Odd Lots - Why Investors Keep Losing Money Betting Against The Hong Kong Dollar Peg

Episode Date: August 3, 2020

For years, macro hedge fund managers have been stalking the Hong Kong Dollar. Since 1983, the currency has been pegged at around 7.75 per US dollar, and it basically has never budged from that. But that hasn’t stopped investors from taking big bets, with potentially major payoffs, that the Hong Kong Monetary Authority would sever the peg in some way. So why do traders keep making this bet, and is now the moment when it finally pays off? On this episode, we speak with Christopher Wiegand, the Chief Investment Officer and Co-Founder of Royal Bridge Capital, about the history of the Hong Kong Dollar, and the factors that have made betting against it such a loser over the years.See omnystudio.com/listener for privacy information.

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Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, and wherever you get your podcasts. Hello and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthall.

And I'm Tracy Allo. So Tracy, you're in Hong Kong. Obviously, we've been talking about some recent episodes about some of the reemergence of the virus there. But also, virus aside, this is just a sort of a big moment in time for Hong Kong for obvious reason. Yeah. There's no shortage of news.

slow here in Hong Kong. Aside from the virus, we've had a year of unrest in the form of the big protests against the extradition law. And now, most recently in the past month, we've had the imposition of a new national security law, which gives China sweeping powers, I guess you'd say, over Hong Kong. Right. So I remember thinking, like, you know, a year ago, you know, it's probably like a, because a year ago by now, the sort of like the protests had really gathered steam. Like, it was like last summer when we really saw the reacceleration of the protests and you and I would be on meetings pretty regularly and you'd have to talk to us about how you were getting into work and so forth and things like that.

Yep, that's right. So you must be pretty exhausted. I mean, look, there's a lot going on in the world. But yeah, definitely a lot going. on in Hong Kong. And like the mood is, the mood's pretty morose at the moment, I got to say. And then beyond that, of course, we have the economic situation, which is that Hong Kong just can't catch a break. So we already saw the Hong Kong economy affected by the protests. Lots of mainland tourists and shoppers stopped coming into the city. And then, of course, we had the virus cases beginning to really

build up earlier in the year. Now we have the third wave. So that continues to hit the economy. So that continues to hit the economy and now we also have the national security law. And again, the question there is slightly different to viruses and protests, which, you know, sort of hit the retail sector the hardest. The question about the national security law is whether or not it's going to impact the international character of Hong Kong as a financial center and international financial center. Right. So obviously, we've seen all this pressure build on Hong Kong, which reminds me, which calls to mind that essentially for the last decade, I feel like every year or every two years or something,

there's some new hedge funder coming out that predicts the imminent severing of the link between the Hong Kong dollar and the U.S. dollar. And for those who don't know, for a long time, the Hong Kong dollar has been pegged to be stable with the U.S. dollar. What's it pegged at again? Do you remember? You must know. Since 1983.

And you know, I remember that because it's my birthday. I am the same age as the Hong Kong dollar peg. So what's it pegged at? Oh, what is it pegged at? Oh, sorry, I thought you said when was it pegged. I think it was pegged between 7.75 to 7.85, something like that. Yeah, there it is. So you have all these hedge funders, and every year, they're like, oh, this is the year that the Hong Kong dollar peg is finally going to break.

But as you point out, since 1983, it's a health quite firm. Yeah. There have been a couple of voices who've been especially vocal recently. One of them is Kyle Bass, who I think has actually started a whole new fund dedicated to betting on a collapse in the peg. And it's an interesting one. I feel like whenever you have a dollar peg, I feel like people are always talking about the potential for it to break for obvious reasons. When I was in Abu Dhabi and Dubai, you know, there was talk about the peg in the UAE. That was always under pressure and on the verge of collapse, according to some people.

But the Hong Kong peg, it's an interesting one. It is. And we're going to be talking about it today. And, you know, obviously it's, you know, even in the setup here, talking about all the pressure on Hong Kong from various angles. You know, there's all kinds of reasons to argue that the peg is going to break. But we almost never hear the other side, which is that the peg has been very durable and why the peg won't necessarily break. So that's what we're going to discuss on the episode today. We're going to be talking with Chris Wiegand.

He is the CIO and co-founder of Royal Bridge Capital, a hedge fund. He used to be at Soros, so we can talk about that. We're going to talk about the Hong Kong dollar peg, why it's so stable and why those betting on its imminent collapse may have to wait a while. So Chris, thank you very much for joining us. Joe, thank you for and Tracy. Thank you for having me. So, Chris, let's talk a little background from your perspective.

Tracy mentioned that the peg was established in 1983, the year of her birth. I'm looking at a chart of it right now. It's pretty remarkable. It's basically done nothing. You know, the peg has been extremely solid since 1983. Why was it established in the first place? Well, so the peg was originally established in, as Tracy said, in kind of fall of 83, largely because the currency had started to come under pretty serious devaluations like depreciary pressure

as Lady Thatcher and then Chinese leader, Deng Xiaoping, were starting to talk about the handover of Hong Kong back to China when the UK's 99-year lease agreement extended. And so those conversations had started in either late 82 or early 83, and they started to filter out into the public domain over the course of 1983. And understandably, there started to be concerns in the marketplace about whether China would maintain Hong Kong's rule of law, whether the English common law system, which underpinned all of Hong Kong's contracts and made it such an important destination for international finance and trade would be maintained.

And so you started to see risk premium widen in that manifested itself in a moment. weaker Hong Kong dollar. Hong Kong dollar depreciated round numbers from something that was sort of six and a half, 660 in the summer, all the way up to something that was about 850, 875 against the US dollar in a pretty short period of time. And the UK decided that in an effort to try to restore stability and help underpin confidence in Hong Kong, that it would try to rep, that it would try to set a, specific band for the currency against the U.S. dollar. And it did. It set 780 is the midpoint in a

tight band between 775 and 785. And it's been successful now for almost 37 full years. I have a stupid question. But when someone decides to create a currency peg, how did they actually go about doing it? Because nowadays, when we talk about currency pegs in existence, whenever there's pressure on them. We talk about, you know, the city or the monetary authorities spending their reserves in order to support the peg. So how does that work when they're initially setting it up? Well, so it's a very good question. And the answer is it depends. If the market believes that the central bank or the finance ministry is committed to that peg, it's possible that just the announcement effect could be successful in releveling that.

I mean, we've seen that very recently, in many respects, with the Federal Reserve's announcement, that it would start to purchase corporate bonds. Back in late March, when it announced that it would buy bonds of investment-grade companies, the market immediately normalized without the Federal Reserve spending a single penny until recently. And so in the Hong Kong situation, you did get a lot of sort of announcement effect, as it's often called, that helped to relevel the currency at around the 775 to 785 band. And then there needed to be some maintenance along the way in the early days and at different points in time to maintain that band. But the announcement effect can be very, very powerful. Now, if you're a country like, let's not pick on Argentina, but if they've had a currency board in the past, and they used to have an arrangement similar to what Hong Kong has, and if Argentina today tried to reestablish a peg at a stronger currency versus the U.S. dollar than it is now, in all likelihood, that would be totally unsuccessful because they don't have any credibility.

But presumably, I mean, there needs to be more than credibility, right? You need to have the balance sheet. you need to have reserves so that you can go out into the market and make purchases if your currency starts to weaken. You mentioned the Fed corollary offering to buy bonds and not needing to spend any money, but no one disputes that the Federal Reserve has all the U.S. dollars that needs to buy bonds because it can create U.S. dollars. Presumably the credibility of a currency board also needs to be accompanied by some level of actual cashhold. Oh, absolutely. Absolutely. It needs to be accompanied by some level of firepower to maintain the link. And for long periods of time, you also need underlying fundamentals in the macro economy to help be supportive of the peg value.

Now, and Hong Kong has benefited from that in part because it has run a current account surplus for decades. Now, its trade positions, which we can get into have shifted notably and have become much more relying upon exports of services to help to maintain its international position. And that's an important potential weakness moving forward. But you need announcement effect credibility. You need the firepower in the form of reserves or other equivalents that can be turned into reserves. And you need favorable underlying fundamentals that are consistent with where you've set. the ban for your currency.

And for 30 years, Hong Kong has been able to, you know, has largely had all of those to maintain, to help to maintain the peg. I mean, it hasn't been a smooth ride. There was the late 1990s when there was the attack on the currency and there was a lot of pressure downward on the currency and required massive intervention to maintain the peg. But again, they had the firepower to do so at that point and the commitment to do so. I'm Francie Lacqua, an award-winning journalist. and I've got a new podcast, Leaders with Francine Lacqua from Bloomberg Podcasts.

I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. Can we talk a little bit about, the rate differentials that you just mentioned. So when you set up a currency peg, you're basically

tying your fortunes to another country's currency and therefore its monetary policy. And, you know, maybe the economic situation in your own country doesn't match up with what's happening in the U.S. at the same time. How has that played out for Hong Kong? And Hong Kong, of course, I guess the situation is even more complicated because its monetary policy is tied to the U.S., but at the same time, it's right on the doorstep of China, which is growing at a very, very different rate to the U.S. over the past few decades. No, that's right. And so, you know, from a historical perspective, you know, Hong Kong has sat in the middle of

the two most powerful trends that we've seen in economics and finance for the past 30 years, trend one being that U.S. interest rates have fallen secularly from low double digits to zero. And so Hong Kong has effectively imported those interest rates and monetary policy, helping to create a very favorable financial conditions in Hong Kong. And Hong Kong has sat at the doorstep, as you mentioned, Tracy, to China. And it's been key in China's early development as its key southern port, as its outlet for financial capital, both into China and out of China. And so it's uniquely reaped the benefits of both of those major trends, huge development in China, which has leaked into Hong Kong and been very profitable and the secular decline in interest rates in the United States, which has also leaked into Hong Kong. And so what you've seen is you've seen a phenomenal period of growth and development in Hong Kong by sitting in the middle of those two trends. Hong Kong has, by most,

estimates, about the same number of billionaires as New York City does, for instance. Its per capita income is nearly 60,000 among the highest in the world. But the downside of that is that you've started to see, especially in the past decade, as rates in the U.S. were very low when you had a spectacular credit boom in China

that kept leaking into Hong Kong, both overtly and indirectly, you started to see misallocation start to, in my judgment in the Hong Kong economy. For instance, property prices have surged since 2008. Property prices on a per square meter basis were up roughly 250% in the past 10 to 12 years. It has seen a surge in credit in the non-financial sector. Non-financial debt to GDP in Hong Kong is something like 375% now,

up by more than 150 percentage points since the end of 2008. So while Hong Kong's been able to reap a lot of these benefits, it's also creating misallocations now, at least in my judgment, potentially pretty serious misallocations in its housing and housing and credit markets. Chris, can you give this slightly more color on the leakage point? So the idea that, you know, excess capital from China sort of leaks out into Hong Kong. because I feel like this is something that's quite unusual about Hong Kong specifically and not a lot of people who are living outside of the area necessarily understand it. Sure.

So it's happened in a variety of ways. Let's talk about sort of the shadow ways first and then get into the more legitimate ways. So early on in the past decade, kind of 2010, 11, 12, 13, and even 14. When Hong Kong was still an incredibly important export destination for export port for Chinese products, you would see a lot of what was often described as over-invoicing of export orders. So there's no issue with a, it's perfectly legal for mainland Chinese company to move capital outside of China if it's being done in the context of international trade. But what you would see is a way to try to get money out of China and into Hong Kong,

where there was the more traditional Western rule of law and possibly the easier ability to move the money from Hong Kong to elsewhere, be it the U.S., Canada, Singapore, or whatever, you would see a lot of over-invoicing of exports and imports. In other words, you know, maybe there was the dollar value of goods moving was, was $10 million, but on the invoices it would be marked for $15 million so that you could basically keep, find a way to get $5 million extra dollars beyond which you were actually trading, you could get that money legally out of mainland China into Hong Kong and then send it elsewhere. The mainland Chinese authorities eventually caught on and started to close that gap.

But that was one way that you saw tremendous kind of leakage from mainland China with its close capital account into Hong Kong in a sort of shadow way. Then there's some more direct, explicit aboveboard ways. As China has become wealthier and wealthier, there's been more and more increase in sophistication and financial services being offered to mainland Chinese people. So there's not much in the way of life insurance in mainland China. That's a booming market in Hong Kong where Hong Kong is able to sell life insurance products to mainland Chinese.

asset management companies, both state-owned and privately owned, have sprung up in Hong Kong with the idea of servicing this huge population in mainland China. So money is coming out of the mainland into Hong Kong in those asset management programs, again, both totally above board, but also in other ways to seek returns that are in non-CNY type assets. So there's lots of things, you know, like that where because of the trade relationships and Hong Kong's importance as a port for China, both export and import, there was a lot of sort of shadow ways that business people, you know, we find ways to get money out of the country into Hong Kong. And now there's these more traditional ways where Hong Kong is really pivoting from being a what has been a mostly an international facing city to one that's trying to take it. advantage of the financial, the better financial wherewith all of the mainland Chinese people. And there's money that comes totally legally.

And then there's money that, you know, continues to try to leak aboard because of the perception that you can get money from Hong Kong to other parts of the world more easily than you can from mainland China. So if I'm listening to you and let's just say like I'm your sort of typical macro tourist kind of hedge fund guy, I don't know. And I listen to that and I say, oh, well, part of the story, a big part of the story with Hong Kong has been these ever decreasing U.S. rates. And that's creating this huge potential boom in private sector debt and crazy housing market bubble. And then on the other side, it's like, okay, Hong Kong has benefited for years as being this destination for Chinese capital, in part because of the Western style rule of law, people wanting to get their money out of,

UN-denominated assets, but we have the national security law, and so maybe that's going to weekend. Okay, great, time to bet against the Hong Kong dollar peg. It looks like all of these things are coming together, and it's the clock must be ticking now. So what would I be getting wrong in that formulation? Because the way you set it up, I could certainly tell a story for why this must be rough times ahead for the peg. No, I think it's a very easy story to tell and a very simple story.

to comprehend as you laid it out. And I think qualitatively got a lot of merits to it. And let me stay right up front. You know, I've been very surprised that in the past month or so since the new national security law went into effect, that the Hong Kong dollar has consistently traded on the strong side of the band. It's been more or less at 775 or thereabouts for the entire month. And there's been, you know, no signs of depreciation pressure.

on the currency. Now, some of that's probably that the dollar has been weak, but still. So I think the situation, the circumstances are a lot more nuanced than the high-level items that you laid out, Joe. One, we really don't know. No one knows what exactly the new national security law is ultimately going to look like. There's plenty of reasons to be very concerned about what it implies for the rule of law in contract law more broadly in Hong Kong. But the reality is no one, self-included, has any idea how it's going to actually manifest itself. And I think until you see some signs that contract law is actually being challenged in Hong Kong,

that there probably will continue to be sort of a sense of complacency. That's one point. Second point is that right now, there's still, you know, Hong Kong still runs a current account surplus. That's helpful for the stability of the currency. One thing to watch very, very closely, and it ties in closely with the national security law slash contract law, is what happens to exports of services? Hong Kong's services exports have become a key part of its balance of payments. and in particular, one-third of its services exports can be broken into financial services,

insurance and pension services, and other business services. So things like legal. If those services start to decline, again, because of things that you mentioned or other factors, then all of a sudden the balance of payments equation becomes a little bit trickier, and I would start to expect to see some depreciation pressure on the currency. But the HKMA still has tools, and we've seen them use them, including in 1997 episode when there was tremendous downward pressure on the Hong Kong currency. The reserves are $450 billion.

Now, not all of those are available for defending the currency, but a large chunk of them are. And there's a large wildcard in that with safe up in Beijing sitting on more than a trillion in FX reserves, if mainland China and if Beijing believes that defending the Hong Kong Peg is critically important, that there's also those funds that could theoretically be deployed to HKMA and provide a massive amount of firepower to lean against depreciation pressure. And then, of course, there's also the higher rates. You know, we saw where Highbore, the Hong Kong equivalent of LIBOR, has been pushed up very sharply by the HKMA to make whole.

holding short currency positions more expensive to change the relative rates of return on capital more in favor of holding Hong Kong dollars versus other currencies. I think that that would actually be counterproductive. If we start this in the current situation, if we start to see meaningful pressure on the Hong Kong dollar because of what it would do to the property market, most Hong Kong mortgages or all Hong Kong mortgages are floating rate in an overvalued property market and an over levered private sector, if all of a sudden you hiked interest rates by 500,000, 1,500 basis points to defend the currency, you would have other problems that you would surface.

So there's a lot of fragility here, but it's more likely, in my opinion, to be sort of a slow motion type development. With the fulcrum being, how does the market perceive the new national security law and its implications on contract law? and what that implies for the sanctity of assets in Hong Kong. That could happen very fast once there's a trigger. It could also take an elongated time. I think it's one of those situations where there are imbalances. There's a potential trigger, but you need another sort of catalyst to crystallize the imbalances into some sort of capital flight episode.

I want to press you on what that catalyst might actually look like, But before we do, you mentioned capital outflow. So we have the $450 billion of foreign reserves held by the Hong Kong Monetary Authority, plus you potentially have all the firepower held by safe in China. You have the possible lure of higher rates. But what about just sort of stopping capital outflows and plugging those holes before they really get started? Is that something that could be done in Hong Kong? or would it just be anatomah to Hong Kong status as an international financial center?

So it's a great question. It's something that can be done, likely would be done. And based on anecdotes, I want to emphasize that they're secondhand, but based on anecdotes, we've already been hearing about for the past 12 to 18 months that the Hong Kong banking authorities or the Hong Kong, certain Hong Kong banks themselves have made it harder for capital. to be moved abroad. As a for instance, our fund has a number of Hong Kong LPs in it. And we have heard that they have, select Hong Kong banks have made it difficult to move money out of Hong Kong in one transfer. Basically putting a lot of sand in the gears to move money out of Hong Kong to the United States,

as a for instance. So that's already going on to some extent. It seems like it's more concentrated in the Chinese banks as opposed to the Western banks. But that's already taking place to some extent, and that could easily be ratcheted up. The mainland Chinese authorities have been able to slow capital outflows tremendously. And Hong Kong could do it also by limiting wires outside the country. Now, I do think that that would certainly damage its, it's, position as an international financial center in a crisis slowing that down or or putting a moratorium on capital outflows from banks. I think it's something that absolutely could happen.

So from a reserves cash standpoint, there's no reason to think that there's a firepower shortage. I guess the two components of a bet on it ending the peg, obviously there's the firepower, but then also the commitment. Do you see anything in the sort of short media? term with the changing legal structure that would cause you to think that the commitment would go away? No, I don't think so. Not in the short term. I think there is this more, I did not think, I convinced there's this more medium term issue of if Hong Kong is going to be, as Hong Kong, is absorbed more into mainland China. And if Hong Kong is going to become very imperfect analogy, you know, Chicago, whereas Shanghai is New York for mainland China and Hong Kong becomes, for instance,

Chicago, then there is the more existential question of why is the currency pegged to the US dollar at 775 to 785 and why do we need that? Why do we have that? Why are we spending our time, you know, maintaining that relationship? And I think that's a very real dynamic that will have to be dealt with and will be dealt with by the Chinese, but is that a 12-month, a five-year, a 10-year, honestly, who knows? But this current, to me, this current situation where the Hong Kong dollars pegged to the U.S. dollar at its current rate, it's not something that's going to prevail forever. It's just a question of what are the circumstances that force it to change? Is it fundamental economic issues? Is it a active policy choice by Beijing? These are all things

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or anywhere you listen. So I guess the suggestion is if you have a sort of slow grind towards an alternative system, like a currency basket regime like they have in Singapore or I guess a dual currency system, like in Macau, like you could have that path, but you could also have something major that happens that really heaps pressure on the peg and causes policymakers to reconsider in the short term. What would be the thing that caused that outcome? Of course, the honest answer is who knows? One never knows in advance what the ultimate catalyst would be. Who would have thought that the U.S. authorities would let Lehman Brothers fail and would trigger off the mass contagion?

Recognizing they need to think about this and have some sort of sense. I think the biggest thing would be that if you started to see major global corporations starting to pull out of Hong Kong, that that would be a pretty strong catalyst for the potential for other capital flight, both human and financial, and that that is the most likely trigger in the sort of three to 12-month horizon. Now, so far we've seen none of that, right? And in fact, the global business community that has large presences in Hong Kong has either been silent or welcome the new national security law because they think it will help calm the political tensions in the city. And they want to continue to do business with mainland China. But I think if you saw something like that, that would start to be a potential flashpoint for capital flight.

Again, both human and financial. And that would be a potential trigger. So I have one more question, which is we started out this podcast. Well, Joe mentioned this idea that throughout history or the past three decades, there have been speculators who have at various times bet against the Hong Kong dollar peg, the most recent or the most high profile being Kyle Bass. What's the lure of betting against this particular peg? I know we kind of went through the narrative earlier, but it seems to happen over and over and over. And secondly, how do speculators actually go about betting against it and how expensive is it to keep that position going? Yep. No, great question. So the lure or the attractiveness is for the betting against the hon-con peg is not dissimilar from betting against any peck currency. History has shown that they're very hard to maintain, number one. Number two, that the volatility in the currency because it's in a peg band is very low. And so if slash when the peg breaks,

you're going to have an outsized, very disorderly move that's likely going to include not just an outsized move in percentage terms from the band, but potentially an explosion in volatility. So if you have some sort of derivative strategy on, you're able to make both money from significant amounts of money from the delta, i.e. the percentage move, but also in the volatility component. And so it offers the potential for, if it happened, spectacular reduction. terms. I think that is, you know, the appeal is no more complicated than that. And then in the Hong Kong case, at least currently, it's augmented by the fact that, again, as I mentioned earlier, you've got an overvalued housing market and you've got a huge buildup in debt. And interest rates are at zero. So if there's any forced rise in interest rates, it's going to put pressure on the housing market, on debt service, et cetera, et cetera.

So, but again, really, in a nutshell, it's fixed exchange rate possibility for very large returns. Same reason people were betting against the Saudi peg or the Middle Eastern pegs, you know, a few years ago. In terms of, you know, being able to monetize it, it's not easy. Being long, you know, basically being loan puts on the, on the currency is a negative carry trade. And if you're on and you're on for a consistently long time, you're going to bleed away your option premium and end up losing money. You know, the other alternative is to have a huge cash position

in the currency. And with things at the strong side of the band, there's, you know, there's some merit, to that. But if the band doesn't break, make money by soaking, you're going to take up a lot of your balance sheet or your fund from moving from 775 to 785. The returns are not that. appealing. So it's very hard to structure trades that you can carry and not end up bleeding away a lot of your investors' money

and maintain the option value of this break. It just sounds like you have this situation in which if you get it right, you can make an unbelievable amount of money in a short period of time and the stories are so good between

everything that you've talked about about sort of these great narratives potentially coming to an end, but pretty killer holding the position waiting for it to happen. It's definitely tricky. And again, you know, let me, let me be clear that with the fundamentals and the narrative and the currency at the strong end of the band, things are all really aligned for some sort of movement, at least to the weak end of the band.

If it's going to go beyond that, though, we're going to need to get something along the lines of one of these triggering events that we've talked about. Chris, before we go, I mean, I want to just sort of get your bigger perspective, Hong Kong aside, we mentioned during the last crisis, you're a strategist for three years at Soros Fund Management. What are sort of the big things you're thinking about right now in terms of how this crisis is either similar or different to the trading environment from about a decade ago? I think the biggest difference, the two biggest differences are as follows. The crisis in 2008 was a financial crisis, and it was very easy to understand.

The banks were bankrupt. We had an event that forced the U.S. government to save the banks, and once the banks were saved, had a pretty good understanding that there would be a recovery recognizing no one knows what it will look like in advance, and asset prices had collapsed and were really attractive. Here, the nature of this crisis is vastly different because it's a public health crisis. And no one, you know, I mean, even the world's leading, you know, scientists don't know how this is going to evolve over the next one, three, six, nine months. And so that's a huge source of opacity for thinking about managing investor. investor capital, you know, through that period and requires intense focus on the downside

and protecting downside tails. On the other hand, the Federal Reserve and other entities, central banks around the world, have crossed over red lines that, frankly, I never thought they would cross over, the backstopping of the corporate bond market, for instance. You've got these kind of competing issues of huge opacity and large left side tail risk from the virus and what it does to behavior, both business behavior, consumer behavior, fear, and then whatever it takes approach from central banks, it makes Mario Draghi's, whatever it takes in 2013,

look small by comparison. So, you know, you're trying to kind of balance, you know, those two things and find assets that, you know, are likely to offer, pretty attractive, risk-adjusted returns without a lot of downside. And what does that mean? I think it means that, you know, companies with near-monopoly power, tech-type companies, they're going to continue to do well. Companies with Fortress balance sheets, they're going to continue to do well. Companies that have to issue debt with special security pledges, i.e., where they're

pledging collateral against specific bond issues at high interest rates, that stuff's pretty, pretty appealing. And so you've got to be very selective, I think, in terms of thinking about how you're allocating capital in this environment because of the opacity and the unknown that flows from the public health crisis. Chris Wiegand is great chatting with you. I think in my mind, I've had all kinds of questions for years and years about the Hong Kong dollar peg. And I feel like I haven't heard any sort of better explanation of all of. the things involved with it than that. So I really appreciate it coming out. Well, thanks so much for having me on. It was a real pleasure. Thanks, Chris. That was really good. Thank you.

Tracy, I feel like after that conversation, A, I really grasp why people for years have bet that the peg was going to end. And also, I grasp why they've been wrong all this time. It's true. It's one of those things where you could see the logic of it. But I guess it's sort of like you don't want to necessarily go up against the might of $450 billion in reserves, plus potentially everything that's safe is holding. That'd be kind of crazy. I feel like in markets in general, there are just a lot of trends that have been called prematurely over the last like several decades.

I mean, it's interesting that the peg came out in the early 80s. But there's so many other things, you know, whether it's just the relentless, short JGBs. interest rates, short JGBs, the grind lower in U.S. interest rates, the incredible, you know, now surge in tech stocks, which again, Chris actually mentioned there in that last answer about, you know, this sort of reacceleration of the money into high tech, strong balance sheet companies. It's like one day maybe a bunch of these trends are going to reverse, but you can lose a lot of money getting that timing wrong. Yeah, in the meantime. But I guess the,

the flip side of that is that you can make your name and become instantly famous and very, very wealthy if you manage to call a reversal of one of those long run trends correctly. Yeah, I mean, that's a good point. I mean, you think about like the few handful of people who nailed it on the housing market. US houses were another one of those multi-decade trends where it's like houses always go up, and a couple people got fabulously rich sort of betting that that was going to be unsustainable. It's interesting that one of the people who scored huge on the downside of housing was Kyle Bass. And as you mentioned during the discussion, obviously he could sort of repeat that performance and reap another huge windfall if he gets it right on the Hong Kong dollar.

Yeah. But it's going to be a really fascinating one to watch. And I think even if we don't get that thing that instantaneously breaks the peg or forces policy makers, to make some sort of decision, even if we don't get that. Just watching a slow development of potentially an alternative currency regime is going to be really interesting. And there are a lot of questions around what even that would look like. You could get a basket like in Singapore, a dual currency system like in Macau.

You could, I guess this is a remote possibility, but Hong Kong could just let the dollar float. It's going to be really fascinating. Yeah. At that point he made about, will Hong Kong become China and Chicago? And it does raise a question if, you know, as the two economies become more similar and the two legal systems become more similar, does it make sense to have one of the really important economic areas just use this different currency regime at some point. Maybe that just won't make any sense. But again, who knows when?

Yeah, exactly. All right. it there. I'll save it there. This has been another episode of the Allot Lots Podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthall. You can follow me on Twitter at the stalwart. Follow our producer

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