Volatility Suppression Turned The Entire Economy Into One Big Carry Trade

of implicitly looking like it's one trade. So many things seemed to go up and down together that while you sort of think that, okay, investing should be some search for interesting individualized opportunities, everything kind of looks like it's it all trades is one. Yeah, that's exactly right. And I think there's been quite a lot of discussion at this point, including on that last episode, about how the market is being generally driven by interest rates a k a.

The central banks. Right, So, the story that multiple multiple guests have told us is that, well, we get into this situation, you know, which growth is slow, perhaps due to income inequality. That means that asset prices rather than sort of actual demand, becomes a key vehicle of what drives the economy. That means the central bank then is ends up becoming more sensitive to asset prices when it

comes to easing policy. That few further fuels asset values that further exacerbates the inequality problem, that further uh causes weakness and growth, that further causes the central banks to then act, and that we're like in this spiral that you know, by some accounts maybe has gone on four decades. And if that's the story, then I would say, you know, it really feels like COVID right now is sort of

a accelerant of that whole process. Yeah, I think that's right, And I think it gets to a theme that we keep coming back to in all these episodes, which is if we are slowly recognizing that the financialization of the economy is not a good thing and we're trapped in this sort of endless cycle, then how do you actually

break out of it? And we've had so many of those discussions now with proposed solutions ranging from fiscal stimulus to full employment policies and that sort of thing, right, and you know, it sort of gets to this idea or it's like, okay, if you know that every time there's going to be a crisis, you know, like I were saying before the crisis, and this is something that you and I talked about a lot and You've written about it a lot, the rise of private sector debt,

particularly corporate debt, share buy backs, corporate leverage, private equity, uh leverage, you know, like people like, okay, but this is all fine. But if there's a downturn, then this all explode. But of course, if the you know, central banks expand credit start buying bonds directly, then you can have an economic downturn in theory without the financial market exploding. And that's kind of what we saw up and in

March and then through now. Yeah, exactly, And I think, I mean, this is one of the reasons why we're talking about this right. People intuitively feel a little bit uncomfortable about the real economy being in a terrible state while financial assets are booming. Well, well they mind. Were you going to say that they were booming up until a few weeks ago, Yeah, I was. I was trying. I'm trying to cave it just in case the market crashes further over the next few days. Well, we are

recording this on Thursday, September. I think the episode will be out in a week, so who knows. Either we may have had a crash since then, or we may be back to all time highs on the sp but hopefully whichever way it is, or maybe's be flat hope, hopefully, whichever way it is, I suspect that the conversation will still be will still be useful, still be relevant. I agree, I think so. Today we are joined by three guests for all the the co authors of a new book.

It's called The Rise of Ry, The Dangerous Consequences of Volatility, Suppression and the New Financial Order of Decaying Growth, Recurring Crisis. That that last line, decaying growth and recurring crisis certainly feels like a theme. And I'll do a quick bio, quick intro of our guests. So we're going to be The three authors are Tim Lee is the founder of a PI Economics and has a long time study of

the field. Jamie Lee he worked for Jeremy Grantham, also a long time expert, also an environment and environmental research and volatility trading. And then Kevin cold Iron, a lecturer in financial engineering at you see, Berkeley's host School of Business. So we're gonna see how this goes. We're gonna see

what the Rise of carry is all about. Before we bring them in, I was just you know, reading the dust jacket again, and the questions at the beginning feel like the questions that I really do think are on everyone's mind. Why have markets risen and crashed so suspectacularly over the past years. Why is the stock market outpacing the growth of the economy. Why do companies buy back stocks? And this is a really big one. We should probably

question ourselves this a lot at the media. Why do traders take every utterance of central banks is the word of God? These are the questions that their book purports to answer. So I think if we can answer all of these questions in the next thirty minutes on this podcast, listeners will have found a lot of value from that. So Tim, Jamie and Kevin, thank you uh so much for joining us. Thanks for inviting us our pleasure. Thanks. So, why do we take central bankers word uh words is

the voice of God? That's a great question that I think sometimes our listeners and viewers of TV, they're like, oh, you guys sort of make such a big deal of every random utterance from J Powell or regional Fed president. What's the deal with that? So we're arguing in the book that um, the main transmission of main transmission mechanisms. Central bank policy has really been through at least over the last years, has really been much more through their

actions in suppressing financial volatility. And Joey, you've already kind of uh said quite a few things that we would agree with in the book, that we seem to be trapped in this sort of circle vicious cycle of markets that rise for long periods, the economy seems to be rather asset price dependent, and then you get these crashes and central banks are sort of scrambling to support markets and when we go into a news cycle, and and we're agreeing with that really and and in the book,

we're sort of saying that is taking us into this what we call it a carry regime, whereby markets have become increasingly disconnected with the real economy. And I think we've seen that kind of spectacularly this year, which is, you know, since we since we finished the book. But we're we're we're we're saying it's much less to do really with the kind of traditional idea that central banks are pumping money into the markets and kind of creating

this surplus of liquidity that can only go into asset markets. Uh, it's it's it's much more to do with the fact that, um, we've come into this what we call a carry regime where a lot of financial structures, transactions trades across the boarder even even including things like private equity, but certainly including things like bier and property or various types of structured finance currency carry trades, which is where we start the board, because that's some more common type of carry trades.

These kind of these kind of trades, which were essentially short volatility trades, have come to have come to dominate markets and really be the primary drivers of asset prices, even if we don't, you know, see that in an obvious way they are. And then so that's associated with more debt and more leverage, which kind of requires these kind of trades because their liquidity providing and these structures

they provide liquidity to a system that needs liquidity. But at some point you end up there's too much leverage and there's too great to disconnect if you like, and then you get a rapid crash and central banks step in with all the measures that they do which suppress volatility again and encourage a renewed growth in those same sorts of carry trade. So we're sort of in this carry regime where the market has become disconnected from from

the economy. And we argue further than that that as you've already touched on you're you're talking, I think about how all asset prices could have become seemed to be rather the same thing we say in the book that really has changed changed, changing the nature of money itself, and that the low levels of volatility of a lot of financial assets that should really be considered risky assets in a normal world, you know, they're included in ETFs and things like that, they suddenly seem to be too

many people much more money like because the central bank is is standing behind in some sense, a lot of financial assets of effectively become contingent liabilities of the central bank, not just money being a liability. And so um. So we've had this, this carry regime has been associated with a kind of or the whole range of financial assets appearing more money like, and then in the crashes that those crashes appear as a kind of complete evaporation of

liquidity across the board. And I mean that central banks feel they have no option but to take even more drastic measures than he did the last time. Around. This is really interesting, but I mean the argument here is basically, as I understand that the growth of carry generates easier financial conditions because financial assets become more liquid and more credit becomes available. And then when the whole thing starts

to reverse, you see financial conditions tighten. And that's what sparks or what encourages central banks to step in and prop up the more ket because they don't want to see credit and liquidity drying up for the real economy. I'm wondering, could you maybe give us a concrete example of how you see a particular carry trade generating liquidity and credit in the real economy. It sort of walk

us through the steps of how you see it working. Yeah, so currency carry trades are the most obvious case because you're you're the currency carry trader is borrowing in a you know, very liquid funding markets. Say, well, in the case of the dollar funded carry trade, which has become the dominant one at a low interest rate and then

um providing those funds. In a sense, Turkey would be the obvious example now because Turkey is kind of liquidity deficient if you like, they've been in a continuing kind of rolling crisis. Provides those um that that liquidity too

to the higher interest rate economy. But I mean we're we touch on in the book, how you know, it's hard to sustinguish sometimes between liquidity in the sense of economists use it and liquidity in the sense that financial market participants use it, meaning, um, you know, the ease of transacting in a financial asset and carry trades are

particularly important I think for that latter case. And in the book we have quite a lot on volatility selling trades in the stock markets, say which which those kind of those kind of trades simply a simple one would just be writing put options, but or you know, you have shorting Vicks futures or a whole variety of ways ways that you can short volatility in the stock market. They essentially provide or buying the dip, as we say, to which their equivalent. They essentially kind of kind of

like market making trades. They make it easier for level traders or those are a bit overexposed to exit the trades. And you could say the same. And I'm sitting in the UK where you know, by to rent properly or by to letters we call it. Here has been such a big factor in the property market. Bye, let's investors in the property market. That's the carry trade too, because they make it easier for properties pople want to sell to sell their property. Just zooming bag for one second.

And for people who maybe aren't familiar with the terminology, how would you, to an average person, define what a carry trade is? And then you know, I still think it's probably not intuitive to people, how to say, buying the dip in the stock market is sort of economically equivalent to buying a house with the intention of renting

it out to someone. So explain what carry is, and then how sort of you cannot you know, sort of the logistics of how that ends up being the same the same trade to So one definition we given the book, which maybe is a bit out of the ordinary, but we think it's quite useful, is that carry trades are trades that use liquidity to provide liquidity, and so a

bye to rent house is a very good example. I mean, anyone who does bite almost anyone is almost certainly going to be taking out a mortgage to do it because they're enormous tax bunch doing it, and because how it's too expensive to buy without leverage. Now, so you're using leverage, but you're doing so to become an active participant who'll be alp liquidity to future house trade is as as Tim was saying. And and also you know you're converting the extremely long duration house into a bunch of one

months or one year short term the sassets. Either way, you're liquefying the market, but in the process of doing so, you're taking on liquidity risk yourself. You can even think of it in a much more simpler way, where it's a trade that makes money when nothing happens. Right. So the classic example that we've talked about is, you know, you you borrow in the end of finance and position

in the Australian dollar. That's a positive yield trade if the if the currency doesn't change, that that makes money. And the same thing of um, you know, if you're like an insurance type of trade where you're selling puts that has an income, a premium income, and as long as the market doesn't change, as long as the world stays pretty much the same, you're the trades profitable. So carry trades in all forms generate kind of this consistent income.

And then there's these occasional sharp drawdowns and that that's quite important because what we're saying is as these trades kind of work their way across the financial system, the stock market and the overall economy is starting to basically show the same characteristics of carry trades, which are steady

profits but occasional crashes. So it's no accident and that we've had these big crashes over the last you know, ten years, it's it's because they the underlying nature of the risk is is kind of mirroring carry trades, right, so this is kind of the picking up pennies in

front of a steamroller idea. And the example that jumps out to me is what happened in the treasury market in March of this year, where we had a bunch of hedge funds that were arbitraging these tiny differences between cash treasuries and the futures contract for treasuries funded in overnight market, so they were basically borrowing liquidity and the trade worked really well as long as nothing happened in the treasury market. But then in March we got a

bunch of volatility. Everything went haywire, and some of these hedge funds suffered really big losses. If one of the hallmarks of carry trades is this idea of steady profits and then a big blow up. What does it actually mean for investors and players in the mark. It doesn't mean that the people who are able to continuously survive those blow ups and continuously keep tapping liquidity are going

to be the ones that that keep going. That's so we actually talked about that in the book, and there there's some people, I mean, ideally without you know, in a kind of totally free market, it would be the people with the very strong balance sheets who would um you know, be natural providers of carry and some some level of carriers important. As Jamie said to liquefy markets.

Part of what we're arguing is that when central banks, you know, because of their role as a lender of last resort, come in and truncate volatility, they truncate the left hand side of distribution, they truncate losses. That does

two things. One it you know, kind of makes the balance sheet of the people who were natural carry traders even stronger, so sort of reinforces their existing advantage and to it encourages people who maybe don't have the balot cheat like the hedge funds you revenue referenced earlier to enter the trade, and therefore the carry regime, as we've talked about it expands over time because carrie looks more profitable than it probably should have been, given the fact

that central banks kind of truncated the volatility, they suppressed it, they stopped some of the losses. So that's not necessarily blaming central banks. They're acting to backstop the markets, but that has this kind of quite important second order effect

of encouraging the growth of carry trades through time. So, you know, one of the things that people have pointed out, and I think there's a corollary between the sort of real economy on the market here, which is that we used to have like sort of recessions where there will be some inventory cycle and the economy would go in a downturn, and then companies would maybe layoff workers and celter their recessions, celter their inventory, and then over time

maybe they would need to build it back and re higher workers than we'd come out of our recession. And we also use to have bear markets where maybe the market we just traded sideways or down for a few years and then there will be some new regime. And it feels like maybe since like two thousand one or so, in the last few downturns, we don't really seem to have recessions or arguably even bear markets anymore. We just

seem to have crashes. And I'm curious if sort of what we saw with the Great Financial Crisis and then uh, sort of what we saw very briefly is sort of the new model as long as we're in this regime, that we don't have these sort of slow rolling downturns, it's just a crash because the moment the income starts to dry up, at the moment the asset prices start to go down, everything on ravels until very very quickly under the carry regime, until the sort of central bank

steps in. Yeah, I mean, that's that's what we're saying. I think perhaps the point we haven't emphasized enough so far is that the way we define carry trades in the book is that the liquidity providing, as we said that, but also the level they're always leveled. You know, they involve leverage. If they don't involve leverage, they're not already carry trades under our definition, and they have that this they they kind of make money if nothing changes, If nothing.

You know, if you don't have a lot of volatility, you don't have a problem. They make money, then you do have a problem they suddenly lose, and I think they also carry trade also always has a kind of target asset at the back of it, a currency carry trade. Obviously, if you kind of borrow U S dollars now and put it into a Turkish mirror bond or something, your target assets are Turkish lirror and and and the bond.

And you're saying, you know, by to buy to let property I was talking about earlier here, although they're aimed um ostensibly at at extracting income the yield pick up or the premium for the volatility short you know, writing insurance to also is another form of carry trading, and

credited fault swaps. These kinds of things your ain't your The primary aim is to pick up the income, but the the if there's an effect on the asset price which which will rise generally, and then the rise in the asset price creates as an economist I would call imbalances.

You know, Turkey was a very good example of that, which we discussed in the book, where you have capital flows going into Turkey that were lever to some extent, and often those were actually Turkish entities, you know, Turkish businesses borrowing dollars overseas to invest locally rather than hedge funds or something. But that made the Turkish leery become progressively overvalued over time, and so Turkey had a huge

current account deficit when you have a debt. Once you have that deficit between spending and income, you need continued carry trades to keep the whole thing going. So you get the double effect of imbalances very often and also the growth in leverage, and at some point that becomes unsustainable, and then you get the you know what you might call the margin call effect. That, yeah, the as Tracey said,

picking up pennies in front of steam rollers. The steamroller arrives and everyone has to get out at the same time. And as we you know, we we try to explain that the liquefying nature of carry trade. When when you get that the crash, it means liquidity evaporates, and as surprises crash liquidity evaporates, all asset prices seem to become highly correlated. They all seem to become the same thing.

And because the economy, the U s economy particularly, but British economy, other economies to have become very as surprise dependent. You then end up with an economic crash. Two. That's what we argue that, And I think Kevin said that that the pattern of the economy has become like the pattern of the classic carry trade pattern of the saw tooth pattern of the steady rise and then the sudden crash.

But over time it's still being profitable, partly because central banks have you know, truncated the crashes, and so carry traders over time have the crash wipes out quite a few carry traders, but central banks rescue a lot of them, and particularly the big guys, and they make money over time.

But there's also an awareness of the risk. So you kind of get that's the the carry trade itself becomes sort of higher risk and high return because the carry trader, a carry trader not only provides liquidity is levied and provides liquidity, but the carry trader has to accept the crash risk to some degree and and relies ultimately on the central banks. So I want to ask, I guess the big question, which we already touched upon in the intro, but if we recognize that we are in this cycle,

then how do we break out of it? How do you actually break out of the carry regime, given that it's gone on for quite some time at this point, and if anything seems to be intensifying in We're a bit pessimistic in the book, Really we needed we We kind of suggest at the end that maybe we've gone, you know, we've gone past the point of no return, and unultimately we will see the demese of central banking in one way or another, either a crash that cannot

be contained like sort of two thousand and eight, but even worse, or m m T type measures which perhaps we could argue have already been happening, that that will ultimately create a lot of inflation and lead to the kind of demise of feat money and then and then

the appearance of alternative forms of money. And you know, perhaps some people point to cryptocurrencies, where we argue that current cryptocurrencies, we only touch on them briefly and not really not really kind of legitimate enough perhaps to become a new form of money now, but something similar or some improved form could become a new form of money.

So we could just be going to we may not there may not be a solution other than the end of the monetary regime that we've become used to just on the mm T think we've been as we've been seeing obviously massive deficits and a lot of inflation bears, at least in market commentary, if not in the markets themselves. We you know, we explicitly identify the carry regime with

deflationary pressure for various reasons. But the one I like post is to do with the linking of options selling strategies and market making as the kind of basic form of carrying. You know, the world in which which was inflating very heavily is a world in which there's tons of cash on the sidelines, and in which people are willing to sit on the bidding ask and willing to sell options for free or less than free. So in in and in a highly inflationary world, volatility buyers rather

than sellers will systematically make money. And of course perhaps we've already been seeing over the last couple of years. So talk a little bit about this further. Let's say, from the perspective of a financial professional or someone who's a trader, how has the rise of the carry regime just changed, say to the day to day nature of the job of an investor of a trader. Um, how is this sort of this the way this is version sort of essentially changed the way people have to approach

their roles. One thing, it's done and I actually want this kind of goes back to a question that Tracy asked earlier, like what are the implications for investors. It's made it very clear that there's much more skewness and asset prices, asset returns and than people expected. So and there's what we're saying in the book is there's compensation

for that skewness. That skewness risk is compensated. So one of the reasons the SMP has UM done so well is that you're you're kind of collecting some of this liquidity premium that's built into it, but at the same time you have to accept this uh skewness risk. And UM that probably should mean that people allocate less to the SMP five they kind of normally would so that they can survive. I think it's also increased the demand for protection, which is why the skew and options prices

is has gotten more extreme over time. UM and again you know, like I I ran a you know, a levered hedge fund strategy for many years, and and that that skewness and that liquidity risk should mean that kind of overall leverage levels you know, should be lower. But I don't actually think that that's happened. I think people have just relied more on kind of dynamically managing their risk and portfolios, which kind of actually reinforces the demand

on the other side for liquidity provision. So I think that that's why you get these much more sudden drawdowns in hedge fund strategies than we saw before. So instead of running and kind of structurally lower leverage, they're managing their leverage um much more aggressively day to day um, which puts more prices on the on the people who are on the other side of that trade, or pressure

on people on the other side that tally. So I forget which one of you mentioned it before, but it's sort of a common dictum and market that in crisis all correlations go to one. Things are bad, you gotta sell everything, whether it's the chair that you're sitting on,

or stock or a bond or whatever. Are we in the in the carrier regime are we seeing the same thing apply except to booms, where essentially in the good times all correlations go to one in the same way, in a way that wasn't really the case in previous up cycles. You know, the part of the suppression of volatility. We're arguing that central bank suppressing volatility is ultimate driving

force of some of these increasingly strange features. Were saying, but one of the ways in which you can get kind of market wide volatility down is by increasing dispersion, by by decreasing correlation. It should be the case that the boom periods of extremely low volatility are marked by relatively low correlation most of the times. So I have a weird question. But every once in a while I see analysts make the connection between suppressed volatility in markets

and social instability or discontent in wider society. So this idea of chaos and populist anger and things like that. And I think it was a week or two ago there was a Deutsche Bank note where they touched on this topic, and I actually have it in front of me because I thought it was relevant to this conversation.

They wrote that quote, asset price volatility is a powerful energy and when it is suppressed in the market due to central bank liquidity or buy backs, it needs to find a home, and that can be outside the market in society, especially in a very inequitable society. The vicious loot can then turn back into asset prices. So I remember when that note out, quite a few people were making fun of it, saying it's crazy how central banks get blamed for everything nowadays, even populous content and things

like that. But I'd be curious to get your take on this. Can the suppression of volatility in financial markets and financial asset prices have an impact not just on the broader economy but society as a whole. Yeah, well, maybe I'll start on that. I think we probably could all speak on that, But I mean we we very

much say that in the book. I mean, the last part of the book is on that on that topic, we were very much in agreement with that that this whole we call carry regime, that um that we that we're describing is associated with rising inequality and deteriorating real growth. So the wealthy benefit of the expense of those those who are not and um that does translate into we say in the book, I think at the very beginning

undermining the social fabric, you know. But the question is we do we do lean towards blay central banks, But we rather say that in some sense, it's really all about the structure of power in society, and central banks put it. To put it in its simplest forms, central banks are really agents of that structure of power. So we are we are height say, but we are basically saying that central banks put it very bluntly. May think they're acting on behalf of America or Britain or wherever

they are, but they're really not. They're acting on behalf of the wealthy and the powerful and the influential. It's curious we think that the carriage and yeah, it's inherently inequalizing because the wealthy benefit from it much much more. They have the balance sheets which enable them do things like I buy to let roperties or short volatility, you know, just one last thing or what one last sort of

thought I have that I'm curious about. It's sort of when I listened to this discussion, particularly when people think about housing, or when people think about say, make buying, uh, the dip and the stock market. People don't think of themselves as like participating in a carry trade per se. They don't think of themselves as doing the same thing as say someone borrowing in and investing in Turkish lyraor

or Australian dollars. And sort of I'm curious off, like, you know, thinking about like the millions of sort of unwilling or or carry traders that don't know it in the way like to the degree to which asset prices become a societal value, because so many people livelihoods and lives essentially become more tied to asset values than um

than their income. Yeah, exactly, And we try to towards the end of the book also we try to discuss that kind of the the kind of evolutionary aspects, if you like, in a financial sense of the carry regime, the fact that it's sort of change the way that really people think a little bit, if you you know, compared to say forty years ago that we've become used to um, you know, particularly here in the UK again, we're by to let property such a big thing. By

to rent property is such a big thing. People assume their house prices will always be rising over time, and you know, you they don't really, they don't see themselves as being doing a similar thing to people who write put options or or or do things in you know, the credit default swap market or something they don't, but it's it's and and we we argued that really the way that even financial analysts or those involved in in you know, the financial industry think has been changed because

this is changed to kind of accommodate this idea of the Carrey regime becoming the sort of normal and the way things are the sort of the norm. I think that we see that in you know, a much greater acceptance in the conventional wisdom in financial markets, you know, much greater acceptance of large scale intervention than there would

have been, you know, thirty forty years ago. I mean, I remember very well when I and my formative period of the nineteen eight is when the dollar at the beginning beginning of the nine, when the dollar was in a big bubble, you know, the dollar was getting overly strong, and the Bunder's bank, uh, you know, try to do

a bit of intervention. And I was kind of learning the learning at that at that time, and people, I think, I think they were kind of intervening in a scale like two to three billion and it seemed a lot, you know, and I remember being told by my mentors that, you know, it's hopeless. They can't defeat the market. The

markets are much more powerful than any central bank. But you know, people then we're thinking in terms of central banks, yeah, being a little part of the market and being kind of trivial, trivial in that respect in the in the bigger picture, now there's a kind of the conventional wisdom is really that central banks pretty much control the market if they want to. It's very very different mindset that

people who are involved in markets. Oh, I would say beyond that and generally have um And I think that is that this kind of this rise that you know the books called the rise of carry, is the rise of carry has changed the way that people think without people even realizing it, and it goes beyond financial markets. I mean, that's a big part of what we're trying to say at the end of the book. To step back a little, I mean, obviously the world is a

lot older than before, at least in the West. There are a lot more people who are at retirement or near retirement and dependent on the assets or the living than they ever have been in the past Joe. If you're if you're looking for a an example of just how far buying the dip is spread. I was, I've got a sixteen year old son, and a couple of months ago, it's eleven at night to go into his room. I say, you know, time to go to bed, and he said, well, just one second, I gotta put my

limit orders in for tomorrow morning. And I was like, you're what he said, yeah, limit orders. You I've got a couple of core positions, but you know, um, if they fall a couple of percent, I'd buy the dip. And you know, I've never told him that where he figured it out, you know, buying the dip. You asked this earlier. And you know, if I've got a lever position in the market right and the market falls, then um, I need to adjust my position or else, Um, you know,

my leverage gets away from me. So people who are buying the dip, they're providing liquidity to to leverage traders. And so that that's why we draw the equivalence of buying the dip as as being like a you know, capturing some of the short volatility premium, being like a Carrie trade by delta hedging arguments. We argue that you know, whole forms, whether you're short fixed futures, short options, or even yes, just physically say buying the SMP every time

is down over the last twenty four hours. All of these trades are highly analogous and highly correlated to actually market making, actually running a continuous h frequency trade market making. Trust you, well, you know, that was a fascinating conversation, Tim, Jamie and Kevin. Really appreciate the three of you coming on.

One thing I just want to say before you guys go, is that, you know, one thing it's really interesting to me is how much what some of you the themes of what you're talking about, they're not that different in a sense from a lot of the sort of MMT friendly people that we often have on this podcast about the sort of destructive nature of an economy that's so

driven by asset prices, so need for central banks. So you know, there there's some there's some synthesis out there that like between the sort of slightly more like fiscally oriented view and this view. You know, we'll we'll find it. Between these conversations. There's I believe that there's less daylight than perhaps people think from your framework, and I really

enjoyed listening to Thanks. Thanks a lot, Thanky Thanks. You know, like I said there at the end, you know, I think that this sort of description volatility suppression sort of bottling up a potential crisis. It's a different way of talking about a problem that I think a lot of people are recognizing, even who I come at the market from multiple angles. Yeah, I think that's right, and I think our previous guest, Jared Woodard, he spoke about this

as well. But it's that notion that when you are in a sluggish growth environment, you kind of have to engineer profits in different or more creative ways, and I think that's often where the carry trades come in. The other thing I was thinking about was the mention of, or the discussion of, the change in investor behavior, which

I think is really striking. So we spoke about by the dip or this idea that whenever stocks go down, people eventually come in and start buying on the assumption that the central bank is going to come in and stabilize everything. But I was also thinking about remember that that other saying from around the same time, which was bad news is good news, bad news is good news meant that whenever you had bad economic news, the central

bank was going to step in with additional liquidity. So actually, if you had bad economic data, sometimes you'd see risk assets go up. And if you think about it, it's just such a perverse way of looking at the overall economy and the financial markets relationship to it. The fact that people are thinking that that bad news can be good news, bad economic news can be good news for risk assets, that should be a huge red flag that

that something is off in that relationship. I think it's super interesting too, exactly that coming from the perspective of like say, even the US home owner they were talking about by the lent and the idea of buying a house with the idea of immediately turning into a rental property.

But think about, Okay, in the US, for decades, we've prized homeownership as being really important, right, And you know the implication of that is like, obviously, as mortgage rates go down, which tends to happen every time there's an economic downturn with this sort of ongoing multi decade decline and more, you know, people can refinance their mortgages and that sort of like turns into a win for them in some sense, Like there are a lot of people

who like it's been there's been a massive year for refives of the last several years. So, you know, I think there is like this sort of like very weird thing where we turn a bunch of people into economic actors. One of the big things that will sort of drive their economic well being is the decline of interest rates, right absolutely, And of course we haven't seen significant wage

growth either. So you're basically telling people that one of the few ways to get wealthy at the moment is to invest in the stock market or some sort of financial asset like how purchase that you would expect to go up in value. And again, it seems to me it's almost inevitable that that impacts how policymakers think and how they view the real economy. This idea that maybe the stock market is the economy at least for people who have a significant proportion of their wealth tied up

in financial assets. Yeah, totally, no, I think you know, there's a lot here and this sort of question of is there a way out maybe through more aggressive fiscal policy probably the best hope, but something like that to sort of get out of the cycle in which not only is policy supersensitive it seems to financial assets, but

each cycle sort of perpetuates the cycle and it gets bigger. Yeah, fiscal policy or I guess in this case, after this particular discussion, you could also be thinking about macro prudential policy and ways to plant down on particular carry trading behavior in the market. Right. That sort of what they were getting at with the market structure argument. But yes, really interesting discussion, I think. Okay, shall we leave it there? Yep? This has been another episode of the Odd Lots Podcast.

I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisn't Though. You can follow me on Twitter at the Stalwart and check out our guest book, The Rise of Carry, The Dangerous Consequences of Volatility, Suppression and the New Financial Order of the Cane Growth and Recurring Crises. Are the authors. Our guests were Tim Lee,

Jamie Lee, and Kevin cold Iron. And be sure to follow our producer Laura Carlson at Laura and Carlton, follow the Bloomberg head of podcast Francesco Leavy at Francesco Today, and check out all of our podcasts at Bloomberg Onto the handle at podcasts. Thanks for listening to