or speculation and brings an international, macroeconomic perspective to topics frequently dominated by domestic discussion in other forums. As always, Felix Salmon keeps the conversation moving with humor, while Anna Szymanski and Jordan Weissmann deliver sharp, well-informed commentary.

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For listeners who missed this episode:
Expect a whirlwind tour of global finance, insightful commentary on current events in the U.S., UK, and Latin America, and entertaining detours into cryptocurrency absurdity and even space-bound roadsters. The discussion delivers both depth and personality—essential listening for anyone interested in how politics, markets, and institutions collide.

Transcript

[A]

The following podcast contains explicit language.

[B]

Hello and welcome to the Petro edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Fusion, joined as ever by Anna Shymansky and Jordan Weissman. Hello, people. Hello.

[A]

Hey everybody.

[B]

And okay, this is the super special Petro edition, not just because we're going to be talking about Petros, but because Dave Rolley is here.

[C]

Hello.

[B]

Dave Rolley is my favorite person in the world. Dave Rolley, introduce yourself.

[C]

Well, I'm co head of Global Fixed Income at Loomis Sales.

[B]

That sounds really boring, but you're not actually a boring person.

[C]

We do bonds, we buy bonds, we sell bonds. Still sounds big bounds. Well, it can be, but on the other hand, a lot more people do equity. So we thought that was a sparser place to set up shop.

[B]

Okay, so you cover the entire world, you invest. When you say global fixed income, you really mean global fixed income.

[C]

We probably have. I think it's. I Forget, it's either 15 or 16 economists looking at at least 80 countries and at any given point in time, about half of them investable and go into portfolios. So yeah, we look at everything.

[B]

So, okay, so we are gonna do a little tour of the world here since Dave is here. And we're gonna talk about Europe and Brexit, we are gonna talk about Latin America and how that is falling apart, continues to. And especially the Venezuelan bit. And we're gonna have to mention the Petro, which is their rumored cryptocurrency because who doesn't want a state backed ico? I think this is just hilarious. And I think the most sort of weirdly incomprehensible, fiscally bizarre emerging market country in the world right now is the usa. So let's start there.

[D]

Emerging into what?

[B]

Yeah, what is it emerging into? This is the thing which I'm really puzzled about. A lot of this talk about this tax plan that is almost certainly going to happen at this point seems to be based on the winners and the losers and comparing the next year's taxes to this year's taxes and that kind of stuff. But if you take a step back sort of directionally, where is America going? You're looking at 80 different countries. What country is it becoming?

[C]

Are you asking, is the tax plan a good idea?

[B]

No, I think we can all agree that it's not a good idea.

[C]

Because what's interesting is we didn't actually need it right now. If you look at the US economy from an economic perspective, we don't need a Stimulus? No, we don't. Right, let's see. We've had a long expansion. Part of the reason why it's so long is because it's been so slow, but nonetheless, one step at a time, 2% per year, we're at something like full employment. And in fact, if you look at the GDP growth for the last two quarters, it's been 3% or better. And we're tracking at about three and a half for the fourth quarter. It's been a long time since we had three consecutive quarters of 3% growth. So the economy is actually doing okay. Why do we now need a massive fiscal stimulus at full employment? Well, we probably don't, but there are social contracts and social contracts are important. And I think the most important social contract here is probably between the Republic Party in Congress and its donor base. And there was a sentence that I think was in the journal that crystallized it for me. I think the donor said, if you don't pass this, don't ever call me again. And so there's a feeling like the Republican Party exists to cut taxes. They can do it. If they don't do it, what are they for? Okay, so it's almost existential.

[B]

As a person who spends your life looking at many countries around the world, nothing will surprise you anymore. Having been in this line for many, many years, what does this remind you of? Where have you seen something like this happen anywhere else?

[C]

Oh, well, it's just another example of a kind of wishful thinking. I guess the best possible interpretation of the tax bill is that the cut in the corporate income tax may to more capital spending by companies, and that's possible. CEO surveys do indicate that they plan to spend a little bit more on equipment next year than they did. Of course, it might also be because we're at full capacity and they might have to. On the other hand, tax cuts never pay for themselves. That was something called supply side economics. It never worked. The math is pretty simple. On the other hand, you've seen all kinds of other places where people have spent money and just hoped that something good would happen later. And those tend to be either places with populism or with coalition governments. But in general, the essence of all of these places is a ruling political executive that is not in a position to allocate austerity. And so they tend to wish for the best. They just don't feel that they have the authority, if you like, or the voting base or what have you to make difficult decisions.

[A]

So I think in a lot of ways though, that might be, or at least as far as I think a lot of voters are concerned, that might be the best of all possible outcomes here, that this only ends up adding to deficits, that you don't see massive social spending cuts of the sort that Paul Ryan is now threatening. But I guess I have a question related to that.

[C]

Oh, well, notice how long have we had. We haven't even gotten a reconciliation bill yet, right? Yeah, but they're so confident that they will, they're already starting to talk about spending cuts because we can't afford it.

[A]

That's right.

[C]

Let me get this right. So we do a, we cut government revenues even though we don't need the stimulus, and then we discover that we have these bigger deficits, so we must shrink spending. That's called starve the beast. And this goes all the way back to, I believe, the, the Nixon administration and has been part of a kind of core Republican playbook for almost my entire professional career.

[A]

I have a bond related question specifically though, since you're a bond guy, let's say we do end up with higher deficits because of this, we end up with higher long term debt load. A few years back, especially around 2011, the Tea Party, you heard a lot of talk about how the US Was going to have to reckon with the bond vigilantes if our deficits got too out of control that the markets were going to somehow, you know, turn on us the way they were turning on some countries in Europe. Is there any conceivable, I guess, is there any. Since we are a country that prints our own currency, for instance, is there any conceivable way that happens? Is that something, as a guy who's actually, I mean, this is your job to invest in the fixed income around the world.

[C]

Is that, that means I am a bond vigilante? Yeah, you have an actual bond vigilante in your, in your studio.

[A]

So would you ever come after us?

[C]

Well, I have to say on the part of all of the bond vigilantes that we have collectively been essentially stunned into a coma by central bank quantitative ease. Now, if you think about this global expansion that we've had for the past few years, it's been really kind of slow and it's had really low inflation. And at the same time, central banks have bought collectively about $8 trillion in government bond and other securities. So what we know is in a world of relatively mediocre growth and weak inflation, if central banks show up and buy a whole lot of bonds, those interest rates will go down and anybody who shorted that market lost their job or their clients or what have you. I mean we bought 30 year Japanese government bonds at 1.4% and made a lot of money doing it because it fell in yield to 80 basis points. That's a nuts trade. But it worked. We sold them. But I mean, but I mean, you know, so that's just the reality. The reality has been that quantitative ease has changed the value proposition not just for bonds, but for every asset in the world.

[D]

And it's important because it's not just that it has in the past, but it also suggests that in the future, if the economy starts to get into trouble again, you're gonna have governments step in and do a similar action. So that's again why there just is not the same concern about deficits especially, or deficits or debt, especially in a.

[B]

Country like the U.S. okay, so let me, let me try and put this together here because it's important. Let's assume this works. Let's assume that we don't get into trouble in the future. So we're not gonna have another round of quantitative easing. We're already unwinding the quantitative easing that we did in the past. Given that there's no QE going on anymore in the United States, does that mean there is actually a risk of the bonfincilantes coming back in the United States?

[C]

They need one thing to wake them out of their coma and that is an inflation surprise. Right now if you look at how the market is pricing inflation, I would use something like a US 10 year treasury break even because it's really liquid and it says that for the next 10 years the market expects inflation to be about 1.5. So less than 2% inflation for 10 years. I think that leaves a lot of room for an upside surprise. And it doesn't really matter that the Treasury Borrowing Advisory Committee is not going to issue as many long bonds as we thought and they're going to be issuing more bills than we thought. So there'll be less duration supply. What will matter is that there's a whole lot of folks owning a whole lot of long term government bonds and, and the yields are really low right now. So if they get stunned by an inflation surprise, they will sell them and they might sell quite a lot of them and that will give us a yield spike.

[B]

So that's the risk because the central bank is not going to be buying them.

[C]

They're not going to be buying them. They're not going to be buying them. If inflation's moving up, they're not going to be interested in qe. They're going to be maybe interested in fighting inflation. And if the bond market curve steepens and does some of the inflation fighting for them, that just means they have to raise short term interest rates a little bit less. They would see, in the case of an inflation spike, they would see a yield spike as actually part of their toolkit.

[B]

So actually what you're saying is that we might have the bond vigilantes turn up and the yield curve might go back to something more approaching vaguely normal territory, but that wouldn't matter very much because the government will be funding itself at the short end of the curve. So it doesn't increase government interest rates that much. And in fact, it just means that the central bank doesn't need to hike as much. So maybe the bond, maybe there's nothing to worry about here.

[C]

Well, I think it's going to be a big deal for people that have bonds in their portfolios, but it's always going to be a big deal for people that have stocks in their portfolios. That's one of the risks to the equity market, which has been everybody's best friend for the past several years. There's two things that can upset equity investors. One would be there would be an earnings disappointment. You know, that the growth story, which has gotten better, stops getting better and earnings disappoint. You know, that's the E of a P E ratio, but the ratio itself is correlated with interest rates. You know, the equity multiple E over P, if you like. The earnings yield is priced off of treasury yields. So if yields are higher, everybody says, well, you know, my future cash flow from this company is worth less. Maybe I'm overpaying for it. So you can break the stock market either with an earnings disappointment or a yield surprise. Either one of them could be very damaging to equities and for real estate, for that matter. Every single thing out there except bitcoin has a, which we're coming to, has a cash flow. And you then have to figure out what's the present value of that cash flow. When people talk about intrinsic value, that sounds kind of magic, right? And like, where did they go to school? Are they smart? None of that. It's intrinsic value is just the present value of future cash flows. That's all it is. I want to give away a trade.

[B]

Secret there, but that's outing himself as what my friend Irof used to call a DCF jockey.

[C]

There you are.

[A]

I guess my question about the bond vigilantes, the fear that some people seemed to have about them back in the day was that it wasn't that they were going to wreck the financial markets or they were going to be bad for equity values. It was that somehow the US was going to find itself in a situation where there were spiraling government interest rates, essentially, and our debt load was going to go up and all of a sudden it would become harder for us to roll over our debt or something like that. And I guess I'm just wondering, is there any scenario you can imagine where the US's fiscal situation would get so bad that you would see that kind of market panic that all of a sudden we were not considered, you know, assuming we weren't going to breach the debt ceiling, that we were, that we were, you know, not considered a safe investment, a safe place to person, or a safe country to lend to.

[C]

There's a bunch of different pieces that we have to look at to actually answer your question properly. And I'm going to pick on two of them. First, the economic numbers don't represent a very big threat to US solvency. We're still one of the richest countries in the world. Per capita, we're huge. We've got a pretty good piece of a continent. There's even more natural resources than we thought there were now that we've figured out how to get oil out of shale. So the economics are basically fine. The debt's large, but the yield is really low. Second point, we're still the world's reserve currency, which is phenomenal. It gives you unbelievable power of seniorage. So you can buy anything in the world with money you print. This is really neat. The Chinese would love it. But there's problems. If you're going to do that, you have to have property rights. We have property rights. There's not a lot of billionaires trying to get money into China to buy property. There seem to be more of them trying to get money out of China to buy property here. So property rights are like a big deal. If you want to be a reserve currency country, keep that in mind. So the only real alternative to the dollar is either the euro, which has issues which we talk about, or Bitcoin or maybe the Petro. Anyway, so right now, reserve currency country economics are fine. How do we mess this up? The way you would mess it up and really frighten the market was rehearsed a couple of years ago when we had a standoff in raising the debt ceiling. It would have to do with. We would go along for a couple of years and there are going to be some bad deficits out there, mostly because my own baby boomer generation is getting older, and as we get older, we consume more health care. Health care is very expensive. So the bill for that is going to only go up unless there are transformational changes in that industry. And we could talk about that in a minute or two, too. But anyway, so you look at that bigger deficit, you can do one of two things. You can either cut spending. My personal theory is that they will ration care to the baby boomers. And so when I need quadruple bypass, they will come back to me and say, I'm sorry, we're only going to pay 2 for 2 instead of the 4. So pick.

[B]

Sounds like a death panel to me.

[C]

Pick your ventricles wisely. Anyway, so I do think that there's a risk of rationed care, and those would be spending cuts. And the other possibility is you could raise taxes internationally. The US Economy is not a highly taxed economy. Its taxes are quite low. What's missing when you look at our tax structure is we have very little indirect taxation. Everybody else in the world has something like a value added tax. We've got these little sales taxes, but they're not very big. If you looked at the ecology and climate change and stuff, you might think a really big carbon tax would be an excellent way to raise money. But this whole thing really means that there will be a crunch point where one side of the political equation will want to cut spending and the other side will want to raise taxes. If they can come to an agreement, we're aaa. If they can come to no agreement at all, then we might have a problem in the bond market.

[B]

Okay, so this week in our little Slate plus segment, we are going to answer Dave Raleigh's question about with a healthcare, because Jordan wanted to talk about the merger between CVS and Aetna. And let's move on to Europe and my home country of Great Britain. Dave, what the hell is going on and what can we expect?

[C]

The most surprising thing about this for me in the markets is that sterling is continuing to trade rather well. We were flirting with $1.35 and we think that's probably on the expensive side. Back before Brexit, we kind of thought, well, maybe fair value for sterling dollars, $1.50, something like that. That is kind of where its trading range was. And then we looked at the potential vote and we went, you know, we got to go underweight into this thing because the downside and the upside are pretty asymmetric. And then they. So we were underweight when they voted it, Brexit got voted. We're like, okay, do we go neutral now? And we looked at it and we went, nope. And if it was a buck 50 before, maybe $1.25 is fair value now, buck 35, we're still underweight. So we obviously have a view that it's worse for the United Kingdom than the market thinks it is. Why? Part of its services. We don't see how the Eurozone can resist the regulatory temptation to pass a bunch of legislation that requires certain kinds of financial things to be done in other places than London. And we think those jobs are vulnerable. We think we're already starting to see migration to the continent. Some of these jobs are going to Poland, some are going to France, some are going to Germany, some will go to Ireland, but. But a lot of them will not stay in London. We have trouble sizing the total effect until we get more comfortable with that and to see if the United Kingdom has something else that they do really well. I mean, they're really good in services, terrific bankers, pretty good architects, some other cool stuff, but I don't think there's a lot of money in architecture. So we just don't see what the alternative is to their lost financial service revenue right now for us to get comfortable with, with how things are going. And we still think there's more pain ahead.

[B]

You're looking at Ireland as well. And Ireland is deeply invested in having an open border, like with. With the Republic and having like, economically, the island of Ireland is one economic unit. The whole EU is one economic unit. Right now, post, I mean, I guess the questions which I have is, number one, is Brexit gonna happen in 2019? Number two, if it does, is there going to be like, suddenly a border between north and South?

[C]

It looks like there should be, according to the law, as I understand it. So that's gonna be painful.

[D]

The Good Friday Accords, that'd be a bit of a problem though, right?

[B]

I mean, the whole.

[A]

That's why this whole thing is going off the rails.

[B]

Like, that's the whole reason why. I mean, this has really not been covered deeply enough in the US as far as I can see. But the reason why we have a power sharing agreement and basically peace in Ireland, the whole impetus which allowed peace in Ireland to happen was the EU and the fact that you could more or less effectively unify Ireland economically to. To the point at which people didn't care so much about the difference between the two. And if you start putting up these borders, that's really bad for.

[C]

Yes, it is. I see the entire UK Irish relationship as having been essentially collateral damage from the Brexit vote. And it doesn't look like anyone did any thinking about it before the vote.

[B]

Except for the Irish. They were thinking about it.

[C]

They didn't get to vote.

[B]

Well, the Northern Irish voted strongly to remain.

[C]

There we go.

[B]

The Welsh voted to remain. The Scots voted to remain. The Londoners voted to remain.

[C]

Maybe. Maybe it's only England that should leave.

[A]

And I think that's. Actually, I saw someone proposing that recently that just like the middle England could leave and everyone else could stick around.

[C]

I think London wants to stay, too.

[D]

Yes, exactly.

[C]

The part of Great Britain that would be leaving just gets smaller and smaller as we have this conversation.

[B]

So I guess the weird thing for me is, given how disastrous this whole thing is going, given the latest crazy from David Davis, the Brexit minister, where he talks about 58 detailed sectoral analyses of the impact of Brexit on various different sectors of the economy, which he's been drawing up for years, but apparently now don't exist, according to him. What is the market seeing? Why is the pound still at 1.35?

[C]

I think that they may be figuring that whatever the tariff architecture is that the UK has to operate under, it's not going to be dispositive. It's just not going to be such a big price change that it will dramatically upend a lot of existing business relationships that may be. I don't know. We have something analogous in North America. It's called nafta. And. And there have been threats this autumn of a unilateral American withdrawal that was very bad in the short term for the Mexican peso that week. Things have kind of recovered since then. But again, there's a big question mark.

[D]

About this, and I do think Sterling had been responding a bit more to be a Bank of England policy up until very recently, almost more than anything else. So I think that's another issue to think about in terms of what we're seeing in the uk. But I think it's also important to see that we're seeing, like, the OECD come out with really negative growth projections for the UK moving forward.

[C]

I don't think the market's taking that very seriously because bank of England came out with some fairly dire projections right in the aftermath of Brexit and nothing bad happened.

[B]

So no one believes either the OECD or the bank of England. There is this weird complacency which you see in the uk and you See in the US post Trump is that the dire predictions of what would happen in the wake of a Leave vote or a Trump election have signally failed to come true. And so now, in the immortal words of Michael Gove, like, we've had enough of experts, like, you guys were wrong.

[A]

You know, well, and I think it.

[D]

Can also be a little bit self fulfilling when you, I mean, it was interesting because I feel like before, before the Trump vote, before Brexit, I mean, you in the, when you spoke with people, people did have really like dire thoughts about what was going to happen and then nothing happened. And I think the markets do also kind of learn from that. And again, it also goes back to what exactly are the markets pricing in? And right now, globally, when you have a very kind of benign global economic environment, it's not surprising that we're not seeing enormous movements.

[C]

I have, I have a theory about this. I think there's a time discontinuity between reality and, and markets, and markets want to price everything faster, not slower. And they would like to. Actually there are folks that trade very high frequency traders that trade nanoseconds. But reality takes time. So if you instantaneously discount a bad thing and then nothing bad happens for a while, you kind of conclude you got it wrong. You may not be wrong, you may simply be early because reality takes time. And I don't think markets have ever been good at that kind of computation.

[B]

Anticipating pricing in events which are going to happen like a year or even a few months in the future. I remember reading about the stock Market in 1914, where it was booming and it was quite obvious that war was coming. Even after the assassination of Archduke Ferdinand, the stock market still failed to crash for a few weeks until eventually it.

[C]

Did highly clear that war was coming. Because I believe the British foreign minister did take his scheduled vacation to go fishing in Scotland that summer. That's true. And I believe the Kaiser was on his yacht in a Norwegian fjord. So you may say that just means that politics wasn't a lot better then than it is now in terms of people being able to anticipate the next event. But nonetheless, I do think that the war came as a bit of a surprise.

[B]

Well, let's hope maybe there will be a kind of muddling through akin to what we're seeing in the US right now. I guess that's the best case scenario. People talk about ending nafta, but it never ends.

[C]

I was thinking about NAFTA and how to think about nafta and we don't think that what's best for the world economy is uppermost in the minds of the policymakers. I do think there are two countervailing pressures that will be considered. One will be what sounds cool to the base and the base seems to be anti immigrant. I think that's fair. So that would be an exit, might be popular. On the other hand, there's the donors and I've already mentioned the donors. The donors are important. They don't like that because it would be damaging to American business and also to Mexican and Canadian business. But specifically I think that we suspect that the donor influence may dominate and what we will get is something that sounds cool but actually has much more continuity in terms of NAFTA's future than the worst case scenarios. Anyway, that's our hope. The reason we hold that view is because a view of donor power which was just recently validated by the passage of these tax bills.

[B]

Okay. Now, Dave Roller, you and I go back many years. We used to talk a lot about Latin America. So now I feel I'm going to go into a sort of nostalgia thing and we're going to talk about how Latin American politics is really fucked up. I feel like this is a conversation we've been having for, since the 90s. Let's start with. I don't know, Anna, what is a petro?

[D]

A petro. So Nicolas Maduro in Venezuela announced that they are going to try to evade U.S. sanctions by issuing this cryptocurrency called the petro that's going to be backed by their oil reserves. Which is, which is obviously insane. Every part of this plan is insane.

[A]

It.

[D]

And having said that, it's obviously not ever going to come to be. But it's a pretty fantastic story and just indicative of the insanity that's going on right now.

[A]

Is Venezuela just going to have like. Is the Venezuelan government kind of like one big wallet that could be hacked? Like, I don't get like how does this work?

[D]

It makes sense. Although there actually are a lot of bitcoin miners in Venezuela.

[A]

Okay, because it's cheap energy, but it's very cheap energy.

[D]

Although their servers aren't.

[A]

I was gonna say, aren't they having like horrible energy blackouts in Venezuela because like, well, yes, actually hydroelectric dimes, dams hard.

[D]

And when you're having people getting arrested for being bitcoin miners, it's because they see energy spike spikes and then they're like charged with illegal like misuse of electricity. It's. It's crazy.

[A]

So this is going to be like Bolivarian bitcoin Yes, okay, but yeah, so.

[B]

But the big picture here is that there's a bunch of. Imagine that all of American fiscal and monetary policy was just run by Donald Trump individually with zero kind of institutional basis or support. If you just have Nicolas Maduro sort of waking up one morning and going repudiate, restructure, cryptocurrency, bitcoin and throwing words out without knowing what they mean, It becomes just chaos. So what we have right now is just chaos. Right.

[C]

I was first asked to analyze Venezuela's sovereign values the year I was hired in 1994. And so I spent some time on it and my manager said, well, what's the bull case? I said well politics are difficult but they've got a lot of oil. And they said what's the bear case? Well, they've got a lot of oil but politics are really difficult and this has not changed. But what has changed is the solvency of Venezuela. And if you look at Venezuela right now, its current conditions, they're in a multi year recession which is not just damaging living standards but life expectancies. Venezuelans are migrating and taking jobs as illegal restaurant assistance in the Dominican Republic because that's better than living in Venezuela. That's bad. And they have a hyperinflation. When you have a hyperinflation, it means that the government has lost its ability to collect taxes. That's what a hyperinflation is. It's an inflation tax. I'll tell you something else, as a bondholder, when you see a hyperinflation, you can kind of figure you're not going to get paid because the only way to stop a hyperinflation is with the currency reform. When that happens, there will be a unilateral change in terms and conditions of domestic debt. And it's very rare to do that, that painful confiscatory thing to domestic debt holders and not include the foreign bond holders who don't even vote. So that's, it's happened once in Bulgaria, but it's very rare. Most of the time you look at a situation like Venezuel and you say well this is a default and we just have to wait and see. What's interesting this week is that the Chinese have come out and said that there are some, they're starting to sue PDESA for nonpayment. That's different. And suggests that the Chinese have exhausted their patience with the Venezuelan government. That leaves Venezuela with only the Russians. Now you may say, well the Venezuelans can't really do a cryptocurrency but I bet the Russians can. So maybe they'll get a little Soviet help on their access to the Internet and what have you. But it's not clear what the value proposition would be for the hypothetical buyer of a Venezuelan cryptocurrency.

[B]

Well, this is cryptocurrencies, to be fair.

[D]

This is very true. And one of the things I also think is really important. I very much agree with you. But to think about is the fact of their reserves. FX reserves are now below 10 billion. And not only they're below 10 billion, but almost all of that is in gold. They have almost no liquid hard currency left. And right now you just saw where they in theory had a default, but it wasn't really a default because they're even the ability to pay coupon payments at this time is becoming very, very difficult. And you had the Russians who were able to kind of reprofile one of their loans extended out, but that's. I mean, that's not buying them that much. Everyone in the market I know when I was, when I was still my former job was kind of saying, okay, 2017, we think they'll probably still be able to make some of these payments. But almost everybody's thinking 2018, it seems incredibly unlikely. And it's also important to remember that right now Venezuela is under sanction, so it's almost impossible to do any type of debt exchange. So then that raises the question of how do you even do a restructuring? And before this kind of Sinopec announcement came out in terms of the suit, people were saying.

[B]

Wait, wait, wait, slow down.

[D]

Sorry. So people were saying, maybe.

[B]

What's the scene?

[D]

So, sorry, sorry. That was the, the. The Chinese oil company that is now suing for nonpayment. So people had been saying maybe China would buy the bonds and then somehow that would facilitate an exchange, which made no sense.

[B]

Okay, I just want to, like. I feel like we're diving into the weeds of, like, whether or not Venezuela was defaulting.

[C]

The most important thing. And now to, to, to explain this importance, I have to first explain that I am from Boston, and one of our prominent urban architectural features is the Sitco sign over by Fenway Park. And it's just part of the Boston urban landscape. I mean, in New York, you've got the Empire State Building, a lot of other stuff. We've got the Citco sign. And we are actually very concerned that we will wake up one day and Lukoil will have repoed our Citgo sign. And it just won't be there anymore. Yes, that's the problem. You have to know that Citco's a.

[D]

Subsidiary and one of the reasons that Pedavisa has not wanted to default, because people often ask, okay, I don't understand, why is this socialist government not paying their importers and starving their population so they can pay their foreign creditors? And the main reason is frankly because of things like Citgo, they do not want their foreign assets to be taken. Not only because they don't want their foreign assets to be seized, because they don't want that to cause interference with the shipment of oil, because they get 90%, 95% of their revenue through oil. So if that happens, if all of a sudden payments can't come through, oil can't be shipped, they're really done. So it's not just a matter of done already, they are kind of really done already. But as long as they can that oil can still move, they still have a little bit of movement with people like Russia, with like the deal they did with Rosneft. If all of a sudden that can happen, then they're really done.

[B]

Okay, so I want to just widen, like, step back a little bit here away from questions of like coupon payments on Venezuelan bonds and just ask about again like this big broad political thing. Politics is trumping economics in Britain, politics seems to be trumping economics in the uk, politics is trumping economics in Venezuela. I mean, it seems to be happening all over the world. It seems to be happening in Brazil too. Right. And Brazil is much more important than Venezuela. Yeah, quick detour into Brazil because I think that's the big one. There's political chaos in Brazil. Right.

[D]

I mean, I would argue that actually we've been seeing in a number of other Latin American countries with MACRI in Argentina and okay, Brazil has a lot of problems, but you are seeing a bit of a pullback from the populism that had been kind of on the rise for so long. And I think there is potentially an argument that although we are seeing this insane corruption scandal in Venezuela, I'm sorry, in Brazil, and this kind of culling of politicians, it's also a sign that people aren't willing to take this. And I think that moving forward you could potentially actually have less corruption and a. Both less populism and a more market friendly economy. So I would actually argue that in Latin America you're seeing a bit of a pushback to this.

[C]

I would say that we agree with some of that. We think that there was a rejection of what you might call left Wing populism. Certainly there's been a rejection of corruption as usual, no doubt. And these are both, I think, very constructive for Brazil in the long run. But it's not clear that we may not swing to the other end of the spectrum as we look at the next presidential election. If we replace a left wing populist with a right wing populist who's sort of a Duterte type and talks about shooting a lot of criminals, that may not be a real market friendly outcome. So I think the market is not prepared to price that election yet. At the moment, they're comfortable with Brazil. It has a lot of yield they've done because they had a multi year recession and took a lot of the pain on the exchange rate. Their current account's in pretty good shape, so they don't really need money. Sort of the opposite of Venezuela. Venezuela needs money and can't get it. Brazil doesn't really need money, so they can get it. But I think the presidential election will be a test coming forward. But we're probably six months away from having any kind of clarity about what that will look like.

[D]

Yeah, I agree. And I don't know if we're going to. There has been a lot of talk about some of the current leading contenders, but it's still a long time to go. And I think I find it unlikely that we would shift that far to the right. But it's a possibility.

[C]

Meanwhile, Mexico could shift quite pretty far to the left if we have many Lopez Obrador as the next president of Mexico. And so again, the more strident the American criticism of Mexico, the more likely Mexico would go with a local nationalist. And so that would again be a source of considerable pain for the markets.

[B]

On which happy note, let's have a numbers round. Dave, since you're the guest, we'll let you give us a number, any number.

[C]

0.5.

[B]

Oh, I like that one. What's that?

[C]

That might be the inflation neutral real interest rate at the Federal Reserve, which we used to call. Or which we are now calling R Star.

[B]

R Star.

[C]

Okay.

[B]

This is my favorite wonky number.

[C]

Are you folks familiar with R Star?

[B]

Wait, quick show of hands, Jordan. Do you know what R STAR is?

[A]

Neutral rate of interest. Yep. I mean, it's basically the Goldilocks interest rate where the economy is supposed to be able to keep plowing ahead at full steam without terrible inflation.

[C]

There you go.

[B]

Is this a traded rate or is this a bit like Nairu? It's one of these things which you kind of think probably, oh, it's much.

[C]

More like Nairu, like all the other really important things in finance, is unobservable and a metaphysical construct. All the stuff we talk about, Nairu, R, the term premium. You can't observe any of these things in the marketplace. All we can see are like interest rates that people trade at. But the idea here goes back to John Taylor and the Taylor rule. And it goes back all the way actually to Kurt Vic Sell, who originally said, you know, there's gotta be an interest rate at which if it's too low we generate inflation and if it's too high we have a recession. So there's gotta be a Goldilocks interest rate. Your phrase, the Goldilocks interest, that's just right. And if you believe in continuity, that's gotta be true. Of course we don't know what it is.

[B]

How much does ASTA move in a normal economy?

[C]

Well, it turns out that it was stable for a long time, but probably isn't now. Like anything else, it's important it starts to move around.

[B]

Was it stable before the crisis?

[C]

Back when John Taylor came with his rule, like for optimal policy, it looked like R had been well behaved at around 2%. Remember, this is an inflation adjusted real interest rate. So to get to something nominal, you might see you add an inflation trend on top of it. Back then, if you thought that inflation was well behaved at 2%, 2.5%, you add the 2% to that 4%. 4.5% looked like a neutral interest rate for fed funds. And if you had a recession, you'd take the interest rate down. You had inflation, you take the interest rate up. That's what the Taylor rule does. It doesn't do anything more complicated than that. It's a feedback rule. Depending on what's causing you the most pain, recession or inflation, that's all it does. It fights the trend you don't like.

[B]

So when did our star fall from 2% to 0.5%?

[C]

The global financial crisis seems to have damaged it. And as we look at the time path that the great and good in economic research, and we're talking now about an important paper from San Francisco Fed by Laubach and Williams, you can show a trend drift in R down towards something like 0 or 0.5 today. If you plug that into a Taylor rule and this is cool, then recent Fed policy looks pretty much optimal.

[A]

Yep.

[C]

Ooh, yeah, yeah. No, they were not too easy. They were right on track. So if that's, that's kind of, that's kind of an important conversation to Have R star is a big deal. And by the way, all the cool kids now know what their R star is. So if you went to the World bank meetings, the IMF meetings, Brazil was there telling you their r star is 3. The Mexicans were telling you it was 2.5. Couple of other central banks had nothing to say because they're not cool. But anyway, R star is a big deal now amongst central bankers about the.

[B]

Mexican central bank is that they've always been the cool kids. But oh, which also I need to ask you, since we have you here, does Mexico have a central bank governor?

[C]

Well, they always have an acting governor. I mean, are you talking about who the next fellow's going to be? Yeah, I'm not close to it. I can't help you.

[B]

Okay, we will pass on that one. Anna, do you have a number?

[D]

I do. 300 million. So that's 300 million rand. And that's how much money was misappropriated from the South African budget to pay for Nelson Mandela's funeral. And it appears that it was.

[B]

Wait, what's that in dollars?

[D]

It's about 22 million. I think.

[B]

That's an expensive funeral.

[D]

Yes. And a lot of it was paid for things like 350rand T shirts. Not sure why you need to buy all these T shirts for a funeral. So yeah, it's clear that a lot of the money was just horribly misused. And there's this like hashtag Madiba funeral that's trending on Twitter. It's becoming a bit quite a big deal again. But again in the grand scheme of things, similar to what we were talking about with Brazil, the fact that people are getting so upset and all this information about ANC corruption is coming out I think is actually ultimately long term a good thing for South Africa.

[B]

My number is 814 million. Since this is the Petro edition and we're talking about asset backed cryptocurrencies, the idea behind the Petro is it would be backed by oil and no one knows how that works. But there is such a thing as an asset backed cryptocurrency. It's called a tether. And one tether is always worth $1. It's a cryptocurrency which is designed with one purpose in mind, which is that it has a 100% fixed exchange rate of one tether to $1. If you buy a tether for a dollar, the tether people go out and use that dollar to buy a dollar and they put the dollar in a bank account and it's Completely. It's like a currency board. And there are reasons why you might want a cryptocurrency which was just always worth $1. Especially if you're not in America. It's easier to just switch from one cryptocurrency into another than it is to go back and forth into dollars. There are 814 million tethers out there in the world which means that they are backed by $814 million at least in theory. The problem is that no one has seen these $814 million. There is no reason to believe they actually exist. There's a lot of vague hand waving talk about well I think they're in a Polish bank account.

[C]

Oh no, no, no, we need to see a custodian. That's what we need. Now one of the things you want to do when you, what you're talking about in a way is a sort of specialized piece of asset management. And there's always two things you want to see in an asset manager. You want to see third party pricing of all assets and you want to see third party custody of all assets. It's fine to pay the asset manager to make decisions to buy things, but you don't really want the asset manager to decide the value of his or own stuff. That's always a bad idea. It's very tempting. It never has ended very well. Third party custody. Third party pricing. Pricing seems simple here. It's one to one. So we're just down to the third party custody. We look forward to hearing from the Polish banks.

[B]

Yeah, the Polish banks are talking a lot about client confidentiality which doesn't really.

[A]

Is that they're like we're taking them back. We're taking on the Swiss model here. My turn. Yeah, My number is 10,731 and I'll get to exactly what that represents in a second. But so at the moment Space X is getting ready for its first launch of its I believe it's Falcon Heavy rocket. And so Elon Musk went on Twitter and as Elon Musk is one to do, he announced that the payload was going to be his Midnight cherry Tesla Roadster and that the car that was going to be on this rocket was going to play Space Oddity and that they were going to launch it to Mars orbit. So I repeat, Elon Musk's plan right now for this locket ranch is to put a electric car in it, put on David Bowie and launch it to Mars. And at first it was unclear if this was a joke and then he kind of tried to walk it back and then someone came out and told the Verge, no, no, he is absolutely serious about launching a roadster to Mars with David Bowie. So I went and calculated how many times you could play Space Odyssey on the trip to Mars. And if you go as fast as possible, apparently the quickest trip directly There is about 924 hours. You could play that song over and over again 10,731 times. 10,731.65 times, approximately. The only thing that is there, the you know the rocket's going to be orbiting Mars pretty much in perpetuity. So obviously David Bowie will be going for a while. Anyway, that is my number.

[C]

Well, that's kind of cool. My senior year in college, I worked part time as a computer programmer for the Jet Propulsion Laboratory and my salary was paid by the end of the Mariner money and the beginning of the Viking money. So I actually have been not a hypothetical rocket scientist, but an actual rocket scientist. And my first important job after the bookstore was actually working on Mars missions. I wish him well.

[B]

So now you can answer the big question, what's better being a rocket scientist or being a bond investor?

[C]

You make more money being a bond investor. Unless things go upside down with those vigilantes we talk about.

[B]

Okay, I think that's it. Dave Raleigh, thank you very much for coming into Slate Money this week. It's been awesome having you. Thanks to Dan Schrader as well. And, and thanks to all of you people who phoned in with your questions. We're going to have an amazing phone in episode in a couple of weeks. And do listen to Slow Burn, which is the new podcast about Watergate, which comes out on Tuesdays. It's an eight episode miniseries. It's really good. There are many reasons, reasons, quite obvious reasons why it's worth revisiting what happened in Watergate right now. So that's exactly what we're doing here at Slate. Slow Burn. Check it out wherever you get your podcasts and we will talk to you next week on Sleep Money.

[C]

Ground control to Major Tom. Ground control control to Major Tone.