If Global Trade Breaks, It’s Worse Than 2008 | Ed Conway

The Master Investor Podcast with Wilfred Frost

Ed Conway discusses the profound vulnerabilities within modern global supply chains in his new book, Trade World. He draws historical parall

Key takeaways

A total breakdown in global trading systems would dwarf the impact of the 2008 financial crisis because modern trade is 'everything.'
The UK's historical dominance in wool and cotton mirrors China's current strategic position in rare earths and semiconductors.
Modern supply chains are significantly more integrated than they were in 1914, increasing systemic risk during geopolitical conflicts.
The shift from 'just-in-time' to protectionist models is driven by a need for economic security over the pursuit of cheap goods.
Russia's dominance as a global wheat exporter, combined with Ukraine, creates a massive geopolitical lever in food security.

Main topics

Global trade fragility
Historical textile revolutions
Geopolitics of grain exports

Notable quotes

If we were to have a kind of breakdown in the global trading system... it would make the financial crisis look like a walk in the park because this is everything.

Conclusion

The episode serves as a sobering reminder that while global trade driv

Transcript preview

Speaker 2 (0:00) You've got two serious kinetic wars happening in the Gulf and in Ukraine and in a sense they're bleeding into each other in various different ways. It's not implausible that if things go south from here people will look back and say this was the foothills for another world war. The thing that I'd say which is different this time around, the nature of the global economy is fundamentally different now to how it was before. You didn't have supply chains that genuinely bestrode the globe back in 1914. Our Speaker 1 (0:31) degree of integratedness, Speaker 2 (0:34) integration rather, is so much greater now than ever before in history. If we were to have a kind of breakdown in the global trading system, God forbid, it would make the financial crisis look like a walk in the park because this is everything. All of which is why I think and I hope that... World leaders would be conscious of that when they're, as Trump and Xi are going to have their meetings. But the stakes are seriously high. Speaker 1 (1:04) Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world to give you, our listeners, the edge. The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council, and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today is Ed Conway. He's the economics and data editor at Sky News, regular columnist for The Times and Sunday Times and author of The Summit, The Biggest Battle of the Second World War Fought Behind Closed Doors of Material World and now most recently Trade World, which came out just a couple of weeks ago. He's not just my esteemed colleague at Sky News, but a great friend of mine over a very long period of time as well. And Ed, it is a delight. to welcome you to the podcast. It's intimidating for me because I'm conscious that I'm neither an investor nor a politician nor Speaker 2 (2:17) basically any of the above. I thought you were going to say it's intimidating Speaker 1 (2:20) because you know me so well and my tactics. Also because you Speaker 2 (2:23) know Speaker 1 (2:24) where all the bodies are buried so this is the moment. We should do another podcast episode about some of the nights out of the past. About the history. Ed, by the way, for those who don't know, is an outstanding DJ. Speaker 2 (2:38) Thank you. Yeah, that's my real forte. You Speaker 1 (2:40) and David Speaker 2 (2:40) Solomon? Yeah, not at the same time. The economists who also like to DJ. He's on the top floor and I'm somewhere Speaker 1 (2:47) in the basement. Well, the parties I've attended with you. I've interviewed him, but I haven't been to one of his parties. He's DJed. Yeah, yeah. Now, Trade World came out just a couple of weeks ago. You were kind enough to give me a copy, which I read over the summer, and I absolutely adored it. Once again, Ed, what you've done is kind of bring together. unbelievably complex topic in a digestible way and highlighted how relevant it is to us. So thanks for the book early and for sharing with us. We're going to spend most of this podcast episode going through it, but I did want to start on the topic du jour, which is kind of in the topic du jour on this podcast for a... A few months now, but it just gets more and more important and the levels get higher as we go through, which is bond yields. You cover this daily very closely. Ultimately, stepping back, what is driving them higher? And I should Speaker 2 (3:39) say that one of the great sea changers that the Wolf of Frost has brought to Speaker 1 (3:44) Sky News is... Someone for you to talk to about bond yields. I Speaker 2 (3:49) wouldn't Speaker 1 (3:49) say Speaker 2 (3:49) a Speaker 1 (3:49) fixation, but more bond yields than we've ever had before, especially in the early hours of the day, Speaker 2 (3:54) which... You know, it's kind of a sign of the times as well, because like these are, and obviously this audience will know all about bond yields already, but like a lot of my job is to try, as economics editor at Sky and, you know, someone who's trying to communicate this stuff, is to try to explain why this stuff is relevant. And obviously, you know, of all the numbers in the world, you know, you could take kind of crude oil, you could take kind of... maybe one or two exchange rates, but like the Treasury yields, what is the number of the Treasury yield right now? Just in terms of its significance infusing into the rest of the economy, like you couldn't get a more important number. And yet it's just crazy times to see like JGBs, Japanese bond yields up to the highest level since the 90s, to see similar thing for 30 years in the UK and elsewhere. Something is happening. And, you know, everyone's got their opinion, you know, their personal kind of opinion on this. But for me, I think we're in this kind of moment of a lot of the presumptions about the foundations of the global economy that we've had for a long time. And, you know, maybe it's about kind of the fiscal sustainability of different countries around the world. Maybe it's just about your assumptions about kind of AI and capital investment and so on and so forth. And maybe, and this is kind of where the book comes in, it's your presumptions about... the extent to which geography is kind of reasserting itself as a factor and whether the disinflation that we've had in the last kind of 20, 30, 40 years, really since kind of turn of the millennium, if not before, maybe if those things are reversing, then all of that is happening at the same time. And so, you know, I think there are kind of cogent explanations for it. But then on top of that, you know, I talk to traders quite a lot, people in the gilts market, people in other kind of fixed income markets. they are struggling to get their head around what is happening right now. And they are seeing that markets are reacting in a very different way. And there's also structural shifts as well, of course, as you know. You know, this change, particularly in the UK, but elsewhere as well, to seeing hedge funds playing a much bigger role in a market that previously was kind of gilt-edged moneymakers. It was these big old-fashioned banks. Now, the marginal buyer and seller in that market might well be a hedge fund without a kind of long-term... you know, kind of stake necessarily in having an investment for a long time. And those kinds of structural changes are significant. And for this to be happening at the same time, following obviously what happened in 2022 with the UK's kind of well-publicized issues, it's unnerving. And I think everyone is quite nervous. And Speaker 1 (6:35) why, you know, we've seen the last two, last week, Bank of Japan and Fed hiked and the week before the ECB hiked. The Bank of England didn't? No. What's your snapshot for why they stood firm? I mean, I think there's a prosaic explanation, which is Speaker 2 (6:47) that usually they tend to hike and make a shift, which this obviously would be a shift. They were going down and now they're going up. Traditionally, they do it in a moment where they're able to communicate it better, so they do it alongside a monetary policy report. I think also the committee, they're not there yet, and there's still... people, some people on the nine member committee that need to be convinced. But for me, you know, having been there and listened to the rationale and talked to a few people around that kind of world. It's coming and I think you know maybe one maybe two hikes not not the four that the markets pricing in but then there's like I say it's these weird things happening at the long end of the curve that even people within the market are struggling to kind of get their head around the market is kind of pointing towards four maybe five increases in UK rates and kind of not dissimilar in other parts of the world then talk to economists and it's maybe maybe one maybe two and so I that that The market is behaving in a strange and unpredictable way. But I think that, again, comes back to the fact that we're in an unfamiliar time where people are asking big existential questions about the nature of geopolitics and the nature of the way that the economy fits together. And I think when those moments happen, it often has a bearing on that most important Speaker 1 (8:05) of all numbers out there. Obviously, there was a little bit of a or a significant reaction last week. at the long end of the yield curve we didn't hike short-term rates but did end uk specifically uk specifically and you did see the 30 and 10-year you'll come down a bit i mean obviously nothing compared to what they've risen this year and that was qt exactly because they ended qt i mean that's an interesting one as to whether that will be a one-week effect or will it change the direction of travel for those long yields to come? We don't know the answer, but I'm interested in how significant you think the ending of QT was. Speaker 2 (8:44) Well, I think there's something. Do we need, because of your listenership, do we need to explain what QT is? No, I don't think so. Speaker 1 (8:48) Because you've just Speaker 2 (8:48) said QT, QT, QT. I Speaker 1 (8:49) think Speaker 2 (8:49) we'll know what quantitative tightening is. I feel uncomfortable not saying. I know. This is quantitative tightening, which is kind of, you know, public service announcement. Just plough on, plough on. I Speaker 1 (8:59) want to do it just because I feel uncomfortable doing it. Speaker 2 (9:01) Okay. I mean, in as much as the way... the Bank of England carried out quantitative easing, which was what they did in the wake of the financial crisis to pump money into the markets and buy up government bonds. They did focus on, obviously, because we have quite a long maturity in comparison with most other countries around the world, they tended to focus on the long end more than other countries. They tended to go all in on government bonds in a way that the Fed and others didn't. quite so monomaniacally. And so by definition, the Bank of England's impact on the gilts market has been disproportionate compared with like the ECB's impact on the various different bonds in Europe and this kind of analogous in America. And I think if you look at the kind of premium that the UK has seen as a result of quantitative tightening. It has been great. And there's arguments as to how much it is. Is it like 30 basis points or something? But it's not nothing. And actually, interestingly, the Bank of England initially were very keen to kind of say, well, there's nothing to see here. And then gradually kind of said, OK, well, maybe there's Speaker 1 (10:13) a Speaker 2 (10:13) bit of a premium as a result of what we're doing. In as much as that is true, what they've just done is they've said, OK, we're not going to be selling off the very long stuff. We're not going to be selling off the very short stuff. We're possibly going to make this quite significant change to who we're selling it off to, which is probably a procedural thing. But the fact that the Bank of England is planning to, rather than sell those bonds off into the market, to sell it to the Debt Management Office, which is another part of the government, similar, I think, to what they do in New Zealand. But it's still an eyebrow-raising moment, isn't it? You've got one bit of the government selling to another bit of the government. Speaker 2 (10:49) I would say all of that stuff, I wasn't surprised to see that the long end came off a little bit. And I think you could see that premium that the UK is on versus the US, for instance. You could see that narrow a bit. But frankly, the story, the prevailing story of the last four years in the UK is that we have been trading at higher levels. So in terms of the yields, we have had a higher interest rate than pretty much everyone else in the G7. Speaker 2 (11:18) disparity has got wider rather than getting narrower. And it's, again, you choose your explanation. Is it the Bank of England and the way they did QT? Is it what happened with Liz Truss? Is it the concern about the UK and this latest government or Keir Starmer's government not being able to implement all of the kind of policies, spending cuts they wanted to do? I think it's a lot of that at the same time. the longer the shorter it is, as a result, we've been an outlier for quite some time. And maybe this kind of Speaker 1 (11:47) narrows it a little bit. It's really also, by the way, the details of the announcement, I think, are not dissimilar from what Scott Besson announced three weeks ago, but without quite the fanfare and press coverage that immediately followed it. But we'll see how it plays out. And to be honest, it's also normal for the Bank of England to kind of keep its head down a little bit more than in the US. And I think that's seemingly been... been achieved. But Speaker 2 (12:11) isn't it, I think it comes back to this thing that a lot of the preconceptions that people have had for a long time about the nature of the state and independent central banks and then these other kind of prevailing factors like the nature of globalization and freedom of navigation and all of these things that sit beneath global commerce. It just so happens where, and that's before you get to the fact that we've got two major wars happening right now in Europe and in the Gulf. All of these things happening at the same time, deep questions, quite existential questions. It's not surprising, is it? And then you've got the industrial revolution of AI happening at the same time and then the green transition. It would be surprising if that wasn't contributing to concern and risk premium going up and people just being nervous about pricing anything right now. Speaker 1 (12:59) Yeah, Speaker 2 (12:59) and Speaker 1 (12:59) huge deficits and debt piles that don't look like they're going away. Exactly, Speaker 2 (13:04) that Speaker 1 (13:04) too. Speaker 1 (13:09) This podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com forward slash master investor. This episode is brought to you by LSEG, the leading global financial markets infrastructure, data and analytics provider. To learn more about how LSEG connects businesses, investors and markets worldwide, visit lseg.com. Speaker 1 (13:53) Let's use that perfect transition, Ed, into Trade World, the new book. Just the quick premise of the book before we get into it. Speaker 2 (14:02) Well, I mean, the premise is just simply that, so I wrote this previous book called Material World, and the gist of that was to say, you know, we like to think, maybe it may be a conventional wisdom. that we have kind of dematerialized and physical things don't necessarily matter, or at least they matter only to a small extent. And if you look at GDP, that's a kind of small fraction of GDP. And the point of that book was to say, no, it matters. And actually, it has outsized importance. And we should be curious about where physical stuff comes from, you know, whether it's fiber optic cables or semiconductors or the steel that goes into infrastructure. And the point of Trade World is to say something similar kind of goes for the nature of kind of modern trade. And I think, you know, maybe we understand this more intuitively, but we maybe just don't engage with it as much as perhaps we could. Every single thing you order, every single kind of item, consumer item, pretty much without exception, certainly in Europe and in the US, most G7 nations, it is imported, you know, or at least a component of it is imported. And our dependence on... physical trade is often understated. And like I say, often that doesn't appear on the label of the thing that you're buying. The example I'd like to give, just because it's helpful on this, is a pack of fish fingers or fish sticks, as I know they're called in America. The fish from them, here in the UK, you're buying it in the supermarket.