Josh Younger on the Origin Story of the Shadow Banking System

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, I feel like in our current period of high inflation, bond market volatility, tension between central banks and fiscal stimulus, all of that, I feel like people tend to have their favorite historical analogies that they reach for to try to explain what we're experiencing now.

Joe Weisenthal (0:35)

Everyone, whatever it is always has, this is just like this.

And I get it, kind of, naturally this is what we do. But I also think there's that danger of knowing too much history, which is if you know your history, you think it's repeating.

Tracy Alloway (0:49)

That's right. I mean, the one that everyone seems to reach for is the 1970s, right?

Oh, this is just like the 1970s. We need a Paul Volcker to come and really tamp down inflation. And then the other one that, I'm kind of partial to this one, the 1918 Spanish Flu.

Joe Weisenthal (1:05)

Who can forget?

Tracy Alloway (1:06)

The period after that and World War I ended up with a high inflation and then it flipped into deflation.

Joe Weisenthal (1:13)

The other one that I think about too is the Euro area crisis and the tensions, what they had to do sort of like plumbing wise, what Mario Draghi had to do in terms of like sort of recreating the European sovereign bond structure on the fly to improve the transmission of monetary policy.

I think some of these issues are also coming up. We really see it in the UK specifically.

Tracy Alloway (1:34)

Yeah, that's a good one. I hadn't considered that. But today, on that note, we are going to be speaking about a historic parallel that hardly ever gets mentioned. It is the year, one specific year, 1953

Joe Weisenthal (1:46)

I don't know anything that happened in 1953 I would never, hey, you could have guessed, asked me any year in the 1900s and I would not have.

Tracy Alloway (1:54)

Yeah, same here.

Joe Weisenthal (1:55)

20 guesses.

Tracy Alloway (1:56)

Same here.

Joe Weisenthal (1:56)

What happened that year?

Tracy Alloway (1:57)

All right, so it turns out 1953 was actually a seminal year for global finance for reasons that I will not get into right now. But specifically because it ended up with a policy decision that still has relevance today. So not only was the US specifically in the 1950s facing high inflation, tension between employment and prices, things like that, but we also had an outcome that has sort of like echoed across the decades ever since.

Joe Weisenthal (2:27)

I want to learn more. I'm ready.

Tracy Alloway (2:29)

All right, well, we really do have the perfect guess to explain 1953 and its relevance to today to us. We are going to be speaking with Josh Younger. He is the Global Head of Asset and Liability Management, Research and Strategy at JPMorgan. He is also a repeat Odd Lots guest.

Joe Weisenthal (2:45)

He's now getting up there. Like, this is, he's become, not quite in the lead, but getting close.

Tracy Alloway (2:50)

All right, one of our favorites. So Josh, welcome back to the show.

Josh Younger (2:52)

That's great to be back in studio, which is really exciting.

Tracy Alloway (2:55)

So this is just your hobby now. It's researching financial history.

Josh Younger (3:00)

I need a new hobby, basically.

Yeah, it's just for fun and there's so much you can do online. Like it's weird to say, but the internet's a wonderful thing. Like you can pull up basically anything and the Federal Reserve Bank of St. Louis has been very kind to provide like an enormous quantity of documents and data. So you don't have to get dusty in archives. You can just search it.

Joe Weisenthal (3:17)

This is what I should be doing instead of just scrolling Twitter at night and playing chess online.

Tracy Alloway (3:23)

I need to go on the New York Times way back machine and see what bond market volatility was like in the early 1950s. Well, okay, on this note, Josh, why 1953 specifically?

Josh Younger (3:33)

1953 has a lot of relevance in general. So that's the year where the European countries start opening up their imports to the dollar zone.

It's the London debt deal with the Germans after the war around German debt. But it's also one of the years where the Fed is really forced to make a really important decision. So it's where a lot of their desire to get out of the bond market, and I'm sure we'll talk about what they did during the Second World War. It's a very controlled market. It's very heavily managed by the Fed on an active basis. They really pegged yields in the long end, and getting out of that is complicated.