Why Interest Rates Are Shooting Up All Around the World
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Terms apply. For J.D. Power 2024 award information, visit jdpower.com slash awards. Bloomberg Audio Studios. Podcasts. Radio. News. Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracey Alloway. And I'm Joe Weisenthal. Joe, how about them JGB yields?

So this is the thing, which is that in some sense, the markets have quieted down, certainly compared to early April or mid-April. But there are some major moves still happening, particularly in rates, some currency stuff. If you know where to look, these markets are not boring at all. I don't even think you have to like act

Yeah.

That's how I measure everything. What were you borrowing from local Japanese banks? Or were you buying JGBs when you were in high school? Sadly, sadly not. Although, well, they wouldn't have been a great investment. Well, you should have bought some JGBs back then. You get great price appreciation. You get great yields. But yes, there's a lot going on. It's a global thing. So in the U.S., we're also seeing fairly elevated rates

And to some extent, that might be a story of expectations that the current budget negotiations are going to continue to widening the deficit. You know, the sort of Moody story. But there's clearly a global factor here that cannot simply be explained by, say, like the willingness or unwillingness of members of Congress to expand the SALT deduction.

There is a bigger macro story unfolding that I don't think I have my head fully wrapped around. Right. So as we're recording this, the 10-year is back at 4.48 percent. And perhaps more importantly, the 30-year is creeping back towards 5 percent. The dollar is falling again. So the sell America theme is kind of getting another airing. There are concerns over the fiscal trajectory and the big, beautiful trend.

bill that, you know, you just kind of outlined. It's literally called that, isn't it? I know. It's literally called the big, beautiful bill. I love that. And so the worry is that that will push up the deficit and possibly inflation. Plus, of course, we have tariffs. Meanwhile, as rates appear to be going up, there are plenty of people still out there who are talking about the prospect of the economy, the U.S. economy actually slowing down. Mm-hmm.

and getting rate cuts later this year. And the market is still pricing those in. So we're at this really interesting juncture in the bond market where we're getting a lot of conflicting signals, a lot of confusing signals, as you mentioned. And it seems like maintaining stable prices, low inflation, and trying to fight all these different cross currents is going to fall almost entirely on the Fed. So I think we should talk about all of this. Absolutely. Let's jump right into it. We have a great guest today.

We have the perfect guest, you might say. We're going to be speaking with Stephen Englander, the global head of G10FX strategy at Standard Chartered. And to be honest, Joe, I cannot believe we haven't had Stephen on the podcast before. I've been reading Stephen's notes for years and years and years. I was actually really surprised to realize he's never been on before. I know. Our oversight. Major our oversight. Lately, his emails have become a must-click item.

for me. I always open them. And so, yes, he's here with us in studio. Stephen, welcome to the show. Thank you very much. I'm honored to be here with the best interviewers in the world. That's right. We are going to clip that and save it for our highlight reel. That's very kind. So why don't we start with JGBs and also USTs? Is there a common theme running through that sell-off or are they being driven by entirely different things?

I think it's mostly different. There is a common element in that if U.S. yields are going up, everybody's yields are going to be going up.

But I think in the case of JGBs, there's particular dynamics. There's uncertainty about what they're going to do on the QT side. They had this very kind of painful 20-year auction, which was pretty close to failing. The BOJ published that there was some debate as to what pace of quantitative tightening they should be going at, if any.

And I think there's a general view in the world that yields are too low and they're going to be going up.

However, it's puzzling because the market seems to like the yen. And normally that would be associated with lower yields. Well, you're getting paid a lot to buy yen. I mean, right? Isn't that part of the story? Like yields are going up. So it's like, I'll buy some yen because at least they're paying me a lot more yen to hold them. Well, remarkably, today there have been times when the yen 30-year yield has been higher than the German 30-year yields. So just on this point, I'm looking at some fun and

I literally on my terminal had just pulled up a chart of German 30 year yields as well, which are above 3%. That's crazy. They were at zero at the start of 2022 and that's the 30 year. They're over 3%. So there must be a global factor. Well, some of it is fiscal, especially in Europe and the US. The Europe had like 10, 12 years of debt crisis in which they didn't want to expand fiscal deficits. The pressure was to do the opposite.

And now they've discovered that defense spending is the key to economic growth. But the market, I think, is looking at it and they're looking at the fiscal prospects in the U.S. and kind of guessing that we're not going to see zero on German yields again. Just going back to the yen and people buying it, how much of that is a strong yen story versus a weak dollar story?

This is why I hate currencies, by the way. Well, they're good because you have two chances to be wrong. I think that much of it is a weak dollar story and looking to see in terms of the negotiations on tariffs and in terms of how kind of off base the currency is, which currencies are most likely to move, which ones will face the least resistance in appreciating against the dollar.

And I think Japan wins on several counts that the tariff negotiations will be tough because they still have a very big trade deficit with the U.S. Trade surplus. Yes, trade surplus with the U.S. The non-tariff barriers, even if you really can't quantify them, they're pretty significant. And, you know, the U.S. has a point in complaining about some of them.

And there's a sense in the market, and I think correctly, that once you get past the 10% baseline tariff that the U.S. needs for fiscal purposes, that they may be willing to trade some of the reciprocal tariffs, the tariffs beyond that 10% for currency appreciation. And there have been a number of currencies under discussion, but the yen is one of the prime currencies, given that it's so weak.

relative to any kind of PPP type of basis. Right. This is sort of a general East Asian story. You know, obviously, we talked about the Taiwanese dollar and the South Korean won and so forth. And there is this view that maybe some sort of difference in currency policy could be part of the packages here. Before we get more to that, you know, one of the things that you heard maybe six months ago or a year or even more,

a few months ago. They're like, oh, if we impose tariffs, it will be offset because that will be a strengthening of the U.S. dollar. And we've seen literally the opposite. But that was a common meme, a common conventional wisdom among a lot of economists, both Wall Street academia or the ones who appear on TV, etc.,

What is the simple story for why the dollar has been so weak since April 2nd, even at a time when stocks have rebounded, interest rates have stabilized a little bit? The one major move that hasn't really reversed is the dollar. What's the simple story there?

Or the complex story. Well, it's a medium story, but it basically goes something like this. I might choose to pick your pocket if I thought you wouldn't respond. But if you did respond, the consequences might not be as much fun for me. And I think that if you start with the assumption that the U.S. can tariff everybody and the market's not going to say, well, wait a second, if

If they do tariffs, what about that Mar-a-Lago stuff? What about foreign policy? You know, what is the limit to which they can expand that policy envelope? You add risk premium to U.S. assets. So the offset to that is that the market is looking at U.S. assets and kind of saying, well, safe haven, maybe not so much. Reliability, maybe not so much as it used to be.

Is there good dollar depreciation and bad dollar depreciation? And I remember one of your notes, you talked about this idea that, you know, you could get a weaker dollar that supports competitiveness, but you could also get a weaker dollar that reduces the amount of capital coming into the U.S. How would you measure those two things?

Well, in a sense, we're getting some of that measurement now. When we look at the dollar weakening and interest rates going up, I think it's a pretty good sign that notwithstanding the greater competitiveness, on paper at least, of the U.S., that investors aren't that enthusiastic about holding U.S. assets. So I think that's one real signal that the market's not thinking that it's an analyoid plus.

But I'd say that most of the time, if the dollar goes down, it's for bad reasons. The basic good story would be something like this, that the rest of the world, for whatever reason, does fiscal policy and kind of expands consumption and they start buying U.S. assets. U.S. foreign yields go up relative to the U.S., never mind what their debt picture is over, you know, 5, 10, 15 years.

And they say, OK, you know, instead of buying U.S. treasuries, we're going to buy, you know, German and European and Asian because they're all expanding their fiscal deficits and their rates are going up. The return is higher. And you can sort of say, yeah, the dollar's weaker, but it's OK for the U.S. They can do their own thing.

I'd say that if you're focused on the U.S., and this is something I can't emphasize enough, that just about for every major, even medium-sized country, 90% of the policy solution is going to be domestic.

The idea that you can fix your economic problems by doing something on the international side, I think, is an illusion. If you did the right thing on the domestic side, you might get good stuff happening on the international side. But it's really, really hard to get around domestic issues properly.

by saying, oh, we'll just depreciate 10 or 15%. Most of the time when you depreciate that way, something's going wrong. Either the market says, hey, the real interest rates are too low and they're not going to be able to push them up, so there's no point to holding their paper.

Or they say risk premium should be higher or something's not going right. So I'd say that, you know, even though there's a route by which you can say that a weaker dollar reflects good stuff, that's not the most common route. Most of the time, a weaker currency reflects bad stuff happening on the domestic side. No, I think this is a really good point. I wrote a thing in the newsletter. I called it like one weird trickonomics because we have all of these things that we can all talk about that sort of

ail or plague the U.S. economy. It's difficult to build here. We seem to have lost our capacity. Joe, if you do the whole list, we're going to be here for like 30 minutes, right? We seem to have gotten worse at building airplanes, which is one of the things that we actually still do export to the world in much of the ways. These are really tough problems to solve.

And it strikes me as sort of fantasy that suddenly we can revive all of these things just by coming to an agreement with our foreign partners about some difference in currency or trade policy. I completely agree. And the other fantasy I would add to that is the implication of all we got to do is depreciate five or 10 percent. And that's going to be enough.

If you take a look at the way the dollar has moved against the euro, the yen, the range over the last 10 years for the euro, I think, is 95 to 125. And the U.S. has run a trade deficit, significant trade deficit, against Europe, both at 95 and at 125. I think there's too much faith that a weak currency is going to bail you out.

of your problems. So, but it's, it's the easiest thing to do and it kind of sounds nice in principle. And here we have a specimen from the early 2000s, a legacy investing platform.

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Was there ever an era in economic history in which

economies did stabilize more directly and more linear fashion. You know, now when I think of like, OK, specialization, Taiwan makes the chips, Europe makes the engines, the U.S. makes soybeans and complex financial products. I get why currency adjustments don't have this stabilizing effect. Was there a period when economic specialty was more distributed that there was a more clear link between exchange rate fluctuations and trade balancing? Yeah.

The simple answer, I think, is no. I think that there was a time maybe when you had the gold standard. But there's also an issue that the movements of gold reflected the confidence of markets that the economy was sustainable. There were no imbalances. So if you ran a trade deficit in the 19th century, yes.

you know, would have to be settled in gold eventually. But it wasn't a problem until everyone decided that maybe you wouldn't be able to do it. And then you would have these kinds of crunches.

Most of my career, it's sort of funny because when you go to school, all you learn is PPP and trade balances and sort of adjustment of exchange rates and so on to get trade into equilibrium. Once you're sitting at a trading desk, all you see are capital flows. And that's kind of the driver. And the issue is, does the market have enough confidence to keep lending you the money? And if you look at the U.S.,

say for the last 20 years or so, through thick and thin until recently, the market was pretty confident that the risk-adjusted returns in the US would be positive.

And yeah, the U.S. ran a trade deficit, but it didn't seem to harm U.S. welfare. What do you see in the capital flows now? Because this seems to be one of the difficulties of the current moment, which is there are a lot of people talking about the sell America idea. But if you look at some of the data and a lot of it comes out on a lag, you don't really see a lot of selling, for instance, foreign accounts selling a lot of U.S. treasuries.

Are you seeing any evidence of the sell America theme emerging? Well, I think you see it in the weaker dollar. And, you know, my best friend is the balance of payments identity. And I might talk to it every day. A little sad, but charming. The thing is that when the market decides that it's not going to lend you money at yesterday's interest rates and exchange rates,

There are two ways of getting that adjustment. Either your demand for credit can go down, which we sometimes see with emerging markets when they hit the wall with respect to foreign funding and the economy crashes because basically they have to get into trade balance or surplus even in order to meet their obligations.

In G10, mostly, and historically with the U.S., the adjustment has been via the currency. Occasionally, like in 78 and in April, with the currency and interest rates. But there's no big demand shock. There's no big shock to output because the money's not there. The money's there, but it's at a different price than you expect it to pay. So I think...

You have to look at the path that's traced by U.S. interest rates and the exchange rates, you know, as well as sentiment and seeing what people are saying to understand whether the financing is coming easily or with difficulty.

Going back to Europe for a second. So Germany has suddenly, maybe briefly, but suddenly found this willingness to spend more money. And that's going to benefit German defense companies. We see higher rates, so maybe a longer term, more inflationary temperature in the European economy.

Is Europe actually a desirable destination, though, for global capital? I mean, it doesn't have really an alternative to U.S. treasuries. The fundamental growth prospects still don't look great. Do you see any changing perspective in like the pure desirability of capital to enter Europe?

Some, but I'd say most of what we're seeing is the market beginning to debate whether the U.S. is going to fall back into the pack in terms of being attractive. I don't think it's really that is Europe pulling away from the pack in terms of attractiveness. And going back to the first principle that I mentioned, when you list the issues limiting growth in Europe, there's been their energy policy, which hasn't worked out. There's the over-regulation. There's

taxation, lack of incentives, the labor market inflexibility, all the issues that we've discussed for 20 or 30 years. It would be remarkable if defense spending...

was the answer to all of those problems. And, you know, I'm a bit skeptical. In the short term, it might make a difference. In the long term, you know, it's not as if we study Attila de Hun's textbook of economics to see how, you know, preparing for war is going to give you a better economy. Yeah. That's another one weird trickonomics thing, the belief that defense spending is going to change everything. I mean, it is a big change, but the idea that it's going to really reverberate across the European Union...

Going back to U.S. problems for a second. So if we can't count on a weaker dollar to save us, and meanwhile, it seems like we're going to get probably more fiscal spending, a bigger deficit. Does the job of reining in inflation now fall entirely to the Fed? Pretty much. There's a hope that some spending can be reduced because if you look at the share of government spending in GDP,

It's way higher than it was in 2018, 2019, you know, for the decade before we hit COVID. And, you know, the Republicans kind of got snookered by Biden when they did the debt deal in that they accepted a higher baseline level of spending that was way above the historical norm.

for the US. So the question is, can they get that back down? And can they do that in a way that's fair, equitable, that's not really going to be on the backs of one segment of the population or the poorest or the weakest or whatever? If they can, it would be remarkable. If Doge can get rid of wasteful spending, if they can actually find waste, fraud and abuse, that would be terrific.

But if they can't, and we know the history of these fiscal bills, which is that the easiest thing to do is to kind of say, well, we'll have a lot of supply side effects or we're counting on this revenue or that revenue, which may or may not come.

If it turns out that it's kind of steepening the deficit path and the path of debt accumulation, the Fed may be the only story in town. You wrote an interesting piece earlier this week talking about the sort of short to medium term outlook for the Fed. And it sounded like you see the window for rate cuts as being sort of narrow and shallow.

that basically in 26, 2027, we're going to be getting a stimulative impact, assuming this tax bill goes through and something that it looks like. Talk to us about like, you know, what the market is pricing in for rate cuts versus what realistically the Fed might be able to do here. You know, I guess I'm kind of at odds with the market, both in the short term and in the longer, medium term. This is what makes an interesting conversation. And in the short term, I kind of think, look, every survey you get tells you,

that everybody's concerned about growth. They expect growth to slow down. How many weak payroll numbers do you need?

To say, oh, wait a second, people have been telling us that nothing's happening, that things are slowing down. Now we get evidence. Do you need three? Do you need six? Or do you just say, well, yeah, that just confirms what everybody's been saying. So I actually think that they will do the right thing, which would be to ease in response to incoming economic data. Having said that, I would see that as an insurance policy.

because the fiscal bill is likely to introduce net stimulus. We're going to get some uncertain inflation. We'll get certain inflation effects from the tariffs. What's uncertain is whether they're one-off or persistent. So between the combination of tariff-induced inflation

And fiscal stimulus, it's not clear to me how they're going to cut. I think that the Fed might see themselves as having an issue in terms of saying, well, if we cut in Q2 or Q3, can we take it back in Q4 and Q1 with the president over our shoulders saying, don't do that?

But if you were running a model, you'd probably say, given all the data that have come in, if you get confirmation that the economy is slowing, you should cut. And then you should keep your eyes open to see what's happening at the end of the year to turn into 2026 and see if you have to take it back because the inflation picture has deteriorated.

Can I ask a basic question, which I kind of always wanted to ask someone, and given your experience in the market, I think I should ask you. What is the central bank playbook for stagflation? Pray. Look, in some ways, when you look at the history, Arthur Burns got dealt a very bad deck. And he probably didn't play it well, but he didn't have a good deck to play with.

Greenspan, Bernanke, even Yellen to some degree. Greenspan and Bernanke actually had pretty strong productivity growth when they were there, so unit labor costs were soft. Yellen had low inflation, so she could be everybody's friend because they were trying to get to their targets. And even Powell in his first term was faced with that issue.

But do you think with stagflation it's really tough? And there's no good answer. You know in the longer term that you can't accommodate a negative productivity shock or negative output shock because you'll just have persistent inflation. The only question is how quickly do you try and wring it out of the system? And that's, you know, that's a very hard decision to make.

Speaking of having views that are out of consensus, you wrote an interesting note a couple of weeks ago. I think it was before the quote detente with China. But actually, you're of the view. Yeah. And you've been talking about this tariffs will have an inflationary impulse. We'll see how far it goes.

but that actually the sort of short-term disruption from the tariffs you sort of thought have been overstated. And I think the markets increasingly come around to this view. I mean, if we were talking to you in April, early April, people were, you know, sudden stop to the economy. They pulled the plug on the economy, so to speak. But at least in the short term, your view is that

It's not quite as big of a deal from a sheer economic activity standpoint. Yeah. Look, 10% shocks the competitiveness. We get those all the time via exchange rates and life goes on. In the last 10 years, the Euro dollars moved 10% in a relatively short period of time, three or four times. It's not fun for the business people on the wrong side of that move, but they managed to deal with it. Yeah.

And China was different, but the imports from China in 2024 were like 1.6% of GDP. Of U.S. GDP. Of U.S. GDP, correct. And even at the worst of the sort of when we saw no boats there, we're probably running at about 50%, 60% of normal. So you're talking about 0.8% shock.

And you sort of say, okay, you know, you look at other shocks that the U.S. gets, you know, either via the exchange rate when you have a big move or via energy prices, you know, which is like 7% or 8% of the CPI. They can easily move 20% or 30%. That's something that everybody has to deal with. It's never comfortable, but the economy can deal with it. Where I did see a potential issue, which I think is really important, is that if we move from tariffs, which is a way of adjusting relative prices,

to start saying, nah, we just don't want X, Y, or Z from China, or we're going to limit imports of stuff. Using quantities to regulate trade rather than prices is

potentially has a much deeper effect because you really don't know how far prices will have to move in the event of a shortage to clear the market. So with that, you'd be playing with fire. But 10% tariffs, it's not that I'm endorsing it. I just don't think that they are as big a deal as they were made out to be.

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Although the boom has prompted concerns from animal rights groups about the ethics of reptile e-commerce and captive breeding, they haven't impeded growth. And hundreds of species can be found in pet shops, trade fairs, and online stores. That's the Bloomberg Business Week Minute brought to you by Amazon Business, your partner for smart business buying.

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It does feel to me like one of the complications of the current environment, other than uncertainty, which, you know, we've been joking on the podcast that we cannot get through a single interview at the moment without mentioning the word uncertainty. But one of the complications is you potentially have uncertainty.

economy sort of moving in different directions, or maybe the impacts of the tariffs are moving at different speeds. So you could have an impact on inflation relatively soon as prices start going up, but you could have an impact on the labor market later on because it takes a while for reduced demand to work its way through the economy. And that strikes me as something that

difficult to deal with for the Fed and also means they have a sort of limited window to operate in. How realistic do you think that timing scenario is? It's pretty realistic. Also, I think that the effects on labor show up sooner. Oh, OK. Because the say imports from China crash.

Are we going to build stuff in the U.S.? And the answer is probably not. The U.S. is probably not, even with 10% tariffs on a bunch of countries, the U.S. is probably not the second lowest cost producer for most of the stuff that China was producing. So, you know, we would get the price effects from China. I don't see that there would be any significant increase in employment there.

So I think we'd get them both at about the same time that demand was getting squeezed because this is a decline in real wages because of the price effects. But I think that they are very hopeful in terms of the quantity effects, the output benefits that they expect to get in the short term from the tariffs. And I suspect we're going to see the downside of that quicker than any kind of upside is likely to emerge. Before I forget...

You said something at the beginning. There actually are real non...

Non-tariff trade barriers employed by Japan. Apparently, it's not true that they have a bowling ball test where they drop a bowling ball on a car. And if it dents, you're not allowed to sell the car there. Apparently, that is something of an urban legend. But whether it's Japan or anywhere else, what substantive non-tariff trade barriers do you see out there that the administration has a legitimate case should be modified in some way?

Well, trade in agriculture is very limited in most countries. You know, there's certain health, you know, with more processed food, there are health regulations which may or may not be completely justified. And there are sort of barriers that you've seen documented over time. It's not that they're wrong. I mean, the U.S. put out this very thick book documenting non-tariff barriers, right?

But I think the importance is probably overstated

They should be gotten rid of, but it's not like cataclysmic type of thing. I mean, look, I think U.S. demand has been stronger than that in the rest of the world. So we've imported more and that's most of the trade story. I got distracted looking up the bowling ball test. Yeah. Did you find anything interesting? It seems to be something that Donald Trump talked about and is probably not true. By the way, I know we already had that agreement with the UK, but I think they should –

let cars drive on the right side of the road and would probably make it a lot easier for Americans to sell into that market. Joe, why do you feel the need to say these things? Keep going. All right. Steven, I'm going to ask a very basic question, a typical question for you, I imagine. But what are your clients asking you about at the moment? What concerns are you seeing out there? What are the questions that you're getting repeatedly?

I think corporate clients, you know, people who are in real businesses make things, sell things. I hate to use the word uncertainty as much as you do. It's okay. It is allowed. You know, the question for them is, you know, if I want to increase capacity, where should I do it? Should I do it in the U.S.? Should I do it elsewhere? How is this going to play out? Is it going to play out for four years or is it going to play out for eternity? Yeah.

And I think that they're having a very hard time getting their hands around it. And to them, that's the biggest issue. I think if you're investors, people who manage portfolios or, you know, trying to eke out gains in the market,

The question about where the dollar is going, where rates are going, how fast they're going, and especially nobody wants to be the sixth person on a trade because that makes you vulnerable. So they're very obsessed with kind of understanding whether any trade that they want to do is, like I say, a steepener trade in the rates market.

Has everybody else done it already or is there still room to get in and be able to do well on that trade? Yeah. On this note, I was out last night. I was talking to a couple of investors, one of whom is involved in a very large family office. But he was saying that it feels like everyone is basically fully allocated at this point. And like there's a lot of nervousness about putting on new trades and there's not a lot of cash actually sitting on the sidelines anymore. Right.

I think we would welcome some of that cash in the FX market because I don't think that positions are very heavy one way or another, given the moves that we've seen, say, in the dollar the end of last year, then the beginning, then Liberation Day, then post-Liberation Day, and after the semi-accord with China. I think a lot of people have actually headed to the sidelines as far as FX goes.

It may be more positioning in equities given the way it's moved the last month or so. And on fixed income as well. I mean, our view that rates will probably be higher at the end of the year.

It's shared by a lot of people. You know, it doesn't mean it's wrong, but I think that the caution about, say, buying bonds right now is very widespread. What is your end of year target for the 10 year? I believe we're just under 5%. So we'll be closer to five than to four and a half by the end of the year.

You know, I want to go back actually to something you said, which is that when you were in school, you're sort of taught that purchasing power parity. These are the things that help determine the fair value of currencies. And then once you became on Wall Street, you realize it's all about capital flows and investment and things like that. What else have you talked to us a little bit more about the gap between academic education?

economics, you have a PhD in economics from Yale, academic economics, and then the type of economics that's actually useful and that people pay money for on Wall Street. What did you learn or what did you have to unlearn? Ooh, that's a hard one. I think that you have to learn to question things.

and the assumptions that everyone makes. And you mentioned one of the pieces we did on how exposed is the U.S. actually. You sort of look at what everyone's saying, and you're saying, can I find some data that will either support it or oppose it? So the questioning of the data, being willing to question central banks and their policies, and even their policy framework. I think that that's something that's really important.

And it's something that is respected in the market. I mean, you don't have to be right all the time, but your arguments have to be well-crafted. And being able to formulate those arguments, I think, is very important. What was your PhD thesis about? Oh, my goodness. It was about agricultural development, how transferable technology was from one country to another. And when you think about, like, when you look at your career in finance, like...

Like, how helpful is this sort of like...

core academic macro, you know, all those equations and all that stuff. If it gives you the confidence to question what people are saying, it's enormously helpful. If you're just another brick on the wall sort of repeating what, you know, the models that you got taught in graduate school and thinking that they're right, I think you're going to have a tough time. And I still use some of the techniques that I used in my dissertation. But I think the key thing is to walk away from this

and being able to say, "Okay, I know the model says this. Is the model robust enough to actually capture what's essential in the real world? If not, how can I do better?"

And that's the value, I think, of the PhD. It enables you to question what everybody else is saying. It's like an arms race, right? The PhD doesn't necessarily help, but without the PhD, you don't have the confidence to question the PhD. Everybody just needs to unilaterally agree, no more PhDs. That's right. And then everyone will be on even footing. That works for me, but I know a lot of people without PhDs who are very, very sharp. And, you know, even Powell, whom I respect a lot, you know, no PhD, but

He gauges the weaknesses. Oh, R star, what's the standard error? Maybe plus or minus 20. You know, sort of understanding that, having the intuition to sort of know when something is really well-founded versus something that sounds nice but is all over the place, only works on a blackboard. That's really important.

I know we touched on a few areas where your theories differ from the market stance at the moment. But just on the note of, you know, the usefulness of theoretical academic economics versus real world, what's the biggest assumption that...

the market or policymakers or investors are getting wrong at the moment? I think policymakers everywhere should pay a lot of attention to the risk premium of having erratic policy and policy uncertainty. And you read some of the stuff that's written and sometimes it's written almost as if it's in a vacuum. I can do this and it will affect this market, which is the one I'm trying to affect, but kind of nobody else is going to pay attention to it.

You know, in the real world, everybody else pays attention to it. And so I think that that's sort of an issue that you want to take into account. You know, I think more generally, especially central bank policymakers, they're sometimes wedded to academic models. And if they don't have an alternative model that's viewed as respectable in academics, it's hard for them to say, well, it doesn't matter that it's not respectable, that it works, whereas the one that is respectable doesn't work.

It strikes me that part of the reason that there's so much uncertainty or confusion is

is that a lot of the big topics being discussed right now to some extent precede economics because they're really about like, you know, we're getting to sort of like core questions about institutional structure and politics, the quality of our political discourse, et cetera, and like the quality of elected leaders all around the world and so forth. And as such, it seems like you sort of like run into issues

a hard limit of like how far you can go in understanding anything simply by looking at the economic lens, which is no knock to economics. I love talking to economists such as yourself, but at some level, the tools and the economist toolkit are just not going to get you very far in sort of like discerning which way some of these questions are going to go.

Well, I think at a significant level, you don't need a high school degree to understand the issues. If you don't trust your trading partners to be reliable suppliers, so much so that you're willing to forego the benefits of trade, the benefits of economies of scale and efficiency, that's a real pity. And there's a real cost to it. And if we have to make all the stuff

that is made elsewhere. There's a cost and a bit of my own background, I come from Canada, there are parts of Canada that make very good wine.

And there are parts of Canada that make very bad wine. If you've ever had the bad wine, you're a free trader in wine for the rest of your life. Where is the bad wine region? I will not denounce the country of my birth. All right. I have a guess, actually. Oh, what do you think? Well, I was recently— You can say it. So I was recently talking to someone, actually while we were in Atlanta—

And I randomly heard someone talking about how there are some really good wine tours that you can take in the sort of Finger Lakes region of New York with the only caveat. It's very beautiful and you can take boats around from one winery to another. The only caveat is that the wine isn't very good.

And so my guess is that it would be somewhere on the other side of that New York-Canada border around there where the wine is not good. But that's just my, that's my hunch. You can get a lot worse wines in the Finger Lakes. All right. That's good to know.

We'll have to do a wine episode with Stephen, but for now we have to leave it there. Stephen, thank you so much for coming on the show. I'm so glad we finally got a chance to talk with you. Thank you both. It's a great pleasure. And you lived up to your awesome reputation. You lived up to the reputation. Thank you so much. Thank you.

Joe, that was great. I'm so glad we finally had Stephen on. Stephen's great. You know, on that last point where he is talking about the sort of the degradation of the comfort that countries have with their trading partners, it strikes me that this has to be a big part of the

part of the global rate story. Because if every country, and it fits into an episode we recently did with Scott Bach about the risks of deglobalization, if every country suddenly needs to start building its own things because their trading partners are unreliable, that means, A, you get less productivity, and B, you just need more spending, whether it's private spending or public spending. And so you get this story where every country sort of logically feels it has to

spend more into an environment of less productivity, which means higher inflation, which means higher rates. Right. And the irony, I guess, is that that happens at the same time that a lot of countries, to Stephen's earlier point, think that they can solve all their domestic problems through international trade policies. Yeah. You know, I remember like, you know, it was a popular thing to talk about like currency wars in the wake of 2009, 2010, 2011. Oh, yes.

And this sort of fantasy that countries can revive their economic fortunes simply via the exchange rate. And I'm sure within any country, there are sectors of the economy for which that is true. I suspect that a weaker currency for the U.S.,

is as always going to benefit our soybean farmers and our corn farmers to some extent. But it is not going to magically put us at the front of the line when it comes to the high value exports or the high value products, period, that typically characterize an advanced economy. Just one more depreciation, bro. One more depreciation will fix it. One more depreciation, bro, and we're going to match TSMC's Taiwan semiconductor prowess.

That's right. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Ehrman, Dashiell Bennett at Dashbot, and Cale Brooks at Cale Brooks.

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