Oil, yen and egonomics

0:00This episode is brought to you by bigdata.com. Your AI is only as smart as its data. Bigdata.com connects Claude, ChatGPT, and Copilot to the sources hedge funds and asset managers use. SEC filings, financial times, earnings calls, and over two and a half million transcripts from 50 plus countries. Verified institutional great intelligence, right where you work. Try it free. Pay as you go plans start today at bigdata.com. There's some big egos pushing global markets around at the moment, and on some level we're all feeling the impact. The first involves Japan's currency, the yen. As regular listeners will know, Scott Besson, the US Treasury Secretary, has taken it upon himself to push the world's third biggest currency up from its long-running slump. It's safe to say this plan has had its doubters, but this week he declared, I am the house now. You can better against me if you want. Good stuff. The second is oil.

1:02Neither the US nor Iran is willing to back down on the conflict that started in February. It's all escalating again, and suddenly the price of oil is back at 105 dollars. A barrel yikes. So today on the show, economics, and what happens when powerful people are spoiling for a fight? This is Unhedge, the markets and finance podcast from the Financial Times. I'm Katie Martin, a market columnist down in the dungeon of FT Towers, in a rather lovely sunny London. Joining me down the line from New York City are very own resident big egos, Mr Robert Armstrong. I couldn't resist. Yes, I have a big ego, but not the power to push anyone around. It's been a painful combination my whole life. It was nice to see you in London the other day. It was great. The audience was terrific, and it was just a lovely event overall. It was lovely to see your mother again. That's the most important thing.

2:03I still don't think she really understands what a podcast is, but she likes hanging out. And our listeners are very nice. Hello, listeners. If you were there, it was nice to see you. Okay, so let's start with oil and then turn to the talented Mr Bescent. This war in Iran, six months, Rob. It just goes on and on. And the oil price rushed higher when it started. Obviously, it came back down again, and we all had a good laugh at all the oil analysts who got it wrong and said that oil was going to 100 Brazilian dollars a barrel. Anyway, now Katie, who's laughing now oil analysts? Anyway, they are because oil's back up at $100. Again, Brent crude this morning, 105, which is getting close to the peaks of the early days of the war, which were kind of at that 110 level. And rising fast. Yeah, no, 105 is squeaky bomb time. That's high oil prices. Yeah, and I think it's a moment where we kind of don't know how much oil is flowing through

3:11the strait and how much oil will be flowing through it. Both at least the Iranians seem to be cultivating a kind of ambiguity about their strategy. They seem to like the slow burn. So that is finally coming through in prices. I think the people who thought the Americans and the Iranians would figure out something before the American midterm elections are now rethinking that prediction. Yeah, because this is a good bit of leverage that Iran has before the midterms in November. And look, you and I, we know what we don't know, we are not geopolitical experts, but I was reading up on this earlier. So the gist is that people have been hoping that the two sides could get back to the memorandum of understanding that was signed in June. That has failed. And now the US wants what it's calling a comprehensive agreement, which includes the strait of hall mues, which you will be aware was open before this all started. And nuclear,

4:14which again had been sorted by Obama. So we're trying to get back to something like square one, and the Iranians are digging their heels in and ships are getting hit by rockets and it's all terrible. And so yeah, I mean, where does oil end up? I mean, you don't know, I don't know. I don't know. I mean, when we talked about this during the first spike in oil prices, we were all surprised, I think, as a kind of the pundit industry broadly, with the finance world, broadly, was a bit surprised at how resilient the American economy was in the face of oil that passed 100. There wasn't a big slowdown. And I think the consensus has come that if you can kind of keep things below 150, it's not an energy crisis. It may be a political crisis. I'm looking at national average gas prices here at $4.27, a gallon of unlated gas is more than a dollar more

5:18expensive than it was a year ago. And a quarter more expensive than it was a month ago. And people noticed that sort of thing. Yeah, diesel $6 a gallon give or take. It was well under $4 a gallon a year ago. And you've got these elections coming up. And it's weird. Like Donald Trump seems to have just sort of given up his message to the electorate now is, oh well, prices are going to stay high into the midterms. It's like, I don't know, like, why are Americans all putting up with this? It's not clear that they are. We'll find out in November when we see how they vote. But it's a real question. And, you know, of course, the other side of it is inflation. We've heard a lot of companies in the last few days report earnings and say that they're being hit by freight prices being quite high. And this is actually not a fuel issue. It's just that freight utilization is quite tight, right? The economy is a little bit hot is what that tells me.

6:21And you put a labor market that may be a little bit tight and you throw $6 diesel on top of that. Diesel was $3.70 a year ago. I think that feels a bit inflationary to me or like a pretty good setup for inflation. And not just in the US either, right? So we did have US PPI inflation today, which is kind of what people call factory gate inflation data. And that was reasonably punchy, wasn't it? Yeah, it was as expected, but it was expected to be punchy. And I think the read back from the economists on this is this keeps us on track for a rate hike next week. It showed the same pattern of above target prices that the Fed has been looking at for a while now. So we're still on track. And loyal listeners, remember that both you and I are betting that they'll be hiking next week down the curve. Yeah, I think so. And we also had just the other day,

7:25Andrew Bay League, of another Bank of England, saying there are upside risks to inflation, which again is a kind of get a load of this oil price, boys and girls. So thank America for this. You see me tightening this morning too, right? Yeah, European Central Bank. They raised by a quarter point, which I believe the ECB president Christine Lagarde said as a decision was a no-brainer, there was like no real dispute about it on the governing council. Everyone agreed, let's do a quarter point. She's been careful not to give specific guidance on what she does next, but you know, it doesn't take a genius to figure out if we just keep getting higher and higher oil price every day when we come into the office, this damn thing is higher. We've got a bad situation and all the kind of analysts at the banks and the investment firms and whatnot are lifting their forecasts, they're saying, okay, we'd previously thought it was going to be here. We think it's going to be a good bit higher than there, you know, by the end of this year and through the course of next year. So again, thank you America for that. And in some ways, the situation has gotten worse since the

8:34last time that oil passed $100 in that global inventories are still lower. So we've got less of the stuff squirreled away in our soaked caves. And refining capacity is tighter, meaning the crucial thing is how can you take this crude and make it into diesel or jet fuel or gasoline or something else? I believe you call this stuff petrol on the island where you come from. In case that's very tight too. So there are these second order effects. However, I generally like to make mistakes only once. And I think I was one of the people who was a shade two hysterical about the impact of oil prices the first time around a few months ago. I don't want to make that mistake again. If this thing stays under 150 and US gasoline stays under, let's call it

9:36five bucks, the US economic expansion can continue. So I'm just getting on the record as being a calm, collected, optimistic person. Okay, fair enough. But you know, again, we are not geopolitical experts, but it just strikes me that Donald Trump does not have the sort of temperament to say, okay, fair enough, this has all been a big mistake. His ego, again, go back to this economics idea. Just prevents him from saying it's a fair cop. Let's just do what the Iranians want. Well, if you're impressed by Trump's ego, perhaps we should talk about Scott Besen's ego. Listeners, how about that for a segue? So look, this does all link into the situation with Scott the house, Besen as he shall be known from now on. I will explain a little bit more why in a minute, but everything is connected. And I know the people in markets when they talk about how you have to join the dots between all these different things, it makes them sound like a little bit nuts and

10:38like they're seeing connections that aren't really there. But in this case, they are there. So all things equal, higher oil prices mean higher inflation. And higher inflation means higher interest rates from the Federal Reserve, right from the US Central Bank. And also means higher bond yields. And higher bond yields mean higher interest costs for the federal government, which means higher deficits for the federal government. Yep, higher borrowing costs for us all, again, thank you so much, United States, America. But also higher US bond yields generally mean a higher dollar against the yen, i.e., a weaker Japanese yen. Now, for reasons that I still can't fully understand, Besen has staked a lot of political and personal capital on pushing the yen up. Not something that typically the Americans get involved in, you know, you leave Japan to worry about where the Japanese yen is, but Besen has jumped in with both feet. We have this joint intervention right at the very

11:43end of July. And we've had further things that look and smell a little bit like Japanese interventions since then, known traders are kind of wondering whether they are or whether it's just the market moving around. So there's lots of rumors of intervention. There might be a little bit of buying of the Japanese yen by domestic pension systems. But I mean, in a weird sort of way, Besen has staked his reputation on pushing up the yen and like it's kind of worked. It has worked. I mean, let's go back to our working theory of what Besen is up to with the yen. I think he foresees the following possibility. Should the yen continue to get weaker and weaker and weaker, this starts to become a problem for Japan, you know, import prices. They're a very import sensitive economy. Start to rise, they get a flation themselves, etc. So the way the Japanese central bank would respond to that would be to raise interest rates significantly. And if they did that, and here's the part, Scott, the House Besen is

12:50worried about, Japanese investors who hold a huge amount of savings start to pull that savings out of US treasuries and put it into Japanese bonds account, which would cause a further escalation in the US bond yield. And therefore, the government has to pay more money to finance its debt, deficits get worse, etc. So that, I think that broadly speaking, that's the worry. And so he's trying to control what he can control. Yeah. The other part of his worry as well is that normally, the way that Japan would try and pump up the yen would be to sell some of its own dollars, which means selling its own treasuries, which again leads you back to the same point, which is higher borrowing costs for Uncle Sam, which Scott Besen really doesn't want to see. But there was quite an amusing statement from Besen this week. He was on stage being interviewed about what's going on in the yen. And like I say, like there's lots of people who've been like, okay, like he's intervening. I don't really understand why this strikes me as a bit unorthodox and weird, and I don't

13:52think it's going to work. And he said, when we intervene in the Japanese yen, I have pretty good insight into what the Bank of Japan is going to do. What Japanese policymakers are going to do. I have asymmetric information. I am the house now. You can bet against me if you want. Booyah! Fight it, talk. And let us just tip our hats. In fact, I'm going to tip my hat to Scott the House Besen twice right now. Number one, first hat tip is look the yen's rising since they intervened. Yep, it's up about six percent since the end of July. That's a lot. So appears to be working. Maybe he's just lucky, but let's give him credit. It's working. And hat tip number two, you say something like that. And the facts go against you. You look like a humongous idiot. And so he's like really making himself hostage to fortune. You got to respect the guy's courage. He's putting himself out there. So, or trading courage. Yeah. It is a profile in courage.

14:55Exactly. That's the one. That's the one. But macro people, you know, trade as an investor's and stuff. Find this whole, I am the house now thing, legitimately hilarious, because it puts a massive target on your back. It's smacks of pride coming before a fall. But also, just as a thing to say, like, I know what the Bank of Japan is going to do. It's like hang on mate. So the Federal Reserve in the US has given up on forward guidance. It's not going to tell us what it's going to do. But now you're telling us what the Bank of Japan is going to do. What's going on here? Like this is extremely weird. It is very strange that we now do forward guidance for other countries. But as you say, we do have a Bank of Japan rate decision coming up. Yeah. It looks like they will raise interest rates. Japan never raises interest rates. Like, I think, you know, it's very unusual. Rates are very, very low. We could be entering a proper rate hiking cycle

16:01in Japan for the first time in a really, really long time. And who knows how that will pan out. And that could be why the yen is rising. It could just be as simple as that. There is that. It could not be besence big man talk. It could be the market is pricing in a rate increase. Yeah. And when interest rates go up, the local currency tends to strengthen because higher interest rates are more attractive to capital. Money comes into the country and the currency goes up. Again, reply guys. Please don't bother emailing us about that. We know this is only a rule of thumb. Nonetheless, it counts. Now, but the thing is for Scott the house, Bessent is his house is in Japan. It's not at home, right? It's a vacation house. Yeah. He's doing this. Look at me. I'm the big man. I, you know, I'm going to tell the world where the yen is going to be trading. But at the same time, the other thing that he's trying to do is support long term US government bonds and bring down the borrowing cost there by doing some buybacks of

17:01long term bonds. And just earlier this week, the Treasury announced how many bonds it was going to buy and I think it was six billion dollars worth of bonds. Normally, it would buy more like two. And the market was like, you call that a buyback. Like, that's nowhere near enough. And so around the night, you call that an eye. So, you know, whether it's a direct result of the size of the buyback or not who knows, but the fact is 10 year US government bond yields really popped higher at around the same time. So you've got buybacks that aren't really moving the dial. They're just not big enough. Inflation that is already elevated and now also you've got the oil price kicking higher again. And the market no like he said the 10 year bond yield is getting towards 5% and so this just today, this morning. So the 10 year yield went up yesterday and it's up another eight basis points today, which is a lot so is the five year. And ladies and gentlemen, the stock market seems to be noticing the Nasdaq index is down more than a percent today. And the higher yields

18:08are starting to cause bad vibes that extend beyond just bond prices and currencies. Because stock markets have done an admirable job of ignoring what's going on in the bond markets, which they don't normally do for like weeks and weeks. And look, it shouldn't matter, you know, round numbers are just round numbers like who cares. But there's something about the times on the 10 year yield hit 5%. It is bad vibes. It's bad juju, market no like he. So I think there is a decent possibility that stocks get a little bit nervous actually when we get up to that 5% round. I will take issue by the way with your characterization of the stock market as ignoring the bond market. The Nasdaq, for example, is exactly where it was four months ago. So you could argue that what this turbulence in the bond market has done has brought the rally to a halt and we are trading sideways as a result. Because God knows the earnings in the US have been cracker jacks. Super fantastic. So

19:12maybe stocks, you know, quote, unquote, should be a lot higher than they are, but they are a little bit spooked by the rates market. I can buy that. So, you know, Scott, the house, Bessonth, can he be in charge simultaneously of the yen, the oil price, the 10 year yield, and the stock market? Because I'm going to say no. No, I mean, it's difficult. The fundamental thing that the US government could do to bring rates down would be to stop spending so much money. And that is beyond the power of Scott Bessonth to cause. The guy's only got so many tools on his tool bench and he's usually as best he can. Well, like he said, you can bet against me if you want. So listen to us take from that what you will. We are going to come back in just one second with Longshore. A quick word from big data dot com. Your AI tools are only as good as the data behind them.

20:14Big data dot com plugs into Claude, chat GPT and co pilot via MCP bringing in the sources serious investors trust SEC filings financial times earnings calls and 2.5 million plus transcripts across 50 plus countries institutional grade data right inside the tools you use every day. Start your free trial at big data dot com. Okay, look, it is time for Longshore that part of the show where we go long I think we love or short I think we hate Rob Armstrong, Ego Maniac, what are you saying? I am short, luck in coffee. Do you know what this is? Oh, you haven't had that name for a long time. Why are you talking about luck in coffee? Well, it's reappeared in New York. It had some corporate scandals and it reappeared in New York and it's a Chinese brand and none of this has to do with why I'm short it. What it does have to do with is the fact that my favorite deli and the favorite deli of many of my co-workers here in the

21:18New York office was pushed out of its place of business by Luckens coffee's willingness to pay higher rent. And so now my usual lunch of two large greasy pieces of pepperoni pizza is unavailable to me. This makes me extremely grouchy. One of our colleagues George has written a whole piece about this travesty committed against lunch break. So luck in coffee, it's bored, it's executives, it's employees, I wish you all the worst. Right, good. I think they've got the message. Maybe they could give you a free coffee to cheer you up, but anyway, I am short the AI headbangers. So one minute Peter Tiel is telling us that regulating AI is, and I quote, the anti-Christ, then you have some like 27 year old whistleblower from Anthropic who says the AI is on the cusp of

22:19eliminating half the humans on earth or something similar. And it's like, lads, make your minds up. Are you going to end humanity or not? I feel like it would help me to plan for this eventuality if you just made your minds up. I mean, I think that should be a required corporate disclosure. If there is a significant chance that your product is going to end life on earth, yes, that should be in the 10k. Put it in your regulatory filings. Listeners, if you have any insight into the end of humanity as we know it, please let us know un-heared.ft.com. In the meantime, I hope we'll be back on Tuesday. So listen up then.