What are the market implications for The State of Financial Stability with Steven Kelly (Yale) & Leslie Falconio (UBS?

Traders should watch the EUR/USD pair closely, particularly as sentiment around U.S. fiscal policies evolves. Key levels to monitor include the psychological barrier of 1.07, which could provide crucial support or resistance amidst ongoing volatility.

What are the risks to this view on The State of Financial Stability with Steven Kelly (Yale) & Leslie Falconio (UBS?

If inflation unexpectedly moderates or fiscal measures lead to a stabilized debt outlook, the current bearish sentiment towards the dollar could rapidly reverse, altering currency trends significantly.

The State of Financial Stability with Steven Kelly (Yale) & Leslie Falconio (UBS CIO)

Q: What's takeaway 1 on The State of Financial Stability with Steven Kelly (Yale) & Leslie Falconio (UBS?

The financial system's instability driven by rising interest rates poses significant risks in currency markets.

Q: What's takeaway 2 on The State of Financial Stability with Steven Kelly (Yale) & Leslie Falconio (UBS?

Current U.S. deficit levels at approximately 9% of GDP could lead to market volatility that traders need to hedge against.

What the desk is arguing

The overarching thesis is that the increased financial instability observed in the U.S. signals potential volatility in the FX markets, particularly as inflationary pressures build. Discussions by Steven Kelly and Leslie Falconio highlight the unprecedented nature of recent financial dislocations, emphasizing that government interventions may temporarily stabilize markets but cannot resolve underlying structural issues.

Supporting this view, the discussion emphasized the significance of the rapid rise in U.S. Treasury yields, where the three-year yield rose by 47 basis points in a mere 48 hours—the largest jump since 1982. This event underscores the immediate sensitivities of the market to fiscal decisions and inflation data, complicating the environment for FX traders who must navigate these turbulent waters.

Where it sits in our coverage

As it currently stands, our consensus target for the EUR/USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

The desk's assessment aligns closely with jpmorgan's target at the upper boundary of our range, indicating a shared expectation of continued pressure on the dollar amidst ongoing economic turbulence. bofa, however, presents a more cautious outlook that diverges significantly from this view.

How other firms see it

Aligned firms, such as jpmorgan, anticipate further depreciation in the dollars and stabilization challenges due to high levels of government debt. Conversely, bofa offers a starkly different perspective, predicting less volatility, possibly leading to a stronger dollar.

Related currency pairs to watch include the GBP/USD trajectory, which is sensitive to the ongoing debates regarding fiscal policy in the UK, potentially mirroring U.S. financial responses and their implications for broader market stability.

What the calendar says

Given the lack of imminent high-impact economic events on the calendar, traders are advised to stay focused on real-time data releases and central bank commentary as potential market movers, particularly as context shifts around financial stability leading into the second half of the fiscal year.

Hello, everyone, and welcome to today's CIO Livestream, The State of Financial Stability. Today is Tuesday, April 15th, 2025. I'm Leslie Falconeo.

Thank you for joining us. Inflation, high levels of debt, geopolitical uncertainty, and central bank policy around the world have added stress to financial markets not seen in the recent past. Compounding this recent heightened levels of uncertainty, which has fueled spikes in volatility, fire sales, and financial contagion at an increasing pace.

From the dislocations and spikes in interest rates witnessed last week, where the third-year treasurer yield rose 47 basis points in a 48-hour period, the biggest 48-hour spike seen since 1982, or the March 2023, the markets witnessed instability in the banking system started with SVB, only to be followed by the regional banking crisis. This was followed by the aftermath of proposed large tax cuts in the UK, which led to a spike in interest rates and borrowing costs, which sent their financial system spiraling, also known as the Liz Truss moment. Each time there's been some type of government intervention to stabilize the market.

Nearly halfway through fiscal 2025, the U.S. deficit has increased by about 1.3 trillion. So we're up around 2.6 trillion annual rate, which is about 9% of GDP. I can't think of a better time to sit and have a conversation with our guest, Stephen Kelly.

Stephen is the Associate Director of Research at the Yale School of Management's Program on Financial Stability, where his research focuses on financial stability and fighting crisis in modern financial systems. He's an advisor to central banks, supervisory officials, and other policy makers on banking and financial market stability. He has regular features and guest appearances across financial media outlets and publishes the widely read newsletter called Without Warning.

Okay, let's dive right in. All right, so first of all, thanks for coming on. The timing is great.

And you know, before we sort of talk about the environment that we're seeing today, I do want to take a step back and look at how we entered 2025, right? A lot of enthusiasm after the election from business owners, investors, and consumers, right? The headwinds that the markets are were from those that feared a large rise in interest rates, you know, due to the deficit, and the anticipated growing supply coming into the marketplace, treasury supply.

While President Trump's two economic advisors, Treasury Secretary Bessant, and CA Chair Steve Moran, criticized the previous administration from tilting towards issuing short-term debt or T-bills to pay for the deficit versus long-term debt. They called it this distortive or a shadow stimulus measure, right? So far, Secretary Bessant has really essentially done the same type of strategy, and this kind of Trump administration is set to continue this wartime sort of deficits.

So how do these developments, you know, in your opinion, carry substantial fiscal risks or risk to the treasury market? Yeah, I guess I'd say a few things. I mean, one is, and you hear Jay Powell say this all the time, that we're, you know, the fiscal situation is on an unsustainable path.

Like you said, nine percent of GDP, sort of unprecedented outside of wartime until recent years. And so, you know, if deficits grow, if the fiscal expense is growing faster than the economy, you sort of get this divergence, you know, off into infinity, and the debt becomes infinite. So that's a risk that we need to get back on a sustainable path.

As far as the quantum of debt, you know, I feel much less concerned about this. I mean, the U.S. is the safe asset provider to the world, and when you look at the U.S. treasury market through that context, it sort of can change the way you think about it. I mean, you can think about pre-2008 as sort of a shortage of safe debt that was met by the manufacturing of AAA securities in the financial system.

And now, you know, it's not clear that we're shifting to a world of a surplus of those assets. You know, we can talk about the volatility in the treasury market of late. Like you said, you know, the new officials, it's like where you stand depends on where you sit, right?

They were outside the treasury critiquing Janet Yellen, now they're in the treasury and going, yes, let's issue more at the short end. It turns out we can't refinance, you know, the government out to an infinite term and feel good about it because there's limited demand for that duration out in the world. But there's sort of like an insatiable demand at the short end.

And, you know, it's not clear that that demand has been met yet. And so it's not clear there's a ton of fiscal risk in that sense. You know, the quantum of debt is still, we're still in an okay world.

As I said, you follow this path into infinity and there's a divergence. But, you know, there's a lot of fear around like auctions, you know, the bids relative to how much they're selling will go from like 2.5 to 2.49 and Bloomberg will write a headline that it's the lowest ever, right? And these auctions aren't going to fail.

The primary dealer system is set up so these auctions don't fail. You have safe asset demand from all over the world and you have the Fed as the backstop if you have a market stability event. So in that sense, I'm much less worried.

But there is a fiscal situation that doesn't make sense into infinity. Well, do you think that just before we get to the next question, I want to just add up with what you said. Do you think that like Secretary Besant changes the strategy or composition?

In other words, he doesn't only issue T-bills to pay for their deficit. He does actually end up locking out a little longer. And, you know, or do we have to see, you know, a three, three, three and a half percent mortgage rate before they decide to do that?

Yeah, I don't think he can. I mean, we're sort of seeing this already in the fragilities that have come in the last few weeks that the fragility is on the short end or on the long end, right? I mean, we weren't seeing like a ton of selling and rates going up on the short end.

And when there is selling, you know, it's well absorbed. And you can tell by when there is a crisis and the Treasury has to issue a bunch of debt, all of a sudden they always issue at the short end and then they term it out over time. Right.

So like when COVID came, they issued a ton of debt to short end because that's even when the market's blowing up, you have, you know, consistent demand, if not more demand, because it's a crisis situation at the short end. So I don't know how much he can push it out. I mean, we're sort of already stressing the limits of who's willing to buy that duration.

And it's sort of an increasingly fragile structure. So I don't know if he can. And again, part of their hope was to bring down the 10 year yield.

And they're really targeting that. And it was going well, and now it's not going well. And so I think that'll be a consideration for debt issuance strategy, too.

So let's touch on that for a second, particularly when you talk about the U.S. as the safe haven asset. Okay. You know, last week, you know, when we had this really spike in interest rates, you know, due to, you know, volatility, right, you know, heightened uncertainty, prolonged inflation, the deficit, you know, you saw this really large rise where people started to question, you know, the safe haven of U.S.

And as a matter of fact, they sort of compared that, you know, movement that we saw last week to that Liz Trust moment. And I'd gotten a lot of questions from our clients and advisors on this. Do you think that's a fair comparison?

It's absolutely a fair comparison. It's a very similar dynamic, right? You have the government coming out with a new policy that sort of shocks the market and demand at the long end.

In this case, it was, you know, selling pressure into a potential trade war, potential recession. In the U.K. case, it was, again, just a big budget that was going to be a lot of debt issuance. And the market at the long end started to price that in and you got a huge sell off.

And then there was leveraged structures underneath it that had to sell assets to meet margin calls that brought the price down further. In the U.S. or in the U.K., it was in their pension system. In the U.S., it's in things like the basis trade and the swap spread trade.

But that's what I mean exactly of, you know, the commitment, this fiscal risk idea that the U.S. is like a household or a business and has to worry about rollover risk, I think is much less convincing than it has to worry about these market blow up risks. And so there is a real case of issuing more at the short end. It's not so manipulative to the extent you're just meeting demand where it is, as opposed to, you know, having to fund it in these riskier structures.

So we have that analogous risk sitting there. And the fiscal risk can be mitigated by thinking less like a household or business when it comes to rollover risk. So let's talk about, you mentioned the basis trade.

And I have to, we have to address this because, you know, listen, last week's move with all the uncertainty and tremendous, you know, illiquidity, although the auctions actually in the end of the week ended up doing pretty well. You know, there was a lot of, you know, finger pointing that it's the hedge fund deleveraging, underwinding, unwinding the basis trade, large foreign selling, the large collapse in swap spreads, which is a point of illiquidity. And, you know, and also, too, the fact that the primary dealers had, you know, had sort of had a bloated balance sheet, if you will.

And they really weren't willing to take on any more securities, even if it was in the point of a U.S. treasury. So let's sort of address the hedge fund and the basis trade first. I mean, we know that it gets a tremendous amount of negative press.

Right. And in a June 2019 report, the Fed, you know, had sort of categorized or claimed to be 21 times levered. Right.

Two things. One, if you can explain exactly what the basis trade is so the people listening can understand. And two, what are the implications of the base trade?

And frankly, how did it get so large? Yeah. Yeah.

Well, I mean, it got so large because for a lot of reasons, but the basis of the basis trade is that it's much less balance sheet intensive to hold futures than hold the cash bond. Right. So like if I wanted exposure to the price of your house, I could come up with the money to buy your house and then I get all the upside.

Or I could write a contract with somebody that just gives me the upside to the value of your house and I don't have to come up with any money up front. And so that's why futures are much less balance sheet intensive. And so they tend to trade richer than the thing that they are referring to, in this case, the 10 year treasury, the 30 year treasury, the five year treasury.

And so what hedge funds do is they go, they pick up those pennies, you know, to use the trope, they pick up the pennies in front of the steamroller by going long the bond, the cash bond and shorting the future. So they have a perfectly hedged position because they can deliver the bond into the future at maturity. But there's a lot of things that can go wrong in the meantime where the prices diverge, even though even though they're going to match at maturity, they can diverge in the meantime and you have to make margin calls on both legs, one of which would be like a sell off of the cash asset because people are liquidating.

We saw this in March 2020. It's analogous to what happened with Liz Trust. We saw it a little bit last week.

So once you get that sell off, you have to meet a margin call here. You start selling the asset margin calls all the way down. And if the futures price goes the other way because people are pricing in Fed rate cuts, then you really have a divergence.

You really have a problem. So if you can stay in the trade till the end, you have a you lock in the profit. But if you can't, you know, you get squeezed.

And it's like 45 basis points annualized to do that trade. So you lever it up. And 20 is about typical.

A lot of times there's as much as 50x leverage in this trade because one, it's safe. And from the point of view of the funder of the asset who will be like the repo market, the repurchase market overnight funding for Treasury collateral. You know, that's a pretty safe trade.

I'll give you $99 for $100 asset overnight because I can walk away tomorrow. And so that's another spot where it can get squeezed because if the collateral value goes down, well, now I'm only going to give you if it goes from $100 to $95, I'm only going to give you $94. So there's another squeeze in the story.

So it's a very fragile structure. And it's huge in the market. You know, there are various ways to measure the size, but figure half a trillion is about right.

And, you know, talking about 20 to 50x lever trade, that means anywhere from 2 to 5% fall in the asset value, you're effectively liquidated. And so that's the fragile structure that we're funding all this Treasury duration with. But if you think about what the hedge fund is doing, I mean, if you ask hedge funds about this, they'll be like, well, we're patriots.

We're doing an American patriotic act because we're buying long-term Treasury debt and it's cheaper than it otherwise would be. If you think about what they're doing, they're buying the long-end thing and they're funding it to the actual cash investor with an overnight repo or something like that, some overnight collateralized funding against long-term assets. That tells you there's a pocket of demand at the short end that wants a short-term Treasury-like thing.

There aren't enough out in the world, so it goes and lends against a long-term Treasury overnight. So again, that tells you there's a lot of fiscal space at the short end. But in the meantime, we have this fragile hedge fund structure that's sort of propping up the Treasury market, and it's why we're vulnerable to a lose-trust moment.

So when we think about that, I mean, it's not just one-sided to the hedge fund side, and I know there's a lot of figures pointing to that. One of the reasons why they're able to do this basis trade is because institutional money puts cash to work now and securitize, credit, all this carrying-type assets, and they buy the futures market. This off-balance sheet.

So that futures market is more expensive, more expensive, more expensive, more expensive, which gives the opportunity for hedge funds to sell it and then do the off-the-run to create the basis trade. So it's not just sort of a hedge fund kind of strategy. It's really, I think, both sides of the market in terms of those that are, you know, non-levered, if you will, or who do off-balance sheet kind of money to the futures market and the hedge fund community.

Yeah. So, I mean, let me say two things. One is the important point there is, well, there's a few, but if you just...

Thank you. Thank you, everybody. If you kill all the hedge funds, if you shut them all, you kick the plug out of the socket on all the hedge funds today, someone else is going to come pick up and do the basis trade, right?

You can't, the spread will diverge more and someone will come pick it up. So I don't mean to sound like, oh, the hedge funds are the enemy. I mean, they are doing, they're making markets more efficient.

It's just the treasury has a free lunch that it's ignoring. And the thing about the asset managers is, you know, there's been some good Fed research on this and the Treasury Borrowing Advisory Committee did a, you know, survey on this, and why these asset managers are using futures is because their index that they're benchmarked against is increasingly long-term. They want to invest in, you know, three-year corporate credit.

That's where their edge is. But the duration of debt in the index is longer and longer because the treasury's issuing so much long-term debt. And so they have to, they go buy futures so that they're hedged against duration risk relative to the benchmark.

And then they mess around in corporate credit, right? So again, it goes back to, it's sort of the treasury that's feeding this machine of, like, the treasury thinks that, you know, it being termed out is a good thing, but the structures that are holding this duration are what's increasingly fragile. Right.

As opposed to the quantity of debt they're issuing. Right. Most, I mean, the leverage part's obviously on the hedge fund side, but I think the, to the point, I think it's just important to make it, this is also a, like, institutional long-only side issue as well.

That's created these opportunities to begin with. Yep. Okay, so let's talk about, you know, last week, a lot of people needed to raise cash, right?

You had a lot of risk-off sentiment, right? And we spoke about the sort of primary balance sheets, primary deal balance sheets getting really bloated, right? Now, potentially, there's deregulation coming down the pike.

We don't know that that could be, that could help, but- It's coming. Every time, okay. Well, to that point, I mean, every time we have these kinds of situations, right?

And mostly because of, they talk about shadow banking, right? Shadow banking, we know, has grown exponentially since the great financial crisis. It's one of those, you know, not overlooked by, you know, not regulated by the Fed, and it's kind of one of those things that's out there, but it's large.

Yeah. And every time we have these kind of bouts of instability, they point to the shadow banking market, particularly those, with those areas that might not be the most transparent. Yeah.

Hedge funds, privates. Yeah. Okay.

How do you see that playing out? Right now, it seems like we've struck an okay balance. You know, it's sort of good when you have bipartisan consensus, and there's like bipartisan consensus that there's bipartisan discomfort that all this activity has moved into the shadow banking system.

But the prescriptions are the exact opposite, right? I mean, more on the right, it's, okay, let's go easy on the banks and bring this activity back into the light so we can see it, we can supervise it, you know, bring private credit back to the banking system, et cetera. And more on the left, it's, well, let's just bring bank regulation out to the rest of the system, which, you know, is an infinite chase.

So it's sort of no good option, which sort of makes me feel like we're in the right spot with it. You know, bank supervisors can still see it because it's funded through prime brokerage and these various, you know, it ultimately comes back to the bank balance sheet. But, I mean, I want to just, like, take a step back and think about the growth because you hear a lot about, like, oh, private credit is going to eat banks' lunch, or, like, everything's moving to the shadow financial sector.

And I'll say two things. One, only banks can manufacture deposits, and that is, like, our primary need of a financial system, right? That's, if you're building the financial system, the first thing you need is deposits that can't be replicated anywhere else.

So that's the edge that banks are always going to have. The second thing I'll say is, you know, when banks complain about all this activity moving to the shadow financial markets, they say, well, it's because our capital requirements are too high. And maybe they're right.

But if you think about, why don't they like capital requirements? It's because long-term wealth that's willing to invest, you know, in an equity tranche is a scarce resource. That's, like, the scarcest thing.

That's what makes the whole machine run, is you need somebody to invest in the equity layer, and then you can build a leverage on top of it, right? And so that's the same constraint that's going to constrain the shadow banking system. Like, you cannot recreate 15x-levered banks with 1x-levered private credit because you need an insane amount of equity, and there just isn't that much long-term wealth.

We rely on the mechanism of banks to create deposits, and that's the structure we've decided is, like, the safe leverage-creating structure. You know, like, an investment in private credit and a big deposit account are not substitutes. Right.

And that's going to be the constraint on how much it can grow. So how do you see this sort of mitigating going forward, and how will this impact the alts market in general? I mean, it depends.

Like, you see them increasingly using banks, right, because they want to keep growth, so they're starting to lever up, and then they're going to start to offer retail options, and they're starting to offer more redemption as opposed to having no maturity mismatch. And so they're kind of, you know, the arc of financial history bend towards banks, right? And so they're kind of becoming more and more bank-like, and that makes me nervous.

Where we are now is, like, okay, but if they keep trending in that direction, you know, I hope the SEC or somebody shows up and says, look, you're operating a bank without a charter. So do you think grid regulation is on the horizon? No.

You don't? No. Is that because the administration or just in general?

I mean, it's a little bit of both, right? Even the Biden administration, which would have been more favorable to regulation, you know, the Financial Stability Oversight Council didn't designate anybody as systemically important. There really wasn't kind of this serious effort to designate asset managers or hedge funds or whomever.

And I think where we've settled, and this is true globally, Japan, Europe, UK, bank supervisors are nervous, right? Because they get nervous about this kind of thing, shadow banking and whatever else. And they're worried about bank exposure.

And we sort of saw, like, a prequel with Archegos a few years ago, where the banks were too exposed to this family office and had big losses. And so now their kind of method is just, you know, it's a subtle recognition that, you know, the banks are ultimately financing these things or partnering with these firms, you know, whether it's prime brokerage, lending to private credit, partnering. And so you can do bank supervision and just be really annoying about private credit, private equity.

And you can ask a ton of questions and you can say, you need more data. And this, you know, is sort of soft discouragement from banks continuing to fund this. And that acts as a cap on the system.

And that's sort of the balance we're in right now. So, you know, I think, you know, it's a little bit of both, right? I mean, it's a little bit of both right now.

Okay. So I wanted to just take that and shift to the dollar. Yeah.

Okay. So, look, I mean, investors are starting to move to the rest of the world, right? We're starting to see this end of globalization, as they call it.

I mean, last week is the perfect, you know, sort of period to look at, you know, as short term as it is. Interest rates went up, the dollar went down. Do you think the dollar is still the safe haven, or is it going to move to some other currency, like in Europe or whatever it might be?

Yeah. I mean, the dollar is definitely still the safe haven now, because you just can't recreate the network effects overnight of, you know, all the 70% of global GDP is either on the dollar or pegged to the dollar in some way. You know, it's like 70% of trade, of finance, it's all finance and dollars.

You can't do that overnight. Like, you can't do that in a week when you're reallocating from dollar assets to, you know, European assets. And, you know, what we've seen so far, the trade, like people are comparing the trade war price movements to like COVID or the GFC, and they're saying, well, a dollar rose in those events and it didn't rise in this one.

So it must be a new world order. And I guess I would tilt against that a little bit. And to me, how this reads so far, I mean, I think if the trade war became a financial crisis, you would see the dollar appreciate again.

How this reads so far is like, if you took, if you tranche the whole economy, right, you know, you got AAA at the bottom, all the way to the equity layer. The trade war so far has sort of, you know, taken some off the top. And it makes sense for investors to think about pulling out of some dollar assets as the US goes into recession, possibly, or whatever else, and reallocating.

If you think about a financial crisis, it's like infection at the bottom, it's at the safest thing. And if we're in that world, I think you see a run into the dollar still. You know, the dollar is not hugely out of historical ranges.

And the other thing is we shouldn't confuse dollar weakness with weakness as a status of a reserve currency. I mean, the value of it can go up and down, and it can still be the reserve currency. So I think that's the distinction.

So agreed. And I think speaking of the dollar, and as well as banking regulations, shadow banking, and Trump administration is following through on promises to open the doors to all matters of crypto. What does this mean for the current other currencies?

Or does it hurt or support the dollar? You know, it's interesting, because the administration seems to want a strong dollar and strong Bitcoin. And the Bitcoin evangelists seem to want this to kind of replace the dollar in some sense.

I don't think it has any effect on the dollar. I think this is, you know, this is really just a financial asset. It's like saying, does Apple's stock price going up have an effect on the dollar?

You know, it's kind of like that. I will say, you know, there's also this stablecoin space where, you know, you have a tokenized dollar that's backed by dollar assets. And the people that run stablecoins like to say, hey, we're like defending the value of the dollar globally, right?

We're expanding its reach. And there's maybe some truth to that. They're really small, right?

I mean, like, all told, the whole stablecoin market, it's like $220 billion. That's just, that's a money market fund. It's one of them, right?

It's just, it's not big enough to control the fate of the dollar. And there's sort of three prongs to what they're doing. Like, yes, there's, maybe there's a marginal merchant in Ethiopia or somewhere that's using dollars that wouldn't have before because of stablecoin technology.

But there's also dollars that, dollar demand that didn't exist before because stablecoins aren't doing anti-money laundering checks, right? And those would be, that's like bad dollar demand, right? Anybody can demand a bunch of hundreds to do crime.

That's not necessarily good dollar demand. And the other is just a shifting of assets, you know, between various dollar assets. So I'm less convinced there that that's a huge part of the dollar's reserve status, but that is out there.

So, you know, we've talked about several issues here. This has been a great conversation, but I do have to ask you, you know, in the beginning, I sort of, you know, introed with every crisis has been by some big bazooka by the federal government to come in and, you know, and save the day. Given the deficit, given the concern of inflation, you know, given all these things that have occurred, you know, over the past several years, if something should happen, can they do QE?

I mean, what do you think would be the sort of remedy given everything that we have in tariffs and, you know, recreating inflation, all these kinds of things that we have that are headwinds to say something that could have been resolved back in, you know, GFC might not be have the same impact today. Yeah, I would say yes, they can and would do QE in a market functioning episode. You know, when there was that Liz Trust moment in the UK in 2022, the Bank of England did an intervention that it basically unwound like 30 days later.

I mean, they bought a bunch of assets to calm the market and they said, look, this is not monetary policy. We swear to God, this is not monetary policy. And the market thought it was monetary policy, but they tried.

And so there's something to build on there of, you know, we're doing a market functioning intervention. This is not monetary policy. I think that can be done.

The awkward spot the Fed's in now is like if they do, if we see like last week again and they set up a buying facility, it's like, oh, this is your hedge fund bailout facility. And that's a tricky comms place to be in, which they're, you know, they're obviously not doing, they're going out and buying treasuries, but that's a tricky place as they're approaching the end of the sell-off of their portfolio. Like, you know, they can cast it various ways.

So, yeah, we're sort of in this awkward world now where, you know, in some sense it's comforting, the banks are in great shape, but post-GFC, every time something blows up, it's kind of like, where's the central bank? You know, commodities markets blew up in 22 and it was like, oh, is the ECB going to rescue the commodities markets? That was like a real thing.

And energy markets in the UK, and this is stuff we used to just like paper over with interest rate cuts and we let the banks go out and just buy this stuff and arbitrage it all away. And now banks are constrained in various ways, but they're really healthy and they're just saying, we can't go do it. We don't have the balance sheet, we don't have the liquidity.

So the central banks that care about market functioning as stuff moves into shadow banking, kind of have to step up. And if their hand is forced, there's something they can do. It doesn't matter if they want to or not, they have a mandate.

And if the market that controls monetary policy blows up, I mean, they have to intervene. Intervene, right. Okay, well, listen, Steve, this has been a really great conversation.

Appreciate your time with us today and thank you to everyone watching for sharing this time with us. We'll continue to keep you updated on what's happening in markets with our latest CAO views through a house of publication videos like our UBS trending series, as well as podcasts featuring colleagues from UBS and our best partners. And as always, we encourage you to continue the conversation with our UBS financial advisor.

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