Ep.58: Russian Default Risk Recedes & Is President Xi In Trouble?

Hey, hello and welcome back for episode 58 of the Market Maker podcast, where I'm joined by co-founder and head of trading Piers Curran. How's it going, Piers?

Good, and good to see you. How's it going with you?

Well, the sun, the sun is shining, and actually, did you know the sun can make you feel less sad?

Well, there is a, uh, there is a disorder called SAD, which is to do with the sun, isn't it?

Seasonal affective disorder. Yeah, that's what I'm referring to. I'm not talking about being sad, I'm talking about SAD as in trying to increase my vitamin D intake and improve my mood through higher sleep quality and stronger bone density and lower blood pressure. Of course, obviously, in terms of this episode then, of what we've got to what we've got to cover apart from, uh, mood updates is a couple of things. One, a big announcement: we've secured a training day at the European headquarters of Morgan Stanley for all of the analysts that are going to be joining our summer analyst training program. So on May 20th, everyone's going to be invited, regardless of your starting date with us over the summer, to come and join the team at MS for a day's training on location on their trading floor, which is going to be awesome. So if you're interested in getting involved in that, just check out the show notes. I'll drop a link with some, with some more information. Um, but otherwise, yeah, super, super busy week. Kind of hard to know where to begin, to be honest. But, um, Russia, Ukraine, the latest there. I'm looking to surmise the week, so I'm going to every twist and turn of Russian Ukraine headlines because there's been way too many. But I guess the major thing came kind of midweek. Apparently they had made significant progress on a tentative peace plan, including a ceasefire and Russian withdrawal if Kyiv declares neutrality and accepts limits on its armed forces. But Ukraine came out, I think, 27 minutes after that initial FT report came out and said, that's not, that's not what's happening. And markets did actually react in some pretty harsh two-way price action on the back of that. So Yeah, not an easy week if you're a day trader for sure. And I'm sure you've had plenty of these types of days over the years, Piers, where it's a bit like the Wild West of price action on a day-to-day basis.

Yeah, when you get these major sort of— it's mostly, I guess, the geopolitical-related macro themes where you're— it's obviously a very live situation. And it's, it's an incredibly precarious situation, and there's a risk of anything kind of happening. Any, any kind of major escalation can happen at any point. Um, the de-escalation side of that coin, um, is a little bit more measured and predictable. So like, okay, they're going to have some talks Okay, they're having peace talks. Okay, ah, nothing's come of those talks, but at least they've had talks, right? And then, right, okay, they've organized a second round of talks and they've organized a third round and a fourth round. And so that the de-escalation of a geopolitical situation is slower, it's more predictable, it's more measurable. I think it's the escalation side that can kind of flip on a sixpence and, a flashpoint can occur at any time. And when you're trading, when it's dominating everything, which of course it has been for a few weeks now, you're very vulnerable to a headline risk, let's just call it, is incredibly elevated. And you've got to be on the money in terms of getting that news flow second by second. And just incredibly dangerous conditions. And so you've got to be on the ball. You've got to be on top of it. But I do think you do get the way information travels these days. And it travels— I guess Twitter maybe was a game changer on that front. I mean, you'll know better than me in terms of being on the kind of front edge of that news curve. It kind of has made news available to everybody, like, almost instantaneously, right?

Yeah, that, that kind of nature of having unfiltered information means that you don't have to go through the traditional channels of authenticating news, having it signed off by editors and things like that. It just means you get so much quicker information, specifically on geopolitics. Because you're typically getting that information from source on the ground. Obviously, yeah, the biggest challenge is always the accuracy of that information that you're receiving. But there's lots of ways and means to circumvent that, to curate your own kind of feeds. I did actually share one if anyone's actually interested. Again, I'll drop this link as well in the show notes, but there's a designated Twitter Ukraine-Russian dashboard that's been created by our friends at Newsquark. And they, um, they put that out for free. And it's definitely— if you are tracking this stuff in real time, I mean, that's, that's where you're getting thousands of bespoke Twitter accounts that have been sourced from individuals to Ukrainian, Russian, Polish, Belarusian news agencies all putting out information and all organized and categorized a certain way that you can aggregate information, um, very quickly. Because I guess, I guess a misconception that you might have as a, as a student or a retail trader is that, oh yeah, Bloomberg would do that. Obviously Bloomberg would cover that sort of stuff, wouldn't they? Um, they do, but they're very slow, right?

Well, now they're slow. Yeah, when I started trading It was Bloomberg and Reuters basically, right?

Yeah. And so even though now you can get a Twitter plugin into your terminal on Bloomberg, the idea though is that you still need to yourself manually monitor that and create your own bespoke feed. So yeah, this is when if you're a retail trader, staying out or taking a more medium-term view on markets is more sensible. Trying to think, I think it was midweek, the NASDAQ was up. It closed up 3.5%. I think it was the night of the Fed when it did that. So it was big moves and it was like, look, yeah, that's the biggest rally in X amount of time. I mean, this week stocks are on their best week since November of 2020. So I think just taking a step back and thinking more strategically of— I guess the ultimate question is, will this Russian-Ukraine situation, will it escalate beyond to the point of which it's got to? I would say I don't need to answer that question. The market's answered it for me because the market's bounced.

Oh, hang on. Okay. It's bounced, but it's not like it's bounced, bounced.

I think—

I mean, I know best week for months or whatever over a year, but, you know, still down. Like, the NASDAQ's still down, what, not far off 20%?

There's a couple of things— there's a couple of things here that, for me, when I look at bounce or no bounce, I look at the equity market, I look at it from a bigger perspective. And are we, you know, the Pentagon, you know, we're about to have nuclear war with Russia and all the rest of it. Is Stocks would be through the floor if there was a real— if people saw serious risk on the table right now, we would still be selling off. Not only have we rallied, we've stabilized even before the rally anyway. We've corrected X%, 20-odd percent. I don't see the need for panic at this point. I'm not saying to pile in and start buying the dip and up we go, But given the commentary that we've had at the moment with what's happened in Russia and Ukraine, I definitely think there's no smoke without fire. If they're talking about ceasefire and neutrality and withdrawals, these discussions are happening. The fact that the Russian military has not made substantial further progress or upped the ante of— we know the military capability that they have beyond what they're doing. Yeah, I think goes to show that they've got to a point where, yeah, it's a two-way street. A, they don't want more aggressive sanctionings on other means, but two, neither do they have to go beyond much further than what they've done because strategically they've secured a lot of the land grab that they required, and then it's the leveraging to have these negotiations that they're having. And then two, the Fed had delivered their hike, and that was a big obviously risk a couple months ago. And that hike's underway, and now it's in. He's telegraphed what he's going to do. Multiple hikes are coming. The information's there now, and it's into markets.

So, well, look, let's get into the Fed in a minute. Just on this Russia thing, like, if I still— there is still one, uh, sort of narrative here that kind of goes against your point. And that is that the kind of peace— the, the ceasefire talks, let's call them, um, is just a front. And actually, Putin's real strategy is that he's just buying himself more time to regroup and then re-escalate the invasion to go well beyond what they've already gone so far. I mean, they've gone well beyond what we thought they were going to do in the first place, right? So when you say they don't need to go any further, I'm just a little bit concerned that we made that mistake once, and are we going to make it again? I mean, so for me, I think the risk— or I don't— I'm not sitting here really comfortably thinking the Ukraine-Russia crisis has peaked. I'm not, I'm not as sure as you.

And that's what makes the market. Yeah, yeah. And, and again, just to, to be clear, I, I don't think that the, the market can't come down again to reverse the rally we've had short term in the space of like 3 days. But as far as the actual situation that's happening Yeah, well, it was oil.

I mean, so you talk about stocks, but I mean, really, if we want to talk about real volatility, then what's gone on with the oil price is just nothing short of extraordinary. Um, that— I mean, both, both the upside and the downside. Um, I mean, the upside I got, and I was definitely expecting that. What I wasn't expecting was the downside. I know I made a bit of a maybe a foolish comment, but it's still valid. When did I make that? Last week or the week before where I said I don't think oil will go below $90. I said something stupid like it will never go below $90 ever again or something like that. And it hit $130 and then it just fell off a cliff, got down to the mid to low $90s. It didn't go below $90 in fairness, to myself, but that view was looking a little bit stupid, but it's still valid. But yeah, I mean, I think the oil price pullback was— it's crazy, it's insane. It's not like the supply risk has just now gone away. Even if the Russian invasion of Ukraine stops now, even if that were to happen, which is not happening and I don't think it will happen anytime soon, then the supply risk is still going to be there. The sanctions that the West have implemented, they're not going to roll them back the day that Putin goes, guys, I'm going to stop. They're not going to roll those back. And anyway, don't forget that there was a massive supply kind of demand imbalance before this crisis that was trending prices higher. Um, so yeah, for me, the biggest price— crazy price volatility was definitely in the energy markets. Um, oil now trading— massive update yesterday for oil. I think it was up 8%, wasn't it? And now it's up again a little bit more, another 1% on top of that today. So WTI is trading at $104, Brent's at $107.50 as I'm speaking.

Um, don't forget as well, you've got the Chinese COVID situation. To counter or to throw in the mix with the oil price movement. And the bounce has come as Beijing came out 48 hours ago and said, look, yep, let's just fire up the plunge protection team. Let's just do whatever's necessary to safeguard this economy, and we'll just boost it up. More stimulus, cut rates, everything in between. And that, that again is another partial reason why this week has been, you know, we've, we've had a decent week for a bit of a bounce in equities and just a general broader negative sentiment that was obviously the dominant feature through the Ukraine outbreak. But yeah, we'll jump to that in a minute. But yeah, before we get too far into that, there's obviously lots of other headlines to talk about. There's the Russian default risk, which has kind of peaked and then receded given a bond payment has been sent to Citi Yesterday you had talk that Saudi Arabia is considering accepting yuan instead of dollars for Chinese oil sales. Very interesting given the geopolitical situation at play right now. And then from the central bank, yeah, we mentioned the Fed very briefly. We'll talk about that obviously a lot more detail. The Fed raised rates as very much expected, signaled they're going to do 6 more likely this year. And then the Bank of England, although the pound did recover a bit of ground toward the back end of yesterday's session, it dipped quite forcefully, irrespective of the fact that they hiked for the third successive meeting, which is slightly contradictory of what normal economic theory would suggest, but we'll explain why. And then nickel, Big Shot's short squeeze is still trying to be worked out on the market, it seems. I was just reading this morning they've had their third successive day of glitching. I think the price now I saw was down to about mid-$30,000. It got up to obviously $101,000 at the peak of the squeeze. I think that was on the 8th of March. So that's kind of— they're kind of slowly working that back in. Yeah, mentioned the Chinese lockdown. We'll talk about that and its impact on supply chains because I think that's very key. And then you've got Biden. We're recording this at 10:00 AM in the morning, London time on Friday. Uh, the 18th, Biden is actually due to meet his counterpart Xi Jinping in just a few hours' time. So after we finish talking, the FT this morning saying that Biden will warn Xi the US is prepared to retaliate if Beijing actively supports Russia, uh, in, in Ukraine. But yeah, I definitely want to talk about the geopolitics side, but one of the things that did grab quite a lot of attention, um, this week was the impending kind of debt repayments from Russia under the circumstance of being sanctioned and not having access to dollars. And we did see the cost of insurance, if you like, against the Russian default, some quite substantial movement. But the cost of insuring against Russian debt, against default of Russian debt dropped, and their bond prices actually spiked. And this comes after some of those funds earmarked for interest payments on the Russian government's dollar notes have been sent, uh, by— I think it's going via JP Morgan to Citi and so forth. So yeah, just wanted to get your thoughts. The implied probability of Russian default now seen around the low 50%, uh, according to credit default swap pricing, but it did get up to about 80% at one point.

Yeah. I think as we kind of tucked into this topic last week, and we were talking about people like PIMCO, for example, and their exposure. And I think it is for that reason that it's my view that it's highly unlikely you're going to get a Russian default. And that's because if one were to occur, then actually It's fine for Russia. You could argue actually it's a really good thing for Russia. Um, they don't have to pay the money. Fine, more, more funds they can plow into their invasion effort, right? I mean, for Russia, it's fine. You do whatever you want. If you don't want us to pay you, that's your prerogative. Um, so it would be very sort of weird, I think, for the West to go, actually, right, let's actually call this a technical default? Okay, they're defaulting. Okay, all the bonds we own, okay, they're not worthless. Oh, we're going to lose all our money. Ah, okay. It just doesn't make sense, right? But obviously, there was going to be a test this week because the test this week was on Wednesday when Russia had a bond interest payment due. It was $117 million. Okay. And this was on a Russian a dollar-denominated bond. Okay. And so this was the litmus test. It's right, okay, here we are then. There is a payment due. Are they going to pay? And to be fair to Russia, Russia said, yep, we're paying. Um, and so they sent the funds, right? But they sent it to JP Morgan, but then JP Morgan actually actually got a hold of the US Treasury Department to say, look, I mean, what do you want us to do here? Russia are trying to pay. We have the money here. What do you want us— do you want us to now actually send this to Citigroup, who basically is the bondholder, and then Citigroup distribute this interest payment to their clients whose portfolios these bonds sit in? And JP were like, what do you want us to do? It's your call. And The US Treasury said, "Yeah, go ahead. Wire the funds." JP are wiring the funds to Citi. And then this money will then be in the accounts of the bondholders. I mean, they haven't got the money yet. It is Friday morning now. The interest payment was due on Wednesday, but that's not unusual. It does take a few days for these massive monster international transfers to happen. And so Look, we're not getting a default.

Um, I can just imagine the, uh, Netflix series and there's the bondholder who's, who's the client at Citi going, calling up the powers that be in the White House saying, they're paying, you make sure that JP get that money and they can release it. I don't care about the sanctions.

So look, I mean, in terms— because they're Russia have $38.5 billion of foreign debt. That's their total amount. Russia don't have much debt, by the way. In this— well, in this day and age, relative to others, certainly after COVID, Russia's debt levels are actually very modest. And that's why— well, they've got an absolute wealth of commodities and minerals and raw materials in their country that they dig up and export. It's a hugely profitable cash engine for them. They don't actually borrow much money. They've only got $38.5 billion worth of debt. It's not that big a deal anyway. But as I've said, I don't think they're going to default. This was the week, right? Russia are keen to pay. Fine. Now the US are keen to take the money, funnily enough. I guess one thing on the price of that dollar bond, and it's maturing in 2043, by the way. So we're still 21 years away from— so I guess it must have been a 30-year bond that was issued, I guess, in 2013, I'm guessing now. But it was trading as low as $0.20 on the dollar, that bond, a week ago. When that kind of default risk was at its peak. It's now rallied back up to 47 cents on the dollar as a result of this payment going through. So yeah, it's a little bit of a side story in this kind of Russia-Ukraine thing, but I think it probably got blown out of proportion. There's not that much money we're talking about anyway. And if the West want to call it a default, they're only burning their own fingers and, if anything, helping Putin.

Okay, so on the— on this subject then, to lead us into like the next part of this, uh, are a couple of things. So there's, there's the, the meeting that's happening between Biden and Xi, and then wrapping this in is obviously the fact that China's stuck in the middle at the moment. Trying to stay as neutral as possible, even though we know they're in a trade war with the US. Strategically, Russia relationship is super important for their long-term ambitions, but they don't want to give away— basically, they just want to say, can we just say nothing at this point and remain on the sidelines? But they're being forced to really get involved. And so a couple of things here then to talk about. One is the fact that what the US is saying, and just talking offline ahead of the discussion today, it's just so interesting. I always find like the strategy behind the news when it comes out and the timing is always very telling, as we know. So ahead of this meeting, a couple of things have happened. First, China's muted response to Russia's invasion of Ukraine apparently has hardened views within the Biden administration that Xi may be moving closer to supporting Moscow as the conflict continues, citing, of course, no one— sources familiar with the matter talking to Bloomberg a couple of hours ahead of the phone call that Biden talks to Xi. Okay, so the next thing is that China's role apparently in spreading Russian disinformation and Ukrainian biolabs— that was a thing, if you remember, not so long ago, plus unspecified intelligence that Beijing is weighing Moscow's request for arms. That was a big talking point— Russia requesting on China arms, a supply of military weapons, and Beijing kind of going, we're not really saying anything at this point. That's also said to have tilted internal people's attention at the administration towards them in favor of the National Security Council in America, who favor a more hawkish approach towards Beijing. At this point. And we've talked about this many times, you know, the pressure's kind of intensified rather than decelerated since Biden took over Trump, if anything. Um, and then Putin can be expected to brandish threats to use nuclear weapons against the West if stiff Ukrainian resistance continues, um, to Russia's invasion, draining conventional manpower and equipment. That's a new Pentagon Defense Intelligence Agency report again, came out last night. The one thing I did— now it seems quite obvious, right? It's kind of— you can't get hold of this report. I— because I thought, okay, Bloomberg said this, 70— they were very specific, Bloomberg, in their article. So they had the details saying that yes, there's, there's nuclear capability then, and he's going to think of using it, Putin. And it said it's a 67-page report. So in my head, I was like, okay, so they've obviously got the report. It must be Is this report public? So I tried to find it, right?

Right.

Because I wanted to see the report. It's like, uh, what— in what context is it? So what I'm saying is, is that Britain could fire a nuclear bomb at another country, right? We probably have the capability to do so. Would we do it? Well, the probability of that is nigh on near zero, but could we do it? Yes. Would it feature in a report of the capability of our military? Yes. So what I wanted to see was what line of Bloomberg decided to extract out of this 67-page report, or— let me rephrase this without being too controversial— of what line did the US administration request Bloomberg print out of that 67-page report in order for it now to be global press coverage that now Putin's going to fire a nuclear weapon?

It's a very interesting point. And I guess there's—

because the final report is the—

you couldn't find it.

No, it's not available, obviously, apart from the, the sound bites that the media are running.

Unless, as you say, it's the report that the US did on Russia's defense capabilities like 5 years ago. And there's this thing called confirmation bias. And if you want— if you've got something like you're reading something but you've already formed an opinion in your mind, then when you read that thing, all you're going to be doing is scanning for evidence and confirmation that what you're already thinking is correct. And actually, and it's all subconscious, and, and you'll discount all the information that doesn't tally with your already your opinion, and, and you'll elevate the importance of the stuff that does support it. So yeah, you might read a report that was produced 5 years ago, and yeah, they do have nuclear weapons, so do we. But now your mindset's— all it can see is the nuclear weapons bit, and it's like, oh my God, they've got nuclear weapons, right? Putin's going to hit the button. And then yeah, it gets fed through the press. But I guess your point is that this is a strategy by the US government to leak this a bit more sensationalist story through the media ahead of Biden meeting Xi to kind of force him to back away from supporting the Russians?

Yeah, I think it's that in combination with the optics of how Biden needs to appear domestically with dealing with Russia. Apparently, I've read some polls that Americans are quite conscious of what's happening in Ukraine, as is the rest of the world as well. So I think he needs to exert a bit of dominance on that as a topic that's ongoing amongst others in a very politically important time for Biden's administration going into the midterms. So yeah, I think it's partially to do with that. And I think it's partially pivoting the fact that the normal citizens of America, like in the UK and elsewhere, are feeling the pain of the cost of living getting exponentially higher every day. So yeah, I think, I think this is all very tactical. I think, you know, this isn't, you know, I don't want it to sound sensational, but this is when you go back and you look at any time there are high-level talks, so heads of state, it's very typical for them to utilize the media in such a fashion. It's not an uncommon approach. This is all about— it's kind of like going into a business deal, isn't it? And you, you're trying to posture and leverage the information and the appearance that you have so that you go into dialogue with the strongest possible hand, even though your hand might not actually be what it— what it's been positioned to showcase.

But, and you know who, who's best at that? Donald Trump. Come on. The Art of the Deal. Biden is— but Biden's doing a Trump. Oh yeah, yeah. Um, but I do think it's interesting thinking about just stepping outside of this Russia-Ukraine thing and thinking about other leaders and what positions do they take up regarding this crisis. And I think what position you take up is very much a reflection of the current state of your domestic politics. And I think that Biden and Xi particularly are in really difficult positions. I think for people like Boris here in the UK, he's got a much easier situation just purely by view of the fact that he's not up for reelection for years yet. Okay? Biden's obviously got the midterms coming up in November this year, but I think it's actually Xi that's in the most precarious or in the most difficult position. I think he, in my view, I think he's seeing this Russian thing is the last thing in the world he needs, the absolute last thing in the world. And he's kind of getting forced from one side or the other to say this or not say that. And actually what's going on domestically in China is this is the big problem. And obviously he's coming up for, you know, it's the national conference in November where he is hoping to get anointed as the, you know, the leader forever. And I think at the moment, the 6 months run-in to this big event for him personally at the end of this year is going to be economically really challenging. And I think actually he's going to go in with the Chinese economy maybe at its worst point for, for decades. Um, so I think he's really worried about that, and the last thing he needs is this kind of Russia headache.

Yeah, which is why I think that as far as these talks will happen today, Biden will say his piece, he will be quite assertive with what he says, and that will be reported in that fashion. I think China will be very passive. I think China will just sit there not say a great deal, continue to have dialogue on both sides, Russia and America, right? And just still sit there on the sidelines for the reasons that you exactly have— you said. I don't think that it's in their interest at the moment to rock the boat from China's perspective. They'll just take a little bit of heat. I don't think that from a trade perspective, I don't think there's a great deal of a shift that will happen. It'll just be sparring of words coming from the US. And I think China can swallow that for the time being.

And Biden gets to paint that picture on domestically that, hey, I'm the strong president standing up and being forceful with China.

Why not cut a deal today with Biden? Why don't you up the rhetoric? We'll take it, and in turn, you know, we'll soften a few of these trade deals, these tariffs.

Yep.

Look, this is how the world works, unfortunately. It's all a house of cards.

And well, the other new— well, one piece of news this last week, of course, was on the Iran side, with the UK finally paying up for this outstanding debt that's been in place for like 40, 50 years or whatever. And all of a sudden, the UK have paid up. And just so coincidentally happens to be in an oil crisis where being a bit pally with Iran again might well help on that front in terms of getting more Iranian crude supply out into the market. It's all— it's just, it's just all about the oil, isn't it?

Yep, always has been.

Yeah.

And will continue to be. But, um, look, talking of China, the other big headache, of course, for Xi is COVID. And the reason for that is that, um, the, the data this week— this was kind of coming into the start of this week— showed that they had the highest daily figure of COVID cases in 2 years. And at that point, the caseload was tripling on the day-to-day. And what that has led to then is that Shenzhen was put under lockdown. Changchun— ever heard of Changchun? It's actually the size of London.

I haven't heard of Changchun.

No, it's in the northeast of China, and it's about as big as London. But that's been shut down. Cases rising in Shanghai, many other big cities, and the outbreak is impacting key manufacturing hubs. So Shenzhen and Dongguan, and that's where a lot of the factories that make goods from like flash drives, car parts, like you name it, pretty much everything. And so again, it's kind of like a repeat almost of what was happening before. So the thing a lot of people are looking at now is the impact on supply chains and some of China's main ports. At this point, they're still open, but vessels are continuing to dock. Congestion is building. If you go on to like Reuters, um, you can see photographic imagery. They have maritime routes and things that they track, quite sophisticated stuff. But you can basically see that container ships are rerouting their, their trips at this point. It's all happening again. It's like a rerun, um, even though you know, going into the city yesterday on a Thursday in London, sun is shining, Ukraine is dominant in the news. You'd be forgiven for thinking like, what, COVID?

Yeah.

Whereas in China, it's the worst it's been since the peak of when this all happened, and they are responding in kind with renewed lockdowns. So similar lockdowns last year. This is a— this is one to look out for from a name operations at Yanqian, which is the world's— this is the world's fourth largest container terminal, essentially. So last year that got cut, the operations, to one-third of capacity, and that led to a bigger disruption apparently than the global shipping that the one was caused by the Suez Canal, the 6-day block that we had with that enormous container ship got stuck in the canal.

But that one— well, that one port specifically, 25% of US-bound sea freight from China comes out of that one port. And then I think it's 50% of the whole of Shenzhen's exports goes out through that one port.

Yeah. Okay, so you're saying that actually to me then, if Biden's meeting Xi today and Biden's got in his mind Russia, Russia, Russia, Ukraine, and so forth, as the main point that he needs to come out of that as a victor in the conversation. If I was you, I'd be mindful of the fact that, as you said, 25% of those shipments are coming out of there. I have control here, and you're facing inflation going very high at the moment. Supply chains caused here will give you a massive headache. So let's just all just play nice. And let's appear to get on and let's just move on. And then next year we'll start talking once you and I have secured our place for a period ahead.

I mean, I think Xi has got two problems. Well, he's got a few problems, but there's two I want to mention with regards to the COVID policy. There's a short-term one and then there's a medium to long-term one. Um, in the short term. I mean, I think now in 2022, Xi's zero tolerance policy on COVID is— the, the longer it goes on, the more negative that will be for him personally and for China globally. I think because in 2022, as you say, in London, it's literally What COVID? And it just means that our economies are fully opening up and we're fully back to normal. And our economies are going to be firing, right? But China with this persistent zero tolerance, ultra lockdowns, it's all a relative thing. I think it was fine in 2020 when the whole world was locking down and fine, China were doing it much faster than everyone else. And Oh my God, that's so much better. They're going to save lives. And look, don't get me wrong, that's great. The upsides then were fantastic. I think the downsides now are easily outweighing the upsides. And he's kind of dug himself in now because it's his policy. And if he now goes, actually, you know what, I'm going to change my mind. Sorry, guys. He won't change his mind, I don't think. He's that kind of stubborn sort of leader and approach. So he's dug in now, and this zero tolerance is going to happen for the whole of this year. And then whenever you get a few hundred cases, right, bang, let's lock down a city of 10 million. Let's impact global supply chains. And I think short term, it's going to have a really negative impact, relatively speaking, on the Chinese economy. I think there's a monster long-term impact that's very negative for China. And that is that the longer this goes on, the more international businesses will get out of China. And I don't just mean out of China, kind of domestically operating in China, I'm talking about supply chain risks and supply chains. This is— it's crazy what China are doing with their policy. And we were talking about— I was looking on my— I kind of do some notes for this show each time, a little bit of prep beforehand. And I was looking back at my show notes, if you want to call it that. And it was back in January of 2021 that we were talking about this exact thing, and talking about diversifying supply chains, and how this is accelerating the obvious need for country— like companies in, let's say, America, to diversify their supply chains. Forget China, move to maybe other Southeastern countries like Vietnam or Malaysia, or probably more likely Mexico will be the huge beneficiary of Xi's own goal that he's kind of inflicting. And so I think actually medium to long term, and we won't see this, that's the problem, until way further down the line, I think this is playing a hugely negative impact on China's standing in the world, which is being that kind of supply chain hub for the planet. And what happens when they lose that hub? So I think Xi, I just think he's having a shocker at the moment with this policy.

Yeah. And then talking about these kind of world powers, so the US, in China, Russia included. There's a really great animated video that got put out by the hedge fund manager Ray Dalio, who I'm sure most people are familiar with. But he goes back and he's basically got this book series and it's accompanied by these really excellent videos. So if you're a student, whether you're— you know nothing about markets at all, or even if you do know some I'd go back and watch some of these. He's done ones about the economic machine, and the latest one he's released this month is called The New World Order. And it looks at the 500-year history of these big cycles, he calls them. And these are basically the transitions of power on a global trade sense. So I think it was the Dutch who were dominant prior to the British Empire, and then that transition from Britain to the US, and what we saw through the 1900s, and then now the convergence of powers that we're seeing of the US and China's basically— the curve is almost parabolic in growth of the move catching up with the US. That kind of in a way explains the thing that Dalio does so well in that explanation is explain the kind of what happens. And this kind of leads us on to partly the central bank talk about the the wealth division that gets created as, kind of, as you say, asset owners who— I think Eddie put a piece out in the US where the appreciation of homeowners on an average price level outweighed the average salary of the typical US person. So people who own things, the division, wealth division gets larger. So then you get more disenfranchised people who a feeling, then that fuels populism, and then you see more civil unrest, and then so on and so forth. Basically, the pattern repeats like clockwork, and all of the signs are there. Um, and he kind of goes over about how the US could look to slow down this, this kind of inevitability of the transition to China. But yeah, super interesting. Again, I'll put the note in the bio of this episode, but definitely check that out because it would explain a little bit of what's been happening in the world really since Brexit. 2016 was a significant trigger point, I think, for a lot of this. But let's shift it on to the central banks. Let's talk about Fed and the Bank of England because it kind of incorporates some of the things we discussed. So from a top level, the Fed, They hiked rates 25. The 50 conversation left town a while ago. So very much as expected. They said they're going to do 6 hikes likely for this year in their dot plot matrix, their forward-looking kind of projections. But that again was as expected. Markets were very much positioned accordingly. Policymakers voted 8-1. There was a dissenter. Bullard, Bully Bullard, remaining as per usual, just going half point please. Um, and yeah, everyone else disagreeing. Um, so he remains the isolated figure. I don't think really that was important. A couple of— I've just extracted a couple of what I thought key takeaways. It's good to get your take as well, Piers. On inflation, they said we are attentive to the risks of further upward pressure on inflation, inflation expectations. On the idea of kind of the flexibility to adapt, said we are attentive to the risks of further— I'm sorry, anticipates that ongoing increases in the target range will be appropriate, and repeated the pledge to be nimble. And then on the balance sheet side of things, because this is kind of that, that sync, the sequence of, of policy tools going further forward now they've pulled the trigger on the rate rise and given the kind of trajectory of that, uh, the Fed will begin, begin allowing its $8.9 trillion balance sheet to shrink at, quote, coming meetings. But they did not elaborate on what exactly that meant. And then on Ukraine, Powell acknowledged the geopolitical uncertainty clouding the outlook and emphasized the conflict is likely to put additional upward pressure on near-term inflation here at home and also weigh on economic activity. The reaction when all of this was happening was initially, um, a dip and then rally, basically. So yeah, just wanted to get your, your thoughts on overall what you thought.

I think that I just still— I think we've kind of seesawed back the other way now in terms of, let's just talk first about number of rate hikes in 2022. So they hiked, and I'm talking here number of 0.25% rate hikes, okay? And so we've had one, and it was this week, and then the dot plot signaling, signaling 6 more now. And I guess if you take the last 3 months, we've gone from thinking there's gonna be 7 hikes this year. Then it all kind of dropped off as we kind of went through this Russia-Ukraine thing a few weeks back, and it's like, oh, it's not going to be 7 now, it might be more like 4. And now after the meeting on Wednesday, it's like we're back to 7. And I've definitely always been of the opinion that 7 is not going to happen and 7 is too much. My opinion on that has definitely My confidence in that opinion, let's say, has definitely been eroded from having heard what Biden was saying— Biden? Powell was saying. I guess central banks typically— I guess here's one of the surprising factors about Wednesday and how straight up hawkish they were, is because central banks typically, they like nothing more than an excuse any good excuse to do nothing. And so when I say it, I don't want to be patronizing, but any good excuse to not have to make really big calls and really big decisions. If we don't have to make those really big ones, great. And normally, a Russia-Ukraine crisis is like, right, that's a really big risk. You know what? Let's just take a step back here. Let's just be a bit more cautious. Let's see how that plays out. In the next few weeks and months, and then, right, we can get back to making these big decisions. But actually what the Fed have done here, they have not chosen to take that option, that kind of get-out card. They've gone, you know what, we're stepping up and we are going to be straight out front, and we're going to hike today, and we're going to hike 6 more times this year. And I think that was a real surprise that they were that forthright about it. Now, there's two ways you can interpret that. And I think you're on one side of the argument, and I think I'm going to be on the other side. But I think your view— well, I don't want to speak for you. What's your opinion?

On what the Fed's done?

On their straight up, we're hiking and we're going to do it 6 more times. What's your takeaway there?

I think he has conveyed that in a good way, in a sense of, I think that he's done it in the way that he said, that he delivers, it calms people's ability because inflation is the key metric that people are fearful of. So it kind of quells that fear. But at the same time, he has said now multiple times about the idea of being nimble. And I think then he could— he can change his approach. And I think overall, given the challenges in which they face, I don't think there's much else— many other ways he could dress up what he's needed to on Wednesday.

So it's so weird, this world. So stocks rallied in the end. All right, there was a brief sell-off, right? Then they punched big time higher off the much more hawkish than expected, or not much more maybe, but more hawkish than expected, and 7 hikes this year when we've been panicking about that scenario for months. So how can that now be positive?

So I think that that's the— in a weird way, I think the market's in a state of inflation anxiety. Powell's come in and gone, look, this is what we're doing. This is what we're doing. It is aggressive, but the caveat, we will be nimble. That gives him the flexibility to keep the option on the table. You go faster, you go slower, whatever the case might be. I think to me, it's almost like the market's this lost child feeling slightly fearful, and dad's just come in the room and gone, look, son, this is what we're doing. And that doesn't mean dad's always right, but the fact that he's been a little bit more assertive with the kind of comms has just meant that it's steadied the ship. Do I think Powell's going to— and the Fed are going to be right with what they're saying here in the dot plots? Dot plots are never right. So no, things will change, but I think he's done what was necessary. And I think perhaps there was a bit of anxiety around the Fed are always kind of, as you say, passive, cautious. They never really want to commit, but he's come out and he's been quite forthright. And I think the market required a forthright Fed chair for this meeting.

Okay, fair. Um, I kind of take a different view. Um, I mean, he did say that— so a couple other sound bites here. Um, he said that the— he saw the US economy as being in strong shape. And that the probability of a recession was not particularly elevated. I was quite surprised by that comment. I know that the US are more insulated from the Russia-Ukraine crisis than Europe, clearly. So yeah, I get the economic risk of that is lower for the US, but, you know, when we talk about commodity pricing, you know, no one's immune to that. Doesn't matter geographically where you sit. So I was surprised at just how confident he was about the recession risk being not particularly elevated. I think the risk is higher than he said it is. And I guess with the dot plot, I guess one thing to take away was— so the dot plot, just for the benefit of those that aren't 100% familiar with it. It's just very quickly, it's just the Fed officials are asked once a quarter to predict where they think interest rates will be at the end of each year. So what will rates be at the end of 2022? What will they be at the end of 2023? Where will rates be at the end of 2024? And then where will they be in the longer run, right? So this is the dot plot and each member of the Fed is asked to plot a dot for each year. OK, now, if you go back to September— in September, the dots plotted for the end of 2022, OK, the dots were zero. So the Fed members in September, 6 months ago, were saying that the end of 2022 will have had no rate hikes at all, and there'll still be rates—

will still be at zero.

OK, that was in September. Fast forward 3 months to December. In December, the dots were saying, actually, you know what, by the end of 2022, rates will be 0.75%. We'll hike 3 times in 2022. OK? Here we now are in March. And now, by the end of this year, apparently rates are going to be 2% with 7 hikes. So in 6 months, we've gone from 0 hikes in 2022 to now 7. OK? So that's one thing. The cycle, the hiking cycle has— it actually hasn't changed the longer run. It's changed the steepness of the on-ramp of this cycle, because all the dots in 2024, let's say— so even though you've seen this huge change in what will rates be at the end of 2022, you haven't seen any change at all about rates in 2024. They've stayed the same, right? And actually, in the longer run, through this 6-month period of this massive hawkish pivot, in the longer run, the Fed are now saying rates will be lower than they were before. In September, the dots were saying 2.5% in the longer run. Now, the dots are saying 2.4% in the longer run. So what's happened is the shape of this hiking cycle, in terms of how we're expecting it to play out has dramatically changed, and it's so much steeper at the front, but actually in the end, it's the same. So that's just one point I want to make. The other thing to say is in terms of how markets react, I know all the press— it's so hard for the press to— their job is to explain what happened after the event. And on Wednesday night, stocks rallied, and look, trying to explain that, I think is incredibly difficult. I don't buy into your Biden's being the strongman, dad says this, dad's always right. We've got an inflation thing, right? We're on it. I actually, I don't buy into that. If you delve under the bonnet a bit about what stocks rallied, then I think it gets a bit more interesting. So a lot of this upside, and it was the NASDAQ particularly punched higher. And actually, so you've got a list of stocks that outperformed, and those are the spec tech stocks that got hammered earlier in the year because of inflation. And inflation erodes those future earnings. And so these spec tech got destroyed, like you were talking, down 50%, down 75% their stock price. On Wednesday, they rallied hard. And that's because, well, hang on, if the Fed are going to be way more hawkish, maybe they can get hold of this inflation problem and bring inflation back down. For those stocks particularly, inflation is way bigger risk than anything that the Russians or the Ukrainians might get up to. So you saw strong rally in Spectac. The other stocks that are massively higher, energy stocks, on both sides of the coin, i.e., fossil fuel and green, they're up big time. And then the banking sector was rallying hard. And why? Well, great, rates are going to be higher faster. That's perfect for banks. Okay? So you've got particular sectors, little pockets of the index that really do straight out benefit from what happened. And they rally hard, dragging up the whole index. And then all of a sudden, you're reporter at the FT's got to explain why is the whole NASDAQ up 3.5%. And they're kind of scratching their head and they're not quite sure. So they come up with a narrative. I think this hawkish Fed, I don't think it's a good thing for stocks. I think you've seen some stocks rally and find we bounced. And on that day, you had the big news out of China, massive stimulus coming. We've got this plunge protection team getting the bat out, right? Then you had a little bit of positive ceasefire news that, all right, turned out to be maybe nothing. But my point is there were some other big forces driving that market higher. So yeah, I'm going to beg to differ with you on the Powell front.

I guess what will be really interesting is if, as you say, Xi is stubborn, if COVID becomes a greater problem in China, If that then causes a repeat, if not a worse, supply chain impact from China, then what? Because this thing's going to get even worse than what's already factored in now, surely.

Which is why I'm very surprised at Powell's seeming, you know, his confidence about the fact that the recession risk isn't particularly elevated. I think he's wrong.

Yeah.

And maybe he knows that. I'm pretty proud— well, of course he does. But maybe, right, he's trying to be glass half full guy because obviously he's in a position of particular importance where he's responsible for confidence levels in the system.

What I find interesting from, again, a strategy perspective as a central banker is the projections are used to forecast the medium-term horizon. So let's say 2 years is the typical timeline. But in actuality, I don't think that that's what they— I don't think that's, A, the purpose they serve, or what the people who— or how the, let's say, the committees use them. So the research team, let's say, that form the broader bank who calculate and forecast these things, I would say that's one team who has one objective. The committee then meet, and it's like, right, we understand the sensitivity and context of the now, and how do we engineer the payoff now? Because markets are pricing forward-looking. And so I just, yeah, wonder of like when the actual purpose that these tools that they have are supposed to set and not actually what they serve, which is to just serve the immediacy of the issues facing now, which is obviously what it is because it is forward-looking. Um, but yeah, it's just—

yeah, that's right. The dot plot, which is forward guidance about the future, its primary purpose is to control confidence in the present, right?

Yeah, which makes nothing— then he says what he needs to say to do to address the now, and does he change and shift? Well, look, you just said 6 months ago, like, yes, basically, and it can shift it again.

Like, what I would, I would love is to sit in on one of these FOMC meetings, and I would love to be able to see what is the actual difference between what they're actually talking about behind closed doors and then what they actually officially say in their statement.

Yeah, I would love that too. And I wonder how much of the conversation is dominated by, this is the economic situation of the United States economy, or how do we think the markets are going to take this?

Right.

So I reckon the conversation is probably 90% the latter. 'With 10%— oh, those bloody— do we have to talk about the numbers again?' And they're just tossing up like, 'Oh, how is it? How do we like—' I mean, the fact that they can turn around the language that needs to be used for him to convey it. I mean, the job that Powell has to stand there with literally a word out of turn could flip the world upside down. I mean, talk about pressure.

Yeah, no, thanks.

Let's, let's talk about the Bank of England then, just to conclude. And, and they hike rates, so the world is, is tightening at the moment. And this was the third consecutive meeting that they've hiked rates now. The interesting thing here was the market reaction, and a lot of that came out of the knee-jerk reaction that unique to the Bank of England is they released the vote split and the minutes. You get the full monty basically when you get the Bank of England. And there was one dissenter and it was the opposite of the Fed where Bullard's going 50. John Cunliffe, who's a deputy governor at the Bank of England, said, "I actually don't want to hike rates. I just want to leave them as they are." And he placed great weight on the very material negative impacts of higher commodity prices on real household incomes and activity. The idea is that higher inflation rises, the more it squeezes living standards, the lower, I guess, household spending power becomes. That destroying demand, unemployment ticks up, growth slows, leaving companies less able to boost their prices. And some of the rationale would be, well, is inflation in itself going to take care of a lot of that rather than them having to, to be aggressively hiking. In context, living standards in the UK are falling at the fastest rate since the 1970s oil shock. The National Institute of Economic and Social Research, NIESR, they expect the UK to be in a recession in the final half of this year. I mean, I'm sure you've had your energy bill through, Piers. At this point. I got hit with that. Yeah. And look, I mean, I don't want to joke about it because this is going to have a dramatic impact on many UK households when those energy bills come in. And the, the price, um, that whole tariff hike situation, that's not till April, isn't it? Yeah. So the impact that we're seeing now is just from the energy squeeze that we're seeing have been. So it's going to get even worse than what it's at at the moment, which is just incredible. Um, but yeah, just wanted to get your take on, on where we're at with the BOE in the UK at the moment.

So the Bank of England, in their statement, the key thing— I mean, the sterling dropped, right? Well, they hiked rates again, third meeting in a row, but sterling devalued. And yeah, so it's about the future rate trajectory. And what the big change in the statement was was that they're no longer saying, like they have done in previous meetings, further tightening is likely, is what they said in previous meetings. Now they're saying some further modest tightening in monetary policy might be needed. Okay, so that's it. Basically, they're saying we've hiked 3 times. It's actually taken rates back to 0.75%. Which by the way is back to the highest interest rates have been in the UK since 2008. And it's like they're saying, right, that's it. We're actually going to stop now because the recession risk is looming. I think they're judging the economic situation much better than the US. I guess for once, for once, once, once, the The Bank of England right in front here, right, on the policy cycle, they've hiked 3 times. I mean, the Fed have literally— they've just hiked once, right? So the Bank of England have already hiked 3 times. And now they're already going, actually, you know what, let's put the brakes on, which is what I think is going to happen over in the US, by the way. They say 7 hikes, whatever. Fine, they might hike 3 times, and then we'll be into a recession. I'm like, ah, okay. But I guess it's almost like steepening the front end of this heightening curve. It's almost like they're going, "God, we better get some rate hikes in quick before the recession comes so that then we can cut again." And this is very typical. If you take out all of the ups and the downs and the crises and the geopolitics and everything else, it is very normal for a central bank to be behind the inflation curve. A very normal economic cycle is the central bank hike too slowly, inflation gets too high, they try and catch up, but make matters worse and we have a recession. And look, it's just happening again. I just think it's happening again in a bit more volatile way because inflation's gone off the scale and fine, you've got all this commodity price inflation and you've got supply chain issues with COVID But take all of that out and it is quite normal what's happening here. And so I think the Bank of England are out in front. They've hiked 3 times. They're going, whoop, let's put the brakes on. We're going to have a recession. And that's what you saw in the meeting on Wednesday. And sterling's trading the lowest— new lows. Actually, sterling's the lowest it's been since— yeah, for 18 months now, or maybe it's 15 months. One of the two. But anyway, we're down to levels we haven't seen since 2020. And that's definitely being a reflection of that idea that the Bank of England have already— the rate hiking cycle's done. The massive 3 hikes, that's all they can do these days. So maybe we're at the top of the cycle in the UK.

Cool. All right. Well, look, we are just clocking the time. I think we should call it a day on, on today's episode. But, um, yeah, covered quite, quite a bit of ground there, and there's quite a few links I said I would, I would share as well. So yeah, if you click on the actual description of the, the episode, you'll be able to locate those down at the bottom. But yeah, we'll leave it there for this week. Lots of disagreement, which is a nice way to, to kick off the weekend. Um, but yeah, hope everyone stays safe and enjoy the sunshine. And see you next week for the next episode.

Thanks, Piers. Have a good weekend.