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

Welcome back to the Market Maker podcast and really pleased to have the one and only Pierers Curran back on the show. How are you, Pierers? >> I'm strong. Yeah. Uh I am refreshed. Uh kind of a bit on holiday. Uh you know what it's like when you get back from holiday and then it's just bang. Uh you know, straight back into it. So just trying to catch up. But yeah, good to get good to get out of the country actually. Bit of time in Italy. Um, and yeah, just trying to keep tabs. You know, when you're on holiday, obviously you're still kind of reading your FT and then whatever. So, still trying to obviously keep on top of what's going on out there. Mark, it's just really interesting. Um, and yeah, looking forward to talking markets. Um, it's been a sort of Anthony Steven takeover for the last couple of weeks. We're going to we're going to bump out the banking stuff and uh back to back to the really interesting uh content which is markets. So yeah, looking forward to the conversation. >> Yeah. And anyone new to the show, the market maker, we do a regular episodes, two a week typically, one which is more M&A deals, uh the IPO market, so big listings, things of that nature. We recently did the last episode with Stephen and I about the Stripe takeover of Open Routter. So go back and check that one out if that's more of your, you know, 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. But 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. >> Absolutely. And what's going on right now if you've been uh 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 it's becoming an important thing. Tokyo dropped a record $96 billion. When I say Tokyo, I mean the government of Japan basically directly intervened into the FX market um by buying yen. They bought $96 billion to try and prop up the value of their own currency. Bessant, that's the US Treasury Secretary. He's even stepping in to that same FX market alongside them. Um and and you know, you 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 that's where it's at. And so, yeah, they're trying to intervene. Um, 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, Bessent doubling down as well here. So, not just a collaboration with Japan and the FX market, but also on the long long end bond buybacks to try and cap US Treasury yields while the Fed signals interest rates aren't done rising. So, today, yeah, very much going to do a bit of a deep dive on this idea of intervention. And 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 Frank collapse and bit of a spoiler. That was our CEO Will Deucy's greatest ever trading single day hole that he made >> on that one day, which actually was on his birthday. >> That's right. Little birthday. >> Well, 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. Um, but perhaps then let's let's get into this and start with Japan, as you said, which is a topical uh 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, well, maybe you should start a bit broader. If you don't look at FX markets very much, well, then basically the dollar's king. I'm I'm talking about trading volumes. So, actually, I think I'm right in saying it's still like something like 85% 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. Uh 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 $1. 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 postcoid. All right. And it's gone actually if you go back to wow, if you go back to the end of 2020, it was trading at 103. Now it's at yeah it 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 1. Yeah, just over 160. 160.37. Right. So, weak yen, weak yen, weak yen, weak yen, bang, big bout of yen strength overnight. All right. And we've gone down. And actually we're down at levels. It's gone from 1. 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 15650 or sorry 15. Yeah, 15650 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 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 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 '9s. 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. Um, 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, postcoid, 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 of Japan have interest rates at 1%. And they've been hiking and hiking, but only got up to 1%, right? Um, when you go and look at a 2-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 2-year when we're paying 1% for our loan. I >> I just think they 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. And 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 7% or something like that. >> And he remember him I remember him driving around in his >> uh super car with the registration plate, the Aussie yen, which didn't make a lot of people happy at that time for obvious reason. >> Was a name for people like him. Um, 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, 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 h 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 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%. versus the US which is 3.4. So not only are the yield differentials still quite decent, the real yield differential is even bigger because inflation in Japan's lower than in the US, right? So it's still nice. this carry trade thing still there. Um the problem is you know um if it unwinds right so is it going to unwind? We'll see. Now what you know why else is this currency um weak? So let's talk about the Japanese sort of domestic situation. And 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 revenues 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 they 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. 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. 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 US 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. Um 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 Taki 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 uh consumption tax rate cut. They're going to cut the rate of consumption tax on food from 8% down to 1%. Because the other big issue, 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 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 got the big carry trade and the yield differentials kind of still in play. Can I ask well that often over the years 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. You always see these these pictures of like Japan and Hong Kong where there's these like grandmarss in their retail trading accounts just almost day trading. But presumably if I'm sat there and looking at a global investment picture even as a retail punter. >> Yeah. >> 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 stock? >> Exactly. Yeah. retail basically domestic savers in 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 at 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? You can't buy SpaceX shares using yen. That's the thing. Trading internationally, there's always an FX transaction first. To buy SpaceX, that's denominated in US dollars. So you got to take 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, six, 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. >> Yeah. 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 4 billion US dollars to to prop up the yen. We also saw US Treasury Secretary Scott Bessant took the unprecedented step of joining in. Um so yeah, this is quite rare. It's the first I think the stat was the first joint US Japan yen support to support that move since 1998. >> Yeah, that's right. 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 in other 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 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 micro structure you know when you step into a 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 a Japanese domestic company generating international revenues and changing FX. It's not a 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 a very unusual, you know, very temporary sporadic. It's not oneoff 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 on to in a bit more detail, but perhaps don't work so well. >> Yeah. The 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 mean the the symptom is, oh my god, the yen's too weak. Quick, let's do something about it. Okay, let's force the FX market and make it change. The 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 I intervene and I just go okay great I've just got another entry point to just >> go long dollar yen again >> and that's what's been happening. So whilst you 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 >> to that point. So from a timing perspective, there's only so much the government can do. And we'll come to the Swiss story in in due course, but that was probably the most obvious one. >> 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 Bessant 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 Bessant and and even War right they're there but all 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 Bessant'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. It's the yen's still weakening. It's a big problem. So, Bessant 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 school boy 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 UEA. 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 unco coincidentally 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. 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 Besset is so 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 and >> So, I think he's just basically bullying them. >> It's true. to take action. >> If you're 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 US have, which is the power of influence, as you said, is the the dominant pair of >> That's the It's so interesting in the US, you know, Bessant and Walsh are both ex-hedge fund traders and together trading together. So you got these two exhedge fund traders now in the two top seats in the US. So it's just kind of interesting to see. But yeah, Besson obviously showing his market knowledge and how it all works, I would say. Um but yeah, we're coming up. I guess there's one thing to say and why this might get even more topical. We got a little bit of a holiday approaching in Japan. Um 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 illquid and more volatile. So this is where markets can be quite vulnerable. So sudden big giant swings. Um, >> funny funny you say that cuz so 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 and 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, >> right? >> I'm assuming the strategy there on their side is, well, look, if it's thin, illquid 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. >> Exactly. Yep. >> And just get more bang for your buck because of the market conditions. >> That's right. So yeah, if you're in the no 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 from the Japanese. So yeah, do you want to 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 let's talk a little bit about the the Swiss situation. So let me take you back uh 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 as to position why they were doing what they were doing. >> So the Euro zone 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 had the Euro zone debt crisis, Greece defaulting and all the rest of it, right? That spilled into 2011, 2012, right? So Euro the Eurozone banking system was really vulnerable. The Eurozone economy was under a lot of negative pressure. Switzerland isn't in the Euro zone 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 Euro zone. 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. That's that's the kind of backdrop. So the Swiss economy was doing way way way way much you know better than the Euro zone at that point because of this Euro zone banking crisis. Okay. As we went along 2014 um you know the euro was weakening and weakening and weakening against the Swiss Frank. 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 you're that directly impacts your revenue when you convert it back to Swiss Franks you're getting less right so it was really really causing a lot of problem 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 Frank 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 Highark 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 through 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 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. Do you remember the famous phrase from Mario Draggy? >> Whatever it takes. >> Right? That was the tipping point that saved the Euro zone debt crisis >> because it was the belief that the bazooka as it was called at the time bazooka. >> Yeah. That the the central bank in Europe would buy un 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 Euro zone debt crisis, the economic problems, and actually it's all all fed through to deflation. Inflation dropped negative in the Euro zone as we went into back end of 2014. Okay, deflation means like like that's even more weakening for your econ 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 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% of Swiss GDP and they were trying to stop the juggernaut, which is market forces saying this can't work. Deflation, Euro zone in crisis, it may collapse. and they reached their breaking point and they said, "Okay, we've tried. We cannot prop this up anymore." >> Yeah. Expensive. >> I think if you can think of it as a price pattern, like think of a almost like a 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 and gets reversed faster and faster and it gets more narrow. It's like tapping on some ice. And every tap the floor gets a little weaker. >> Yeah. >> Until that moment arrives. >> And Yeah. >> Well, yeah. And the moment was uh Will Dooy's birthday. Uh 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 and it just vanished. Suddenly the market wasn't there. uh 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 at like I think he got in at 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 going to this thing's going to 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 that this thing could snap back and it might come back in my face. But yeah, it opened at 0.85 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 >> on that one single moment and they still owe me $30,000 What? >> Very much serious. >> Never paid their bill because they used to they used to subscribe to our our desk to have >> Well, they went bankrupt, >> right? >> Yeah. With all the credit. >> Explain. >> Well, they were I mean they because I mean they're brokers, right? And they were broking loads and loads of different markets, by the way. Like hund 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 Frank 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 go into 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 grandby I'm afraid but yeah this is it that there are casualties because if there are players in the market that aren't aren't riskmanaging effectively enough to avoid getting annihilated in a black swan, you know, one, what would you want to call it? 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 say you're dead. Not unless your name is Cashia Hilderbrand 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 Besson. What did he say? He said, "I have information that the market doesn't have." >> Exactly. who I need to track Besson's wife's trading account. And I say this for people for people who didn't know, there was a big investigation at the time because the Swiss National Bank chief's wife >> um apparently bought over $500,000 US using family funds. And this was all in and around when all of this was happening. So lot obviously lots of cries of insider dealing. And actually Hilderbrand who was the SMB chief stepped down denied any wrongdoing. So >> it's shocking. It's absolutely shocking um you know what happened and the fact they didn't get done for it. They 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. I think she made 500 million was it off that trade and she built this big position in the 3-week runup to the Swiss National Bank announcing they're removing the floor. So obviously you know when they're back at home over dinner um discussions were happening. I >> I think I think the actual what happened here was actually this the so yeah she made I think it was the transaction was half a million US dollars but >> okay Sorry. She didn't make that announcement. >> It was uh actually the two events were independent. The So the the floor was what 2015. The insider dealing 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. What? You don't You don't keep a trade log of your insider dealing. Come on, Pier. I expected more of you than this. >> Anyway, >> never keep a paper trail, peers. >> Shocking. But look, it's 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 right now it's I was just checking Swiss I haven't looked at this exchange rate for many years. It was the one to be watching but I haven't looked at it for years and years. It's now trading at N4. Um 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 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 uh the yield levels and US treasuries. So longdated US Treasury yields. So 30 years hovering near the 5.25 5.3% the 10year 4.8. >> What happened then? So what's happened with Bess? We said that there's two there's two sides of his attack here. One's on the FX with the >> kind of forcing nature of his commentary to Japan. >> What's happening in the bond market that he's trying to engineer? 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. Um 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 postcoid 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 uh mountain that they've got. And so generally we're worried about debt sustainability. If creditworthiness 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 US happen 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 whole $40 trillion debt book, their average cost is 3.5%. But if they're rolling it now, they're going to be paying five if they're 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 Bessant 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. Okay. 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. All right. 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? Well, you're driving up price. Okay, that market impact thing. If you're a big buyer that steps in, you drive up price and yield is invoice 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 the there's a normally something called uh quarterly refunding. And quarterly refunding for a bond market trader is just keeping tabs on >> well 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. Is that is that the way to look at it? >> 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 at the 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 right you know ever since covid because of the rate hiking cycle and inflation and so on but the these yields are the the highest we've seen for decades now. Okay so 5.2% there was a big level in in 2023 just above 5%. we've broken it. Okay. So, it's the most expensive for them to borrow, you know, in decades. And whilst yes, he's intervened, it's tiny amounts, you know, that's the problem with US Treasury market. Um, it's it's the biggest market on the planet really. So, to try and impact it, you got to 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 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 player. Yeah, both of those are absolutely true and I think so look there there's a you know it's not I don't think so basically Walsh remember Walsh and Bessant are all buddies uh hedge fund traders right 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 that the long end of the curve while yields are high is a wor not 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 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. So Walsh was was quite hawkish trying to say we've got this. Yes, inflation's 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 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 US so unlike in the 1980s where when adjustable rates dominated. Most US homeowners locked in 30-year mortgage rates at 2.5 to 3.5% in 202021. I 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 England rate hike that happened postco. So whilst my neighbor is paying same might have the same level of debt, they're paying like 4x what I'm paying on a monthly mortgage payment. >> Even with that though, equities keep remaining up. Is that like 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 the longer for higher uh 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. So, 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, 5 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 got to start coughing up a much higher interest rate in the US. And certainly in the housing market, they're protected. That's why the housing market's dead in the US. 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 that 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 is 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 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 US because you got this10 trillion dollar backlog that they've got to roll. 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 3 4% and interest rates have had to be hiked by 1% or more, then you know this is going to be a different conversation. M and I guess when everything's hinged on the AI buildout or productivity boom occurring but the cost of borrowing that's fueling the growth that starts to increase >> then the wheels come off. >> Yeah. And sorry last point about the economy. You've heard this thing about a K-shaped economy, which is like talking about basically the economy is being 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 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 p pay higher food prices for so long without wage growth. And what's happening in the US, the 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 US wage growth number continue to decline whilst inflation stays high? And that's where you start to see the middle income bracket start to get pulled into this problem. And then in the end, doesn't really matter what's happening with AI. You know, in the end, if the consumer is on their knees, well then that's when you're going to get a recession and then the whole thing starts to unwind. God, you've come back from holiday and you are absolute misery. I mean, what is that about? Uh, you need to go on holiday earlier in the year when the sun's coming down. It's a bit more >> bright. I'll give you something positive to end on. Snowflake shares, what's the time now? It's like 11:20. They're going to open about 25% higher when the New York Stock Exchange opens in 3 hours time. Snowflake have just guided to they've just upped to massively increase their forward-looking revenue targets. Um, so the AI boom like we had Nvidia numbers like last week that was super strong and like who wa amazing. So the AI boom is still doing lifting and it's it's still there. So that's one thing. >> You know, it's uh too big. I don't know what I'm going to use. Too big to fail or should I should say whatever it takes to make AI. There's too many parties invested in this trade now. >> Yeah. >> Really is the government's included >> literally with the American Stargate buildout, everything in between. >> It 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 hundred billion dollars of yen or US Treasury buying back uh longdated bonds, it 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 hawish hike or the Fed >> stays hawish, >> yeah, >> 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. All right. Well, look, lots there. So, appreciate um might be quite heavy going for anyone. if there's anything that you want to uh leave a question at all to clarify or you have an opinion or thoughts uh maybe something more half glass full than than Pierce um then do let us know but otherwise yeah we'll see you for the next episode. Thanks, Pier.