Zoltan Pozsar and Perry Mehrling On The Historic Crisis Of Financial Market Plumbing

Tracy Alloway (0:10)

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

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, I was gonna start with a really long intro for this one, but I think we can actually make it really short.

Joe Weisenthal (0:24)

What is it? I'm all for that. I'm all for, we don't need, we're past the era of throat clearing and intros.

There's no time for that anymore.

Tracy Alloway (0:32)

Yeah, exactly. Okay, so anyone who's been listening to Odd Lots knows there's been volatility in the market. There's been a lot of drama in the repo market, specifically a lot of things going on with money market funds as well.

Who do we turn to in times of repo market madness?

Joe Weisenthal (0:51)

I can only think of one person when the phrase repo market madness comes to mind.

Tracy Alloway (0:58)

Yeah, and you would be absolutely right if you said Zoltan Pozsar, the strategist over at Credit Suisse. He is with us once again, but to make this episode even better, we also have Perry Mehrling, who we've had on Odd Lots before as well. He's a professor of international political economy at the Pardee School of Global Studies at Boston University and he's worked with Zoltan. They've co-authored some papers a long time ago and in fact, Zoltan referenced one of Perry's famous quotes in one of our original episodes with him. So basically, we have two heavy hitters who are going to walk us through what just happened in money markets.

Joe Weisenthal (1:42)

Well, I think furthermore, I mean, obviously you mentioned repo and Zoltan's work on this, but I think part of what is so extraordinary about this moment is just the degree to which the entire monetary system is coming under strain. And of course, past that, we had Perry on not long ago, talk about this idea of the money view and how everything, all of our interactions are this sequence and series of meeting financial obligations that we've set forth, credits, debits, deficits, and so forth.

Everyone, every aspect of it feeling the strain right now. So I think this is the perfect set of guests to help us understand this storm that we're right in the middle of.

Tracy Alloway (2:26)

Yeah, a lack of liquidity kills you quick, as Perry would say, and we're seeing a lot of that now. So without further ado, we're going to jump right into it. Zoltan and Perry, welcome to the show. Again, thank you so much for coming on.

All right, maybe just to begin, Zoltan, one of the things that you always do in your research is, I know you call up a lot of the market participants and try to get lots of color on what's been going on. Can you walk us through what you've actually heard over the past couple of weeks?

Zoltan Pozsar (3:02)

Well, the past couple of weeks has been eventful, to say the least. But when all this fallout from the outbreak started to happen, when you talk to bank treasurers in various parts of the world, initially you would call up the Japanese treasurers, had treasurers in Hong Kong, ask them what they would see. You would get conflicting color from them, right? Because depending on your business model, you were either swimming in dollars or you were losing dollars. So if you talk to Japanese banks who are very big in trade finance, shipping finance, and commodities finance, they would say, well, we actually see a big drop-off in demand.

When you talk to banks in Hong Kong or mainland China, that's a clear dollar payments for corporations. They would say that, well, we see a lot of corporate customers bleed a lot of cash and so the money is slipping away from them. And because it's slipping away from them, it's slipping away from us. So dollars are a big type. And so it was very hard to kind of come up with a unified theme about whether this is going to be a net positive or a net negative for funding. So it was a bit confusing. And then I think it was the second week of January, James Sweeney, the Chief Economist at Credit Suisse who's our third Musketeer, Musketeer meaning Perry, Zoltan and James, he tumbles into my office and it just says, well, you know, this IP shock that we are going through and your stuff, I mean, this is where the two things meet because, and I think this meme from him is going to go down in as one of those heavy-hitting memes. And he said, the supply chain is a payment chain in reverse.