Associated Bank Thought Leadership Podcast

WGN: We’re on with Michael Sankowski, vice president of foreign exchange at Associated Bank. Michael, welcome back.

Mike Sankowski: Thanks, Steve.

WGN: I want to focus our conversation a little bit on the currencies, world currencies and some other things as well. We'll touch on AI, but I want to, off the top here, just sort of get your snapshot of where the economy stands right now. We've had a couple of inflation reports and some reports on jobs as well. How are we doing and how is that impacting the global economy as well?

MS:  Sure. You know, over the last couple of weeks, we've had some inflation numbers. They've been about where they've been for the last several months. This is, you know, stronger and higher than what the Fed wants. And so, the inflation numbers aren't really going down. They're not going up. But it's been about where it was.

Some of these numbers are a little bit more noisy than they used to be. So, you know, back eight, ten years ago, they were very reliable in terms of the numbers that the Fed and other people were getting. Kind of more recently, they've been a little bit more noisy just because fewer people are responding to the surveys.

What we're seeing is just, you know, the inflation numbers have been what they've been over the last several months, and around this 3%, 2 ½% level. And they're not really going down right now. Neither are they going up. So, in terms of the economy, we had a couple numbers showing that the, you know, last month's job numbers were really strong, very good. But those numbers are a little more volatile than they used to be, too, because fewer people are responding to surveys and it takes a few months, more months to get really solid numbers. And so, strong numbers last month. But, you know, what are we going to see coming up in the next couple of weeks here? It's still pretty much up in the air.

WGN: You know, Michael, one of the other things has been the oil situation. I think for most of us, we've seen the impacts of that at the pump where we've been paying higher gas prices. They've come down a little bit. Oil prices have come down as well. But this up and down, almost like a sticker shock situation, has impacted more than just our cars. Right. I mean, we're talking about global supply situation where people are having a hard time moving their stuff. We can't really put a good bet on oil anymore. Talk to us a little bit about that.

MS:  Right. The oil markets right now are maybe as disjointed and, as you know, in some ways as volatile as I've ever seen. We have big discrepancies kind of across the globe in terms of prices, depending on where the actual oil is. Here in the United States, we’re looking in the low nineties, upper eighties at the moment. But that could change tomorrow or the next day. It's very, very volatile there. Out of Asia, we're seeing prices, and out of Europe, we're seeing prices, spot prices above 110, in the 120 range. And so, usually these oil prices are a lot more connected to each other, so you'll see a smaller difference.

And there's we're seeing a lot more on where the actual oil can be delivered. Those prices are very different across the world. And kind of what that means is some of the transportation that we're seeing out of Asia into the United States for goods that are produced over there—those prices are going up. We're seeing incredible, incredible numbers for what it costs to transport goods in some of these transport stocks have kind of been through the roof there on that too.

WGN: Bonds have usually been well, historically, I guess they've been sort of a hedge, but they're not really providing that hedge much anymore, are they? Talk to us a little bit about bonds.

MS: It's really an amazing time in the markets. You know, everything we look at here, it's just really been really all over the place. We right now are seeing some multi-decade highs in bond yields. And so, you know, bonds are typically a hedge against some volatility, you know it's a safe haven run. In this case, it seems like, you know, not just here in the United States, but a lot of investors are really, really hesitant to invest in the government bonds. And so, as a result, we're seeing yields not just here in the United States, but yields across the world go up. We're just seeing some of the highest rates we've seen in decades, you know, above 5.2, 5% and the 10-year above that number, in the 30-year, and so these are these are kind of scary numbers for people in some ways, because it shows that they're really concerned about what inflation is today, but also what future inflation might be.

And also, there's some credibility concerns about the United States federal government’s willingness to pay back on these bonds, you know, $40 trillion in U.S. debt, they're just concerned about that.

WGN: You mentioned this kind of a scary situation. I think most older folks who've been in this for a while remember the financial crisis of 2008. That's where some of these bond numbers are now, sort of reminiscent of that era. Should we draw a correlation between that, or is that too far?

MS: You know, in terms of a financial crisis, we're not really there quite yet, Steve. But it's really interesting that you mentioned 2008, because one of the things that's kind of really been percolating out there in the markets, people are talking about this is a return to kind of the pre-2008 era of rates. And so, prior to 2008, we typically had rates in this 5% range, in the 6% range. It was very common. And after the global financial crisis, we had what we call a savings glut. There was a lot of money sloshing around the world, and you could borrow money really cheaply and a lot of it, and you didn't pay that much for, you know, sometimes borrowing costs were 2% or even lower in some cases.

And so, with that last couple of years, that savings glut era is kind of going away. We might be moving back to something that's more like the pre-2008 cycle, where these rates are just simply higher. Inflation rates across the world are a bit higher. There's differences in economies that were, you know, rates. The rates projections for different economies are different because the rates have more room to move around. And so, when you're in this 5%, 6% range for rates, you know, if the Japanese economy is going well, they might look to raise rates while the U.S. government is not doing that. There's going to be a lot more variation, we think, over the next couple of years and maybe even longer between the different countries and what their rates might be.

WGN: So, if bonds aren’t a good portfolio hedge they were once, what are the hedges these days and what would you recommend to folks? Where are you seeing people hedging their bets now?

MS: That's really put me on the spot. Come on! In terms of doing some hedging, we recommend that whatever your time horizon is, especially in the currency markets, you match a hedging program around that. And I think if you're looking to hedge bets in your equity portfolio and other places, it might be a little more difficult to kind of push on that, because you're locked into what does the stock market do, and what does the bond market do.  

You know, one of the things that is interesting, though, when you're talking about hedging bets, and this might be a little bit out there on that topic, is that we're in the middle of this gigantic AI boom right now. And it doesn't really appear to be going away. A lot of the projections are for this to continue for the next several years here. And the size of the investments that we're talking about are truly giant, and they're almost unprecedented in U.S. history.

WGN: Yeah, I'm going to touch on that. I have a couple more questions about that. But just one more note here on the hedging: I've been reading that some investors are hedging with agriculture and metals and mining and electrification even. Are those things that you're seeing, and would suggest or no?

MS: When you said to hedge against these movements, it's, you know, a lot of these, we are seeing some incredible moves in the metals market. Copper is at all-time highs right now, and it's the electrification that's being rolled out with the AI boom is truly huge. And so, this is a situation where, with the market at an all-time high, it's tough to say you want to hedge with that as being the proper hedge, but it is something that is certainly in a boom and the end of the boom doesn't seem to be happening right now or anytime soon.

WGN: Back to that—on a note of that AI situation, you talked about all the investments being made. And then I read a story this past week where there are some people who are really concerned that this AI situation, all the money it's been put into that, might deflate soon, and that would cause significant problems for the world economy, would it not?

MS: Sure, it would. You know, any time you have a boom, there's the potential of a bust. And how does the bust actually happen? Right now, the AI boom is going on. I looked at some of the statistics. We're talking about things that are roughly the size of when we built out railroads, you know, here in the United States or when we built the interstate highway system in the fifties through the seventies. So, this is the type of, this is the size of the investment that we're talking about with AI. It's truly gigantic.

Any time you have an investment of that size, there's the potential of when the music stops, what happens? And a lot of these loans to the AI companies, they're being really held in a way that's not obvious on their balance sheets. And as a result, it's not immediately clear to someone who's just glancing at them and looking at them what might happen when the music does stop.

And I mean, the numbers that we're talking about are truly enormous. We're talking in the trillions. And so these are not small things. And when the music stops, it could be extremely dangerous for the fallout, for the U.S. economy. It's not something that I would be concerned about at this moment, but certainly it's not a small number. And if it does stop and when it does stop, there might be some serious repercussions for the U.S. economy.

WGN: Any time you say a bubble bursting, I automatically think of the subprime mortgage situation. I think of the internet bubble. Those were big bubbles that busted in the 2008 situation that we, you know, took world intervention, world government intervention to fix that.

MS: Right. The bubbles that we see when things like AI happened, and that's where we're at, where something like in this massive rate is the same level as the incredible real estate buildout that we had prior to the global financial crisis, on the same level as the internet buildout, before the internet bubble burst. This is where we're at.

You know, these situations and so go on a bit longer than people expect. And during that time, there can be, you know, a lot of money made during those bubbles. But like you said, Steve, when they do bust, it can be really dangerous for people. And so, while it's happening, maybe don't avoid it, but certainly be wary of when things begin to turn; it can turn quickly and it could turn in a way that is enormously destructive to, you know, parts of the economy. It's just something to be concerned about.

WGN: In your role there on the foreign exchange at Associated Bank, you monitor world currencies on an hourly, if not minute-by-minute basis, I think. Talk to us a little bit about where the major currencies are. How does the dollar fare against that these days? And when we hear a report that, you know, maybe the Fed's not going to raise rates again at its next meeting. How does that move the dollar?

MS: We’ve seen, because of what's happened in the oil markets and what's happened with the bond markets recently, we've seen some strength in the U.S. dollar versus other currencies. In the last month, it's gained about 1.7% kind of across the world currencies. Against individual currencies, it’s fared a bit better in some ways and a little bit worse, but we've seen some dollar strength in the last month.

The recent talk just over the last couple of weeks about maybe the Fed not raising rates as quickly as people expected—well, that's some of the talk, but I also look at kind of a longer-term picture over the next year. And from the 1st of September through the recent last couple of weeks here, they've actually looked at maybe adding another rate hike later next year. So, we're talking about looking at almost four rate hikes over the next year. And so, we see a lot of talk back and forth, day to day. And that does hit the U.S. dollar when they talk about not raising rates at the next meeting, but kind of the bigger picture, that's been a boon for the U.S. dollar. We're seeing some strength in the U.S. dollar over the last several weeks here, into some of the strongest levels of the last couple of years.

WGN: All right, Michael, great conversation. How can people get ahold of you and have a one-on-one if they want?

MS: Sure. A great way to reach out to me is just directly, 312-404-8717. And my email is Michael.Sankowski@AssociatedBank.com.

WGN: All right, Michael, thank you. We'll talk to you next time.