Zoltan Pozsar on His Next Big Move and the Coming Monetary Divorce

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1:15Hello and welcome to another episode of the All Thoughts Podcast. I'm Traci Alloway. And I'm Joe Weisenthal. Joe, do you remember what we were doing this time last year? No. Yeah, I can barely remember two weeks ago. Yeah, no. But I actually, I remember this one mostly because I looked it up right before we started doing this recording. But this time last year, we were preparing, organizing our first live All Thoughts debate between Zoltan Pozar and Perry Merrily. That was really fun. We got to do that again. Yeah. More debates. So we were sort of frantically doing a lot of the sort of travel arrangements and things like that for that.

1:57Sorry, waking up early in the morning, like of the day of the debate, entering names into a database so that people could get into the Bloomberg office. Yeah. Do you remember that? Yes, I do. That was fun. All right. But my point is, it's been a while since we've spoken to Zoltan Pozar. It has been a while. And it's unfortunate because he is one of our most requested guests. People would listen to him every month if we interviewed him. I agree. In fact, I think we should do monthly or even quarterly interviews with Zoltan. But I am very happy to say, without further ado, that Zoltan is, he's back.

2:34He's back. And so, right. So he was at Credit Suisse. He left Credit Suisse. He's been kind of silent. There has been this incredible mystery about what he's going to do next. And we don't know, but he's coming on the Odd Lots podcast. So let's find out. He's going to tell us now. Zoltan, welcome back to the show. We're so glad to have you back on. This is like when LeBron James announced on ESPN all those years ago what he was going to do next. Very nice to be back. Thanks for having me, guys. All right. So what are you doing? Let's just jump right into it. Yeah, you were a strategist at Credit Suisse, as everyone knows at this point.

3:10And now what are you up to? Well, the next steps is I have founded my own macroeconomic consultancy. The name of the firm is Ex Uno Pluris, and I will be providing research to institutional investors and consult institutional investors about plumbing, as I always have. Okay, many questions. Well, let's just start simple. What does Ex Uno Pluris mean? Ex Uno Pluris is the opposite of a pluribus unum, which is this little motto that we can find on a great seal of the United States and on the dollar bill. it means in english out of one many it's meant to capture two ideas the first idea is you know my retrospective on what i've been doing for a strategist for a decade is basically anticipating moments when prices fall apart in funding and rates markets so the basic idea is that most of the time things trade on top of each other you know the industry structure is is orderly And then when something bad happens, whether it's panic or a pandemic or a balance sheet constraint or liquidity constraint, prices fall apart.

4:20So out of one price, you are dealing with many prices. And so that's basically the bread and butter of what a rate strategist and a rate trader is doing, anticipating those moments and being on the right side of those moments. And then the other idea is that, you know, global macro as such, I think it grew up as a concept and an asset class, if you will, in a unipolar moment where globalization was moving forward. The dollar was the undisputed global hegemonic currency. And so we were all kind of creating the global dollar cycle. And going forward, as we discussed in the context of Bretton Woods III, that's no longer going to be the case.

5:03So it's kind of capturing the zeitgeist in that, you know, China is trying to extract itself from the Western financial system, much like the Western real economy is trying to extract itself out of supply chains that are running through China. And so we are, I think, at the beginning of this era, the next five to 10 years at least, where we are going to go through this monetary divorce. And, you know, the dollar's hegemony is going to be challenged by some geofinancial moves that China is plotting. So out of one dominant reserve currency, we will have a world where we will have money. That's a great name.

5:43So, you know, you mentioned moments in macro. And I think last year when you released that Bretton Woods 3 thesis that you talked about on the show and wrote a number of research notes about, it definitely demarcated a thing that seemed to be, you know, floating out there in people's minds, this idea that maybe finally some things were changing around dollar hegemony, as you just mentioned. Talk to us about that original thesis a little bit more and whether or not you think it's been borne out over the course of the last, I guess, 12 to 15 months or so. I think the concept is very healthy and it's alive.

6:27I personally see more and more signs that some of these themes that we have discussed on that first show when we talked about Bretton Woods 3 are coming to fruition. And also the conversation with Perry, I think we did a quick temperature check on the idea. And the conclusion I had there was that, you know, Bretton Woods 3 is a healthy baby boy, so to speak. So it's growing and developing rapidly. Look, a couple of things. To frame my answer to that question is, I think it's becoming very obvious that when you talk to policy circles and investors in the West, I think the primary focus is on how do we, so to speak, de-risk supply chains that are running through China.

7:11How do we become more self-sufficient in terms of rare earth or the capital goods we need for energy transition, chips, and so on and so forth. And so the focus in the West is on making sure that the real economy is decoupled from the East, so to speak. And when you speak to market participants and policymakers in the East, the primary focus there, because they have all the supply chains and so they are in control of that part of the equation there, the primary focus is on how do you extract yourself from the Western financial system and how do you de-risk this relationship that you have financially with the U.S.

7:49dollar and Western financial institutions and financial centers in general. And I would say that since we last spoke about this topic, there have been a number of news headlines, readouts from state visits, what have you, where things like the Renminbi invoicing of commodities is moving ahead. We are reading about more and more stories where natural gas deals and oil deals are invoiced in Renminbi and not the US dollar. I have not talked about this aspect of Bretton Woods 3, but I kind of uncovered the new aspect of it, which is the whole central bank digital currency topic and how all that fits into Bretton Woods 3.

8:30And, you know, when you start digging in that domain, I think you uncover several things that are kind of eye-opening. So let me just offer one, for example, the real economy and real economy analog again is, you know, in the US, for example, we don't allow Huawei to build cell phone towers for obvious reasons. You know, there is a risk of eavesdropping and spionage. And, you know, central bank digital currencies are basically the same story. I have been kind of cursorily following CBDCs, but I couldn't really fit into an overall macro picture as to what are CBDCs about. But, you know, if you think about it, China has been quite busy trying to internationalize the rent and use it more for trade settlement purposes since the middle of the last decades of rent.

9:172015 is when they started. And then that process somehow stalled. And I think the reason why the process stalled is that they recognize that it's pointless to internationalize your currency through a Western financial system, through London, through New York and through the balance sheets of Western financial institutions. when you basically do not control that network of institutions that your currency is running through. For you to do something like that, you basically nailed out a whole new correspondent banking system. And so this is also the time when Russia annexed Ukraine's financial sanctions became a much more dominant topic in the financial press.

9:56So I think that was a wake-up call for China, that if they want to indeed internationalize rent fee, They need to start from scratch and they need to build a de novo financial network that they control. And so this is also the time when CBDC has become a hot topic. You know, CBDC started in China, you know, the ECNY. And the way I think about CBDCs and developments in that space today is that you basically need to imagine a world where five, 10 years from now, we are going to have a renminbi that's far more internationally used than today. that the settlement of international RMB transactions are going to happen on the balance sheets of central banks.

10:37So instead of having a network of correspondent banks, we should be thinking about a network of correspondent central banks and a world where you have a number of different countries and each of those different countries have their banking systems using the local currency. But when country A wants to trade with country B, you know, Thailand with China, for example, the FX needs of those two local banking systems are going to be met by dealings between two central banks. And so when you reimagine a system like this, it's basically a state-to-state and a central bank-to-central bank network that is completely independent of Western financial centers and the dollars.

11:19So there's a ton of development. We can develop some time later on the show to talk about this. So there's a ton of development on that front. And also the context here is that if you want to imagine an alternative to a dollar-based system, the single most important thing that makes the dollar so important is that 90 % of FX transactions any given day in the world use the US dollar as one leg of the transaction. okay so basically that's because we inherited the system where if you want to sell you know if you want to settle a transaction between someone in hungary and thailand okay the way you will do that today is you would sell your hungarian foreign buy euros sell the euro and buy the dollar and sell the u.s dollar and buy bought so that's basically three different currency pairs three market makers three bid ask spreads incredibly inefficient but again if you go back to this concept of correspondent central banks as opposed to correspondent banks this transaction just can settle between the local nigerian banking system and a local thai banking system we produce central banks as dealers of last resort in the fx markets and so that that's the last you know piece I want to mention in this part, which is that, you know, in the West, we are talking about this dealer of last resort thing a lot.

12:40And the context in which we talk about dealer of last resort in the West and in the US case in specific is that we need a dealer of last resort for the treasury market because the treasury market is not liquid. That's where the focus is. And of course, we need the dealer of last resort in the repo market and the FX pop market. But I think it's also time to start thinking about dealers of first resorts in terms of FX market making for the global east and south, which is the central bank insurance, central bank correspondent system that I'm describing.

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14:07Support for the show comes from Public. On Public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and now generated assets, which allow you to turn any idea into an investable index with AI. It all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20 % year over year. You can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one-of-a-kind index, and lets you backtest it against the S &P 500. Then you can invest in a few clicks. Generated assets are completely customizable and based on your thesis, not someone else's.

14:47Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by public investing. Brokered services by open to the public investing Inc. Member FINRA and SIPC. Advisory services by public advisors, LLC. SEC registered advisor. Generated assets is an interactive analysis tool. Output is for informational purposes only and is not an investment recommendation or advice. Complete disclosures available at public.com slash disclosures. This is so interesting because I don't think I'd ever heard anyone talk about CBDCs within the context of like a new kind of plumbing.

15:27And you hear stuff about, okay, well, you know, it's the 21st century and we need to be able to pay for stuff on our phones, which we already can do. Or sometimes you hear about it in the context of privacy. I've always had this theory that CBDCs are just a way for central bankers to get invited to panels and get really plush jobs after they leave the central banking world, like doing digital money for Visa or something like that. So, but this is like actually sort of like an interesting theory before we go a little bit further down this road, because I want to talk more about it, but I'm still curious about the business.

15:59You know, you're going to be going out to, you know, be independent. What is your sort of vision for ex unoploris, which is, again, I think is a really clever name, the opposite of e pluribus unum. What is your vision for like, what kind of business who it'll be? Is it going to be who are your clients? Talk to us a little bit about what your vision for your firm is. Well, thanks for coming back to that. I mean, look. I figure if you're going to announce the decision, the big decision here on OddLots, happy to like. I'm actually also just, I'm very curious about how this world works. Okay, so look, I will offer two streams of publications in terms of research.

16:35The first one will be Money, Banks, and Bases. This will be the publication that most people kind of, you know identify me with so i will be looking at the 50 largest balance sheets in the world with a lot of attention you know what the big banks are up to what the gsips are up to what are they doing in their portfolios where the balance sheet constraints and it's going to be basically a research piece about the day-to-day working of the dollar system as we know it today and then the parallel publication will be money and world order which is going to keep track of how Bretton Woods 3 is evolving because, you know, these topics of de-dollarization, the re-monetization of gold, you know, using central bank digital currencies to build out, to knit out, you know, the novo financial system, you know, the petro-yuan and the rent-invoicing of commodities and traded goods going forward.

17:29I think these are basically the two lenses through which one should be following dollar funding and dollar rates markets going forward because you know the day-to-day we just have to live with but then we absolutely cannot lift our eyes off all the geopolitical realities and challenges that the dollar will be facing so these will be the two publications that subscribers will get as i said you know it's a it's a high price tag so you know target audience is institutional investors exclusively and that and not retail investors And so I will be completely behind the paywall and subscribers will be able to chat with me and have conference calls and meetings.

18:09And that's basically the simple vision. I was actually going to circle back to that towards the end. Oh, sorry. But since you gazumped me, let me ask a question that sort of squares these two thoughts, like the new business and the Bretton Woods 3 vision. So one of the criticisms that we sometimes hear about, you know, big, bold predictions about changes in the overall financial system is that it's hard to actually invest money based on them. So I guess the question is, you know, if someone hears Bretton Woods, three new central bank digital currencies, forex lenders of first resort, things like that, what's actionable about those ideas?

18:55What does it actually mean for investors? I think it means a lot. So number one, I think if you are looking at a whole new plumbing where, let's back off, for example, I mean, we are used to thinking about a world where there is either a dollar shortage in some regions or dollar surplus in other regions. and then these surfaces get recycled either in the fx swap market or in the rates market and you know i think if we end up in a world where countries are now going to have several options for example as to how they pay for commodities i mean let's take oil for an example you know people hold dollars many reasons one one reason why people hold dollars is because oil has been historically priced in dollars so if you are a poor country that needs to import oil on the margin you need to have dollars to be able to do that now if you are going to live in a world where you can pay dollars for oil but you can also pay renminbi for oil but if you are a gold miner you can also pay for oil with gold like Ghana for example you know that's basically three options you're looking on at a screen and so you will just choose whichever one is is cheaper and that picture gets you know further complicated by the fact that there is oil flowing west which is one price and oil flowing east which is another price so it's not just again out of one many it's not just one price anymore but it's a bunch of prices and a bunch of currencies and choose whichever works best for you.

20:38And also, if you go into a world where trade is not dominantly invoiced in dollars, so people don't have to borrow dollars to import stuff and the exporters don't earn dollars exclusively, then it's no longer a machinery where the dollars are getting created on the margin, the dollars are getting accumulated on the margin. And the question is, how do you recycle the earned dollars back into funding and rates markets? So if that world splits into, you know we are now doing half of this in renminbi and the other half we are doing it in dollars then naturally for example the fx swap market the landscape of the fx swap market is going to get redrawn the following way there will be regions that used to be short dollars but not they are not because they can you know source renminbi through the renminbi swap lines from the pboc so dollar shortages in certain regions are going to disappear then there will be regions that used to recycle dollar surpluses into the FX swap market, you know, maybe the Reserve Bank of Australia putting in FX swap market and then, you know, some Japanese investor picking those dollars up in the FX swap market to hedge their treasury portfolios, what have you.

21:50You know, if Australia ends up, you know, earning only half as much dollars than as they used to in the past, and the other half is now in Renminbi, then the dollar recycling is going to suffer as well. So, So, you know, the supply of dollars in FX swap markets and the demand for dollars in the FX swap market is going to get redrawn. And I think there will be some regions that are going to turn that are going to be turned on their head. You know, so there will be positive cross currency bases that will turn negative and there will be negative cross currency bases that will turn positive. So it's just one example, for example, in terms of FX swaps.

22:24And then in terms of, you know, the rest of the world's demand for treasuries, which is a big question. Again, dollars you historically need because you need to import a bunch of things which have been exclusively invoiced in dollars. But if you have a world where things are being invoiced half in dollars and half in rent fee, you know, that need to accumulate dollar reserves doesn't exist there. China, I think, is a very important example in this regard because one reason why China has so many FX reserves is because that's kind of like your life insurance policy. because all the commodities and foodstuffs that they need to import, I mean, I think the big five commodities that they import is natural gas, oil, soybeans, copper, goodness, what else?

23:06But the annual bill for those imports is running at 500 billion. So if you don't have the dollars to pay for those, you're toast. So you have to have a lot of dollar reserves. But if you end up in a world where you can now force commodity exporters to accept your currency for those commodity imports and not the US dollar. You basically have gained sovereignty from a monetary perspective. And so, again, you will not have to run with as much FX reserves. And so, you know, this is going to have feedback effect on, you know, demand for treasuries in general and on the margin. You know, things are always in the margin.

23:43So I think if these themes are going to play out over the next five to 10 years on the margin, you know, demand for treasuries and the recycling of dollars in the front and the back end of rates markets, I think is going to get pushed around. Would you anticipate and, you know, or do you have some timing? Like we talked about this on a recent episode with Karthik Sankaran, but that we'll see, you know, there are a lot of countries around the world that float dollar bonds for one reason or another. Do you anticipate that we'll see if Renminbi internationalization continues, that we will see various EMs float more renminbi bonds or would that be a crucial aspect towards a successful internationalization of RMB?

24:28I think it can be a part of RMB internationalization I mean you know it's just a way of kind of raising offshore RMB that's out there and you can either tap swap lines with the PBOC you know that's a very important aspect of it I mean PBOC has swap lines with way more countries than the u.s has swap lines with for example so there is you know when you kind of look at the topography of that eboc spotline network and when you look at the topography of the central banks that are actively planning to have a cbdc or they actually have a cbdc pilot up and running already i mean there's a perfect overlap you know so if you think about the apex swaps as the funding angle to the rent fee that you don't have in the system yet And then if you look at the CBDC as the kind of swapping and clearing of existing local currencies in the system, I mean, you basically have a spot FX market and a funding market infrastructure around it.

25:21So, you know, you can internationalize around MinBee that way. You can internationalize it by, you know, EF countries raising RMB funds to raise term RMB liquidity. But again, I think the most important thing here is that we are starting to see evidence that more and more commodity trades are being settled in Renminbi. And also, over the past year, the Renminbi's share of trade finance has increased tremendously. I think it has increased from barely 1 % to 5 % in a 12-month period. And now it's at par with the euro's share of trade finance. And again, if that one 12-month period is any sign, you know, you project that five, 10 years out, you can have a lot of ground that the rent you can gain.

26:07You know, Zoltan, you mentioned changes in structural demand for treasuries. And I wanted to ask you about this because this is one of the, I guess, last research notes that you wrote at Credit Suisse. I think it was in January. So definitely not the final one. But you were talking about at some point the Fed's going to need to come in and support the treasury market once again because you have all these natural buyers of bonds who are starting to step away. And I think you talked about potentially the Fed having to restart asset purchases as soon as the summer. Is that something that you still see on the table?

26:46Well, it's the summer. So let's put it this way. I mean, we have now the offer on buyback program that's up and running, if I'm not mistaken. Correct? Yep, you're right. Yep. Okay. So there is that. And then we had the problems around SPB and some other banks. So let's just put it this way. I think that when we think about these, what is the government going to have to do to step in on the margin to calm things down? I always tell you that the answer is always along the spectrum. So I think we are in the anteroom of something. you know we are dealing with illiquidity with the buybacks so far so good we have dealt with underwater bank portfolios i mean the bank term funding program effectively your ability to raise at you know the value underwater bonds at the fed at par and raise liquidity that way if you have to i think that's a pretty that's a pretty big uh support to to market functioning.

27:47So I think, you know, things are happening on the margin, which kind of points to the Fed and the Treasury building scaffolding around the Treasury market to deal with the illiquidity issues and kind of this lack of marginal buyer issues that we have been talking about. You know, the other point here is that, you know, in the front end, there's a ton of liquidity. And so all this issuance that the Treasury has been doing and will be doing is going to be front-end heavy, you know, so that's another way of dealing with treasury market functioning. I mean, you have$2 trillion in therapy facility, you're just going to issue where you can most likely soak up a lot of liquidity without any glitches.

28:25But again, I think this underlying issue that we are talking about, that the world is probably going through a split where demand for treasuries from the rest of the world is probably not going to be what it once was, is going to be an issue. And as these issues pop up, we are going to be dealing with them in a step-by-step fashion. But again, I think these illiquidity problems are present and we are dealing with them as they pop up.

29:06Support for the show comes from Public. On Public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and now generated assets, which allow you to turn any idea into an investable index with AI. It all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20 % year over year, you can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one-of-a-kind index, and lets you backtest it against the S &P 500. Then you can invest in a few clicks. Generated assets are completely customizable and based on your thesis, not someone else's.

29:46Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market.