Can Governments Really Control Financial Markets? | with FX Intervention Explained (JPY, CHF, USD)

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0:31Brussels clean up nicely at Sweetgreen. Maple glazed, roasted and edges perfectly caramelized. Sweetgreen's fall harvest is back on the menu and the season's most overlooked little green vegetable is dressed to be devoured. You know what to do. Order on the Sweetgreen app. Welcome back to the Market Maker podcast and really pleased to have the one and only Piers Curran back on the show. How are you, Piers? I'm strong.

0:59Piers Curran: Yeah, I am refreshed, kind of. A bit on holiday. You know what it's like when you get back from holiday and then it's just bang, you know, straight back into it. So just trying to catch up. But yeah, good to get out of the country, actually. A bit of time in Italy. And yeah, just trying to keep tabs. You know, when you're on holiday, obviously you're still kind of reading your FT and whatever. So still trying to obviously keep on top of what's going on at our markets. Just really interesting. And yeah, looking forward to talking markets. It's been a sort of Anthony Stephen takeover for the last couple of weeks.

1:43Piers Curran: We're going to bump out the banking stuff and back to the really interesting content, which is markets. So yeah, looking forward to the conversation. Yeah, and anyone new to the show, The Market Maker, we do regular episodes, two a week, typically one which is more M &A deals, the IPO markets, the big listings, things of that nature. We recently did the last episode with Stephen and I about the Stripe takeover of Open Router. So go back and check that one out if that's more of your persuasion. However, this show with peers is always about global markets. And today we're going to talk about one of the biggest illusions in finance, and that is the idea, of course, that we're all led to believe, at least in the Western markets, that global markets are purely driven by free market, baby, supply and demand.

2:34But the reality is when asset prices threaten economic stability, central banks and finance ministers step in. And intervention is really the main word and topic we are going to discuss today.

2:48Piers Curran: Absolutely. And what's going on right now, if you've been keeping up to date, then authorities are basically trying to fire every weapon in their arsenal to try and manipulate markets. And so basically Tokyo, for example, and we're going to talk a lot about the yen. The yen weakness is really key. I've talked about it on the podcast a few times in recent months to flag that, you know, this is going to be a really important thing. Well, it's becoming an important thing. Tokyo dropped a record 96 billion dollars when I say Tokyo I mean the government of Japan basically directly intervened into the FX market by buying yen they bought 96 billion dollars to try and prop up the value of their own currency Besant that's the US Treasury Secretary he's even stepping in to that same FX market alongside them.

3:44Piers Curran: And, you know, you've got things like Japan's 10-year bond yields hitting levels not seen since 1996. We've got some pretty alarming kind of price points being reached in various different markets, but definitely currencies and bond yields. That's where it's at. And so, yeah, they're trying to intervene. We're going to discuss today, should they even bother trying? Is it effective or not? Yeah, and then over in Washington, as you said, Besant doubling down as well here. So not just a collaboration with Japan and the FX market, but also on the long-end bond buybacks to try and cap U.S. Treasury yields while the Fed signals interest rates aren't done rising.

4:27So today, yeah, very much going to do a bit of a deep dive on this idea of intervention. We'll also not only break down Tokyo and what's going on in Japan, but we'll dive into the classic historical lesson of the 2015 Swiss franc collapse. And a bit of a spoiler, that was our CEO, Wilder Lucy's greatest ever trading single day hole that he made on that one day, which actually was on his birthday.

4:55Piers Curran: That's right. You were there with him side by side on that fateful day. And I was the voice covering that. So we'll get to that story in a little bit. But perhaps then let's get into this and start with Japan, as you said, which is a topical talking point at the moment. Yeah. So, I mean, look, the yen is really weak. If you don't look at FX markets very much, then maybe you should start a bit broader. If you don't look at FX markets very much, well, then basically the dollar's king. now i'm talking about trading volumes so actually i think i'm right in saying it's still like something like 85 percent of global fx trading volume has the dollar on one side remember when you're doing an fx transaction of course you need two currencies you're swapping one for the other you're selling one currency you're buying the other and the rate you pay for that conversion is obviously what we call the exchange rate okay so we often talk about currencies being expensive or weak but that that's relative to other currencies right so the yen is now very weak and if you don't know what the rate of the yen is well shame on you but it's been banging up against the what we call the 160 handle for the whole year right so that's 160 yen gets you one dollar all right now the yen has been weakening so when that exchange rate goes up that's the yen weakening and the dollar strengthening and that exchange rate has been going up and it's been going up and up and up and if you want to go all the way back it's been going up really since post-covid all right and it's gone actually if you go back to wow if you go back to the end of 2020 20 it was trading at 103 now it's a yeah i briefly got above 160 why we're talking about it today it's had a big move overnight that's the yen strengthening meaning the exchange rate's gone back down okay we're currently trading at 156 but at its worst point you know in this this kind of general trend of yen weakness its worst point last week uh it got to one yeah just over 160 160.37 right so week yen week yen week yen week yen bang big bout of yen strength overnight all right and we've gone down actually we're down at levels it's gone from one yeah as i said 160 down to 156 we're testing a really key technical level now after this overnight strength and that level was the may low for the exchange rate around this sort of 156 50 or sorry 150 yeah 156 50 basically is a key area so it'll be really interesting to see if it breaks that level and allows more yen strength or like every other time this bout of yen strength driven by you know external market forces as in the government stepping in we'll see whether it's temporary and the longer term trend of yen weakness continues so i guess let you know i guess what's important here is we want to talk specifically about the intervention and why and you know is it working but i think before we get into that why is the yen weak and who cares you know what difference does that make to anyone and you know why is this important so why is the yen weak well the yen has been generally so you know the the kind of funding currency in what we call the carry trade okay so there's and this has been going on the Japanese had a financial crisis in the 90s they had their bank they had their great financial crisis in the 1990s before really the rest of the world had theirs in 08 and 09 but Japan's interest rates have been at zero for like 30 years inflation they've had zero inflation so basically their interest rates relative to the rest of the world have generally been very low okay now post covid we've had this inflation explosion and everyone's hiking rates including the japanese but the japanese have been hiking at a slower rate from a much much lower base so what's important is to look at the yield differential right the interest rate differential so right now the bank in japan have interest rates of one percent and they've been hiking and hiking but only got up to 1%, right?

9:31Piers Curran: When you go and look at a two-year treasury yield, that's at 4.3%. So we're looking at the differential between the two. So what traders will do, they will borrow money where it's cheap to borrow. Where is it cheap? Where interest rates are relatively low. So you go and get your yen, you borrow money in yen, you then take that yen, you convert it to another currency and buy a higher yielding asset. For example, let's convert our yen to dollars and let's buy US treasuries where we might yield 4.3 % on a two-year when we're paying 1 % for our loan. I distinctly remember during 2008, there was when all of the public was getting very annoyed with the city for the risks that they had taken on the subprime crisis.

10:20and I remember you know what the traders were like back in the day there was this one guy and he all he traded was Aussie yen right and to make your point I think the gap or the differential at the time was like zero to seven percent or something like that and I remember him I remember him driving around in his uh supercar with the registration plate the Aussie yen which didn't make a lot of people happy at that time for obvious reason it's a name for people

10:53Piers Curran: like him yeah but this is it right it's it's it's this kind of arbitrage it's free it's free money in inverted commas right if you can borrow cheap convert to another currency and buy something that yields a lot higher then it's free money but you know and it's been such a huge trade for the financial industry right it's a really crowded trade one of the big risks down the line in the future is this trade unwinds where everyone suddenly panics and like right let's all get out at the same time because people might start dumping us treasuries converting their dollars back to yen and then paying their yen loan back right and that's going to have all sorts of kind of knock-on chaotic effects right across the kind of global system so that's not happening right this carry trade is very much still on as i've said the yield differential is still large also we we look at something like real yields whereas actually you take the yield of a of a 10-year bond minus the rate of inflation and actually that's your real yield so it's not just what's the differential between the yields like for light you then got to factor in inflation and whilst japan have now got some inflation finally for the first time in like three decades their inflation rates are well so their inflation right now is 1.9 percent versus the us which is 3.4 so not only are the yield differential still quite decent the real yield differential is even bigger because inflation in japan is lower than in the us right so it's still nice this carry trade thing is still there um the problem is you know um if it unwinds right so is it going to unwind we'll see Now, why else is this currency weak?

12:42Piers Curran: So let's talk about the Japanese sort of domestic situation. Now, remember, if your currency is really weak, this is great news for a certain section of your economy. Those companies that export, because they're selling goods in the US, for example, in dollars, they then convert that dollars back to yen and they're basically getting more yen. Their revenue is going up. as the currency weakens. Great for them. The problem is it's bad for everyone else. So it's bad for imports. Your imports get more expensive. The problem Japan have, they have no natural resources when it comes to things like energy.

13:21Piers Curran: They've got to import all their oil. So think about what's gone on with oil prices this year. It's like a double whammy. Oil prices have spiked in dollars whilst the yen's weakening. So for them, the oil price has just gone even more crazy to the upside. It's super expensive. Obviously, that's a real drag on the economy at large, on the government's ability to kind of fund that energy agenda and so on, right? So that's obviously really bad. It's also, it is inflationary. So if your currency weakens, well, then imports get more expensive, which feeds into higher inflation, which feeds into the need for the central bank to potentially hike rates to contain that inflation.

14:03Piers Curran: problem being domestically japan have a ridiculous crazy amount of debt so we're getting into the realms of debt sustainability concerns with japan like we are though with everyone to be fair it's not just japan right we're worried about the u.s debt sustainability we're worried about the uk we're particularly worried about countries like france at the moment with regards to their debt sustainability this is one reason why generally bond yields have been climbing top of all of that we've had a change of leadership in japan and there's a new prime minister and her name is takeuchi and she's come in with a really big bold stimulative spending agenda okay not just spending she also wants to help out on the tax side she's just put through a really big kind of food consumption tax rate cut and they're going to cut the rate of consumption tax on food from eight percent down to one percent because the other big issue fit you know from a government point of view is the cost of living crisis so she's trying to help with that let's cut tax on food but of course that's great on one hand but on the other hand that means less revenue for the government whilst they want to spend a whole ton of more money so they've got to borrow more right so it just feeds into the debt sustainability concerns so you've got all of that going on in japan whilst you've got the big carry trade and the yield differentials kind of still in play can i ask as well that often over the years and i've read press culturally it seems like in the far east there's a lot more uh it's kind of more normalized for retail participation to be quite proactive in the marketplace.

15:42You always see these pictures of Japan and Hong Kong, whereas these grandmas in their retail trading accounts are almost day trading. But presumably, if I'm sat there and looking at a global investment picture, even as a retail punter, and you look at the AI narrative, and that's all concentrated really in the US and the US stock market, despite concerns on AI bubble or the amount of debt and interest rates higher for longer, we're at record highs pretty much. So is there also an FX impact where you've got domestic people looking to buy US-orientated stocks? Exactly.

16:22Piers Curran: Yeah, retail, basically domestic savers in Japan are short their own currency, basically. Retail net purchases of overseas equities, you know, through things like, it doesn't have to be a specific company, just buy an investment trust. And that investment trust is invested in an international kind of portfolio of stocks, right? That's running near a decade high. The value of that retail net purchases of overseas equities is running up at like 9.4 trillion yen at the moment. So, yes, the domestic players are also helping to force this currency lower because they're ultimately selling yen to buy these international stocks, right?

17:04Piers Curran: You can't buy SpaceX shares using yen. That's the thing. Trading internationally, there's always an FX transaction first. To buy SpaceX shares, that's denominated in US dollars. So you've got to take your yen, do a FX conversion, sell yen, driving it down, buy US dollars, driving it up, right? Then you can buy your SpaceX shares. So that's, yeah, a really another key factor in all of this. It's like the perfect storm. all of these very different mechanics are kind of all coming together right now and all forcing the yen lower and it's got to this point of 1.6 which is a really kind of psychological kind of key level and you know it's levels yeah we haven't basically seen for for many many years and that's why the government's worried about it this episode is brought to you by indeed You're ready to level up your business, but the pressure to find the right person to make that happen is intense.

18:07Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a$75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs. so that brings us to the point then of the intervention you mentioned there at the top of the show the japanese authorities spent a record 15.4 trillion yen that equates to around 96.4 billion u.s dollars to to prop up the yen we also saw u.s treasury secretary scott besant took the unprecedented step of joining in um so you know this is quite rare it's the first i think the stat was the first joint u.s japan yen support to support that move since 1998 yeah that's right

19:04Piers Curran: i mean this is how incredibly like all the way through things like the great financial crisis and covid and yeah nothing there was no interventions yeah 1998 was the last the last time um but look what happened overnight again and this is this definitely isn't the first intervention this year right there's been multiple but so they've spent like another another load of trillion yen going into the market and they they have managed to to move the the needle marginally right so it was at 160 it's now at 156 just rounding okay so it's gone 400 pips you know how do you move a market well in the end you know like the kind of market microstructure you know when you step into a market if a big buyer comes into the market well then you actually have a market impact and force the market higher which is what happened right so i should say lower here right because ultimately they're they're kind of selling dollars and buying yen so they're kind of selling on if we talk about the exchange rate 160 they've moved it lower they moved it down to 156 by selling and forcing it down right but this is of course it's an unnatural market participant you know this isn't a market participant that's swapping currency because they operate a business like, I don't know, Sony, that's a Japanese domestic company generating international revenues and changing effects.

20:32Piers Curran: It's not a hedge fund who's making a bet on directionally where this exchange rate is going to go. It's not a constant market participant. This is a very unusual, very temporary, sporadic, it's not one-off because they've done it multiple times but it's not far off a one one time and done and so perhaps this is one of the reasons why these market impacts you know we'll get onto in a bit more detail but perhaps don't work so well yeah the the phrase that comes to mind that i think people always say here is the fs intervention treats the symptom not the cause what is it they mean when they say that phrase yeah well the i I mean, the symptom is, oh, my God, the yen's too weak.

21:18Piers Curran: Quick, let's do something about it. Okay, let's force the FX market and make it change. The disease is all of those economic factors that I've just described, right? It's the yield differential. It's the domestic situation. That's the disease. So that's why the yen has been trending, has had a weakening trend. for six years all of those underlying factors unless you cure the disease well then why wouldn't the yen just continue to weaken you get these temporary banks where this massive giant player the government steps in and tries to make a difference but but then they step straight out again and so what are you going to do if you're a hedge fund yeah i mean i was going to say to that point then do i not just run some sort of mean reversion strategy and intervene and i just go okay great i've just got another entry point to just yeah go long dollar yen again and that's what's been happening so whilst you've got this blip down to 156 if it's going to be a repeat of all the other times we're now going to see it grind back up to 160 and perhaps pick up on that that upward trend that's been ongoing for years and presumably then this is when traders it's almost like a game of poker where one of the things here is that mechanically it makes sense right the government can protect the hold the line but you can only hold the line as long as you've got reserves right yeah and so so the the hedge fund kind of knows that yeah to that point So from a timing perspective, there's only so much the government can do.

23:00And we'll come to the Swiss story in due course, but that was probably the most obvious one.

23:06Piers Curran: Yeah, but it's not just you can do other things, right? It's not just actually directly stepping into the market, having a direct market impact and changing the exchange rate. You can do other things, which is like talk and threaten. and actually this is where Besant because what we've had over we've had the g20 there's been a g20 finance ministers meeting over the last you know earlier this week right so you've got you've had all these hot shots you know Besant and even Walsh right they're there but you know you've got the central bankers and the finance ministers from all over the world from the 20 largest economies i should say are convening and so obviously they're talking and like Besant's obviously talking to the Japanese finance minister and they're trying to figure out what the hell are we going to do here it's not working yet the yen's still weakening it's a big problem so Besant came out and made some comments to try and make a difference and he said and I quote I can't affect the natural equilibrium of the markets he means but what I can do is send a signal and he said I have information that the market doesn't have and it's my and it's my belief and it's my belief the japanese government and the bank of japan will do the things that will lead to a stronger yen that is the most unsophisticated forward guidance i've ever heard in my career in 20 years yeah it's so bad isn't it i mean it's like schoolboy stuff but um but what he's trying to do well i mean this was a couple of days ago that quote and right now we did have intervention overnight all right and we are getting the bank of japan governor ueda he is trying to be more hawkish chances of interest rate hikes in from japan have gone up and actually we're now pricing 50 basis points of hikes between now and the end of the year which is ironically or not ironically uncoincidentally perhaps is now the same amount of hikes that we're expecting from the fed so there's no differential anymore we're not expecting the differential to widen Remember, it's that widening differential that makes the yen weaken more.

25:15Piers Curran: So at least they're trying to say, well, at least it's not going to widen. I mean, they'd have to do a lot more hiking in Japan to make it narrow. But you can kind of see what they're trying to do. Yeah, I actually don't think Bessett is so silly here. I think he's not speaking to the market at all. I think he's just speaking directly to the Bank of Japan's governor. Yeah. So I think he's just basically bullying them. It's true. if he's saying it out loud they've kind of got to do it otherwise the markets will punish them and that's just the the seat that the u.s have which is the power of influence as you said is the the dominant parent it's so interesting about in the u.s you know besant and walsh are both ex-hedge fund traders and together trading together so you got these two ex-Helschland traders now in the two top seats in the US so it's just kind of interesting to see but yeah Besant obviously showing his market knowledge and how it all works I would say but yeah we're coming up I guess there's one thing to say and why this might get more topical we've got a little bit of a holiday approaching in Japan actually can you tell me what week that is but they call it the silver week holidays in japan when you get a national holiday one thing means that you know trading floors empty out which just means market participants kind of go away on holiday it means then we get thinner order books there's less volume on the order books of markets which means it's more illiquid and more volatile so this is where markets can be quite vulnerable to sudden big giant swings um funny funny you say that because so just as dates that's happening uh 19th of september to the 23rd is the five full five day silver week in japan that's happening i remember when i used to run my old desk doing the market surveillance and obviously as you know being the head of the desk i'd have some time off over Christmas and New Year's.

27:26It'd be one of the only slots. And the reason why was because it would be deathly quiet. Nothing would happen at all in that period. But the one thing that was always a tail risk that could just flip the whole thing on its head was actually Japan used to intervene. Historically, there'd be a pattern during the downtime. I'm assuming the strategy there on their side is, well, look, if it's thin illiquid market and we go in with some huge firepower, instead of moving it, as you said, in dollar yen from 160 to 156, perhaps we can bump it down to 150.

28:01Piers Curran: Exactly. And just get more bang for your buck because of the market conditions. That's right. So if you're in the know as a trader, then you're thinking about that week that's coming in like two weeks time. And there's a real genuine sort of timing risk that you may well get more intervention from the Japanese. So yeah, do you want to buy this dip that's happened overnight? maybe but yeah you just got to think about that holiday week that's approaching and be careful so let's talk a little bit about the the swiss situation so let me take you back a few few years now this was january 15th of 2015 the swiss national bank event perhaps you could give some context when you were trading in and around that time period of what was going on more broadly in the european sort of debt scene at that time is to position why they were doing what they were doing so the eurozone debt crisis kicked off in 2010 it was a kind of kind of the the side effect or the one of the impacts of the financial crisis so we have the eurozone debt crisis grease defaulting and all the rest of it right that spilled into 2011 2012 right so europe the eurozone banking system was really vulnerable the eurozone economy was under a lot of negative pressure switzerland isn't in the eurozone for those who aren't aware of their european geography in fact it's not even in the eu right however it's surrounded by it's basically landlocked by the eurozone okay so geographically even though it's not in that you know economic club it's entirely surrounded by it so from an export point of view they're hugely dependent on exports going, you know, across their borders to countries that, you know, are immediately surrounding them.

29:49Piers Curran: That's the kind of backdrop. So the Swiss economy was doing way, way, way, way much, you know, better than the Eurozone at that point because of this Eurozone banking crisis, okay? As we went along 2014, you know, the euro was weakening and weakening and weakening against the Swiss franc, okay? So this just was really hurting Swiss exports. Because if you're exporting, if you're a Swiss company, you're selling stuff in France, in euros, but the euro is weakening. Well, then that directly impacts your revenue. When you convert it back to Swiss francs, you're getting less, right? So it was really, really causing a lot of problems.

30:29Piers Curran: And it actually got to the point where you started to get Swiss people, and I knew some, like living in Geneva. They would go and do their weekly grocery shop across the border in France because it's like a 40-minute drive. i'll go to france i'll do my weekly shop in euros and i'll come back it got so extreme that it was impacting internal consumption never mind bad news for exporters right so the swiss stepped in and said enough we can't have this anymore we're going to peg the euro swiss franc at 1.2 okay and actually their comment at the time was we will use unlimited amounts of money to make that happen so you think about that unlimited and back to your point earlier you know what do you do as a trader here can they hold that can they permanently intervene like this how much money have they got well of course in theory a central bank has unlimited amounts of money they can just print new money right in theory obviously in the end that's not sustainable because print too much and you get stuff crazy stuff like hyperinflation go and ask the germans um in the high mark republic in the 1920s for example but this is this is what they did right 1.2 and for a time it worked and actually that time being i was looking at a longer term chart this morning this was basically from kind of 2011 through till the fateful day at the start of 2015 it worked it worked for about three years and they didn't spend too much money on that to start with and i'm just the threat was strong enough that traders believed it and the threat not only was strong enough it had validity because i was just looking up i remember the famous phrase from mario draghi whatever it takes right that was the tipping point that saved the eurozone debt crisis because it was the belief that the bazooka as it was called at the time yeah that the central bank in europe would buy unlimited again that word sovereign bonds to bail out whomever basically it's too big to fail we'll do whatever it takes and then that was the tipping point wasn't it at the time and that was in summer of 2012 2012 yeah august 2012 absolutely i'll do whatever it takes so look it worked for a few years the problem was that the it was the symptom they were solving the disease was ongoing and the disease being that eurozone debt crisis the economic problems and actually it's all fed through to deflation inflation dropped negative in the eurozone as we went back in the 2014 okay deflation means like that's even more weakening for your economy your currency so it just piled more and more pressure on euro weakness to the point where traders started to think there's no way the swiss can hold this line and they took it to 1.2 and they were trying to get it below 1.2 and the swiss were having to step in with money and try and prop it up and the like final quarter of 2024 they threw the kitchen sink at this the swiss national bank they bought hundreds of billions of euros their reserves blew past 85 percent of swiss gdp and they were trying to stop the juggernaut, which is market forces saying this can't work.

34:02Piers Curran: Deflation, Eurozone's in crisis, it may collapse. And they reached their breaking point and they said, okay, we've tried. We cannot prop this up anymore. It's too expensive. I think if you can think of it as a price pattern, like think of almost like a flag, if you like. and it's like the interventions even though they're of the same magnitude in nominal terms the bounce gets smaller and smaller it gets reversed faster and faster and it gets more narrower it's like tapping on some ice and every tap the floor gets a little weaker until that moment arrives and that yeah yeah and the moment was uh will de lucy's birthday he won't mind me revealing january the 15th uh 2015 10 30 a.m to be exact and the swiss national bank abruptly announced we're pulling our floor we are no longer going to be trying to prop this currency exchange rate at 1.2 we're out what happened absolute carnage and the exchange rate dropped from 1.2 to 0.85 in seconds and the liquidity in the market that means all the orders just vanished suddenly the market wasn't there this thing just i cannot describe it's impossible to describe in words the magnitude of this move in in such a short time frame to the point where the market closed because you have these mechanisms in markets where you have limits to try and control the chaos and liquidity and if your limit down and it depends on the market as to what the percentage change might be so it could be like 10 if the market drops 10 or goes up 10 in a short time frame within an intraday period they close it just in case the whole thing breaks and they say all right everyone calm down we're closing it you can't trade now well will shorted this currency off the news shorted it like i think he got in it i think i remember the entry price was like 1.185 or something so it was falling but he he got it then the market closed and then the problem with that is where's it going to open right so i remember at the time because i was on the other side of this on the desk trying to cover it in real time and you were getting noises that yeah it's down at 0.85 yeah that's right so so this is it right he was locked out of the market he couldn't trade and so then you're vulnerable where does it open what happens if it opens back above 1.2 i'm going to lose a fortune so he was like really panicked for a bit for these few minutes while the markets closed but as you said we were getting news basically through you getting through the back channels to say actually this thing's gonna this thing's gonna open way way way down so he was quietly confident this was going to be a phenomenal trade but just a slight kind of doubt and risk this thing could snap back and it might come back in my face but yeah it opened at 0.85 and um happy birthday uh yeah his single best trade of his career and at that point i remember alpari not many people remember that name but alpari was like the ig markets or the cmc markets of the retail trading world and i remember alpari very clearly because they went out of business yeah on that one single moment and they still owe me 30 000 pounds what very much serious never paid their bill because they used to they used to subscribe to our our desk to have they went bankrupt right yeah so you had to go bankrupt all the credit to explain well they were i mean that because i mean they're brokers right and they were broking loads and loads of different markets by the way like 100 i don't know how many markets they were brokering hundreds and yet it was a move in one singular market that actually meant they went bankrupt because they had exposure they had basically long you know swiss franc euro exposure and then the markets closed and then when it reopened they were so far offside they couldn't afford to pay the losses so they went bankrupt so then people like you where you're a business supplying them a service like any business going bankrupt you know they're going to chapter 11 if you like then you sit in the queue with all the all the other kind of people that erode money and there's basically a hierarchy as to who gets paid out first and it can take years and years and years and i guess here we are 11 years later and you still haven't got any money so you can probably kiss that 30 grand goodbye i'm afraid but yeah this is it There are casualties because if there are players in the market that aren't risk managing effectively enough to avoid getting annihilated in a black swan, you know, what do you want to call it?

39:16Piers Curran: One in a million event, you know, whilst it's almost certainly never going to happen, when it does, you're dead. Well, you say you're dead. Not unless your name is Cashier Hildebrand and you're the wife of the Swiss National Bank chief and you're a former hedge fund trader. Yeah, it's a bit like Besant. What did he say? He said, I have information that the market doesn't have. Exactly. i need to track veston's wife's trading account and i say this why people for people who didn't know there was a big investigation at the time because the swiss national bank chief's wife apparently bought over 500 000 us dollars using family funds and this was all in and around when all of this was happening so lots obviously lots of cries of insider dealing and actually hildebrand who was the SMB chief stepped down, denied any wrongdoing.

40:29So, yeah. It's shocking.

40:31Piers Curran: It's absolutely shocking, you know, what happened. And the fact they didn't get done for it, they really should have gone to jail for that, I would say. But him stepping down was the kind of deal that got done behind closed doors and they tried to sweep it. I think she made 500 million, was it, off that trade. and she built this big position in the three-week run-up to the Swiss National Bank announcing they're removing the floor. So obviously, you know, when they're back at home over dinner, discussions were happening. I think the actual what happened here was actually this... So yeah, she made, I think it was...

41:13Or the transaction was half a million US dollars, but it was... Okay, the transaction was all right.

41:18Piers Curran: She didn't make that. it was uh actually the two events were independent the so the the floor was what 2015 the insider dealing that was happened in 2011 apparently oh well that was on the way up that's when the floor got put in place yes yes right that's when they put the floor in place for the first time come on do what you don't you don't keep a trade log of your insider dealing come on Piers I expected more of you than this never keep a paper trail Piers shocking but look I think it's the best example of you know what we're talking about here can intervention from a government or a central bank can it work the answer is yes for a time but it's all back to that point you can treat the symptom but unless you cure the disease it's not going to work and And right now, I was just checking, Swiss, I haven't looked at this exchange rate for many years.

42:16Piers Curran: It was the one to be watching, but I haven't looked at it for years and years. It's now trading at 0.94. And it's been, yeah, it's been below that 1.2 peg ever since they removed it 11 years ago. So let's bring it on home to close and talk about the fixed income market, because that's the one that's dominating a lot of the news this week, which is about the yield levels and US treasuries. So long dated US Treasury yields. So 30 years hovering near the 5.25, 5.3%, the 10 year 4.8. What happened then? So what's happened with Besson? We said that there's two sides of his attack here. One's on the FX with the kind of forcing nature of his commentary to Japan.

43:03What's happening in the bond market that he's trying to engineer?

43:06Piers Curran: Well, so again, quickly the backdrop. remember these bond yields and certainly long duration bond yields really dictate the cost of borrowing for the whole system talking about corporations that are issuing corporate bonds and borrowing money i'm talking about the government issuing bonds and borrowing money i'm talking about consumers um you know with regards to mortgage costs and that kind of thing right yields are climbing and climbing and climbing and it's all around this inflation and interest rate hiking cycle post-COVID and now interest rates are relatively very high compared to what we've been used to for the last 20 years and now we're worried about debt sustainability especially at the government level because the government has to carry on borrowing and as yields have climbed the cost of borrowing is going up and up and up and it's getting ever more expensive to service the interest costs on this debt mountain that they've got and so generally we're worried about debt sustainability if credit worthiness risk you know deteriorates then yields climb and climb and that's what's happening okay now why is it important right now it's because the u.s happened to have 10 trillion dollars worth of debt that they've got to roll over in the next 12 months and right now their average debt cost if you look across their all that the the whole$40 trillion debt book, their average cost is 3.5%.

44:37But if they're rolling it now,

44:40Piers Curran: they're going to be paying five. If they're doing 30-year bonds, they're now paying 5.3%. So their interest costs are going to jump on 10 trillion, right? This is why it's key. So Besant is trying to get these yields back down. And he's trying everything he can so that the government can roll this debt at a cheaper interest rate. And so what's happening is, you know, the Treasury Secretary then, he executed a surprise move to at least double the size of Treasury buybacks. So this is the Treasury directly intervening in the bond market by buying back bonds. If you buy back bonds, how's that impacting things?

45:22Well, you're driving up price, that market impact thing.

45:26Piers Curran: If you're a big buyer that steps in, you drive up price and yield is inverse to price. So if you drive up the price, you're driving down the yield. So they're trying to directly intervene to ultimately make it cheaper for the government to borrow. And there's normally something called quarterly refunding. And quarterly refunding for a bond market trader is just keeping tabs on what are these known schedules. So you have a fixed expectation of what's the current rate. And so when he comes in and does something surprising like this, you can judge then as to what magnitude it's over and above what's priced in as to the underlying market impact it should equate to.

46:08Is that the way to look at it?

46:10Piers Curran: Yeah, absolutely. And like you look at, I'm just looking at, like if you look at things like the, well, let's look at the 30-year yield now. So I'm just getting a chart. So it's a 5.26%, right? And again, it's a bit like the yen story in that these yields have been trending higher for a long time, ever since COVID because of the rate hiking cycle and inflation and so on. But these yields are the highest we've seen for decades now. So 5.2%. There was a big level in 2023, just above 5%. We've broken it. So it's the most expensive for them to borrow in decades. And whilst, yes, he's intervened, it's tiny amounts.

46:50Piers Curran: you know that's the problem with u.s treasury market um it's it's the biggest market on the planet really so to try and impact it you'd have a lot of firepower and whilst he's been trying you know same stuff it just kind of keeps snapping back so you're not you're not curing the disease so some of the hedge funds have called this a bluff that backfired is the market more at risk now in the modern age from say i don't know 50 years ago not just because the debt profile has changed on a global level but because of the market participants like hedge funds are just so more prominent than they were yeah both of those are absolutely true and i think so look there's a you know it's not i don't think so basically wash remember wash and Besant are our buddies, hedge fund traders, right?

47:46Piers Curran: I don't think it's a coincidence that at Jackson Hole last week, Walsh actually came out pretty hawkishly, okay? Why would he do that? Well, one of the reasons at the long end of the curve why yields are high is it's not just about debt sustainability. It's a worry that inflation, which has been above the Fed's target for like four years and is creeping up again, they're worried that the Fed aren't going to do enough to contain it and we're going to be back on a real inflation problem. If inflation climbs, long duration bond yields go up. So one of the trends on that long end of the curve is a worry the Fed aren't going to do enough and inflation is going to get out of control.

48:29Piers Curran: So Walsh was quite hawkish trying to say, we've got this, yes, inflation is too high and we're going to do something about it. so trying to ease concerns and they're trying to then allay those concerns and try and force those long duration bond yields to go back down is part of the problem the fact that normally when yields get to these types of levels something breaks namely let's say equities drop aggressively and the whole thing kind of hits the reset button however at the moment i mean i was just reading about the profile and how it's changed over the last 50 years with the you know you think of a 30-year mortgage in the u.s so unlike in the 1980s where when adjustable rates dominated most u.s homeowners locked in 30-year mortgage rates at 2.5 to 3.5 percent in 2020-21 i was one of those right i'm one of those where my five-year resets in may and i locked in the very first bank of rate hike that happened post-COVID so whilst my neighbor is paying same might have the same level of debt they're playing like 4x what I'm paying on a monthly mortgage payment even with that though equities keep remaining up is that part of the problem here because then you have this orderly move higher rather than this uh more disruptive move and that keeps the the longer for higher kind of fear alive if you like i'd say there's two big forces that are preventing the collapse that are preventing a cost of borrowing collapse of the whole system two things one's exactly what you've said and actually those 30-year mortgages in the us they lock in rates for 30 years it's one of the problems with the uk one of the problems in the uk you get these fixed rate mortgages but the lenders will only allow it for two years three years five years i don't think i've seen anything that's longer than five years maybe there is and i haven't been looking but as you said eventually you're going to have to start paying up because once your fixed rate which might have been low based on rates in the past comes to an end well then fine you've got to start coughing up a much higher interest rate in the u.s and certainly in the housing market they're protected that's why the housing market is dead in the u.s no one's moving because it's only when you move house do you then have to remortgage you would never do that you're never going to give up your super low interest rate mortgage um to move house so the the housing market is kind of dead right so that's one thing and also corporate debt a lot of corporate debt is also fixed rate okay so that that is protecting the other thing well it's economic growth it's the ai boom baby and how do you ultimately how do you solve a debt crisis grow out of it and so whilst you've got this ai boom thing going on and you got a load of people on fixed rate mortgages from years back it's kind of protecting the system from this yield spike and surge that ultimately but the government is the one that's most vulnerable because they're they're rolling their debt all the time and this is why the next 12 months is particularly important for the u.s because you've got this 10 trillion dollar backlog that they've got a role and so i think as we go through the next 12 months i'm not saying this is going to happen tomorrow or next month but if we're here in 12 months time and inflation is still three four percent and interest rates have had to be hiked by one percent or more then you know this is going to be a different conversation and i guess when everything's hinged on the ai build out or productivity boom occurring but the cost of borrowing that's fueling exactly the growth of that starts to increase then the wheels come off yeah and so last point about the economy you've heard this thing about a k-shaped economy which is like talking about basically the economy has been propped up by the the more wealthy portion of society who are being less impacted by the inflation crisis okay they've just got more surplus income to pay up when food prices have gone up so much of course the lower income category have been really really suffering but of course the longer this goes on the the bigger impact that lower income portion has but also you're getting people other like the middle income bracket get pulled in you know you can only pay higher food prices for so long without wage growth and what's happening in the u.s the kind of red flag in the labor market is wage growth is dropping it's been really solid and powerful it's now starting to decline and so that's another thing to monitor in the months to come does the u.s wage growth number continue to decline whilst inflation stays high.

53:38Piers Curran: And that's where you start to see the middle income bracket start to get pulled into this problem. And then in the end, it doesn't really matter what's happening with AI. In the end, if the consumer is on their knees, well, then that's when you're going to get a recession. And the whole thing starts to unwind. Gosh, you've come back from holiday and you are absolute misery. I mean, what is that about? you need to go on holiday earlier in the year when the sun's coming out and it's a bit more fresh out there i'll give you something positive to end on snowflakes shares what's the time now it's like 11 20 they're going to open about 25 percent higher when the new york stock exchange opens in three hours time snowflake have just guided to the just up to massively increase their forward-looking revenue targets um so the ai boom like we had video numbers like last week that was super strong and like whoa amazing so the ai boom is still doing the lifting and it's it's still there so i'm gonna that's one thing you know it's uh it's too big i don't know what i'm gonna use too big to fail or should i just say whatever it takes to make ai there's too many parties invested in this trade now yeah it's got to work really is the government's included literally with the american stargate build out everything in between yeah better work all right well to conclude then so interventions was the main theme intervention buys time but not solutions so whether it's japan spending close to 100 billion dollars of yen or u.s treasury buying back long-dated bonds.

55:19It only works long-term if the underlying fundamentals, i.e. monetary policy, fiscal deficits, all align. Number two, looking forward then, September features both the FMC, the BOJ policy meetings. If the BOJ doesn't deliver a hawkish hike or the Fed stays hawkish, this is obviously going to get interesting in the coming weeks. Throw in that Japanese holiday, the silver week that we mentioned, that's going to sap some liquidity and perhaps make moves more pronounced. So it could even get more interesting in the weeks to come. And then, yeah, keeping an eye on that 30-year US Treasury yield and that 160 level as those red lines in the sand, so to speak, which is going to be interesting.

56:04All right, well, look, lots covered there. So appreciate, might be quite heavy going for anyone. If there's anything that you want to leave a question at all to clarify or you have an opinion or thoughts, maybe something more half glass full than Piers, then do let us know. But otherwise, yeah, we'll see you for the next episode. Thanks, Piers. Brussels clean up nicely at Sweetgreen. Maple glazed, roasted, and edges perfectly caramelized. Sweetgreen's fall harvest is back on the menu and the season's most overlooked little green vegetable is dressed to be devoured. You know what to do. Order on the Sweetgreen app.

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