What is behind the calmness in global markets?

0:04Hello and welcome to Business Matters. I'm Roger Hearing. On the programme today, the strange calm of global markets, despite the upheavals of recent months. So what's going on? Also, a group of economists, backed by the Vatican, call for a reshaping of the international financial system to help indebted countries. But why do those nations keep taking on new debt? Basically, you don't have enough resources to allocate to your priority suspending. That's actually sort of crowd out all the resources that are needed for other priority, whether it's healthcare, whether it is education, whether it's infrastructure.

0:41Plus, how secure are international supply chains? There's a new survey. A report from Thailand on the elderly Westerners finding a cheap retirement home there. And eggs in America, so expensive that they're getting stolen. And I'll be joined throughout the programme by two guests on opposite sides of the world. Na Pham, journalist and filmmaker, who's joining us from Hanoi. Na, very good morning to you. Good morning, Roger. I ended very, very early in my country now. 7 a.m., can you imagine? Yes, well, I think I located you earlier in Taipei by accident. That's right. That is your normal residence, but it's good to hear you're in your home of origin, I think, is the right way to put it.

1:26That's right. Good. Well, anyway, good to have you there. across the other side of the world, Tony Nash, CEO of Complete Intelligence, who's joining us on the line from Houston. Tony, a very good evening to you. Roger, hi. Good morning. Good to have you both there. Well, as we always do, by getting a sense, I suppose, of what's going on where you are. So, I mean, Nile, let me come to you then. Hanoi, Vietnam, what's making the headlines there? Well, I'm following two stories this week, actually. The first one is the reciprocal tariff, of course, because the deadline for the expiration of Trump's announced reciprocal tariffs is approaching on the 31st of July.

2:03And it seems that the Vietnamese haven't achieved anything at all after three rounds of negotiations with Trump teams. So everyone is holding their breath here, very nervous. And the second story I'm following is actually what happens between Thailand and Cambodia in the border area between the two countries. It's very tense, kind of, you know, conflict is looming. So I'm watching to see what the Thai government is doing at the moment. OK, well, Tony, what's caught your eye this evening in Houston? Oh, gosh, it's just hot, Roger. That's it. It's hot. So it's summer in Texas and it's hot. Right.

2:45OK, so you're sheltering in place. I suppose this is the way they put it, isn't it? Well, it's interesting, actually, of course, that, But now you were talking about tariffs and the impact of tariffs because it has been a pretty extraordinary time, not only in terms of trade, of course, but lots of other things as well. But no one, in fact, could dispute that a lot has been happening in the world over the last few months. Wars, natural disasters and a man in the White House who almost defines unpredictability. Yet global markets have remained remarkably, perhaps worryingly quiet. As in the Sherlock Holmes story, Silver Blaze, they're the dog that didn't bark in the night.

3:21Stock prices haven't collapsed, energy prices haven't rocketed, and although interest rates on US Treasuries have risen, everything has been within normal parameters. But should the calm in the markets actually be a reason for concern? Well, Gillian Tett is the chair of the editorial board of the Financial Times. She's also the provost of King's College, Cambridge, and she's been writing about all this. So I began by asking her what she really means by the silence of the markets. If you look at what's happened in the last few weeks in terms of geopolitics, it's absolutely remarkable how threatening it potentially is, whether you're looking at the events in the Middle East or around Ukraine and in so many other parts of the world.

4:03and you would normally expect to see markets really showing some sign of, if not panic, then really deep concern. And instead what's actually happened is that after the April 2nd announcement of the so-called Liberation Day tariffs, you did see the equity markets fall very dramatically. But they've since then come back again and they're pretty much near record highs now. Yeah, well, I suppose people might point to what's been described as TACO, that acronym, Trump always chickens up. Perhaps the markets simply don't believe that he's going to do what he says he will. So they say, well, let's ignore the noise and carry on.

4:39Well, absolutely. It was actually my colleague at the Financial Times, Robert Armstrong, who came up with this brilliant TACO acronym. And certainly there are a lot of people betting on the idea that his bark is always worse than his actual bite. So that's one potential explanation. I mean, another explanation is that there's really a time lag effect happening in that most of the impacts of the measures that have been announced in terms of the tariffs or the deportation of immigrants, which potentially is going to really push up inflation and create bottlenecks for the US economy. You know, all of those things are going to take a long time to actually feed through the tangible data.

5:13Or the other issue lies with investor psychology and the fact that the world today is so darn confusing. There are so many things happening at once that people have, if you like, information overload. They can't pass it all. So they're basically sitting a bit frozen, trying to wait and see what's going to happen next. And it's quite different from the COVID pandemic because back then there was one really big clear shock to deal with. And if you like using traders language to price into the markets. Now you have numerous different shocks, and that's very disorientating. It is, but I suppose you could take the optimistic view, well, maybe the markets are just being mature about this, that actually we should be relieved and indeed grateful that there aren't these big ups and downs.

5:56I remember people in the past saying all the markets, it just reflects what the traders happened to feel, whether they had a good breakfast that morning. So in fact, if things are staying as the same, it suggests perhaps that this is a way in which the market has matured. Well, you could absolutely say it's a way that the market has adapted, because the reality is that most of the people, you know, trading in the markets today probably grew up in an era, at least in the West, when things were pretty calm. And so every time there was a big shock, like an outbreak of war, they would react in a very dramatic, panic-stricken way.

6:25And we saw that during COVID, remember, when the supply chains shut down and traders went, oh my goodness me, this is going to call us a deep depression. Now, after all this series of shocks, whether it's the COVID, you know, pandemic, or the Ukraine war or the financial crisis, people have almost got used to shocks. So maybe it's a sense of maturity and adaptation, or maybe it's because people still think the fundamentals in the world economy are still pretty good. So maybe, for once, people are becoming cheerful. Well, maybe, but Gillian, I'd have to say that it doesn't sound to me like you're taking that view particularly.

6:59I mean, just the headline on your piece for the Financial Times, the markets are silent, and that is worrying. So what are you worried about? Well, I didn't actually write the headline, I must say. I think the key thing to understand is what we're dealing with is a situation of great fragility. And it's a bit like that cartoon character Wile E. Coyote who runs off a cliff and keeps peddling furiously in midair and stays at the same level until they suddenly look down and panic and fall. And as long as people think it's all basically going to be okay and or they're too disorientated to actually sell things, then it will carry on being okay.

7:32but I do think we're dealing with a situation of growing fragility and what that means is that if we have new shocks coming along suddenly we could have, if you like, this whole sentiment cracking in a way we can't predict. We don't know when that's going to happen. It's a bit like trying to predict an earthquake but the fact you can't predict an earthquake means that you shouldn't recognise that risk is there and prepare. So if you're not panicking it's because you're not really aware of what's going on almost. No, I wouldn't say panic is the right reaction right now. It's simply that no one should be complacent and assume that the silence around the market amid all this crazy geopolitical noise means that they can just relax and take their eye off the ball.

8:10Do you think this is going to continue, though? Because we've talked about a lot of shocks coming to the system. And heaven knows we've seen a lot in the last three months. But it seems to be accelerating, if anything. Is there a point where, you know, it's the famous catastrophe theory, which everything falls off a cliff? And is that just coming in the near future? Well, the image I would use is a bit more like the game of Jenga, where you keep taking block away after block away. And so what you have right now is you have oil prices potentially coming under pressure because of the disruption in the Middle East.

8:41You've got supply chain shocks that could certainly be emerging because things like the Strait of Hormuz could easily become blocked. You've got the tariffs that are forcing businesses all around the world to dramatically reorientate their supply chains too and have tremendous amounts of uncertainty. You've got a deportation of lots of workers potentially in America, inflation. And the most important thing that people aren't talking nearly enough about right now, which is a rising level of debt, which just keeps growing and growing. And of course, President Trump is threatening to add even more debt to America because of the new big, beautiful bill.

9:14So you add all of that together and none of those in themselves are enough to cause the whole mound of Jenga blocks to come tumbling down. but at some point they could up to a very nasty type of vulnerability. Gillian, Tony, do you share that concern that, I mean, what the markets aren't reflecting on really is perhaps the reality? No, I don't. Let me just, there's four things that I got out of that interview. Very good discussion, by the way. The first thing is oil, okay? There's this expectation that crude prices should surge to triple digits But the fact is, most of Iran's oil comes out of a place called Karg Island, which is pretty much off limits.

9:56The U.S. will not let Israel bomb Karg Island. China gets, I think, 15 percent of their crude supply from Karg. So it would impact China. It would impact Iran. But the U.S. doesn't want that much instability. So if Karg gets bombed, that's a problem. But it's not happening. We also have to look, she mentioned the big, beautiful bill. The status quo analysis that's out there says there's something like$4 trillion of debt. Now, I'm a nerdy economist, analytics guy, and the multipliers that go into that analysis is just wrong. It's two times the amount of cost and half the amount of revenue that would go into any academic analysis.

10:43So it's a very political analysis that's being put out there. It's about$1.8 trillion of debt. I've done my own analysis. Still big enough, though, isn't it? Yeah, but it's$180 billion a year for the US. When you take the cost savings on the other side of it, it's not a big deal, right? So the other part is we have central banks easing in Asia, in Europe, in Canada, in Australia, New Zealand. The only central banks that aren't easing, really, are Japan and the US, right? So when central banks ease, it makes the risk environment a lot more approachable. And at the same time, you have China that has massive stimulus packages on right now.

11:24So there's an overconcentration of supply chain risk in China, and there's actual deflation in China in a big way. so the central bank and the central government have to put out stimulus to kind of save the Chinese economy but also acknowledge that manufacturing will continue to offshed into places like Vietnam and Malaysia and Mexico and other places. Okay okay well we're actually going to come on to supply chains very shortly in fact in a more significant way but but now let me come to you do you share Tony's feeling which I think I'm interpreting right that maybe things are better than they appear and therefore market confidence is reasonable?

12:01You know, I don't feel like that in this part of the world. I mean, it's really interesting to listen to your interview early on, but I don't see that, for example, in Vietnam. I think the market here is very volatile and the calmness described there is not observed. I think it's quite a different scenario here because the market is underdeveloped. developed. It's not as regulated as, you know, for example, in the States or in Europe. And it's very, the trading base is very, very retail heavy. So I mean, any rumor, any policy change, everything affects the market. So yeah, I mean, it's up and down like, you know, like the weather.

12:43Yes, indeed. Well, we know how that's playing at the moment. Certainly, we know how this play in Texas, of course, where it's really hot for various reasons. But let's come on to that whole idea about global sources and supply chains. Because it is very interesting, and you mentioned it, Tony, and it is part of perhaps some of the concern that is out there. Because if we think back to the COVID-19 pandemic, that showed the world how vulnerable to disruption its long supply chains were. There are plenty of promises after all that to simplify and risk-proof the ways in which we get our stuff. But now there's something rather interesting.

13:17It's a global Sourcing Risk Index. It's produced by Proxima and Oxford Economics, and they're trying to show how much we still need to do to protect our supply chains and indeed to analyse them. I've been speaking to Simon Geal, Executive Vice President at Proxima, and he took me through some of the main findings. About 75 % of the money that a business makes is spent with suppliers, and a lot of that goes into this global supply chain system that we hear so much about, that so many businesses are now looking at rewiring. So what we wanted to do, if we're talking about rewiring because we're worried about some risks that we're facing into, is profile some of the risks that we might be trading in doing that.

13:58So the risks that you're looking at, are they country risks? Are they root risks? Are they commodity risks? What are we talking about? We've selected eight risk indicators, and they're things like geopolitical conflict, human rights, governance and rule of law, input costs on labour and raw materials. So we're trying to get to some of the things which might disrupt or increase cost or cause reputational damages for businesses. So in terms of risk, what you're saying is that certain things, but also certain things that cause risks, but also I gather you list countries or areas perhaps that are more risky to source from.

14:37Exactly. So what we wanted to do, if you look at the global economy, we've picked 30 countries which are responsible for about 75 % of global trade. So that's the world's top 20 largest economies and 10 emerging economies which we've picked, which we believe are of significance over the next decade or so. So essentially what we're saying is if we're going to be trading amongst each other, because that's where the majority of global trade is done. So for example, if you're thinking about a China plus one strategy and moving to Mexico or Turkey. And what are the risks that we might be facing? OK, well, I'm asking you now, where should I where's the riskiest place I could have as a source for for my supply chain?

15:20Top of the index, perhaps somewhat surprisingly, was Mexico, closely followed by Turkey, India and the Philippines and then Russia. So that's our top five. Mexico was top. Now, I thought that was quite surprising because, you know, Mexico is is a bit of a paradox, right? It's a US top trading partner. It's a near-shoring magnet. It's very, very cost competitive. So all big pluses. But why does it rank so highly? Well, it ranks quite high on things like governance and rule of law, supply concentration. So perhaps an over-concentration of supply in some of the industrial zones and border states.

15:54It ranks quite high on climate risk. It's very sensitive to US policy. And it's had a, well, let's say an improving record on human rights. And when you look across the eight, you know, that sort of aggregation of those scores is what puts it into top place. But I think what's really important is we're not saying don't go to Mexico. What we are saying is, of course, there are quality skills and economic gains within Mexico. But when setting up new supply sources, make sure you understand the risks that you're facing into and take the appropriate mitigating strategies. Another eye catch and I just had a look at the report is the US.

16:29It's 13th on the list. And to put it in context, it's a higher risk profile than Brazil, Malaysia and South Africa. Yeah, that was a real surprise to me too. Actually, when you look into the US, it actually scores relatively well on a number of our risks, but it does score quite highly on things like labour input costs. So post-COVID in the US, there's been some quite marked labour shortages, particularly in things like manufacturing and logistics. And the sort of, you know, the targeted re-industrialization and onshore is driving up labor costs. On things like geopolitical risk, well, it's, you know, I mean, some of the listeners might chuckle, but it's been a semi-stable state, but a central player in, you know, global affairs and conflict.

17:14And although it's not reflected in the report, the time of writing, if you look at the Global Peace Index, for instance, the US has shot down that over the last two or three weeks in reaction to its role in the Middle East, for instance. It's interesting, isn't it? Simon Geel there. Now, talking us through really what seems an almost perverse list in some ways of the most risky places to source things from. I mean, what do you think about the index and how it reflects on the supply chain issue? Because you're in a part of the world that is very much part of that. That's right. I think it's quite accurate, actually, when it comes to countries like Vietnam and China.

17:55China obviously has a higher risk than Vietnam, which is a raggedness, low moderate risk, I think. Vietnam has been trying so hard to be neutral, to not pick sides between superpowers. We talked so much about that already in previous sessions. So that stability and the strategic neutrality helps Vietnam to stay low and moderate in terms of risk. But, you know, China, of course, you know, they've been involved in that trade war with U.S. for God knows how long. And, you know, they have lots of, you know, changes in policies and crackdowns on this and that. So, yes, I agree with the index, actually.

18:36I think it's pretty on point when it comes to these countries. Yeah. Tony, I mean, you mentioned supply chain issues earlier. I mean, what do you think of the survey? Because, again, they put the U.S. in a pretty interesting position where it isn't – would be a fairly big risk in many ways. Yeah. I don't know. Whenever I get an index, the first thing I do is go to the methodology. And this is an index of indexes. It's not really a secondary index. It's a tertiary index. So, I mean, there are some real methodological problems with this. Oxford Economics is a great firm. I'm not in any way disparaging them, but I would question the person who put this together as to why they had like when I was at The Economist, my team actually put together the Global Peace Index.

19:19This was 15 years ago or something like that. So and I know the kind of the great stuff and the flaws of indexes like that. So I think it's OK. I think, you know, if you're going to look at supply chain from a country, you're not really sourcing from a country. You're more sourcing from a kind of a region. Right. So, you know, if you're going to say Mexico is a high-risk country, I wouldn't necessarily disagree with that. But, you know, a lot of the sourcing is coming from some very specific regions that have really tuned things for exports, right? So, you know, I think it's probably a blunt judgment on a more precise discussion.

20:00And so I think as a blunt tool, it's fine, but I'm honestly not sure how useful it is. And I mean, talking about the methodology, I did raise this with him in other bits of things you haven't actually played. But how do you, you know, which factors do you actually put in there? And what weighting do you give them? Because, you know, he talked about the problems that, for example, Europe was quite an easy place to come from. But on the other hand, it's a hugely expensive environment. So that really matters. So it's quite paradoxical in some ways. Yeah. OK, let's look at how to supply chain people actually work.

20:32You know, if they're really weighing, say, climate risk as high as this is, then why is everyone sourcing from China? Why like why? You know, why is sourcing in China such a huge concentration issue if climate is such a big deal for these supply chain guys? Right. Right. So, you know, I mean, it's just again, it's I'm sure that they weighed this. And in fact, they did actually weigh the climate risk pretty heavily. But when you look at a supply chain team, they're actually not weighing that. They're looking at how safe are the people there? Will I get my shipments? Is it cost competitive? Am I going to get things on time?

21:09Right. Climate is a very distant consideration. And I'm not saying that based on any political view that I have. just talk to supply chain people. And it's just not really that much of a calculation for them. Yeah, no, it is interesting, the factors you put in there. Because now, I mean, in terms of keeping supply chains reasonably secure, which obviously is what the survey speaks to, do you get the sense in your part of the world that they're rising to that and thinking we need to actually make it pretty clear that the supply chain works and that it is secure? And also maybe, echoing Tony's point, that some things like environmental concerns can also be addressed?

21:47Yes, of course. I mean, environmental concerns and the climate risk, of course, are considered there. I think countries here in this part of the world, they're trying to look for new markets, you know, joining new trade agreements, finding new partners to diversify their, not only export markets, but also the source of their products and manufacturing. So I think, I mean, there have been immense efforts by every country, actually, in this part of the world. So, and we see that, I mean, we see the risk has been reduced in the index. Yeah, no, it's certainly, it's interesting to see how it all plays through.

22:29And clearly, I think it's something that a lot of people are going to be looking at as they try and assess, well, the new world on the Trump tariff period and how supply chains are affected by all that as well. Right, stay with us. Much more coming up here on Business Matters. In a moment, we're going to be talking about the issue of debt, debt in developing countries, and how it can be tackled. Stay with us here on Business Matters.

23:03Welcome back to Business Matters with me, Roger Hearing, and my guests today, Narfam and Tony Nash. Now, debt has been a millstone around the necks of less developed countries for many decades. Back in 1996, the HIPIC initiative was brought in by the International Monetary Fund and the World Bank in order to try to provide debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels. But a new report by some of the world's top economists, back now by the Vatican as well, suggests it hasn't solved the problem. They're calling for urgent changes to the global financial system so countries struggling with high debt can invest in things like health care, education and climate protection instead of just paying off interest.

23:46Well, I've been speaking about this to Dauda Sembene. He's the founder and chief executive of the advisory firm Africatalyst, which is based in Senegal. He's also one of the authors of the report. The challenge of actually being over-indebted is basically you don't have enough resources to allocate to your priority spending. Because you're spending too much on interest payment, that's actually sort of crowd out all the resources that are needed for all the priority, whether it's healthcare, whether it is education, whether it's infrastructure, or simply the delivery of basic services. Now, Dauda, I mean, I remember 20 years ago, a lot of people talking about a move to change the situation for highly indebted, poorer countries, the HIPIC initiative, it was called, and pushed, in fact, by the later British Prime Minister, Gordon Brown, amongst many others.

24:38And did nothing come of any of that? Are we just coming back to the same situation again? Well, that's the question, Roger. What has happened 20 years ago, this was the highly indebted poor country initiative that was, of course, successful in reducing significantly the debt burden facing many developing countries at that time was to find a way to avoid the recurrence of debt challenges, which means that they did not take the necessary action to reform the underlining problem that was actually making those countries to be over-indebted. And it includes reforming the global financial architecture that compound and aggravate risk to debt sustainability facing many developing countries, but also applying the principle of responsible borrowing and lending.

25:24What we have been proposing as part of this report is very much to encourage and incentivise the international community to come up with a solution that would be more sort of permanent and that would allow us to avoid the recurrence of this lending for gift cycle. So, Dauda, what would this involve? Writing off some of the existing debt, but also somehow stopping countries getting into the debt crisis again afterwards? The first thing that is important is to find ways to lower the cost of borrowing. Because I think if countries are forced to borrow at high rates or interest rates, chances are they won't be able to maintain debt sustainability.