Why Interest Rates Are Shooting Up All Around the World

This week the big story in markets is the selloff in bonds. Yields on benchmark 10-year US Treasuries jumped 20 basis points from last Friday’s low, while the 30-year rate is back above 5%. Meanwhile, 30-year Japanese government bonds clocked their highest yield since records began in 1999. And rates on UK gilts, German bunds, and Australian bonds are also rising. To make matters even more unusual, US Treasury yields are going up while the dollar is weakening (something that doesn’t usually happen.) So what’s going on? And how much does this have to with worries over the US fiscal position, the return of inflation, and the outlook for rate cuts from the Federal Reserve? On this episode, we speak with Steven Englander, global head of G-10 FX research at Standard Chartered. We talk about what’s driving the dramatic moves and the relationship between fiscal and monetary policy. Read more:Deglobalization’s Threat to the Bond MarketUS Bonds Swing as Dip Buyers Enter After Moody’s-Fueled SelloffOdd Lots Live is returning to New York City on June 26. Get your tickets here! See omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 0:58Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:41Speaker 01

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:57Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 2:02Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:03Tracy Alloway?

  Joe, how about them JGB yields?

• 2:07Joe Weisenthal?

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

• 2:24Tracy Alloway?

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

• 2:45Joe Weisenthal?

  Were you taking out-

• 2:45Tracy Alloway?

  That's how I measure everything.

• 2:46Joe Weisenthal?

  What were you borrowing from local Japanese banks? Or were you buying JGBs when you were in high school, et cetera?

• 2:53Tracy Alloway?

  Sadly, sadly not, although, well, they wouldn't have been a great investment for a while.

• 2:58Joe Weisenthal?

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

• 3:37Tracy Alloway?

  Right. So as we're recording this, the 10-year is back at 4.48%, and perhaps more importantly, the 30-year is creeping back towards 5%. The dollar is falling again, so the "sell America" theme is kind of getting another airing. There are concerns over the fiscal trajectory and the big beautiful bill that, you know, you just kind of outlined.

• 3:57Joe Weisenthal?

  It's literally called that, isn't it?

• 3:58Tracy Alloway?

  I know.

• 3:59Joe Weisenthal?

  It's literally called "The Big Beautiful Bill." I love that.

• 4:01Tracy Alloway?

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

• 4:41Joe Weisenthal?

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

• 4:44Tracy Alloway?

  We have the perfect guest, you might say. We're going to be speaking with Stephen Englander, the Global Head of G10 FX Strategy at Standard Chartered. And to be honest, Joe, I cannot believe we haven't had Stephen on the podcast before.

• 4:58Joe Weisenthal?

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

• 5:05Tracy Alloway?

  I know, our oversight.

• 5:06Joe Weisenthal?

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

• 5:15Tracy Alloway?

  Stephen, welcome to the show.

• 5:16Speaker 04

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

• 5:21Joe Weisenthal?

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

• 5:24Tracy Alloway?

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

• 5:37Speaker 04

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

• 6:20Speaker 04

  And normally that that would be associated with the lower yields.

• 6:23Joe Weisenthal?

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

• 6:32Speaker 04

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

• 6:39Joe Weisenthal?

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

• 6:59Speaker 04

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

• 7:26Tracy Alloway?

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

• 7:36Speaker 04

  Well, they're good because you have two chances to be wrong. I think that much of it is a weak dollar story and looking to see in terms of the negotiations on tariffs and in terms of how kind of off-base the currency is, which currencies are most likely to move, which ones will face the least resistance in appreciating against the dollar. And I think Japan wins on several counts, that the tariff negotiations will be tough because they still have a very big trade deficit with the US.

• 8:10Joe Weisenthal?

  Trade surplus.

• 8:11Speaker 04

  Yes, trade surplus with the US. The non-tariff barriers, even if you really can't quantify them, they're pretty significant. And, you know, the US has a point in complaining about some of them. And there's a sense in the market, and I think correctly that once you get past the 10% baseline tariff that the US needs for fiscal purposes, that they may be willing to trade some of the reciprocal tariffs, the tariffs beyond that 10% for currency appreciation. And there've been a number of currencies under discussion, but the yen is one of the prime currencies, given that it's so weak relative to any kind of PPP type of basis.

• 8:53Joe Weisenthal?

  Right. This is sort of a general East Asian story. And obviously, we talked about the Taiwanese dollar and the South Korean won and so forth. And there is this view that maybe some sort of difference in currency policy could be part of the packages here. Before we get more to that, you know, one of the things that you heard maybe six months ago or a year, or even a few months ago, they're like, oh, if we impose tariffs, it will be offset because that will be a strengthening of the US dollar. And we've seen literally the opposite. But that was a common meme, a common conventional wisdom among a lot of economists, both Wall Street academia or the ones who appear on TV, et cetera. What is the simple story for why the dollar has been so weak since April 2nd?

• 9:38Joe Weisenthal?

  Even at a time when stocks have rebounded, interest rates have stabilized a little bit, the one major move that hasn't really reversed is the dollar. What's the simple story there? Or the complex story?

• 9:49Speaker 04

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

• 10:34Tracy Alloway?

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

• 10:52Speaker 04

  Well, in a sense, we're getting some of that measurement now. When we look at the dollar weakening and interest rates going up, I think it's a pretty good sign that notwithstanding the greater competitiveness, on paper at least, of the US, that investors aren't that enthusiastic about holding US assets. So I think that's one real signal that the market's not thinking that it's an unalloyed plus. But I'd say that most of the time, if the dollar goes down, it's for bad reasons. The basic good story would be something like this, that the rest of the world, for whatever reason, does fiscal policy and kind of expands consumption and they start buying

• 11:33Speaker 04

  US assets, US foreign yields go up relative to the US, never mind what their debt picture is over, you know, five, 10, 15 years. And they say, OK, you know, instead of buying US Treasuries, we're going to buy, you know, German and European and Asian because they're all expanding their fiscal deficits and their rates are going up, the return is higher. And you can sort of say, yeah, the dollar's weaker, but it's, it's OK for the US. They can do their own thing. I'd say that if you're focused on the US, and this is something I can't emphasize enough, that just about for every major, even medium sized country, 90% of the policy solution is going to be domestic.

• 12:15Speaker 04

  The idea that you can fix your economic problems Yeah. by doing something on the international side, I think is, is an illusion. If you did the right thing on the domestic side, you might get Yeah. good stuff happening on the international side, but it's really, really hard to get around domestic issues by saying, oh, we'll, we'll just depreciate 10 or 15%. Most of the time, when you depreciate that way, something's going wrong. Either the market says, hey, the real interest rates are too low. And they're not going to be able to push them up. So there's no point to holding their paper. Or they say risk premium should be higher. Or something's not going right. So I'd say that, you know, even though there's a route by which you can say that a weaker

• 13:00Speaker 04

  dollar reflects good stuff. That's not the most common route. Most of the time, a weaker currency reflects bad stuff happening on the domestic side.

• 13:08Joe Weisenthal?

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

• 13:25Tracy Alloway?

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

• 13:29Joe Weisenthal?

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

• 13:50Speaker 04

  I completely agree. And the other fantasy I would add to that is the implication, all we got to do is depreciate five or 10%.

• 13:57Joe Weisenthal?

  Yeah.

• 13:58Speaker 04

  And that's going to be enough. If you take a look at the way the dollar has moved against the euros, the yen, you know, the, the range over the last 10 years for the euro, I think is 95 to 125. And the US has run a trade deficit, significant trade deficit against Europe.

• 14:14Joe Weisenthal?

  Yeah.

• 14:15Speaker 04

  Both at 95 and at 125. I think there's too much faith-

• 14:18Joe Weisenthal?

  Hmm.

• 14:19Speaker 04

  -that a weak currency is going to, is going to bail you out of, of your problems. So I, but it's, it's the easy thing to do and it kind of sounds nice in principle.

• 14:44Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Sean McHugh from- Dubai-based virtual assets regulatory authority has this to say.

• 15:00Speaker 05

  We're seeing a lot of insocial players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service insocial clients.

• 15:08Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 15:16Speaker 06

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 15:36Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 15:46Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,

• 16:29Speaker 01

  but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 17:08Joe Weisenthal?

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

• 17:41Speaker 04

  The simple answer, I think, is no. I think that there was a time, maybe, when you had the gold standard.

• 17:47Joe Weisenthal?

  Yeah.

• 17:48Speaker 04

  But there's also an issue that the movements of gold reflected the confidence of markets that the economy was sustainable, there were no imbalances. So if you ran a trade deficit in the 19th century, yes, you know, it would have to be settled in gold eventually. But it wasn't a problem until everyone decided that maybe you wouldn't be able to do it. And then, then you would have these kinds of crunches. Most of my careers, it's sort of funny, because when you go to school, all you learn is PPP and trade balances and sort of adjustment of exchange rates and so on to get trade into equilibrium. Once you're sitting at a trading desk, all you see are capital flows. And

• 18:29Speaker 04

  that's kind of the driver. And the issue is, does the market have enough confidence to keep lending you the money? And if you look at the US, say, for, you know, the last 20 years or so, through thick and thin, till recently, the market was pretty confident that the risk-adjusted returns in the US would be positive. And yeah, the US ran a trade deficit, but it didn't seem to harm US welfare.

• 18:58Tracy Alloway?

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

• 19:22Speaker 04

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

• 19:32Joe Weisenthal?

  A little sad, but charming.

• 19:34Speaker 04

  The thing is that when the market decides that it's not going to lend you money at yesterday's interest rates and exchange rates, there are two ways of getting that adjustment. Either your demand for credit can go down, which we sometimes see with emerging markets when they hit the wall with respect to foreign funding and the economy crashes because basically they have to get into, you know, trade balance or surplus even in order to meet their obligations. In G10 mostly and historically with the US, the adjustment has been via the currency, occasionally like in 78 and in April with the currency and interest rates, but there's

• 20:18Speaker 04

  no big demand shock. There's no big shock to output because the money's not there. The money's there, but it's at a different price than you expect it to pay. So I think you have to look at the path that's traced by US interest rates and the exchange rates, you know, as well as sentiment and seeing what people are saying to understand whether the financing is coming easily or with difficulty.

• 20:43Joe Weisenthal?

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

• 21:21Speaker 04

  Some, but I'd say most of what we're seeing is the market beginning to debate whether the US is going to fall back into the pack in terms of being attractive. I don't think it's really that is Europe pulling away from the pack.

• 21:35Joe Weisenthal?

  Yeah.

• 21:35Speaker 04

  In terms of attractiveness. And going back to the first principle, you know, that I mentioned, when you list the issues limiting growth in Europe, you know, there's been their, you know, energy policy, which hasn't worked out, there's the overregulation, there's taxation, lack of incentives, the labor market inflexibility, all the issues that we've discussed for 20 or 30 years. It would be remarkable if defense spending was the answer to all of those problems.

• 22:04Joe Weisenthal?

  Yeah, right.

• 22:04Speaker 04

  And, you know, I'm a bit skeptical. In the short term, it might make a difference. In the long term, you know, it's not as if we study Attila the Hun's textbook of economics to see how, you know, preparing for war is going to give you a better economy.

• 22:17Joe Weisenthal?

  Yeah.

• 22:18Tracy Alloway?

  That's another one weird Triconomics thing.

• 22:20Joe Weisenthal?

  Yeah.

• 22:20Tracy Alloway?

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

• 22:50Speaker 04

  Pretty much. Yeah, there's a hope that some spending can be reduced because if you look at the share of government spending in GDP, it's way higher than it was in 2018, 2019, you know, for the decade before we hit COVID. And, you know, the Republicans kind of got snookered by Biden when they did the debt deal in that they accepted a higher baseline level of spending that was way above what the historical norm for the US. So the question is, can they get that back down? And can they do that in a way that's, you know, fair, equitable, that's not really going to be on the backs of, you know, one segment of the population or, you know, the poorest or the weakest or whatever?

• 23:34Speaker 04

  If they can, it would be remarkable. If Doge can get rid of wasteful spending, you know, if they can actually find waste fraud and abuse, that would be terrific. But if they can't, and we know the history of these fiscal bills, which is that the easiest thing to do is to kind of say, well, we'll have a lot of supply side effects, or we're counting on this revenue or that revenue, which may or may not come. If it turns out that it's kind of steepening the deficit path and the path of debt accumulation, the Fed may be the only story in town.

• 24:10Joe Weisenthal?

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

• 24:43Speaker 04

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

• 24:48Joe Weisenthal?

  Love it. This is what makes an interesting conversation.

• 24:50Speaker 04

  And in the short term, I kind of think, look, every survey you get tells you that everybody's concerned about growth, they expect growth to slow down. How many weak payroll numbers do you need to say, oh, wait a second, that people have been telling us that nothing's happening, that things are slowing down. Now we get evidence. Do you need three? Do you need six? Or do you just say, well, yeah, that just confirms what everybody's been saying. So I actually think that they will do the right thing, which would be to ease in response to incoming economic data. Having said that, I would see that as an insurance policy, because the fiscal bill is likely to introduce net stimulus. We're going to get some, you know, uncertain.

• 25:36Speaker 04

  Inflation, we'll get certain inflation effects from the tariffs. What's uncertain is whether they're one off or persistent. So between the combination of tariff induced inflation and fiscal stimulus, it's not clear to me how they're going to cut. I think that the Fed might see themselves as having an issue in terms of saying, well, if we cut in Q2 or Q3, can we take it back in Q4 and Q1? With the president over our shoulders saying, don't do that. But if you were running a model, you'd probably say, given all the data that have come in, if you get confirmation that the economy is slowing, you should cut.

• 26:19Speaker 04

  And then you should keep your eyes open to see what's happening at the end of the year that turned into 2026 and see if you have to take it back because the inflation picture has deteriorated.

• 26:30Tracy Alloway?

  Can I ask a basic question, which I've kind of always wanted to ask someone? And given your experience in the market, I think I should ask you. What is the central bank playbook for stagflation?

• 26:43Speaker 04

  Prey?

• 26:45Speaker 04

  Look, in some ways, when you look at the history, Arthur Burns got dealt a very bad deck. And he probably didn't play it well, but he didn't have a good deck to play with. Greenspan, Bernanke, even Yellen to some degree. Greenspan and Bernanke actually had pretty strong productivity growth when they were there. So unit labor costs were soft. Yellen had low inflation, so she could be everybody's friend because they were trying to get to their targets. And even Powell in his first term was faced with that issue. But dealing with stagflation is really tough. And there's no good answer.

• 27:25Speaker 04

  You know, in the longer term, that you can't accommodate a negative productivity shock or negative output shock because you'll just have persistent inflation. The only question is, how quickly do you try and wring it out of the system? And that's a very hard decision to make.

• 27:43Joe Weisenthal?

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

• 28:25Speaker 04

  Yeah, look, 10% shocks to competitiveness. We get those all the time via exchange rates and life goes on. You know, in the last 10 years, the euro dollars moved 10% in a relatively short period of time, three or four times. It's not, it's not fun for the business people on the wrong side of that move, but they, they managed to deal with it. And China was different, but you know, the imports from China in 2024 were like 1.6% of GDP.

• 28:53Joe Weisenthal?

  Of US GDP.

• 28:55Speaker 04

  Of US GDP, correct. And even at the worst of the sort of, you know, when we saw no boats there.

• 29:01Joe Weisenthal?

  Yeah.

• 29:02Speaker 04

  We're probably running at about 50, 60% of normal.

• 29:06Joe Weisenthal?

  Okay.

• 29:07Speaker 04

  So you're talking about 0.8% shock. And, and you sort of say, okay, you know, you look at other shocks that the US gets, you know, either via the exchange rate, when you have a big move or via energy prices, you know, which is like seven or 8% of the CPI. They can easily move 20 or 30%. That's something that everybody has to deal with. It's never comfortable, but the economy can deal with it. Where I did see a potential issue, which I think is really important, is that if we move from tariffs, which is a way of adjusting relative prices, to sort of saying, no, we just don't want X, Y, or Z from China, or we're going to limit imports of, of stuff. Using quantities to regulate trade rather than prices.

• 29:52Speaker 04

  Essentially has a much deeper effect because you really don't know how far prices will have to move in the event of a shortage to clear the market. So with that, you'd be playing with fire. But 10% tariffs, it's not that I'm endorsing it. I just don't, I don't think that they are as big a deal as they were made out to be.

• 30:27Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 31:10Speaker 01

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• 31:50Tracy Alloway?

  It does feel to me like one of the complications of the current environment, other than uncertainty, which, you know, we've been joking on the podcast that we cannot get through a single interview at the moment without mentioning the word uncertainty. But one of the complications is you potentially have the economy sort of moving in different directions, or maybe the impacts of the tariffs are moving at different speeds. So you could have an impact on inflation, you know, relatively soon as prices start going up, but you could have an impact on the labor market later on because it takes a while for, you know, reduced demand to work its way through the economy.

• 32:31Tracy Alloway?

  And that strikes me as something that's difficult to deal with for the Fed and also means they have a sort of limited window to operate in. How realistic do you think that timing scenario is?

• 32:42Speaker 04

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

• 32:48Tracy Alloway?

  Oh, okay.

• 32:48Speaker 04

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

• 33:33Speaker 04

  And I suspect we're going to see the downside of that quicker than the, any kind of upside is likely to emerge.

• 33:40Joe Weisenthal?

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

• 34:14Speaker 04

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

• 34:58Tracy Alloway?

  I got distracted looking up the bowling ball test, Joe.

• 35:01Joe Weisenthal?

  Yeah, did you find anything interesting?

• 35:03Tracy Alloway?

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

• 35:08Joe Weisenthal?

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

• 35:20Tracy Alloway?

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

• 35:23Joe Weisenthal?

  Keep going.

• 35:24Tracy Alloway?

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

• 35:37Speaker 04

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

• 35:46Tracy Alloway?

  It's okay. It is allowed.

• 35:48Speaker 04

  Okay, you know, the question for them is, you know, if I want to increase capacity, where should I do it? Should I do it in the US? Should I do it elsewhere? How is this going to play out? Is it going to play out for four years or is it going to play out for eternity? And I think that they're having a very hard time getting their hands around it. And to them, that's the biggest issue. I think if you're investors, people who manage portfolios or, you know, trying to eke out gains in the market, the question about where the dollar is going, where rates are going, how fast they're going, and especially, nobody wants to be the sixth person on a trade because that makes you vulnerable.

• 36:31Speaker 04

  So they're very obsessed with kind of understanding whether any trade that they want to do is like, say, a steepener trade in the rates market. Has everybody else done it already? Or is there still a room to get in and be able to do well on that trade?

• 36:49Tracy Alloway?

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

• 37:08Speaker 04

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

• 37:49Tracy Alloway?

  Yeah.

• 37:50Speaker 04

  You know, it doesn't mean it's wrong, but yeah, I think that the caution about, say, buying bonds right now is very widespread.

• 37:59Tracy Alloway?

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

• 38:02Speaker 04

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

• 38:07Joe Weisenthal?

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

• 38:43Speaker 04

  Ooh, that's a hard one. I think that you have to learn to question things. And, you know, the assumptions that everyone makes. And you mentioned one of the pieces we did on how exposed is the US actually, you know, you sort of look at what everyone's saying, and you're saying, can I find some data that will either support it or oppose it? So the questioning of the data, being willing to question central banks and their policies, and even their policy framework.

• 39:12Joe Weisenthal?

  Yeah.

• 39:13Speaker 04

  I think that that's something that's really important. And it's something that is respected in the market. I mean, you don't have to be right all the time, but your arguments have to be well crafted. And being able to formulate those arguments, I think, is very important.

• 39:30Joe Weisenthal?

  What was your PhD thesis about?

• 39:32Speaker 04

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

• 39:40Joe Weisenthal?

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

• 39:53Speaker 04

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

• 40:35Joe Weisenthal?

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

• 40:46Tracy Alloway?

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

• 40:49Speaker 04

  That works for me, but I know a lot of people without PhDs who are very, very sharp.

• 40:54Joe Weisenthal?

  Okay.

• 40:54Speaker 04

  And, you know, even Powell, whom I respect a lot.

• 40:57Joe Weisenthal?

  Yeah.

• 40:57Speaker 04

  You know, no PhD, but he gauges the weaknesses. Oh, our star, what's the standard error? Maybe plus or minus 20. You know, that sort of understanding that, having the intuition to sort of know when something is really well-founded versus something that's, you know, sounds nice but is all over the place, you know, only works on a blackboard. That's really important.

• 41:18Tracy Alloway?

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

• 41:40Speaker 04

  I think policymakers everywhere should pay a lot of attention to the risk premium of having erratic policy and policy uncertainty. And you read some of the stuff that's written, and it's, sometimes it's written almost as if it's in a vacuum. "I can do this, and it will affect this market, which is the one I'm trying to affect," but kind of nobody else is going to pay attention to it. You know, in the real world, everybody else pays attention to it. And so I think that that's sort of an issue that you want to take into account. You know, I think more generally, especially central bank policymakers, they're sometimes wedded to academic models. And if they don't have an alternative model that's

• 42:23Speaker 04

  viewed as respectable in academics, it's hard for them to say, well, it doesn't matter. That's not respectable. It works. Whereas the one that is respectable doesn't work.

• 42:33Joe Weisenthal?

  It strikes me that part of the reason that there's so much uncertainty or confusion is that a lot of the big topics being discussed right now, to some extent, precede economics. Because they're really about like, you know, we're getting to sort of like core questions about institutional structure and politics, the quality of our political discourse, et cetera, and like the quality of elected leaders all around the world and so forth. And as such, it seems like you sort of like run into a hard limit of like how far you can go in understanding anything simply by looking at the economic lens, which is no

• 43:13Joe Weisenthal?

  knock to economics. I love talking to economists such as yourself, but at some level, the tools and the economist toolkit are just not going to get you very far in sort of like discerning which way some of these questions are going to go.

• 43:26Speaker 04

  Well, I think at a significant level, you don't need a high school degree to understand the issues.

• 43:31Joe Weisenthal?

  Yeah.

• 43:32Speaker 04

  If you don't trust your trading partners to be reliable suppliers.

• 43:36Joe Weisenthal?

  Yeah.

• 43:37Speaker 04

  So much so that you you're willing to forego the benefits of trade, the benefits of economies of scale and efficiency, that's a real pity. And then there's a real cost to it. And if, you know, we have to make all the stuff that is made elsewhere.

• 43:54Joe Weisenthal?

  Yeah.

• 43:55Speaker 04

  There's a cost. And a bit of my own background, I come from Canada. There are parts of Canada that make very good wine, and there are parts of Canada that make very bad wine. If you've ever had the bad wine, you're a free trader in wine for the rest of your life.

• 44:10Joe Weisenthal?

  Where is the bad wine region?

• 44:12Speaker 04

  I will not.

• 44:13Joe Weisenthal?

  Okay.

• 44:13Speaker 04

  I will not denounce the country of my birth.

• 44:16Tracy Alloway?

  All right.

• 44:17Joe Weisenthal?

  I have a guess, actually.

• 44:19Tracy Alloway?

  Oh, what do you think?

• 44:20Joe Weisenthal?

  Well, I was recent.

• 44:21Tracy Alloway?

  You can say it.

• 44:21Joe Weisenthal?

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

• 44:54Speaker 04

  You can get a lot worse wine than the Finger Lakes.

• 44:58Tracy Alloway?

  All right.

• 44:59Joe Weisenthal?

  That's good to know.

• 45:00Tracy Alloway?

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

• 45:09Speaker 04

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

• 45:14Joe Weisenthal?

  You lived up to the reputation. Thank you so much.

• 45:30Tracy Alloway?

  Joe, that was great. I'm so glad we finally had Stephen on.

• 45:33Joe Weisenthal?

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

• 46:16Joe Weisenthal?

  into an environment of less productivity, which means higher inflation, which means higher rates.

• 46:20Tracy Alloway?

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

• 46:32Joe Weisenthal?

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

• 47:15Tracy Alloway?

  Just one more depreciation, bro.

• 47:17Joe Weisenthal?

  One more depreciation, bro. We're gonna, we're gonna match TSMCs, Taiwan Semiconductor prowess.

• 47:25Tracy Alloway?

  That's right. All right. Shall we leave it there?

• 47:27Joe Weisenthal?

  Let's leave it there.

• 47:28Tracy Alloway?

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

• 47:33Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez at Carmen Erman, Dashell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat with fellow listeners 24/7 in our Discord, discord.gg/oddlots.

• 47:55Tracy Alloway?

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

• 48:48Speaker 07

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