Models Don't Work in Crisis, says Spence.

You do that when you're speaking to the lawyer at Michael Spence of New York University, and that when you're a gentleman who changed graduate school education across this nation profoundly, as Michael Spence did it Stanford gsb Um a few years ago, and when you do what he did within economics across numerous economics platforms, including our study of information, how we receive, how we push, how we miss information? With his Nobel Prize, with Mr Aklof and Mr Stiglitz.

There's a lot of ways to go. And of course Pharaoh is brilliant and goes right to the moment, which is in crisis. What do we do? Turkey's in crisis. The Central Bank comes out what John forty minutes ago says, we will take the necessary steps, whatever that means. And then the reports come out of Turkey that he'll be mating with them the president, Mr do models work? Everybody's got all this advice and help in that, and yet after Guy Jonson's interview with Mr Aeroine yesterday, nobody uses

the models in crisis? Do they know? Because they don't work at crisis. I mean, what you have instead of models is m experience, a growing body of experience. And so if you if your currency comes under attack, um, you basically have to let it decline a bit and then and then raise interest rates and and do a balancing act. But the mode, the models themselves just don't

capture this. How difficult is it to regain credibility with markets when markets no longer believe you have any Argentina with a great example of that over the last couple of weeks, How difficult is its response to that? Well, if you respond, I mean is you can do it, but but it's not easy. And if you make several mistakes in a row, then it's then it gets a lot harder. So I mean, I think, and you know, and then it takes a long time. But the Russian

case was a good example. I mean the Russia Central Bank, it took quite a while, but then eventually re established its credibility and the and the currency stabilized several years ago. Remember this episode, So it um, it's better, it's certainly better not to make you know, well known mistakes in dealing with this. You mentioned the AMIS rate. Yeah, for for central banks looking at that currencies, walk us through what central banks may or may not have learned um

economic history. Well, what I was saying is that, you know, I mean in the Asian financial crisis, I mean, some of these countries tried to hold up their currencies because they had um dollar or hard you know, hard currency denominated dead and they basically ran out of reserves doing that, at which point, you know, chaos ensues. That's the one side that's propping up your currency and you run out of ammunition. You know, you have the British case, a

whole lot of experience. On on the other side, you can it's not necessarily a good idea if you overdo it, but you can hold down the currency by by accumulating reserves for a fairly long period of time. And so that's the asymmetry. There's there's much less severe limits in on that side of the Ledger. What you wrought It's Stanford was all intimately about executive leadership and government. We have not been able to speak to you since President g decided he would take more lengthy term with a

new communist experiment in China. Your comments please on the distinction of one or two terms or forever terms, and particularly within the new template of a new more totalitarian regime in China. Right, So, China has moved in the direction of being having the party both clean up its act and be much more intrusive in multiple parts of the society and the economy. UM. I think Chinese are you know, when you get to find get them to

speak frankly, you know, sort of off the record. Uh. Understand that the reform program is sufficiently large that they're willing to grant that maybe two terms wasn't ideal at this stage, you know, because he'd become a lame duck in the second term, and and therefore they they might have thought that, you know, extending that UM is not a bad idea. That's a little different than, you know,

than leader for life. Uh. And so I I do think in within China there are people who are nervous about that um, that rather extreme version of UH, altering the term limits that they that they abided by for several transitions. Very quickly here on the linkage the correlations of the markets, I feel like I'm talking to professor Engel over. Do you see correlations that can cause challenges? I mean, I'm not an expert at this, but my sense is that correlations go up when there's turmoil or

crisis for sure, UH. And and that certainly does cause problems. I mean it cause problems for investors because you know, reduces the benefits of diversification. UM. But it's also a signal that there's trouble somewhere. We're going to leave there. Michael Spence, thank you so much, greatly appreciated. He is at New York University, among other things. Can't say enough about his book. I'll throw it out my book Twitter site here from five, six, seven years ago as well,

seen foreign exchange was boring. I can sally seen FX is anything but boring. Joining us now David Ranney Blue Bay, a set of management chief investment strategist. David just talked to me about what is happening in foreign exchange and how it is changing your world. Well, The big story is that we've seen this resurgence in the U S. Dollar, and I think that's a pain trade for the market more generally, I think for risk assets, and we've clearly

seen that spill over into emerging markets. And you know, I think that rather than actually higher US rate has been the catalyst for exposing those emerging markets which have either weak fell up fundamentals and weak policy credibility. And that's really been Argentina and has been Turkey. So this raises the question, David. Over the last several weeks when I've asked many investors and strategists about the renewed resurgent US dollar strength story, the pushback I get is this

is just a squaring of positions. I struggle to find the belief in the move um. The short story has been a slow burn to eventually capitulate. David, where are we Do people believe in this yet? That this could last? I still don't think people believe it will last. And Buddhist speaking, I mean I'd share that view. And I think what's fundamental to that view is during the course of seventeen and coming into this year, it was a

global reflation story. The US was not the only economy that was growing strongly and where you could get both higher rates but also higher equities and risk grows sensitive risk assets. Emerging markets were doing well, China was doing well, Europe was really powering ahead and was a big upside surprise. What we have now is that we've had some weak data.

We've got Japan printing a negative print on Q one GDP, Europe has come off the boil, and so I think the dollar move is really reflecting going back to that story whereby maybe the US is the only place in town, and that has implications both in terms of divergence in in rates, but also in terms of where you can get um, where you can get returns. If I think the market and we do believe here that we will get a rebounding global growth in the second quarter that

slowed down in Europe is is largely transitory. China still holding up. And if had occurred and I think this rally and the dollar kind of runs out of steam, well you bring up rates though, and rate differentials are clearly a story that we should be talking about. It looks like rates of recoupling with foreign exchange. If you look at rates in the United states relative to rates in say Europe and look at Germany, that two year BUN treasury spread has blown out to three hundred and

fourteen three hundred and fifteen basis points. That screams dollar strength. It screams euro dollar must go lower, David, Why does that relationship not re established itself in a more material way that is lasting. But I think that spread, the gap or that you yield gap on the two year is reflecting that the market has been pricing in higher fed hiking path uh. And we saw that in the

back of yesterday's US sales data. Well, they've actually been taking out some sort of past or normalization starting next year in terms of ECB rates. And that's what's been driving What's what's been driving it. It's been disappointing growth data coming out of Europe and better than expected data coming out of the US. I think once we start getting convergence in the economic data, we'll start getting a closing in that two year gap, and then the dollar

runs out of team David. What is fascinating to me is how all of us have any ilk have forgotten a ten percent correction in eighteen percent bear market and stocks and of course folks, we can go much worse than an eighteen percent bear market. Is our rationalization of these new instabilities different now because we really don't remember the volatility you and I studied and lived for years.

I think it's a good point, Tom, that the market and investors for a very long period now have got used to having central banks and particularly the FED at your back, and therefore you know, they crust volatility. I think, um Jerome Pou made a remark some time ago about the FED balance sheet was essentially taking volatility out of

the market. I had a sort of short volatility position, and with the FED running down his balance sheet gradually normalizing interest rates the famous FED put, I think is quite a long way out of the money. Then I think we're going to get more volatility. And where I think we're getting caught out a little bit on on the investor side is that we have not fully built

that into the way that we're positioning. So I think part of the volatility that we've seen in uer sequities with the short et F and in places like Argentina for example, if we bring it to to there has been very crowded positioning, then you get a volatility shock called capitalist for volatility, and then everyone's scrambling and it's one way marketing, everyone scrambling for an exit. That's very narrow, David,

we're talking about shocks. But I just wonder whether this is all sort of a natural, gradual process of rebalancing portfolios away from risk. If you think about what QUE was for, it was about rebalancing portfolios towards risk assets. Now, as they wind down QUEUE on a global basis and QUE becomes QT quantitative tightening, shouldn't the opposite apply that you rebalance away from risk to some degree. But it's also remember that QUEUE was taking um, you know, duration,

and was squeezing the term premium. So if you're a Euro investor right now, um, is it an obvious thing to do to go out and buy ten year buns sixty basis points? Is it an obvious thing to do to go out and buy UK guilt which are given you a negative real rate of between one and two percent. I think treasury is for a U S investor as donting to look potentially pretty attractive. So I think we may well get some of that rotation that you're describing

UM in in the US. But I think What's crucial in Europe is that even as the ECB brings Queie to an end, is their forward guidance do they anchor short term interest rate? And if they do, volatility remain constrained. And I think on that basis, things like you know, sovereign credit as well as corporate credit can actually do. Okay, David, what's a cash right now? I mean there's there's John

mentioned earlier. On a real basis, cash has value and on a percent growth of yield, cash is outrageously wonderful versus what John six months ago is cash is cash like the new asset. Well, I think cash and that move higher in cash rates in the United States has been one of the most profound shifts during the first

part of this year. I think some again, some of the repricing we've seen of emerging market credit has been uh a response to that higher US cash rate and also the higher effics hedging costs of that implied basically, you needed wider spreads UM and a repricing in order to justify why you would be holding UM an emerging market credit dollar asset versus exactly as you've alluded to, Tom, holding US cash. I think absolutely right. Like us, cash has become, you know, a factor. But again a comeback

to the rest of the world. When we as investors decided that we're going to part some money into cash on some of our Euro denominator strategies, it's actually costing us fifty basis points to actually do that, let alonely apply because of the loss of carrier as well. So the moment is more of a U S story than a than the European and rest of the world story. David Raley, thank you so much from them this morning

with a I'm really pleased to say that. A quick phone call away and Jane Foley joins us head of FX Strategy at rubber Bank and joining us out of the capital, the global capital of the foreign exchange, the city of London. Jen, it's always great to catch up with you. There is some euro weakness and dollar strength.

How much of a pain trade is evolving in the FX market at the moment, Jane, Well, I think actually we can go back to February to see the beginning of this, and I think if you look back then we do see the dollar really began to perform well against the emerging markets, which are called suberhaps more sensitive to risk capitaes any more sensitive to hire US rates

than perhaps some of the other markets. But it was any really a few weeks ago where the breakdown in neural dollar really began to focus on markets attention on the strength of the dollar. But I think really today there's there's now more attention on Italian politics and perhaps more attention on the structural weaknesses within the Euro as well as on dollar strength as well. Before we get to the European side of the trade, let's begin with

the US dollar. Is the consensus short dollar position for is it capitulating? Jane, I think it probably is, and we changed the view it was. It was much the fift when when I took out the view for the higher year a dollar and put in a stronger dollar.

And this was partly because of that that picture that was emerging with with lower levels of risk appetite, the fact that emerging markets were beginning to get a little bit more worried, and that I think was treating from these high risk or high yield trades back into the U. S dollar. So I think at that point also the market had built up pretty short dollar positions and was also pretty long in a lot of high risk markets and including long in euro as well. Within this chane.

And we heard this yesterday from one guest, which is the rationalization and the people bet one way for whatever reason, we're removing another way. It will go on a step basis. To me, that's a market chat in trader chat for the idea of rationalizing moves. Is the rationalizing you see um a rabble bunk desks. Is it the same as other instabilities we've seen or is there something different this time? Well, I think that's I mean, this is this is not a crisis in the way that we've had prices before.

And to be honest, I think with this one, I think a large part of it might be just positioned. And I think the market really got excited last year there was so much risk capitite in seventeen. We had far better global growth than most people had anticipated from places like Europe and places like Japan, and that really lifted a risk capitite and people were really pushing ahead of themselves to to get hold of a high risk, high yield et cetera. And I think that took it

into this very first part of this year. But I think as we moved into February, that began to change, and I think the market was just positioned perhaps all right, in order to face a new world of Lester's appetite. I mean, just as an example in Folks, a bank like Robble Bank deals with this in the trenches. We're

all talking dollar based speculation. Business has to get done and with a strong chairman Powell dollar for whatever reason, whatever anybody's theory, the fact is oil and goods in an e M economy, a non opec EM economy really begins to pain the public, which folds into the political process. I'm describing. Turkey is one example. What's that tension right now,

Jane Foley that robble Bank hedger c not speculators. What are the hedger c in terms of domestic pain in e M. There's a huge amount of attention, a huge amount of pain, certainly in countries such as Turkeys, countries such as Urgent tina Um, and I think if we look at Poland also, I think the movement in that currency is not anticipated by the majority this year, so the companies that are trying to deal are certainly feeling a bronson and this will have an impact on investment

and potentially on growth for a while to come. And what's so important, Jane, as you see it not you know they're not doing in Argentina, but Brazil was pretty ugly yesterday. Or Malaysia's bringing back at ninety two year old. I get it, and there's a popular recovery. But they're these set of tensions, folks, that aren't about three zip codes in New York. They're not about three zip codes in London. They're not about two zip codes in Hong

Kong or Singapore, Jane. They're about these domestic economies. When do they begin to snap or break? Well, I think perhaps they are, and I would you know, in Argentina, I think they have broken Turkey. I think it's coming to a boiling point because we have an election in around about a month's time, and that's going to be really really telling whether they're not this stiff and or this this conge in the currency makes any difference in

that result. So that's another really interesting one. But but certainly, you know, we are seeing very significant moves in foreign exchange, and some of these moves have been brewing for some time. And when I again, I would say go back to February, and we do see a lot of these these movements, a lot of these um distallar move really begin to take place. Back then, let's talk about Turkey and the

Turkish laer a record weakness once again. Earlier in the session, a bit of strength came through as the central bank started talking about taking the necessary steps Jane, what are the necessary steps for the Turkish Central Bank to take now? Well, if you ask that question a week ago, I might give you a different answer because it was earlier than week.

We did have president earlier and in London we had that interview with Bloomberg TV and you seemed to indicate that the central bank is no longer an independent central bank now. Really, for for many people in the foreign exchange market, that we would assume that if the currency goes into free fall, et central bank can come in and hike interest rates for protecting a temporary period of time and then start to draw back on that. If that center bank it is not independent, can they really

do that? Argon was saying that he wants rights to be lower, and he thinks that needs to be down for the benefit of the Turkish economy, and that's really difficult for investors to to reconcile. It's a really important question, folks, and we must point out that since Ms Foley trumpets the Guy Johnson interview, Guy Johnson just email me and

say you can have Jane back on again. But within that Jane is the old crux which you won't see in a CEFA exam, which is the idea that the markets test a central bank, whether it's the huns and silver a million years ago blah blah blah, or sorrows

and sterling zillion years ago. Jane, is that what happens markets test a institution in trouble, Well, they can do, but you know these degrees of being in trouble, and and Turkey is always vulnerable because it does have a very large current account deficit, and that means it's it's more susceptible to the whims of of non domestic investors.

And that is perhaps why you would expect a cential bank like Turkey or the government of Turkey to to to actually want to applicate the international investing community a little bit more than we saw at the start of this week. So um, that is a currency that can be volatile if you had a current account surplus currency, it's not so vulnerable to the whims of of of investors taking their money home. And unfortunately with Turkey, yes it can be quite it can be tested quite ferociously

because of that current account deficit. Jane Foley, it's great to catch other you. Thank you for giving us your time at such short notice. This morning, as the foreign exchange starts to generate a few really interesting stories. One of the joys we have is to dive into economic research and investment research from firms that are hyper focused.

Now would include High Tongue out of London. High Tongue really digs into Asia, tries to you know the phrase I use go beneath the headline data and really find out what is going on. Miranda car joins us now head of China China Thematic Research at High Tongue. Miranda, if you were to have a cup of coffee, not so much with the president, but just within anybody in Washington, what would you instruct them of how they are viewed

or perceived from Beijing? How does Beijing perceive greater political Washington. Well, I think the Washington under Trump has thrown a lot of the sort of Beijing's calculations into into a slight disarray because it's it's it's much more difficult to deal with someone who's um where where you're conflicating a lot of the different issues where there it's trade, intellectual property UM, dominance in different global markets, plus with sort of North

Korea UM. So how you then go and tackle that um in is raising quite a lot of questions domestically, But I think I mean, obviously sort of Leo her is over in over in Washington just now, and he's able to probably to offer sort of quite a bit in terms of trade concessions, but that they're still not going to give much ground on terms of you know, the made in China I p UM and trying to

sort of stop trying technological process. Well, what so it was so valuable about you being on the show is I think many of our listeners, if that most of our listeners sort of kind of like understand when the president says he wants to make a deal what that means, or maybe we want to understand what Mitch McConnell thinks when he says he wants to make a deal to get Republicans to vote with the Democrats to vote with them. I get that when the Chinese say they want to

make a deal, what do they mean. Well, the thing is a lot of the sort of trade war is not at all in China's interests. This is not something that's that's good for them, and they want to you know, continue to trade, but also to continue to develop their their domestic side. So if they can get something where um, if they can increase imports, even on a temporary basis, and and get that side sorted out as but still be allowed to develop their their sort of own technologies

in their own companies, then that's the most important. But in terms of it being a I mean, I think getting a getting a deal done is going to be the obviously the main focus, but then the longer term it raises more and more issues about how you control that intellectual property and then the ongoing and I think what's happened the really problem this time and getting a deal done is it's China realize they cannot rely on

the US and US technology in the long term. So you've actually just raised the States quite significantly in the sort of long term game. Miranda, what does realistic success look like? We send the demands from the United States, and I have to say most people would agree most of those demands are very reasonable. The Chinese need to open up. They haven't been doing it quickly enough. What's realistic though, in terms of what the Chinese can give

the United States? Well, I think the focus China is probably going to very much focus on UM increasing imports, and so it will it will offer to to reduce the trade trade trade deficits through the through that through increasing trade imports quite significantly. UM. It can also say opening up the financial markets, opening up the auto markets for luxury goods, et cetera, because that's something that's been

on the cars for quite some time. So it might it maybe seem as a concession during the current talks, but it's actually been something which is UM. You know, there's no major hurdle to that happening. That. The big issue where there's going to be massive pushback though, is the request to stop the MAID in China into five program and to stop the technological progress in China, because that, particularly with the whole d d um um disruption potential, then China is not going to want to rely on

US technology. It's going to want to build more of its own domestic technology and and that sort of long term is not going to be not going to be really be negotiable, So rerender. What do you suggest is the best way for the United States to tackle what is a blatant attempt to dominate certain industries and using protectionist methods to do so. Um, that is basically what

met in China. Is actually the United States tackle that? Um, It's it's very difficult to do so because the US is the US companies obviously rely on the Chinese market for quite a high proportion of sales. So is they is they try to put up barriers to China and

sort of say, well, you can't develop this industry. Then I think one of the one of the threats has been that then China could take action against companies like Apple, which could obviously have they have very high revenues in China and that and that could come under threat, um if you did have a complete breakdown in in in negotiations.

But in terms of the I mean, I think the key thing is to try to the US and Japan stays similar issues back in the nine nineties, and there was constant tension and there was three or three or one investigations, and there was constant negotiations. But now you have a situation where both sides are developing their technologies. They're competitive, um, but they're also complementary. Now that would be the that would be the long term goal I

think for for China. Miranda Karr, thank you. Similar to the High Time, greatly appreciate perspective, their sea matic perspective on China. I got good news, folks. Kevin Currel is with US, our chief Launchington correspondent. The bad news is he's a slow reader and he's only on page eight hundred pages of Donald Trump Jr. Transcripts and I guesses total, Kevin, let's cut to the broader view here. Does Mr Mueller care about these documents? Is there anything in here that

would be news to a Special Council? Or is this old news and a media frenzy versus what the Special Council knows already? Good morning, Tom. I'm embarrassed to say

that I'm even slower than that. I'm only on about page twenty six of these documents of hundred page document dump, but so far from what I've gathered, as well as what other of my colleagues have gathered across the Beltway media is that there does appear to be new information regarding that meeting that Donald Trump Jr. Had met with Paul Man for the president's previous campaign manager or campaign chairman.

Uh too, with regards to a Russian lawyer. You'll remember that they had said they had walked out they thought it was nothing. They were promised dirt on quote unquote dirt political dirt on former Democratic presidential nomine Hillary Clinton.

I did get in touch with Donald Trump Junior through a spokesperson, and he released a statement that he says, quote, he appreciates the opportunity to have assisted the Judiciary Committee, and he also actually thanked Chairman Grassley and ranking Member Fine Steiner Republican and Democrat, respectively, for their quote unquote professionally.

And we read it on air, Kevinists sounded like, you know, one of his good attorneys wrote it, which is great and all that help our global audience and our audience coast to coast. It's not addicted to this like you are to the Philadelphia Eagles. What's the so what of

this moment this morning? Well, I think the so what is that it continues Congressional and investigations, which are separate from Bob Mueller's investigation, which quite frankly, I mean, both investigations matter, but if you're in the global audience, Bob Muller's investigation is the one that matters the most because it's the one that could lead to a host of

other potential problems such as impeachment proceedings or whatnot. Not that I'm suggesting that there's any appetite for that right now, but that investigation from from Bob Muller is much more independent than the political investigations up on Capitol Hill, And the political investigations up on Capitol Hill really are only at this point used to kind of frame the goal post of what's out of bounds and inbounds, and Bob Muller's investigation is really the one that is the most notable.

Does that make sense, No, it does not make sense. Sorry, well, Kevin, I I want to know why what was the impetus for Senator Grassly to release the documents. Well, I think that there's a couple of things. I think that that folks want to know what's what's going on, what was said, and and I think from the administration standpoint, phim if they get the documents out there all at once, they're

not they're not being beholden to selective leakage. We should know that Senate Democrats did leak some excerpts ahead of the the entire dump at nine AM, and then I think the Democrats, you know, they don't mind keeping this in the headlines as well. That said, it's hard, it's hard to see how how these congressional investigations are not political at this point. So does that make it more difficult for UH for investigator Mueller to actually continue his

investigation if this is really leak versus leak. No, in the sense that I think that it also allow if you talk to folks who are very much carefully following this in the political world, it allows for Bobbler's investigation team to kind of get things out in the public forum that otherwise might not be in all so to to to again set the parameters of of really what's

an investigation here? I mean, when you have congressional committees, Bob Muller's investigation, as well as UH intelligence saying that that Russia tried to to influence and the election and divide Americans along every which way, I mean, that's that's now a fact. Well, I know you're gonna be busy. You've got a lot of pages to read today. I want to thank you very much, Kevin Serlian to our chief White House correspondent, knows all about what's going on

in Washington. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio