Oil, yen and egonomics

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0:28Rob Armstrong: There's some big egos pushing global markets around at the moment, and on some level, we're all feeling the impact. The first involves Japan's currency, the yen. As regular listeners will know, Scott Besant, the US Treasury Secretary, has taken it upon himself to push the world's third biggest currency up from its long-running slump. It's safe to say this plan has had its doubters, but this week he declared, I am the house now. You can bet against me if you want. Good stuff. The second is oil. Neither the US nor Iran is willing to back down on the conflict that started in February. It's all escalating again and suddenly the price of oil is back at$105 a barrel.

1:14Rob Armstrong: Yikes. So today on the show, economics and what happens when powerful people are spoiling for a fight. This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist down in the dungeon of FT Towers in a rather lovely sunny London. Joining me down the line from New York City, our very own resident big ego, Mr. Robert Armstrong. I couldn't resist.

1:44Katie Martin: Yes, I have a big ego, but not the power to push anyone around.

1:48Rob Armstrong: No.

1:49Katie Martin: It's been a painful combination my whole life.

1:53Rob Armstrong: But it was nice to see you in London the other day.

1:55Katie Martin: It was, and it was great. The audience was terrific, and it was just a lovely event overall. It was lovely to see your mother again. That's the most important thing.

2:03Rob Armstrong: I still don't think she really understands what a podcast is, but she likes hanging out, and our listeners are very nice. Hello, listeners. If you were there, it was nice to see you. Okay, so let's start with oil and then turn to the talented Mr. Besant. This war in Iran, six months, Rob. It just goes on and on. And the oil price rushed higher when it started, obviously. Came back down again, and we all had a good laugh at all the oil analysts who'd got it wrong and said the oil was going to$100 bazillion a barrel. Anyway, now oil is...

2:37Katie Martin: Who's laughing now, Katie?

2:38Rob Armstrong: Who's laughing now, oil analysts? Anyway, they are, because oil's back up at$100 and odd again.

2:45Katie Martin: Brent crude this morning, 105, which is getting close to the peaks of the early days of the war, which were kind of at that 110 level and rising fast.

2:58Rob Armstrong: Yeah, no, 105 is squeaky bum time. That's high oil prices. Yeah.

3:03Katie Martin: And I think it's a moment where we kind of don't know how much oil is flowing through the strait and how much oil will be flowing through it. At least the Iranians seem to be cultivating a kind of ambiguity about their strategy. They seem to like the slow burn. And so that is finally coming through in prices. I think the people who thought the Americans and the Iranians would figure out something before the American midterm elections are now rethinking that prediction.

3:40Rob Armstrong: Yeah, because this is a good bit of leverage that Iran has before the midterms in November. And look, you and I, we know what we don't know. We are not geopolitical experts. But I was reading up on this earlier. So the gist is that people have been hoping that the two sides could get back to the memorandum of understanding that was signed in June. That has failed. And now the US wants what it's calling a comprehensive agreement, which includes the Strait of Hormuz, which you will be aware was open before this all started, and nuclear, which again, had been sorted by Obama. So we're trying to get back to something like square one and the Iranians are digging their heels in and ships are getting hit by rockets and it's all terrible.

4:25Rob Armstrong: And so, yeah, I mean, where does oil end up? I mean, you don't know. I don't know.

4:29Katie Martin: I don't know. I mean, when we talked about this during the first spike in oil prices, we were all surprised, I think, as a kind of the pundit industry broadly or the finance world broadly was a bit surprised at how resilient the American economy was in the face of oil that passed 100. There wasn't a big slowdown. And I think the consensus has come that if you can kind of keep things below 150, it's not an energy crisis. It may be a political crisis. I'm looking at national average gas prices here. At$4.27 a gallon of unleaded gas is more than a dollar more expensive than it was a year ago and a quarter more expensive than it was a month ago.

5:23Katie Martin: and people notice that sort of thing.

5:25Rob Armstrong: Yeah, diesel$6 a gallon, give or take. And it was well under$4 a gallon a year ago. And you've got these elections coming up. And it's weird. Like Donald Trump seems to have just sort of given up. His message to the electorate now is, oh, well, prices are going to stay high into the midterms. It's like, I don't know, like, why are Americans all putting up with this?

5:48Katie Martin: It's not clear that they are. We'll find out in November when we see how they vote. But it's a real question. And, you know, of course, the other side of it is inflation. We've heard a lot of companies in the last few days report earnings and say that they're being hit by freight prices being quite high. And this is actually not a fuel issue. It's just that freight utilization is quite tight. Right. The economy is a little bit hot is what that tells me. and you put a labor market that may be a little bit tight and you throw$6 diesel on top of that,

6:29Rob Armstrong: diesel was$3.70 a year ago, I think that feels a bit inflationary to me or like a pretty good

6:38Katie Martin: setup for inflation.

6:39Rob Armstrong: And not just in the US either, right? So we did have US PPI inflation today, which is kind of what people call factory gate inflation data. And that was reasonably punchy, wasn't it?

6:51Katie Martin: Yeah, it was as expected, but it was expected to be punchy. And I think the readback from The Economist on this is this keeps us on track for a rate hike next week. It showed the same pattern of above target prices that the Fed has been looking at for a while now. So we're still on track. And loyal listeners, remember that both you and I are betting that they'll be hiking next week down the Ferry. Yeah, yeah, I think so.

7:22Rob Armstrong: I think so. And we also had just the other day Andrew Bailey, governor of the Bank of England, saying there are upside risks to inflation, which again is a kind of get a load of this oil price, boys and girls. So thanks, America, for this.

7:39Katie Martin: ECB tightened this morning too, right?

7:41Rob Armstrong: Yeah, European Central Bank, they raised by a quarter point, which I believe ECB President Christine Lagarde said as a decision was a no-brainer. There was like no real dispute about it on the governing council. Everyone agreed, let's do a quarter point. She's been careful not to give specific guidance on what she does next. But, you know, it doesn't take a genius to figure out if we just keep getting higher and higher oil price every day when we come into the office, this damn thing is higher. We've got a bad situation. And all the kind of analysts at the banks and the investment firms and whatnot are lifting their forecast.

8:16Rob Armstrong: They're saying, OK, we previously thought it was going to be here. We think it's going to be a good bit higher than there, you know, by the end of this year and through the course of next year. So again, thank you, America, for that one.

8:29Katie Martin: And in some ways, the situation has gotten worse since the last time that oil passed $100 in that global inventories are still lower.

8:42Rob Armstrong: So we've got less of the stuff squirreled away in our salt caves.

8:48Katie Martin: And refining capacity is tighter. Meaning the crucial thing is how can you take this crude and make it into diesel or jet fuel or gasoline or something else. I believe you call this stuff petrol on the island where you come from. In any case, that's very tight too. So there are these second order effects. However, I generally like to make mistakes only once. And I think I was one of the people who was a shade too hysterical about the impact of oil prices the first time around a few months ago. I don't want to make that mistake again. If this thing stays under 150 and U.S. gasoline stays under, let's call it, five bucks, the U.S.

9:39Katie Martin: economic expansion can continue. So I'm just getting on the record as being a calm, collected, optimistic person.

9:49Rob Armstrong: Okay, fair enough. But, you know, again, we are not geopolitical experts, but it just strikes me that Donald Trump does not have the sort of temperament to say, OK, fair enough, this has all been a big mistake. You know, his ego, again, going back to this economics idea, just prevents him from saying it's a fair cop. Let's just do what the Iranians want.

10:10Katie Martin: Well, if you're impressed by Trump's ego, perhaps we should talk about Scott Besson's ego.

10:15Rob Armstrong: Oh, listeners, how about that for a segue? So look, this does all link into the situation with Scott the House Besant, as he shall be known from now on. I will explain a little bit more why in a minute. But everything is connected. And I know the people in markets, when they talk about how you have to join the dots between all these different things, it makes them sound like a little bit nuts and like they're seeing connections that aren't really there. But in this case, they are there. So all things equal, higher oil prices mean higher inflation. And higher inflation means higher interest rates from the Federal Reserve, right from the U.S.

10:52Rob Armstrong: Central Bank, and also means higher bond yields.

10:56Katie Martin: And higher bond yields mean higher interest costs for the federal government, which means higher deficits for the federal government of the United States.

11:05Rob Armstrong: Yep, higher borrowing costs for us all. Again, thank you so much, United States of America. But also, higher U.S. bond yields generally mean a higher dollar against the yen. i.e. a weaker Japanese yen. Now, for reasons that I still can't fully understand, Besant has staked a lot of political and personal capital on pushing the yen up. Not something that typically the Americans get involved in. You know, you leave Japan to worry about where the Japanese yen is, but Besant has jumped in with both feet. We had this joint intervention right at the very end of July, and we've had further things that look and smell a little bit like Japanese interventions since then.

11:51Rob Armstrong: Traders are kind of wondering whether they are or whether it's just the market moving around. So there's lots of rumours of intervention. There might be a little bit of buying of the Japanese yen by domestic pension systems. But I mean, in a weird sort of way, Besant has staked his reputation on pushing up the yen and like it's kind of worked.

12:12Katie Martin: It has worked. I mean, let's go back to our working theory of what Besant is up to with the yen. I think he foresees the following possibility. Should the yen continue to get weaker and weaker and weaker, this starts to become a problem for Japan. You know, import prices, they're a very import-sensitive economy, start to rise. They get inflation themselves, et cetera. So the way the Japanese central bank would respond to that would be to raise interest rates significantly. And if they did that, and here's the part Scott the House Besant is worried about, Japanese investors who hold a huge amount of savings start to pull that savings out of U.S.

12:58Katie Martin: treasuries and put it into Japanese bonds again, which would cause a further escalation in the U.S. bond yield. and therefore the government has to pay more money to finance its debt. Deficits get worse, et cetera, et cetera. So I think that, broadly speaking, that's the worry. And so he's trying to control what he can control.

13:18Rob Armstrong: Yeah. The other part of his worry as well is that normally the way that Japan would try and pump up the yen would be to sell some of its own dollars, which means selling its own treasuries, which again leads you back to the same point, which is higher borrowing costs for Uncle Sam, which Scott Besant really doesn't want to see. But there was quite an amusing statement from Besant this week. He was on stage being interviewed about what's going on in the yen. And like I say, there's lots of people who've been like, OK, he's intervening and I don't really understand why. This strikes me as a bit unorthodox and weird and I don't think it's going to work.

13:53And he said, when we intervene in the Japanese yen,

13:57Rob Armstrong: I have pretty good insight into what the Bank of Japan is going to do, what Japanese policymakers are going to do. I have asymmetric information. I am the house now. You can bet against me if you want. Booyah, fighting talk.

14:12Katie Martin: Booyah, fighting talk. And let us just tip our hats. In fact, I'm going to tip my hat to Scott the House Besant twice right now. Number one, first hat tip is, look, the yen's rising since they intervened.

14:27Rob Armstrong: Yep. It's up about 6 % since the end of July. That's a lot.

14:31Katie Martin: So, appears to be working. Maybe he's just lucky. but let's give him credit. It's working. And hat tip number two, you say something like that and the facts go against you. You look like a humongous idiot. And so he's like really making himself hostage to fortune. You got to respect the guy's courage. He's putting himself out there. Portrait in courage. It is a profile in courage. That's the one.

14:57Rob Armstrong: That's the one. But, you know, macro people, you know, traders and investors and stuff, find this whole I am the house now thing legitimately hilarious because it puts a massive target on your back. It smacks of pride coming before a fall. But also just as a thing to say, like, I know what the Bank of Japan is going to do. It's like, hang on, mate. So the Federal Reserve in the US has given up on forward guidance. It's not going to tell us what it's going to do. But now you're telling us what the Bank of Japan is going to do. Like, what's going on here? Like, this is extremely weird.

15:36Katie Martin: It is very strange that we now do forward guidance for other countries. Yeah.

15:43Rob Armstrong: But as you say, we do have a Bank of Japan rate decision coming up.

15:47Katie Martin: Yeah.

15:48Rob Armstrong: It looks like they will raise interest rates. Japan never raises interest rates. Like, I think, you know, it's very unusual. Rates are very, very low. So we could be entering a proper rate hiking cycle in Japan for the first time in a really, really long time. And who knows how that will pan out.

16:06Katie Martin: And that could be why the yen is rising. It could just be as simple as that.

16:09Rob Armstrong: There is that.

16:10Katie Martin: It could not be Besant's big man talk. It could be the market is pricing in a rate increase. And when interest rates go up, the local currency tends to strengthen because higher interest rates are more attractive to capital. money comes into the country and the currency goes up again reply guys please don't bother

16:32Rob Armstrong: emailing us about that we know this is only a rule of thumb nonetheless it counts now but the thing is for scott the house besant is his house is in japan it's not at home right it's a vacation house yeah he's doing this look at me i'm the big man i you know i'm going to tell the world where the yen is going to be trading but at the same time the other thing that he's trying to do is support long-term US government bonds and bring down the borrowing costs there by doing some buybacks of long-term bonds. And just earlier this week, the Treasury announced how many bonds it was going to buy. And I think it was$6 billion worth of bonds.

17:09Rob Armstrong: Normally, it would buy more like two. And the market was like, you call that a buyback? Like, that's nowhere near enough. That's not a knife. You call that a knife? So, you know, whether it's a direct result of the size of the buyback or not, who knows? But the fact is 10-year U.S. government bond yields really popped higher at around the same time. So you've got buybacks that aren't really moving the dial. They're just not big enough. Inflation that is already elevated. And now also you've got the oil price kicking higher again. And the market no likey. So the 10-year bond yield is getting towards 5%.

17:49Katie Martin: So this just today, this morning. So the 10-year yield went up yesterday. And it's up another eight basis points today, which is a lot. So is the five year. And ladies and gentlemen, the stock market seems to be noticing. The NASDAQ index is down more than a percent today. And the higher yields are starting to cause bad vibes that extend beyond just bond prices and currencies.

18:15Rob Armstrong: Because stock markets have done an admirable job of ignoring what's going on in the bond markets, which they don't normally do for like weeks and weeks. And look, it shouldn't matter. You know, round numbers are just round numbers. Like, who cares? But there's something about the times when the 10-year yield hit 5%. It is bad vibes. It's bad juju. Market no likey. So I think there is a decent possibility that stocks get a little bit nervous, actually, when we get up to that 5 % round number.

18:45Katie Martin: I will take issue, by the way, with your characterization of the stock market as ignoring the bond market. The NASDAQ, for example, is exactly where it was four months ago. So you could argue that what this turbulence in the bond market has done has brought the rally to a halt. And we are trading sideways as a result.

19:05Rob Armstrong: Because God knows the earnings in the U.S. have been crackerjack, super fantastic. Great. So maybe stocks, you know, quote unquote, should be a lot higher than they are. But they are a little bit spooked by the rates market. I can buy that. So, you know, Scott, the House, Besson, can he be in charge simultaneously of the yen, the oil price, the 10-year yield and the stock market? Because I'm going to say no.

19:31Katie Martin: No. I mean, it's difficult. The fundamental thing that the U.S. government could do to bring rates down would be to stop spending so much money. And that is beyond the power of Scott Besson to cause. The guy's only got so many tools on his tool bench and he's using them as best he can.

19:55Rob Armstrong: Well, like he said, you can bet against me if you want. So listeners, take from that what you will. We are going to come back in just one second with Longshore.

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20:40Rob Armstrong: Okie doke, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob Armstrong, egomaniac, what are you saying?

20:51Katie Martin: I am short Luckin Coffee. Do you know what this is?

20:55Rob Armstrong: Oh, you haven't heard that name for a long time. Why are you talking about Luckin Coffee?

20:59Katie Martin: Well, it's reappeared in New York. It had some corporate scandals and it reappeared in New York. and it's a Chinese brand and none of this has to do with why I'm short it. What it does have to do with is the fact that my favorite deli and the favorite deli of many of my coworkers here in the New York office was pushed out of its place of business by Luckin's Coffee's willingness to pay higher rent. And so now my usual lunch of two large greasy pieces of pepperoni pizza is unavailable to me. This makes me extremely grouchy. One of our colleagues, George, has written a whole piece about this travesty committed against lunch break.

21:45Katie Martin: So Luckin Coffee, its board, its executives, its employees, I wish you all the worst.

21:52Rob Armstrong: Right. Good. I think they've got the message. Maybe they could give you a free coffee to cheer you up. But anyway.

21:59Katie Martin: Wouldn't work.

21:59Rob Armstrong: I am short the AI headbangers. So one minute Peter Thiel is telling us that regulating AI is, and I quote, the Antichrist. Then you have some like 27-year-old whistleblower from Anthropic who says that AI is on the cusp of eliminating half the humans on Earth or something similar. And it's like, lads, make your minds up. Are you going to end humanity or not? I feel like it would help me to plan for this eventuality if you just made your minds up.

22:35Katie Martin: I mean, I think that should be a required corporate disclosure. If there is a significant chance that your product is going to end life on Earth, that should be in the 10K.

22:46Rob Armstrong: Put it in your regulatory filings. Listeners, if you have any insight into the end of humanity as we know it, please let us know. Unhedged.ft.com. In the meantime, I hope we'll be back on Tuesday. So listen up then.