Odd Lots - Hyun Song Shin on How Big the Yen Carry Trade Really Is

Episode Date: August 29, 2024

Remember August 5th? That was the day that markets around the world plunged in historic fashion and everyone became an overnight expert on the yen carry trade. But what really is the yen carry trade? How big is it? Who is making the trade? And what is its connection to markets all around the world? On this episode, recorded at the Kansas City Federal Reserve Bank of Kansas City's Economic Symposium in Jackson Hole, Wyoming, we speak with Hyun Song Shin, economic advisor and head of research at the Bank for International Settlements. He walks us through the mechanics of the trade, what went on in early August, and the lessons we've already learned from it.Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Bloomberg Audio Studios. Podcasts, Radio, News. Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthall. Joe, do you remember the carry trade on wind?

So the carry trade, what's the deal? Basically, people borrow yen and buy Nvidia, and then the yen went up, but then the trades didn't work as well? Well, that was one aspect of the commentary. It's like the Twitter version of what's happening. Yeah, but I think actually, okay, so we are recording this on August 23rd. The carry trade Unwind happened, what was it, two weeks ago, two or three weeks ago? It feels like a lifetime ago.

And it's kind of remarkable how quickly it faded into the background with the market rally and the recovery. But the conversation at the time was that there is this carry trade, which involves borrowing in lower yielding currencies or lower interest rate currencies such as the yen and then investing in higher yielding assets like in theory U.S. technology stocks. Or U.S. Treasuries. Yeah, but the problem is that some of the discourse around this has been, I've kind of been offended by some of it. I've seen things out there basically implying that the entire financial system is imploding because the carry trade is unwinding. I mean, it's really crazy. Like, like how quickly that disappeared because, you know, there was that mega vols spike. And we were talking

like historically high levels on par with some of the financial crises. And then, you know, the expectation was like, at a minimum, this takes a while to settle down. Yeah. And it's settled down in about 15 minutes, in a day and a half. Absolutely. And so like, what was that? What is the carry trade? Because there is this sort of caricature version that is out there. Who actually is engaging in it, is it still going on? Many questions in my head remain unanswered. Yeah, and one of the big ones is just how big is it actually? And one of the funny things that happened a few weeks ago was people were basically looking at all the yen denominated assets in the world, like the entire Japanese banking system and saying, this is the carry trade. This is how big it is. Okay. Let's clear

up some misconceptions. We are going to do that right now. And I am so pleased to say that we do, in fact, have the perfect guest. We are recording here in Jackson Hole, Wyoming for the Kansas Fed Economic Symposium, and we have once again run into one of our favorite all-thoughts guests, an expert on this exact topic. We're going to be speaking with Huan Sung-Shin. He is, of course, the economic advisor and head of research for the Bank for International settlements, and he's been looking at the carry trade for years now. So, Hn... He actually knows what he's talking about. Yes. Hion, thank you so much for coming on all- lots. Thank you for having me again. It's so good to see you again in beautiful Jackson Hole. Absolutely. I'm so

glad we could make this happen and I am kind of glad that the carry trade unwind happened just a couple weeks ago. Something to talk about. Yeah. And you happen to be here and you're an expert on this. So let's start with something very basic. What is the carry trade? The carry trade is a financial transaction where you borrow a currency with a low interest rate. And then investor proceeds in other higher yielding assets. And I think the classical version of a carry trade would be where you borrow, I mean, it's basically a currency transaction where you borrow a currency with a low interest rate and invest in a higher interest rate currency.

But the way that the carry trade was portrayed in the recent discussion, I think that was described in much broader terms where you were going into all kinds of things. different assets. And Joe, as you describe, it was a very short-lived episode of stress, but at the time it was pretty intense. Yeah. And, you know, I think, you know, we can now look back on it with some relief that nothing broke. You know, there was no financial market dysfunction, as we saw during the March 2020 episode, for example. So, no, we're now back to something which looks more normal, but I think we should try and learn some lessons from that episode. Absolutely. And, you know, obviously there's a lot of that's still out there and much to be learned.

Before we even get to the future, I mean, you described what a sort of classical carry trade is and what we're talking about. And I joked in the beginning, you know, it's like, oh, borrow yen cheaply and then buy Bitcoin or whatever. But actually, like, when we talk about this, who are the actors involved? Is it speculators who see a spread? Is it institutions like insurance companies? etc. that have some sort of like larger structural reason. Like who actually is engaged in such type of activities? It's really the whole ecosystem, if you like.

I think the main actors would shift from time to time. I think one way that we could try and approach this question is, you know, as Tracy alluded to earlier, how large is this? What's the most reliable way of trying to gauge this? Now, one way of doing that is to look at the on-balance sheet lending. in yen. And at the BIS, as you know, we received data from our member central banks. We collected and then we distributed and we've been doing it since 1977. So in a way, we are the curators of this very important banking data of international banking business. So one thing that we can

look at in that data set would be what is the cross-border lending that is yen denominated? Or even if it's not cross-border, what is the yen-denominated lending? as a foreign currency. So even if the loan is booked in a country outside Japan, it's in yen and it's in foreign currency. Now, one of the things that I put in the tweet thread is that if you look at that number, there was clearly a very sharp increase

in yen borrowing as foreign currency in 22, 23. But it's something like 40 trillion yen. So that's quite large. 270 billion dollars, roughly, depending on the exchange rate. But it's not the kind of numbers that were being banded about in the markets. And not all of that is going to be engaged in Yen-carry trade. The other way of thinking about this, how does that borrowing take place? And one thing that is quite interesting is that a lot of the cross-border lending is happening through the inter-office accounts, which is to say, if there's a foreign banking group, which

has an office in Japan, how much is the subsidiary or the office in Japan lending out to the headquarters in yen? And that turns out to be a pretty sizable chunk of that 40 trillion. It's around 14 trillion would be that interoffice. But much more important than this on-balance sheet is the off-balance-sheet transactions. And here, the crucial market is the FX swap market. And FX swaps are where, you know, one party would deliver one currency. So if I deliver dollars to the counterparty, counterparty would give me the equivalent in yen, with the promise that that transaction would be reversed at a set date in the future at an agreed exchange rate. So the exchange rate is fixed at that point. And normally, if I'm a dollar provider, what I do is

I provide the dollars, I receive the yen in return, but because I need to repay the yen, I need to keep it in a safe place. So I would park it in a safe, in a yen asset. Just to be clear, typically FX swaps, it's not really a trade per se or it's not often a trade. It's more of a hedging activity. So if I have a lot of yen exposure, I want to offset some of that by acquiring dollars and vice versa. Yeah. And that's exactly the classical, the use case for a swap contract. But the issue here is if I receive the yen, rather than parking it in a safe place, what if I just sell that yen on the spot market and acquire dollars, then I have a naked yen obligation, which I will need to meet at the time by repurchasing the yen on the spot market. And that market is pretty sizable. It's around $14 trillion,

the swap market between yen and another currency. That's quite a bit larger than the $270 billion that I mentioned earlier. So as Tracy characterized it, there is sort of a natural hedging need for those sort of swaps. What types of institutions have that need to engage in the swap market? It's both financial and non-financial. I think typically the textbook case is of a non-financial institution. So if I am an exporter or an importer, I would like to pay for the goods in a advance, but then I need to hedge the currency exposure in the meantime until the maturity of that

swap. What we've seen, though, is that since the global financial crisis, it's the financial uses of the FX swap market, which has really grown much larger. So it's fair to say that it's the financial uses of the FX swaps, which are the lion's share of the FX swap market. And I think it raises perhaps a deeper question, which is if you're not constrained by the funding currency in what you can invest in by using the swap market. In other words, suppose I can only raise funding in one currency. Well, typically that means that, you know, unless you have balance sheet mismatches, you would need to invest mostly in that same currency.

But through the swap market, you can basically overcome, you know, that particular constrained. And what that means is it's much better to think of financial conditions in global terms rather than simply country by country because you can always deploy the funding in one currency and invest in the assets of another currency. Canadian women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. I'm Jennifer Stewart. And I'm Catherine. and in this podcast we interview canada's most inspiring women entrepreneurs artists athletes politicians

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that bring you the best analysis in our daily podcast. Search for Bloomberg surveillance on Apple, Spotify, YouTube, or anywhere else you listen. Coast, listen at lunch. And on the West Coast, listen as soon as you wake up. That's the Bloomberg Surveillance Podcast with Tom Keene, Paul Sweeney, and me, Alexis Christophores. Subscribe today, wherever you get your podcasts. Bloomberg Surveillance, essential listening each and every business day. It sounds also like it's additional liquidity. If you can use FX swaps to bypass specific currency constraints in terms of funding capacity, if I would was, I don't know, an emerging market like exporter, and I needed dollar funds. Obviously,

there's a limit to the amount of dollars that I can get in a situation like that. But if I know that I can go into the FX swap market and get that additional liquidity, it presumably expands credit in the overall system. In contractual terms, a swap is completely symmetric because, you know, one party is providing one currency in return for the other and vice versa for the other party. But from time to time when financial conditions vary across different currencies, different markets, there is a, if you like, a lead party in asking for that transaction. And, you know, there is a market, if you like, response in supplying it. So let me give you an example.

So if I am a, let's say I'm a euro area insurance company and I would like a globally, you know, diversified portfolio, including dollar assets. but most of my obligations are in euros. And so if I were to invest, you know, nakedly in dollars, there would be a currency mismatch on my balance sheet. And this is where I would go to the swap market. I would swap the euros into dollars and that I would invest the proceeds into dollar bond, for example. In a way, that's like borrowing dollars. I mean, the economic rationale is very similar to borrowing dollars in order to invest. But it's not treated as borrowing in the conventional accounting sense because, you know, it's a swap. There is also

a countervailing, you know, a transaction the other way. But you can normally track what's called an FX swap basis to see which direction that transaction is going. So it turns out that typically, normally it is more expensive to borrow dollars in the swap market than it is to borrow dollars in the dollar money market. And that extra premium is, if you like, the additional price you have to pay in order to access dollars. Now, coming back to the yen story, although most of the time, you know, financial institutions are borrowing dollars in the swap market in order to invest in dollar assets, that's typically the direction of the trade. This is why, you know, during financial stress periods, you know, these effects swap bases, you know, spike, and then there

has to be central bank swap lines to quell, etc. But there's nothing in principle that says it always has to go towards the dollar, right? If your intention is to engage in a yen carry trade, but through using FX swaps, you know, you could borrow yen and then, you know, acquire that yen obligation by going through the swap. And so one telltale sign is what happened to the FX swap basis during this recent episode. And in fact, one of the interesting findings is that the dollar FX basis versus the yen, you know, hardly budged. It's actually, you know, very high, you know, small movement, which is very atypical of a financial stress event. Yeah, how did, why is that? Because I would have assumed that the people providing swaps, who I assume are dealer banks of some sort,

with such volatility in the currency rate, I would have thought that they would back away from providing that liquidity. And so the basis would blow out. So there was definitely a little bit of that, but it was by no means the same magnitude as we saw. For example, in the March 2020 episode. And the reasoning would be that in that case, the, if you like, the party that was driving that particular transaction wasn't borrowing dollars, which needed to be, you know, repaid in the scramble for dollars, but rather it was the, you know, repayment of yen. Oh, I see. Okay. So it goes the other way. So actually, you know, so much sort of happened during that, I don't know, the sort of like the, the mini crisis of, of,

July 31st to August 6th of 2024 and it came and went. That should be the official name. Yeah, that's a name of that. So, you know, there was a Fed meeting that perceived perhaps to be a little hawkish. Then we got a weak unemployment report. Then, of course, you know, the yen had been creeping up right now and, you know, we'll probably still be learning more. What is the story that you tell, like, what actually happened in those six or seven days

that triggered such a move and then triggered such a move that was able to reverse so easily? What's your basic? What happened that week? Yeah. And clearly, Joe, there was quite a bit of action in the currency markets. But I think what you're referring to is the fact that equity markets were impacted very broadly across the world. In a way that you wouldn't have expected if it were a sort of narrow carry trade story. And indeed, I think there is something to that in that probably we're putting too much weight on the carry trade as a key theme of what happened. in early August, in that, yes, I mean, there may have been the classical carry trades going on where you borrow yen and then you invest in the high yielding currencies.

You can see which currencies fell most in early August, and they were the Mexican peso, Colombian peso, and the RAND. So these were the destination currencies for those classical carry trades. But I think it's not really enough to explain why there was this much more brutal based stress, especially in the equity markets. And I think here we have to think about the broader issues to do with how, you know, risk is managed, how, you know, risk management itself, risk management in the form of loss mitigation also generates some, you know, potential for amplification that could actually, you know, make things, you know, more volatile. So let me explain

what I mean by that. So if I have a value at risk rule that says, you know, if my risk is triggered beyond this VAR level, then I cut my position. That means I sell, or if I'm lending, I cut my lines, et cetera. From the point of view of the borrower or from the point of view of the market as a whole, that is something that would actually amplify whatever stress that was there in the first place. If I'm a lender and I set margins, or if I'm a CCP, a central counterparty or an exchange, you know, there is a margin that I ask for, you know, the various contracts that I deal with. Typically during stress periods, those margins go up.

So that's kind of de-leveraging. Now, the way that we deal with risk is precisely to mitigate loss. And there is this, you know, spillover effect that goes to the broader market. And I wonder whether we should, you know, look back on the events of early August and if you like apply that lens to, you know, to the events back then. So if, you know, for example, I was not, you know, borrowing yen and investing in technology stocks as you suggested. But it's just that, you know, you know, within my firm, you know, there is a team that is

doing a classical carry trade. but there is also a team that is, you know, leveraged to US tech stocks, but one team doesn't know what the other team is doing. So let's say, you know, one pod doesn't know what the other pod is doing. But from the firm's point of view, it looks as if, you know, in aggregate that, you know, there is a short-end position and the long position in technology stocks. And if that, you know, risk constraint is triggered somehow, it's going to have a much broader implication, much broader repercussion through all of the holdings. This kind of reminds me.

There used to be that saying about in a crisis you sell what you can, not necessarily what's most impacted. So it might be that the most volatility is falling in the currency market and in the carry trade, but the thing that you're selling to reduce your risk exposure is something totally different just because you can or because it's easier to do in an extremely volatile environment. And if you like, it's the risk limits that are triggered.

And the way that risk limits work is if the aggregate portfolio is suffering losses, then the risk limits are tightened for all the different assets that you own. And I think, you know, there is, I think, something that we need to think about in terms of how we can mitigate some of these issues. And going back to the FX swap discussion, the BIS also collects data on FX swaps. we have the six-monthly release of our over-the-counter derivative statistics. And the numbers that I've given you, these are all from our data. It's all on our webpage. I think there is probably more scope for us to have more refined data.

For example, who is the instigator in having the FX swap drawn up in the first place? So who is the lead party? Where is it being booked? What are the sectors that the two parties are coming from? At the moment, we don't have that kind of data. But this is something that the BIS is working very hard to try and assemble. And given the shift away from the very bank-centric system to something which is much more a market-based system, which we have now,

I think this is really something that we need to do as a matter of urgency. Canadian women are looking for more. More to themselves, their businesses, their elected leaders, and the world are out of them. And that's why we're thrilled to introduce the Honest Talk podcast. I'm Jennifer Stewart. And I'm Catherine Clark. And in this podcast, we interview Canada's most inspiring women. Entrepreneurs, artists, athletes, politicians, and newsmakers, all at different stages of their journey.

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So can we actually, I want to go back to your point about, you know, financial conditions being a global phenomenon, because that has been one of the questions here in the U.S. and people scratching their heads, financial conditions by some measures being tight, but spreads being very narrow for credit. And of course, the stock market having rocketed up, can you flesh that out a little bit more like this sort of like how we should rethink financial conditions in a world of sort of like easy swapping between currencies on a non-bank basis? Sure, sure. I mean, that's a very, very important issue, actually, Joe.

You know, when you look at the typical financial conditions index, let's say, you know, you take the Goldman Sachs index, which is probably the best known. There are two components there. One is really just about how high interest rates, how high are yields. There's another set of indicators which measure how tight are the credit spreads, you know, what's the dollar doing, that kind of thing. And what's really been quite surprising is that even though rates have been raised to quite high levels, so the rates, those indicators that point to how high interest rates are,

they've been quite tight. but stock markets, credit spreads, they've been extremely accommodative. And I think one way that we could rationalize this is that if we have a world where essentially money is fungible across currencies, basically what a swap does is to make money fungible across currencies. If I have dollars, I can get yen, vice versa. And in that kind of environment, it's not simply how. much the US money supply is, how much the euro money supply is, that matters.

It's really about what the global picture is, and what are the marginal rates at which one is swapped into the other. And I think one potential explanation for why financial conditions have been so accommodative in spite of the very high rates is that money will flow to the most accommodated section of the money market, and the swap is the insuffercedure. that's going to really, you know, give you that fungibility. And when we look at the growth of the aggregates, it's been, you know, it's been quite rapid.

So if we go back to the GFC, before the GFC, the global financial system, it was very much a bank-based system. And the GFC was, you know, in essence, a banking crisis. And the existing BIS banking statistics covered that really well, you know, in some of my work as an academic, you know, I relied really a lot on the BIS. banking data to really document what happened in the lead-up to and then the resolution. But since the GFC, we've moved very much to a market-based system, where the non-bank financial intermediaries are taking on a much bigger role.

And in that world, the banking statistics that the BIS puts out is only looking at a very small part of the overall universe. And increasingly, it's the FX swap market and other market-based intermediation figures that we need to keep track of. And so in that sense, it's quite important for us to update our perspective on how markets work, what kinds of indicators we need to keep track of, and basically make sure that the official statistics are really up to scratch. So in the two or three weeks since the carry trade hit the headlines, the yen dollar exchange rate has normalized somewhat. But if you had to take an educated guess, how does the carry trade reestablish itself or how does it evolve from here? Because I have to imagine there's some lingering memory, even if it feels like a lifetime ago that this actually happened on the market. So what happens next in terms of the Harry trades evolution. Well, actually, I think, you know, you've had guests on, on odd lots, where one of their big themes was, you know, we're waiting for this big crash because it's

going to present a huge opportunity for us to come in and really pick up some bargains. And, you know, if you were following this and you had spare powder on August 5th, for example, that was the Monday, then there were huge opportunities out there. I mean, you know, think about the VIX. The VIX hit 65 on the morning of August 5th. So I think we have to assume that many of the people who are very, who are very, you know, agile are already back in. And I think what we need to think about is, well, first of all, we have to, you know, we have to be thankful that nothing broke. But at the same time, you know, we can't be complacent and say, well, that's it, we can forget about it. I think we have to learn some lessons from that episode.

And one of those lessons is some of the standard ways that have been looking at markets may not be adequate. We have to look at some of these bigger picture issues, especially those big aggregates that have been off the radar for various reasons. And we have to bring them back on the radar. And I think when we think about the broader policy questions as well, especially monetary policy, financial conditions are absolutely key. They're a key input into how we conduct monetary policy. And so even for that question, how will financial conditions evolve, we have to think about this bigger picture. Thinking back to that week, from a sort of fundamentals standpoint, there was nothing that major that had happened. You know, like I think maybe the unemployment rate caught people by surprise, but data is noisy and there are surprises all the time in both directions.

Maybe the Fed, I don't know. The Bank of Japan, obviously, they're a little bit out of cycle. perhaps with other central banks. I think actually today we got a 2.7% inflation reading, so maybe it's a little higher, but there's nothing like that unexpected. Thinking about like risks going forward, the fact that you could have such a sharp move in such a short term, what does that say generally about the broader, I don't know, structure of the financial system? And nothing broke and it did quiet down extraordinarily fast. But what does it say about the structure of the financial system more broadly? That's something that sharp can happen without.

some seemingly, you know, major fundamental surprise. And you're absolutely right. So the fundamental economic news was not, you know, that big a surprise. I mean, there were some surprises at the margin, but nothing major. I think what it does point to is the power of amplification effects of various sorts. And, you know, as officials, you know, as policymakers, we need to think about how do we dampen those amplification effects in a way that's going to, you know, preserve financial stability and not have one of these episodes feed into the real economy.

And, you know, the typical response we would go to would be something like regulation. If these were banks, you know, that would be sort of in the first port of call. But because if these are non-bank, some of them, many of them are not regulated, that's not really, you know, the first port of call. But, you know, there are points of contact with a regulated financial sector where we can do something. I think one of the lessons we learned during March 2020 with the Treasury market stress was that we need to make sure that we don't have these hugely pro-cyclical margin variation that means that there are four sellers onto the market.

Now, these huge swings are justified, well, some people were justified saying, look, I need to protect my solvency by raising the margins, but that has huge repercussions for the others. So from a systemic risk perspective, you know, that has negative spillover effect. So that's one example where if we can make sure that margins are, margins don't get eroded too thinly during good times so that, you know, they're raised very sharply. That's really a no-brainer. And that's something that the official sector has worked on.

We actually, of course, need to have much better data on these other aggregates that, you know, have now emerged as being very, very important. And the BIS is on that case. You know, we are working very hard to make it much more detail so that it's going to be much more useful. But it's going to be a continual, you know, struggle, Joe, because you can never declare victory because, you know, the financial system is always evolving. And you're just, you know, you're playing catch-up all the time. It's just a case of how badly behind are you, you know, with the realities.

I have just one more question, which is thinking back to August 5th. when markets were tanking. There were, or at least there was one prominent call for a hundred basis point emergency rate cut. And I really don't mean to be mean-spirited here because, you know, hindsight is 2020 and we all get things wrong from time to time. But I'm just very curious. We are here at Jackson Hole with a number of high-profile policymakers. Is there any discussion of that call or any like, are people talking about how ridiculous maybe that call actually was at the time? The idea that the Fed was going to cut rates, 100 basis points, and now two or three weeks later, we have markets near all-time highs. The FX exchange rate

has normalized to some degree, and a lot of this is just in the rear view mirror. I think we have to look at this with a bit more sympathy, Tracy. I don't think we can say definitively yes or no. You know, if we think back to the summer of 1998, when LTCM, long-term capital management, the hedge fund failed, there was tremendous stress there. And, you know, there was an intermeeting cut at that point because what, you know, we could see then was that the real economy looked to be, you know, showing signs of being affected. And so, you know, you know, we could see. And so, you know, Similarly, I think with March 2020, you know, that was the treasury market, clearly. Fixed income is much more closely tied with the real economy.

So I would never say never, but, you know, if it's, so what are we looking at in deciding whether you would go in and to intervene? Well, you're looking for signs of complete dysfunction in the market, where the market is just broken down and nothing is, you know, being sold or bought. And this means that the flow of finance to real economic activity is really really. suffering. I think if you see signs of that, then I think, you know, there is a stronger argument for an extraordinary intervention. But as you say, I think, you know, looking back, although it was a pretty, you know, intense period, those two days, in retrospect, wasn't the kind of thing that needed

extraordinary intervention. I just have one last question, and I guess it's sort of broad, but it's also one that I think some of our listeners are curious about. And I'm so I'm curious about from the BIS perspective. Like people are always very interested in the idea of like speculative excess, bubbles, et cetera. I'm curious from the BIS perspective, do we have reliable measures that can observe that? Do we have, you know, you could feel it in the air sometimes people are talking about AI or whatever it is at any given time. But do we have good tools to quantify sort of the, level of what we'd call speculation in the market and at any given time. We always have good measures when in retrospect.

So we can always look back to the previous crisis. Say, oh, wow, we should have taken notice of that. So, you know, before you go back to the GFC, it was a growth rate of credit. It was growth rate of cross-border lending. And in particular, the growth rate of cross-border lending in dollars, which was, you know, making this round trip from the U.S. to Euro. Europe back to the US. And what tends to happen, and I think the BIS, like any other official institution, is guilty

to some extent, is that we draw up a checklist and say, well, next time let's not ignore A, B, and C, and let's have a list that we check. And of course, you know, we have this accumulated checklist that we take along with us as we experience markets. But it's never going to be adequate, right? So this time around, what happened was not really, you know, central to some of our checklist. So, you know, I think to be fair, I think the BIS is probably the best place to draw up a checklist that is closest to, you know, what's going on.

You know, we are pretty close to the ground and in following these things and we have very good data. But something that needs constant effort, right? It's not something that just comes easily, and it's simply a matter of effortless, you know, brilliance that gives you that. It's something that always needs effort. We have to keep, you know, we have to keep studying. We have to keep looking.

And so it's going to be a never-ending struggle. All right. Well, we both look forward to the BIS bubble index that you will inevitably be building. But, Hjohn, thank you so much for coming back on all thoughts. That was amazing. Yeah, that was fantastic. Thanks for inviting you back. Yeah, great conversation.

Joe, I'm so glad that we could catch up with him and that he was basically our first episode on the carry trade. I love talking to Hian, it's always just like incredibly illuminating and pleasant and great. Many interesting things there. I mean, for one, I sort of appreciated him just explaining what the carry trade is of the different types of factors, whether you're an importer, exporter, why you would want to engage in it. Like, again, just, I don't know if misinformation is the right word, but the amount of people who want to. opine on something like this for the first of the people who actually like have some insight is a there's quite a gap well i do think the nuance on causality is kind of important there so the idea that okay two things kind of happened at the same time which is the carry trade unwound and u.s.

stocks sold off but that doesn't necessarily mean that one thing is directly causing the other right and it gets to like the joke every time you know there's some big market event and someone goes a pod blew up. But it's sort of like that, which is basically it really, if there is some volatility, if you're losing money, it doesn't really matter what strategy you're using or whether that strategy was central to it. You sell something. Right. And so you still have that effect. Someone taps you on the shoulder and says reduce leverage. So you reduce leverage. The other thing I thought was really interesting was the idea of the fungibility of money. And I think we've talked about it on the podcast before. and I've certainly mentioned in the newsletter.

But I do feel there is the sense that, okay, interest rates went up in the U.S., and so credit and dollars became more expensive. But that doesn't mean that they became less available. Yeah. No, that's such a fascinating idea and the idea of like a global, the need for a global financial conditions index or something like that. And if you're just looking at the U.S. in isolation, there are things that don't seem to make total sense in terms of especially the disconnect between

what happens with rates and what happened with spreads over the last couple of years, but that perhaps if you sort of aggregate everything together and recognize that any, there are multiple places to get funding or get liquidity, maybe some of these puzzle pieces fit together a bit more. Yeah. So I'm looking forward to the Global Financial Conditions Index and the bubble index. Yes, many indexes for the BIS to get on. But if there's any entity that I feel confident, could do it. It would be Hyn and his team. All right. Shall we leave it there? Let's leave it there.

This has been another episode of the Oddlots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at the stalwart. Follow Hune Song Shen. He's at Hune Song Shen. Follow our producers, Kerman Rodriguez, at Kermann, Dashob Bennett at Dashobin at Dashbot. And Koe, thank you to our producer, Moses, Andam. For more OddLod's content, go to Bloomberg.com slash OddLots. We have transcripts, a blog, and a newsletter.

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