Why the US Dollar Is Booming And Creating A Possible Doom Loop

others posted I don't know. It's sad that we work for a gigantic financial data company and we can't figure this out. I thought it did. I'm pretty sure it did, very very briefly. Um, but let's just you know, even if it hasn't actually hit parody today, we're recording this on July twelve. It seems like it's going to any moment. And I got to say the fact that we're recording

this episode though, probably means that this is marketing the peak, right. Yeah, So of course when this episode comes out, it's going to be the peak of the dollar, because that's how it works. Nonetheless, yes, euro has come very close to parody with the dollar. De facto parody. The dollar itself is just like incredibly strong. It might even be you know, obviously inflation and the trajectory of inflation is sort of

this huge variable question for the economy. But in terms of like maybe the defining market story right now has just been this incredible strength of the US dollar, which all kinds of different ramification exactly. So setting aside what happens to the Euro, you cannot argue with the fact

that we have had this broad based dollar strength. You know, there's some irony that, of course everyone's talking about the end of the world, and we recorded episodes about how the Russia Ukraine conflict and the sanctions mean that the dollar is going to fall out of favor in the global financial system. And yet the immediate knee jerk reaction

to the world falling apart is dollar strength. It almost always is, yeah, right, because in the end, in the good times, you never really have to pay your bills. You just sort of roll over your debts or you don't worry about that or your flesh with money. In the bad times, you're like, oh, how am I going to pay my bills? I can't pay my bill is probably in bitcoin. I can't pay my bills and shares of Tesla. I can't pay my bills in you know, shares of arc or whatever. What I do is I

need dollars. So everyone scrambles for dollars and they get more expensive. Right, so the dollar is basically a play on risk appetite at this point. But I guess the ultimate irony This is the second time I brought up

irony so far. Ultimate The ultimate ultimate irony is that when everyone's worried about the future of the economy, the dollar tends to strengthen, and then the dollar strengthening actually has a negative impact on the global economy, and so you can get the situation where it becomes a self fulfilling cycle. The dollar doom loop is what some people

have called it, Yeah, a feedback loop. But if you're a Germany and you're already sort of like moving from this huge current account surplus to current account deficit largely due to the surging price of energy, and then obviously everything becomes even more expensive now, especially things price and dollars or invoice in dollars, and so yeah, you can have this sort of doom loop where the strength of the dollar even further puts the squeeze on different players.

So without further ado, to talk about the doom loop and more broadly what's going on with the dollar and a bunch of other currencies like the euro and the yen. We are going to be speaking with John Turke. He is, of course the founder of JST Advisors and the author of the Cheap Convexity blog. John, Welcome to the show. Thank you so much for having me. So, I think the first time we had you on was actually to talk about exactly this dynamic, the dollar doom loop. Yeah,

it was. It was actually I think in the beginning of around pandemic had just started, and it was really the first time that FED really fully unleashed its swap program in terms of foreign exchange, and I felt that, you know, the doom loop was a very prevalent factor in kind of the cycle where we saw this slow down in the manufacturing side of the economy, largely on the fact of China's aggregate growth numbers starting to structurally fall, which you know, as the US is less exposed to

global trade, global manufacturing saw it become a relative beneficiary, and then given the dollar linkages through global trade and manufacturing, it only reinforced the weaknesses of manufacturing. So it seems

like we're in a similar dynamic with different catalysts. So before we even get into the dynamics, like how would you describe, I mean, everyone is sort of waking up to this weird phenomenon, which is that after an era of like so much stress and so must talking, you know another like end of the dollar, it's going to be replaced. It's gonna be a if my bitcoin, or China and Russia are gonna like circumvent the dollar or something like. You know, all this every crisis, this kind

of talk. I am old enough to remember when the euro was going to replace gold. We've we've we've we all we've heard it, the bricks are going to like form some sort of new like deutsch mark whatever. You you know, that all the theories. If someone's like, Okay, here's the dollar, it's like basically back at all time highs. And someone says, John, well, as the dollar so strong, what's your answer? Well, I think that that part of the reason this time is that it's a structural dynamic.

You know. I think a lot of it was the US was the cleanest of the dirty shirts, and I think that this time, the US is the most self sufficient, and I think that is that is I think the relative dynamic at play this time, as opposed to last time, when we were just broadly in a slowing nominal GDP world where we had you know, low levels of realized growth and the US was kind of growing just a

bit faster. Um. Now, I think it is really a self sufficiency thing that I think is you know, really been encapsulated by this energy crunch that we're seeing, especially you know, Tracy, And I'm thinking back to our last conversation from a few months ago, exulting Posar, and of course he has this whole framework of like you know, Brent Wood's bree commodity centrality, and I did have that thought at the time, and I think it's on the episode.

It's like it's in the US also like filled with tons and tons of commodities, like maybe like you know, it's like if we are going to be entering this new like commodity oriented regime where whoever has the most stuff, right, and like US is pretty good on that front too, right,

It's not the worst place to be. But Okay, so John, maybe talk to us a little bit more about how energy factors into currency, you know, the weakness in the euro, the strength and the dollar, if it all comes down to energy, could you maybe walk us through exactly how energy prices or an energy shortage actually feed into currency

weakness or strength. Yeah, of course, So you know, I think that a good way to do this also take a step back in the sense that a lot of currency movements, especially in the previous cycle, and I would say even really argue until the Russian invasion, was a lot of it was predicated on relative interest rates and kind of you know which central bank was a bit more hawkish, which was dubbish, That was kind of usually the forward rate space was a big marginal factor in

kind of you know which currencies would be best off. And I think you know, really what changed now is that we're really in a terms of trade trade balanced current account world where the market in currency space is really looking beyond you know, which central bank is going to do the most to where are trade balance is going to settle. And given that energy has now a two pronged effect on that, I think it really emboldens that to play a more determinant role in exchange y prices.

And I think you know, getting into the role of energy, especially when it's this sort of crunch where you know, we're talking about the potential of Russia turning off gas flows into Europe, it really does have a two pronged effect. One is that either the price of you know, related fossil fuels or energy inputs goes up, which is something we've seen that gas prices in Europe are very very high, power prices as a byproducts that have risen a lot,

so the trade balance is getting hit on that. And then we have this factor where because it is a crunch, Europe is not able or at least projected to not be able to produce as much as it's product as its capacity is, so their exports by nature will fall relative to what they could have been because they don't

have the energy inputs to facilitate it. So really, in terms of thinking about the current account of the trade balance more importantly is it's really a a double whammy because they're importing more energy inputs and they can't export

as as as many outputs. And as we started to see with the Northern European trade balance, you know, Germany, after twenty years of running significant significant trade surpluss is now running a pretty significant trade deficite, and I think that is why this factor is so so important, because it really hits on both fronts. So I have two quick questions, one short and one is a little bit more. But the first one real quickly, have we actually seen

exports start to weaken in Germany? Because I know, obviously the import bill has surged, and we know a lot of industrial players have said like, look, we can't just we can't work economically with these high gas prices. But have we actually seen that in the data where the

exports start to turn down. So exports haven't started to fall all meaningfully yet, but we have already seen the imbalance grow between the imports side and the export side by nature of you know, the trade deficit, and we've already started to see at least in you know, the p m I data on the manufacturing side, that there will be slowdowns. It's just not economical for a lot

of the heavy industry players at these prices. So and then my related question is in a situation like this where there is a true crunch that you know, the energy bill is soaring, but also you have domestic weakness because you just can't even maybe run the factories at these level of power prices. Does that contribute to does that make it essentially harder for the e c B to fight inflation? Because here, I guess look like maybe I don't know, you know, the U S economy is hot, right,

or at least has been up until very recently. So it's sort of like a very natural thing for the FED to wanna hike rates and tap the brakes and try to diminish demand. It does doesn't seem like the ECB has that luxury. Yeah, so the e c B is really in a proper bund here, and I think

it really boils down to two problems. One is even taking I think more meta structurally, even looking beyond this shock in its specific nature, is that the ECB was already faced with a problem of you have central banks around the world who are aggressively responding to much above target inflation and the threat of higher inflation expectations, and the e c B was going to have to play catch up in some capacity. And we've we we already started to see that pivot over the course of the year.

We know they'll hike at their meeting next week and they'll hike again in September and kind of commence a hiking cycle. But the problem we started to see as more hikes got priced into the European curve is that it started to create stresses in the periphery where we had an uneven transmission of policy as spread heads between you know, Italy and Germany UM and really the periphery

and the core started to blow out. And this was really emblematic of the structural um imbalance that is sort of innate to the your area, where we started to see the world of potentially you could have a rate that is not high enough to fight inflation and too high for the perfect and this led to the forthcoming ECB meeting will be sort of introduced to a anti

fragmentation tool. We've seen that the ECB has already started flexibly reinvesting their their pet purchase portfolio kind of a way to alleviate these issues in spreads, but nonetheless it's still a big issue. And going before all of the gas related energy country issues, that we were already entering a world where rates weren't getting high enough to cut off imported inflation by currency weakness, and they were getting to you high for some of the perfect holders, namely Italy.

So that is one side of the ECB challenges, which is already pretty drastic. The other side is the nature of this shock is innately very stagflationary in the sense that it raises the cost of energy by a lot, and it also reduces output by that actually isn't enough or there'll have to be some sort of reallocation of resources.

Right if the decision becomes you know, making sure that everyone stays on in the winter or turning off one or two factories, the decision is going to be pretty easy for policy makers, um as unfortunate as it is.

That is the second fold of it, where the now we have a shock that really worsens the inflationary pressure in Europe but also further reduces the growth impulse and on the output side, all in the backdrop of a imbalance at the ECB is fighting that is almost innate to their bout design, which is you know, common common Currency Union, no common fiscal So it's gonna be an extremely challenging task for the e c B. I think, you know, at the forthcoming meeting it will be interesting

as we begin to outline you know, the e c B has taken a stand that growth is still good, and you know, nominal growth, especially on the consumption side in Europe is still pretty good. But we we know that once the industrial side, especially in the Core and Germany, becomes uncompetitive, that the economic spillovers are going to be

pretty significant. And we could be looking at, you know, for the second time and into the last two e c B hiking cycles, or the ECB is hiking into a recession, and you know how the e c B kind of structures, you know, their inflation fight in the context of the material growth slow down. It's going to

be very interesting. And I think the currency right now is proving to be on top of all of these factors, proving to be an outlet for that unknown what happens to capa all flows or capital inflows when the ECB starts hiking, because one of the weird things about what we've seen so far this year is that even with all the challenges that your faces at the moment, I think they've still had net inflows into the euro Zone.

And you would expect if the ECB hikes rates that that would make um them more attractive compared to some other yields on offer. But like even if inflows happened positive, it doesn't seem to have had much of an effect

on the euro. Yeah, it's it's it's an interesting one because this year was supposed to be and I you know, I think if we scrolled back to the last time it was on going into our preview, this year was kind of supposed to be a very positive euro currency story in the sense the potential of the end of negative interest rates was going to spur this return of you know, longer term stick year capital, either through reserve managers,

pension funds, etcetera. That kind of became you know, priced out by negative rates, and you know, we saw the story of a p P and nerve in Europe is very much this one of you know, starting from on. It was basically this replacement of ownership between a lot of foreign owners who owned buns BTPs in Italy and and and French government bonds, and it was basically replaced

by the e CB. So the currency channel was we had what called portfolio The portfolio channel was really in full effect, and there was some thought that we could trigger the inverse by leaving negative rates, and I think we really did start to see that, especially after February ECB when it became clear that you know, negative rates were probably going to end this year. I think it

was a trigger. There were yielding, nominal, yielding securities in your area that we're compelling that hadn't been for eight years almost, and I think that was a spur for capital. I think the problem now is is as the e c B fights this is we really don't know, you know, what is it going to look like and kind of in the in the choices of bad choices, which bad

choice do they lean on me? And I think the thing that you know is probably worth watching the most is that if there really is rationing and some of the industrial activity has to go offline, is there's going to be a fiscal response? Right? I don't think we none of us really assumed that, you know, the fiscal authorities are going to just let companies default or people be laid off because their factory can't run because they don't have the proper inputs. There is going to be

a response. And then the question is, you know, especially in the context of an already problem in Italy in terms of perferee spreads, is how does the e c B respond and you know, I think we are setting up for the potential. I wouldn't you know that everything on this, but you could envision a world where the ECB is actually net buying securities again while they're hiking things. And this is something that you know, tri she actually talked about on a Bloomberg interview not too long ago.

And you know, I, I don't know that it's I wouldn't say it as a base case, but given how the energy crunch could turn into a liquidity crunch at the same time that you know, Italy is facing a problem with you know, rising European rates, it's not impossible start to think about, you know, kind of what does the ECB balance sheet approach look like in that context. And I don't think it's one of significant contraction, even though they are tightening policy to deal with above target inflation.

If the ECB is expanding its balance sheet in order to maintain or constrain Italian spreads while at the same time hiking your rates in order to fight inflation, that seems like one of those things where it's like, yeah, a bunch of people are going to dunk on that on Twitter and get it it's like, oh, those look at the A, C, E, C B folks, they don't know what they're doing. They're trying to fight inflation but

expanding the balance sheet. But said I, I I said, Twitter dunks like, it's not necessarily economically unsound, right, Like you could do both at the same time. They're not. It's not necessarily contradictory. It is not necessarily contradictory. It will be in a relative sense because we'll be in a world where every other central bank outside of the Bank of Japan is withdrawing liquidity, So it would be in that sense, and I think the currency message would be confusing.

But I personally think and you know, I don't know how relevant this is, but I think the ECP did make a mistake in terms of linking a p P their QI program to rates the same way that every other central bank had, only because we know that in for the b o E or for the FED that they've kind of outlined, QWI is sort of this almost forward guidance tool, which you know, when it exists, we know that they can't high rates, and the linkage between

KIWI and rates actually enhances the net easing effect. And I think the ECB wanted to do this, which was basically kind of set up these guardrails for the market to price and hikes via the balance sheet. The problem is is that as we're sort of seeing, especially in periods of wide economic variants, is that QUI is probably a more structural dynamic to Europe given the innate and balances of the Union then it is let's say in the US, or in the UK, or in you know,

really any other developed country. So I think that is something that will probably become more talked about as we

get to the end of the year in Europe. Is in this you know, kind of nasty stagflationary world, is you know, what is the role of you know, QUEI even in a hiking cycle, especially as the e c B is never going to be able to kind of have a quote unquote QT episode where the stock of liquidity would also basically fall not only the flow but no, I I think it would be you know, on the day if that were to be announced, I think you would like further amplify currency weakness just as a byproduct

is they would be the only ones injecting liquidity at the same time that everyone else is withdrawing it, and as we move forward on I think it could become like it, just a more institutionalized. Part of how the ECB kentuckt monetary policy is that you know, there is sort of this like net sticky buying of government bonds, even that is agnostic for the policies. So you mentioned something striking, which is the idea of a lot of the major central banks, you know, being in tightening mode

all at once. And we've had previous situations where the major control banks have been in loosening mode all at once, and they've been you know, launching their own keeweep programs and things like that and lowering interest rates all at the same time. And in that environment, people used to worry about competitive currency devaluations and a sort of race to the bottom. With more people tightening, do you worry about currencies going up like a competitive valuation? That seems

kind of weird. Like what I guess what I'm asking is what is the impact of all these people trying to raise rates at the same time. Yeah, it's a it's a great question, and I think it's it's only has added importance given that many of the world central banks right now we're fighting imported inflation much more so than excess demand. We do have cases like the UK and the US where there is there was some signs

of overheating or excess demand. But you know, taking the Europe example, and something that I think Leguard has been quick to point out, but even more so the Chief economist Philip Laying, is this idea that you know, real real output has not exceeded it's pre pandemic level in Europe. Yet it doesn't mean that this hasn't been a strong recovery. It has. We know that unemployment is the lowest it's ever been in Europe. There are signs that you know, wage games are picking up, and it has been a

strong recovery from COVID. But it's not just purely a there is too much demand story. There is a lot of There is an imported inflation terms of trade shock that is clearly amplified the inflationary dynamics that we've seen. And in that world, the biggest health in terms of tightening policy is the currency because that's sort of how

you nwter the imported inflationary dynamics. This is something that we've seen China do actually relatively well over the last call it year is being able to kind of neutralize the imported inflationary dynamics from energy, commodities, food, etcetera by having a stay able, strong currency basket, you know, the remmby against the currency basket that they track um and I think, you know, we're in a world now where central banks, who are all dealing with above target inflation,

have very little tolerance for massive currency weakness because it's thought to only amplify the pressures that they're dealing with by hiking rates. And this is something we've seen pretty much across the board. We've seen the SMB in Switzerland

high rates fifty basis points at the first meeting. They surprised the market, and part of their calculus is that even though the Swiss frank has been strong, it hasn't been strong enough in the real terms to kind of offset some of the above target inflation that even they're seeing. We've seen kind of a little bit of a pivot from the Bank of England, who originally had was kind of the first central bank to entertain the idea that a growth scare should also be part of their kind

of calculus in in resetting policy. But we've seen from you know, external OLYMPC member Katherine Man put out his speech about the idea that not if we're not keeping track with the FED, then we're gonna be you know, we're going to further exchange right pressures, which is going to further the important inflation dynamics that we're dealing with already.

And we've seen kind of you know, more people on the b OE entertained this idea that you know, the exchange passed through is amplified right now, especially as we're in this like kind of bind and in terms of where inflation expectations are they moving away from target, and we've seen that central banks have sort of taken a risk management approach to that where if there is no doubt that they're kind of threat at all, then they're

going to act. So I do think, you know, I don't know that it's we're averse currency war in a way, but I do think you have central banks around the world saying that, you know, our currencies have weakened and that has only amplified the pressure that we're facing because a lot of the nature of the shot is imported by the commodity side. So I I do think we

are in that sort of world. And to further this that we've seen central bank that have relied on currency strength as a way to almost not hike interest rates, hike interest rates the cycle because the currency is either weakening or not doing enough. We've seen Switzerland hike, We've seen the Bank of Israel hike, We've seen Taiwan hike.

And these are central banks last cycle that we're able to weather sort of you know, participating in hiking cycles via just having a very strong nominal effective exchange rate. And this cycle we're seeing is there's a difference between your near and your rear, which is your real effective exchange right, and you kind of they don't move automatically one for one in a very high inflation environment. So I do think we are in this sort of you know,

reverse currency war. But I think that central banks are clearly making an emphasis on the role of currencies, some more explicit than others, of course, But I do think given the nature of the shop, it doesn't make sense for central banks to have a very big, you know, overarching currency focus. We need to do like a series of john with like all these niche central banks or these smaller ones. All right, let's Bank of his reel day,

Swiss National Bank day, uh Taiwan new Central Bank. That would be you know, of course we would need to have a whole week just devoted to Australia and New Zealand because they tend to be bill whethers that being said, I wanna pivot a little bit to Japan, where we see dollar yen basically at its highest level. Since I don't think my understanding, I don't think the Bank of Japan has pivoted in any way like some of these other major central banks in terms of easing. I think

they're still doing old curve control. The yield on the tenure Japanese government bond is still like, you know, point to five or something like super low. Like what's going on there? I seem to recall something to were like last month the market thought it was gonna try testing the b o J in some way and the GGB futures got out of hand a little bit. But what's

going on there? Yeah? So, I mean the last B a J meeting in June, we really had a real earnest test of b o j's resolve in terms of fighting, where we saw ten years swap rates in Japan move a lot further away from where the you know, ten year equivalent j GB yield is, which is you know, enforced by the b O. J saw the same thing in futures, and it was kind of of this idea that you know, once dollar an gets above one thirty gets to one thirty five, you know, maybe they don't

drop yield curve control, but maybe they readjust the band. Maybe they go from you know, targeting twenty five basis points to fifty basis points. Maybe they move y c C to the five year instead of the ten year. And the market was really, you know, kind of wrestling

with this. You know, how do they adjust because certainly they're not okay with kind of this further rapid depreciation in the end, especially as Japan, like everyone else, maybe to a lesser extent, is dealing with an energy shock and you know, higher levels of spot inflation domestically, etcetera. It's funny, I'm looking at the Bloomberg and Japan's inflation is its highest in multiple years. But so two and a half of the through that's a big change. Anyone

that grew up in Japan, that's a big change. Yeah, right, right, And you know, I think the so where where the b o J is And I think what their stubbornness has has surprised a lot of people. But I actually think they've been pretty you know, consistent with their reaction function and their idea is that they're not going to jump on this bandwagon of you know, global tightening of policy in the context of something that they think is

only a one year phenomenon. Because what's idiosyncratic to Japan as well is that a big part of the above target inflation we're seeing this year is not only from the energy side, it's also from mobile phone prices, which has kind of had this mechanical upward pressure on prices that will kind of come out next year. They're committed, so they're still team transitory in Japan. They're still team

transitory in Japan. I think the thing that would change them from being team transitory is that something that Kuroda has really emphasized is that the medium term forecast or inflation has to move close to two percent. Maybe that would be the catalyst for a change, because as we've seen is the b o J has sort of operated in this well. Inflation is at two percent right now or it's going to be above two percent for this year.

But if you look at kind of we the last bank View meeting we had, which is where the b o J publishes their economic forecast, was in April, and looking back at that meeting, they had three inflation between one point one one point three percent for three and then twenty four, you know, somewhere around that ringe. And the b o J has contextualized their reaction function as that prices need to be going to two percent in a stable manner, and you know one point one percent

inflation next year would not be considered stable. So what that is meant in terms of them setting policy is that not only is it do not don't move y c C continue to let these like currency pressures manifest between widening interest rates, but also if you look at the bankage fan statement, it still has an easy by us.

And we've even heard from Corona over the last few days where he's talked about, you know, the b o J could be willing to do more, which I just think really like encapsulates how all in they are as and this is going to be you know, some sort of procyclical reflation that is b o J endorsed because not only is it do they not want to marginally tighten, it's they actually still have their full easing posture in

terms of four guidance. So I think that, you know, in terms of thinking about the b o J and especially as it relates to the currency, I think really this whole year we've been in this inconsistency between what the market implied pain point is for the b o J and what the b o J keeps telling you their pain point is. And they have continued to say implicitly effectively that there's still plenty of room to go

on getting resetting inflation, inflation expectations higher. And I think, you know, the thing to look for now is less of a well dollar young goes to one forty, so they'll definitely move. And I think this has kind of become amplified by the fact that the politics and Japan

have become less favorable to a very weekend policy. But I think the thing to look for now is as we actually this month will get a new fresh forecasts of you know, more medium term inflation in Japan, and I think that would be the catalyst who maybe a rethink, especially as energy pressures have only increased a lot since April,

currency has weakened a lot. It's very plausible to think that that the medium term inflation projections are starting to move higher, and as they do, I think the kind of wrinkle will be is the b o J is not the FED, they're not the ECB, they're not the Bank of England. There don't promise to be overly transparent. Is that y CC starts to move in a kind of non announced way. So I think that is kind

of the thing to sort of look out for. I think for now we're in this world where the b o J is still max easy because they have seen the things that they've told you or told us that they want to seek to trigger some form of marginally tighter monetary policy, and they're dealing as much of the developed world is is with this massive trade shock in terms of deterior terms of trade and worsening trade balance.

So it's kind of been this this double whammy. Um And I don't think that you know gets arrested immediately, but I do think the thing to watch in terms of why SEC is these and will see in July and we'll see again in October, I believe is kind of this medium term inflation forecast is that would be

kind of more the catalyst change. Of course, in the intro, Joe and I were talking about the doom loop and this idea that it sort of becomes a self reinforcing cycle because people worry about global growth and that sends the dollar higher, and then the higher dollar implies slower global growth, and so you get this never ending cycle. What what, in your opinion, is most likely to break that loop in the current scenario. It's a good question,

So I think you know true. What we saw in the is there was really two circuit breakers to the dollar doom loop. One is, you know, a massive Chinese credit easing that had global macro economic spillovers by just increased global aggregate demand. The other was a dubbish pivot from the FED. And the pivot from the Fed is

something we saw a few times in times. We saw it at the end of We saw it in January after hiking once and the dollar kind of went nuts, and you know, commodity prices started to follow manufacturings or the fall. The FED after that said, you know, we're not going to be hiking as much. And sixteen, as we said we were going to be in fifteen. I

think that has also been a catalysis time. What makes this version of the doom loop really scary is it's kind of hard to see how those circuit breakers play out over the near term, where you know, we're now in this world of we have a European problem, which creates pressure on the euro, which sends the dollar higher, which worsens the manufacturing cycle, which does this whole thing again. But is the FED going to pivot with spot inflation at an eight handle? Is we've seen that China has

already um started a pretty significant credit easing. We saw two numbers this week which were high. We've seen we started to seem like new loans beat. But we also are going to be very cautious and almost doubtful of some sort of Chinese credit expansion when we don't really get passed through in the context of COVID zeroth. So you know, it seems a little bit like a broken transmission mechanism, at least in the context of the current

economic constraints. So it's it's very I think that is kind of the dynamic we're now where it's a little hard to see what kind of stops this, and I guess the best answer is that it could stop itself.

And I think, you know, something to start to think about as we get specially path September fom C and really into the end of the year depending on how you know bad the growth conditions are, especially in Europe, is that the will the FED sort of be able to do this implicit handoff from interest rates to global economic conditions for an exchange general f C. I s where you know, I think something that's possible to me and something I started thinking about, you know, talking to clients,

is that the FED may be able to hand off

in a sense to the dollar. It's not this idea that the FED would stop hiking or would be easing immediately, but sort of this idea that the FED can start to slow down maybe in November UM as we get like a few more consistent readings of lower core PC or point threes on core PC, and you know, the FED can be able to point to look at what the dollar is doing, look at what financial markets are doing, and basically the FED can net effectively tightened by staying

still given the context they're in. And I think this is like an interesting dynamic that could possibly start to curtail some of these pressures. But you know, I think until we get there, we're still in this bind of you know, these are big disinflationary forces that the FED is cheerleading at the moment. Right. The thing that we saw last cycle is the FED wanted to prevent them because it was always a financial conditions tightener that was

more than what monetary policy setting warranted. Where even where the FED was on a you know, a quote unquote path to neutral is, it always ended up being tighter than they thought. And this was obviously the case when they only had hiked once in December fifteen. Where now the FED is telling us they want to be restrictive, they want to get to restricted expeditiously, and this is sort of a mechanism that amplifies the outcomes they're trying

to engineer. I think it's very hard to see sort of you know what the off ramp is in sort of an indulgent sense. I mean, the obvious you know, other off ramps is sort of some sort of resolution in in Ukraine and that you know, I don't I don't have any uh and any good insights into but it will also become a byproduct, you know, of how

much pain Europe is willing to take. I would assume, you know, I think that is kind of what makes this version of the doom loop so challenging is that it is a condition or externality that the Fed, in its efforts to lower inflation and lower inflation quickly, is actually accentuating that I think is almost in their view positive. The question I think that you know, market participants should begin to ask, is if the dollar is doing all this work, you know, does the Fed have to go

to four and a half or something like that. I think that is an interesting question on its own. But in terms of like what arrests this current dynamic, it's really tricky. We have seen this pretty significant decrease in commodity prices over the last month, and granted commodity prices aren't cp I, but they feed through like there are

signs of this disinflationary impulse. Gasoline prices have been rolling over other commodity prices, like some food commodities of like way down, Like is it a is it possible that

inflation actually meaningfully starts to surprise on the downside? Like is there any prospect of that, yeah, I do think so I think that, you know, it will be very tricky to I think it meaningfully lower prints and some of the stickier stuff on the services side, where especially in the US will be dealing with headwinds from shelter for a while, where I think it will be tricky to kind of get back into the you know, high

twos on inflation. But I do think that, you know, and something that markets are pretty clearly starting to suggest is that we're on a path back to you know, still maybe elevated inflation, but certainly nowhere near the levels

we are now. And I think know the dollar has clearly been a big part of reinforcing that mechanism between the exchange rate and things like you know, break evens or the market supplied inflation rates, because I think that the nexus of all of that is that the dollar has started to get to a level which has really started to hurt commodity prices, even though we haven't seen

any alleviations per se on the supply side. So and then my fun question is, and you mentioned, you know, and we talked at the start of the year, at the end of the last year, you know, there's hope it might have been a good year for Europe and

the positive benefit to the end of nerve, etcetera. But the big thing that we certainly did not talk about the end of last year, and which most economists were not thinking about, is the possibility of the war in Ukraine and the effect that that would have on commodities, and so like, how much of this whole discussion that we're having, you know, we sort of talked tongue in cheek about a team transitory and everyone abandoned that last year, Like, how much does so much of the surprise to markets

really just a function of this thing that happened that did not have to do with anything that at least economists were equipped to be predicting at the end of last year at the very beginning of two. Yeah, I mean, I think it's led to the stickiness partly. I think

it's more amplified the severity. You know, I think that something we've seen, you know, in the US, we we've had more evidence that you know, there's a large part of the inflation that overshoot is non energy, especially as energy costs are so much lower than they are in Europe. But even in Europe we've seen in like Christian the Guard you know, talk at CenTra that you know, four fifths of their core basket is running above two percent.

We've seen the Bank of England say, you know something similar, that of their core basket is running above I think two and a half. So I think that we were in a a higher nominal GDP world, with inflation being a big part of that to begin with. I think that probably what has contributed to further central bank fears about inflation expectations and very elevated readings of headline inflation has been the has been the resh of Ukraine War.

But I think that we were in a probably higher inflationary regime than we realized, call it December of one that was probably going to be persistent regardless. John Turk, thank you so much for coming on odd lots. Always impressed by both your ability to explain all these things, but also like your breadth, like you know, keeping tabs on what the Bank of its real is up to is a very helpful. So thank you so much. Always a blast. Thank you so much. Guys really appreciate it.

So Joe, I guess, uh, two things jumped out at me there. One is the US is in a relatively good place once again, dollar privilege strikes, but also in commodity privilege and commodity privilege. But to Europe just sounds like it's in a whole lot of trouble. Right, Yes,

the double whammy on Germany is really striking. So the import bills soaring, and then if you can't even operate parts of your economy because they're dependent on this one specific input gas at a certain price, that's brutal, right.

And it also feels like, you know, Japan, the bo j could sort of face off against speculators last month, and they were somewhat successful in doing that, but the e c B, facing that particular inflationary back drop, it just feels like there's no possibility that they're going to

be able to job on the market in any way. No. And then and you know, on top of the sort of double whammy to the core of how your industry works, you have the spreads problem, and that's because of the nature of European you know, your area architecture and having to contain Italian spreads, which might mean expanding the balance sheet at a time when it's fighting inflation. That's tricky.

That's a tough job for the ECB. Yeah, I feel like this always comes up when we talk about central banks, But like I do not envy central bankers and what they have to do right now. I don't know. I mean in Japan, it's just like we're setting the yield, we're setting rates at this you could just go on vacation for setting rates or setting tenure rates. Well, that's different. Okay. Wait, if you were going to be ahead of any central bank in the world right now, which one would you choose?

I think I would choose Japan because it really does seem like they could say, like, you know what, and is John pointed out they don't have the same commitment to transparency as others have moved towards. She's like, you know, we're setting this at zero. We're gonna take off for a while. We'll be back in a few months, will check in. That's how I would do it. Yeah, two point five percent inflation looks good in any other country. Two point five basically target in the US. All right, um,

shall we leave it. Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe. Why Isn't All? You could follow me on Twitter at The Stalwart, Follow our guest John Turret He's at ja Turret eighteen. Follow our producer Kerman Rodriguez at Carmen Arman, and check out all of our podcasts at Bloomberg under the handle add Podcasts. Thanks for listening.