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How El Salvador and Nigeria are taking different approaches to digital currencies – plus, are we living in a simulation? The Conversation Weekly podcast transcript

This is a transcript of The Conversation Weekly podcast episode published on January 12 2022.



Going digital: Nigeria launched the eNaira central bank digital currency in October 2021. Aleksandra Sova/Shutterstock

This is a transcript of The Conversation Weekly podcast episde: Crypto countries: Nigeria and El Salvador’s opposing journeys into digital currencies, published on January 13, 2022.

NOTE: Transcripts may contain errors. Please check the corresponding audio before quoting in print.

Dan Merino: Hello, and welcome to The Conversation Weekly.

Gemma Ware: This week, we dive into the world of crypto and digital currencies and take a close look at two countries approaching them in very different ways.

Iwa Salami: Initially, people that have Nigerian bank accounts are the ones that can access the eNaira.

Erica Pimentel: Now we see El Salvador standing up and saying “we don’t want the dollar any more, we want to be masters of our own domain.”

Dan: And if the latest Matrix film has left you wondering whether we are really living in a simulation, we talk to a philosopher on the long history of that idea.

Benjamin Curtis: The advent of computers opened up the idea that perhaps a mind could be run on a computer.

Gemma: I’m Gemma Ware in London.

Dan: And I’m Dan Merino in San Francisco. You’re listening to The Conversation Weekly, the world explained by experts.

Gemma: Nigeria is Africa’s largest economy and its most populous country. El Salvador is small republic in central America.

Dan: But despite their many differences, they have two economic problems in common with each other: the first is that a large proportion of their populations don’t have access to bank accounts. Second, their economies rely heavily on remittances - that’s money sent back by people living abroad. The problem there is that the money-transfer companies that facilitate these cash flows are really slow and costly.

Gemma: In 2021, both countries turned to the fast-moving world of digital currencies in an effort to tackle these problems. But they’ve taken very different routes in doing so. El Salvador made the cryptocurrency bitcoin legal tender. Nigeria banned bank trading of cryptocurrencies and launched its own central bank digital currency.

I’ve been talking to two experts about the choices made by Nigeria and El Salvador and why other countries are watching what happens in both places really closely. But first of all, let’s make sure we’re all on the same page about what these terms mean.

Iwa: A digital currency is a means of payment and money that’s purely in electronic form.

Gemma: This is Iwa Salami. She’s a reader and associate professor at the University of East London in the UK, and an expert in fintech. I asked her to explain some of the different types of digital currencies.

Iwa: So for a central bank digital currency, it’s one that has been issued by the central bank or monetary authority of a country. Because it’s purely in electronic form we can compare it with cryptocurrencies, such as bitcoin and ethereum, which really are a digital representation of a value, facilitated by technologies, including cryptography and of course the blockchain, which is a system of storing transaction information across a wide network of computers. So when people transact using crypto assets or cryptocurrencies, as they were originally called, they are transacting behind codes, so we don’t necessarily know who is transacting behind these transactions.

Gemma: OK so we’ve got these two things which are both digital currencies and they both use the blockchain, but what are the real differences between a central bank digital currency and a cryptocurrency like bitcoin?

Iwa: The significant difference is that central bank digital currencies are much more account-based type. So we know who are those transacting behind the scenes. And particularly also because central banks actually are the ones that are issuing the central bank digital currencies, there’s a protection. It’s not accessible to the whole world, so we’ve got quite restricted access as to who can actually engage or use those digital currencies because they have to be issued by the central bank.

Whereas with your standard cryptocurrencies, such as bitcoin and ethereum, anybody can connect with the network and access them. So that’s a major difference. Another difference is that crypto assets have evolved, they pretty much operate as financial assets people buy, track, want to try to gain profits on, depending on how they’re doing. Whereas central bank digital currencies, really are currencies that tare he electronic version of the physical fiat currency that’s issued by the central bank. So there isn’t any opportunity to gain any profit on it. It’s not a financial asset, it’s not an investment. So really it’s the currencies actually track the physical version, if you like, of central bank money.

Gemma: OK, what about stablecoins because people might have heard of them?

Iwa: So stablecoins actually were introduced to deal with the volatility problems of cryptocurrencies, such as bitcoin and ethereum, because those currencies have had wild degrees of fluctuations, that can be the result of anything going on in the market. So stablecoins were really introduced to be able to peg certain types of digital assets with standard fiat currency. So for example, you would have one stablecoin that could be pegged to the dollar. So we have, for example, Tether which is also known as USDT. So one USDT for example, is pegged to the dollar and that sort of helps prevent the volatility.

Gemma: The similarity between a stablecoin and a central bank digital currency is that it’s paired to an actual currency, say the dollar or the pound.

Iwa: Supposedly, so it should be pegged to a dollar or a pound, but there’s huge controversy around the fact that it isn’t. So we don’t have US$1 sat somewhere for one stable coin. And that’s a major issue about it.

Gemma: OK we’ve got cryptocurrencies, the most famous of which is of course bitcoin, but there are many others out there too.

Dan: There are probably the ones you’ve heard of like ethereum and dogecoin, but there are at last count about 8,000 other cryptocurrencies around.

Gemma: And they can all be traded on cryptocurrency exchanges, where investors try to make money by fluctuations in the price.

Dan: There’s a lot of variation in how these cryptocurrencies work, but most, like bitcoin, need to be mined. To mine cryptocurrency, you basically just take a computer and set it to work doing some complicated calculations, and this adds new blocks to the currency’s blockchain. It can take a whole lot of energy.

Gemma: One of the big allures of cryptocurrencies has been this idea of decentralisation, that there’s no single administering authority behind them. Although today, some cryptocurrencies are actually a lot more decentralised than others.

Dan: And this is why the central bank digital currencies Iwa was talking about differ dramatically. They are, by their very nature, centralised.

Gemma: Exactly, Iwa told me these CBDCs, as they’re known, are not considered cryptocurrencies. They’re actually issued by a country’s central bank or monetary authority, which establishes the rules for the currency’s use and controls it. To understand how all this actually works, Iwa told me about what’s been happening in Nigeria.

Gemma: So tell us what happened at the beginning of 2021 that kind of kicked off the events that we’re going to be talking about.

Iwa: Just before 2021, when it came to the approach to take to regulating cryptocurrencies, you know countries were a bit unsure as to how to actually treat it. Some countries decided to ban it outright. Some countries decided to just take the watch and a wait approach to seeing how things evolved.

Nigeria actually didn’t particularly know how to approach sort of the regulation. So it initially began to advise people that these were risky assets, like most other regulators, just letting people know that if you invest in them, you’re liable to lose because they’re quite risky assets. But somewhere in 2021, there was an outright central bank announcement that actually banks would be pretty much banned from, actually transacting with cryptocurrency exchanges and businesses.

Gemma: Why did they do that?

Iwa: The primary fear really was a competition between sort of a lot more people and businesses preferring to use cryptocurrencies like bitcoin rather than using the naira, which is the fiat currency. And so there was that genuine fear that if actually citizens predominantly use bitcoin then it might be difficult to use things like monetary policy tools, to sort of control the amount of money in the economy.

Gemma: This happened in February 2021. What impact did it have? Did people keep using them or was it just impossible?

Iwa: That whole process of banning hasn’t particularly deterred people from transacting in cryptocurrency. So people carried on using bitcoin. I think obviously the technology lends itself for that type of, if you’re connected to the bitcoin blockchain, you can pretty much transact in different ways. You have a bitcoin wallet, for example, there are other ways of actually transacting, without necessarily actually going through an exchange.

Gemma: So we’ve got this situation where the Nigerian central bank has banned cryptocurrencies. And then in September it makes an announcement.

Gemma: Tell us what happened.

Iwa: So in September it makes an announcement that they are going to be issuing the central bank digital currency the eNaira. And people were surprised by that. We didn’t see it coming.

So we had heard of the digital yuan that the People’s Bank of China has been working on. We know of the digital euro that the European Central Bank is working on, we know the digital dollar that people are considering. So we know that countries are exploring this and quite publicly. But we didn’t actually know that Nigeria was actually considering this. It was just quite surprising to see that it announced it and shortly after announcing it, it launched it in October.

Gemma: And we should say that Nigeria wasn’t the first country in the world to formally launched a central bank digital currency. The Bahamas actually launched one in 2020.

Iwa: The first country in Africa and the largest I’d say; the largest economy on the continent as well.

Gemma: So what was the government’s explanation for why it decided to do this?

Iwa: The first reason is to help to achieve financial inclusion. At least these are the benefits that the central bank has outlined, because about 38 million people in the country – which roughly is 36% of the adult population – do not have a bank account. So the idea is that by introducing the central bank digital currency, this will provide an opportunity for these people that are currently unbanked or undeserved to have access to the eNaira that is issued by the central bank.

The second is the facilitation of remittance and Nigeria is one of the largest remittance destinations on the African continent. So the Nigerians, particularly on the diaspora, are sending money back home, if you like, to Nigeria. And that was valued at US$24 billion in 2019.

And this is typically done through international money transfer organisations, with fees ranging from 1% to 5% of the value of the transaction. So basically the eNaira is expected to make it easier for Nigerians on the diaspora to remit funds to Nigeria. So that significantly reduces the amount of remittance costs.

Gemma: How does it work? Who can currently make transactions in eNaira?

Iwa: Initially people that have Nigerian bank accounts are the ones that can for now access the eNaira wallets And these are people that have fulfilled what’s known as the bank verification process. It’s called the BVN which is basically an identification, quite stringent identification process that is required for you to be able to have an account in Nigeria. So how it works is people would first of all be able to download the app, and link it with their bank accounts and be able to transfer funds from the bank accounts to that.

Gemma: And you can transfer to somebody else who’s got eNaira as well?

Iwa: Yes. That’s the whole idea that it’s going to be a peer-to-peer sort of transfer mechanism.

Gemma: Obviously the idea of financial inclusion is that it’s trying to reach that 38 million people without bank accounts. So what’s the goal going forward?

Iwa: So there’s a tiered mechanism to roll out if you like the usage. So first for those that have bank accounts, and then secondly, for those that have registered mobile phone SIMs, and then it whittles down to people that have national identity numbers. And then for those that don’t, but have phones, they would also be able to access it. But the thing is, the less identification that you’re able to establish, the less the transactions that you can engage with and the idea around that is to prevent things like money laundering and all other types of financial crimes.

But ultimately even for those that fulfil the highest level of identification through the BVN, there’s a limitation as to the total amount of money that they can actually transfer. So the maximum amount of money for those fulfilling the highest identification verification standard, for example, is 5 million Naira, which really is the equivalent of US$12,200.

Gemma: And are there any risks that come with the introduction of a digital currency like the eNaira?

Iwa: So if I start with the financial stability risks, or the risks that are associated with existing commercial banks, there’s that fear that if we have the eNaira wallets, people may be tempted to use that wallet as a deposit account. And therefore rather than using commercial banks, they’re actually storing their savings in that account, which then means that the relevance of banks becomes redundant. Obviously in the way that banks work, they work on the basis really of deposits and using the deposits they have to actually lend out, which means that the less deposits that are kept in banks, the less opportunities there are for a bank to actually provide services, loan services, or credit services to individuals.

We’ve also got the financial integrity risk, and that’s the extent to which these eNaira wallets can be used as a mechanism to finance things like terrorism financing and the like. So there has to be real scrutiny along the lines of us really knowing who is transacting behind the space and really getting very solid identification mechanisms in place.

Of course we’re using digital technology here. There are all sorts of risks around sort of cybersecurity. There was some sort of Twitter incident of a scammer advertising themselves as the Central Bank of Nigeria and saying that the central bank is willing to give extra X amount of eNaira for anybody who is willing to get it. And so the central bank had to come out very immediately to say, please don’t click on anything because if you do so there might be a direct access to your e-wallet.

Gemma: So quite quickly scammers have started using it. Are there other particular risks?

Iwa: There are other types of risks such as operational risks, ensuring that we have solid IT systems in place that can be updated regularly. The question is if Nigeria has the infrastructure to ensure that the IT system is robust enough to be able to support this type of system.

Gemma: What are Nigerians thinking about this?

Iwa: I think a lot Nigerians, quite a good amount are positive, particularly around the international remittance perspective and the fact that there’s opportunity or potential for international remittances to be cheaper. The only problem, though, is whether or not it would be able to fully achieve financial inclusion in the way that it’s been promoted. Because as it is for now, we know it’s just people that have banks and are able to fulfil the BVN that can have wallets. And also because things like the requirements for people that have national identity numbers, although they’re lesser identification requirements, they’re also quite difficult to access.

Accessing a passport, a Nigerian passport is very expensive and quite rigorous in the process. The people in the far-flung parts of the country in villages that are very poor, does that mean they will never be able to get to that tier where they’re able to transact sizeably if you like, in the eNaira, just because they can’t get an national identity number. Some of these people don’t have birth certificates. And also how accessible is the internet to people that are going to use it? How accessible is wifi? How accessible is electricity as well, because the country has quite significant problems with electricity issues.

How do we really get them on board? Because if even though we’re saying we’re going to have a situation where anybody who has a phone would be able to access it, we’ve placed quite stringent limitations as to the amount of transactions they can transact, with the eNaira wallet anyway. So how financially inclusive is that?

Gemma: That’s a really important point. Thank you very much for coming on and talking to us about that.

Iwa: It was a pleasure doing this.

Gemma: A number of other countries might soon be following in Nigeria’s footsteps to launch their own central bank digital currencies. And first among them might well be China.

Dan: In early January, China launched a pilot digital yuan on app stores across ten areas of the country.

Gemma: In December, the Eastern Caribbean Central Bank rolled out its own digital currency, DCash, which can be used in seven countries, including Dominica and Grenada. With the Bahamas and Nigeria, that takes the total launched to nine, and according to the Atlantic Council, at the end of 2021, there were 14 currencies being piloted, 16 in development and 40 in research phase.

Dan: While many countries are making their own centralised digital currencies, some countries are taking a very different route. And one of those is El Salvador.

Gemma: The US dollar has been El Salvador’s currency since 2001. But last year El Salvador also made the cryptocurrency bitcoin legal tender.

To understand why El Salvador did this, I reached out to an expert in Canada.

Erica: My name is Dr Erica Pimentel. I’m an assistant professor at the Smith school of business at Queen’s university in Kingston, Ontario. I’m really interested in how people interact with crypto, how that changes how payments are made, and really the financial order as it is.

Gemma: I asked Erica what prompted the government of El Salvador, which is led by president Nayib Bukele, to adopt bitcoin as its legal tender.

Erica: We have to understand where this decision came from, why it all happened. First, there are geopolitical reasons for this, right? We have this young leader of El Salvador who sees an opportunity to stand out as this techno hipster leader and who wants to bring El Salvador into this new fintech era.

Erica: We also have to think of, in the context of more broadly, the US taking a position of no longer being the world police. And this has left a space for these mid-level powers, these smaller countries like El Salvador to take a larger space in their region. And now we see El Salvador standing up and saying we don’t want the dollar anymore. We want to be masters of our own domain.

Also, if El Salvador is using the US dollar as their primary currency, they can’t print money. They don’t have any control over their money supply. So by using bitcoin and the way that they’ve organised how bitcoin will be used in the country, they’re taking power back. They are recentralising power over their money supply into the government’s hands.

More practically, though, El Salvador’s economy relies a lot on remittances from El Salvadorian expats. So using a platform like bitcoin allow these remittances to come home more quickly and more cheaply. And I think beyond that, you know, 70% of El Salvadorians don’t have a bank account. And so this is a way to bring the unbanked online and allow them to participate both in their local economies and eventually their international economies as well.

Gemma: What actually happened in September when bitcoin became legal tender? What actually happened?

Erica: So the first thing was getting everybody onboard and so the first thing they did was that they created Chivo wallets. So they had a government-run app where they gave every El Salvadorian the equivalent of US$30 of free bitcoin.

And that was done because the government set up a US$150 million trust that would fund this and eventually they also set money aside for setting up bitcoin ATMs around the country. They even installed some in the US to facilitate remittances, while also setting up education programmes, but they really repurposed money that was intended for economic development, and used it for this new bitcoin initiative.

Gemma: What happens when a country replaces its legal tender with bitcoin?

Erica: If we look at the original law that was proposed in El Salvador it states that prices may be expressed in bitcoin, that if you want to pay your taxes, that has to be done in bitcoin. And it also provided some preferential taxation on transactions in bitcoin. In other words, they wouldn’t be subject to capital gains taxation. But it also stated that every vendor, every economic agent must accept bitcoin as a means of payment if it’s offered to them by a customer.

But later in August, the leader of El Salvador tweeted that actually I changed my mind, vendors don’t have to accept bitcoin. And I think that’s a reflection of the economy in El Salvador, which is very much a cash-based economy. Right? So a lot of these small vendors may not have had the know how, the infrastructure in order to accept bitcoin. So I think we need to understand that the application of where does a legal tender apply is that the government can’t compel private organisations or individuals to transact in bitcoin. Individuals and businesses still can transact in US dollars if they so choose.

Now that, coupled with some of the challenges associated with the rollout of the bitcoin wallets that are promoted by the government in El Salvador, has meant that the uptake of Bitcoin among El Salvadorians has been rather slow.

So it’s going to be quite some time until we start seeing broader application. People say, “no, I’m actually better off, there’s a compelling reason why I should change from my usual patterns of using the US dollar to using bitcoin.” And that comes from having confidence in bitcoin, having confidence in the infrastructure around the technology, and really believing for an individual citizen that they’re better off using that as their means of payment rather than the US dollar. And frankly, so far, the statistics have shown that by and large El Salvadorians disagree. By and large, 90% of El Salvadorians say they prefer the US dollar to bitcoin.

Gemma: And where is this heading now? What else has the government got planned?

Erica: There’s been a lot of talk about the announcement of this new Bitcoin City. So this would be a city built from scratch, whose economy is centred on bitcoin mining and is powered by a volcano. So it uses the geothermal energy produced by the volcano to power bitcoin mining, which is extremely, extremely energy intensive. But if you’re next to a volcano then well that’s energy that’s basically free and that’s one of the major economic costs or challenges with bitcoin mining is really finding the energy to make that mining possible.

So the way the Bitcoin City is going to be established, it’s going to cost about a billion dollars in volcano bonds. So they’re going to issue a billion dollars of volcano bonds starting in mid-2022. Half of that money is going to be used to buy bitcoin just as an investment and the other half is going to be used to start construction on the city. And what’s going to be really special about this city is within it it’ll be qualified as a special economic zone, there’ll be no income tax, no property tax, no city tax. The only tax that there will be, will be a value-added tax, half of which will go to fund the city and the other half will be used to pay back some of the volcano bonds.

Gemma: What are the wider dangers of a country doing this, going full throttle towards crypto as their main currency?

Erica: So the main worry that I would have would be money laundering, that’s provided by the pseudo-anonymity provided by the blockchain specifically by bitcoin. If people want to get involved in the bitcoin space in El Salvador, what’s being done about anti-money laundering? What’s being known about the identities of the people that are getting involved in this? There’s been huge, huge cases of identity theft in their implementation of this new bitcoin system in El Salvador. Across the board, people want to sign up for the system, Oh, their ID is already being used by someone else … there were very weak controls over who had access to open an account in this system. So, I would worry about the country becoming a haven for money laundering or for illicit activity to pass through the country.

I also think another really big danger is that because the El Salvadorian government is the custodian over these bitcoin funds and the way these wallets have been organised, they are centralising control over these funds. So that goes against the powers of decentralisation that bitcoin is all about. And what if the government decides to freeze this bitcoin? What if they decide to put a tax on this bitcoin? What if they decide to misuse this bitcoin? I think a lot of the purported benefits of using a cryptocurrency are decentralisation and worldwide access to funds. But I think the way that it was implemented in this particular case undermines many of those advantages.

Gemma: So one of the real reasons why El Salvador chose this route is because it wants to get away from having a reliance on the US dollar. And yet it’s now reliant on a financial asset that is very volatile and actually even in the last couple of months of 2021 has gone down a lot in price. So how does that play into this decision?

Erica: Everyone thought by the end of 2021, bitcoin would be worth US$100,000 per coin. At the end of the year it was maybe around US50,000. Others are claiming, “Oh, by the end of 2022, it will be up to US$100,000”. But a coin whose value can grow by 250% in a year can also lose that much in the same period of time. There are these ups and downs, ups and downs. How are individuals going to want to invest their life savings in a currency that they know can lose 50% of its value in a day? If this was a move to contribute to economic stability and certainty in the country, I’m not sure this was the way to go about it.

The question is, will El Salvadorians accept their hard-earned money being invested in a currency that’s this volatile. I’m not sure they will and I think that will affect the long-term adoption of this plan.

Gemma: What’s been the global reaction to El Salvador’s embrace of bitcoin?

Erica: Immediately, there was a lot of other central American and south American governments, different political figures saying, this is great. We want to do this in our country. The reality is you have to have the political will to do it. There has to be the regulatory backing to do it. Panama has sort of alluded to it a little bit, but credible, OK the wheels are turning, we’re going to do this tomorrow – I haven’t really seen anything like that.

Gemma: What do you think would need to happen for it to be deemed a success for other countries to follow it?

Erica: First of all, the level of adoption. If we actually see people making payments in crypto to one another, amongst individuals, overtaking the US dollar in cash, that would be a major success. And I think the bond issuance for the bitcoin city will be a major test, right? If they raise their billion and they raise it fairly quick, then I think the rest of the world will say, maybe this is possible and maybe we could have other similar, smaller initiatives in our countries, especially ones that have the geothermal or the geography to support a similar project.

Gemma: OK so El Salvador is a bit of an outlier, although other countries will be watching it closely to see what happens… but as we’ve heard, a number of other countries, Nigeria in particular, and China, are doing the opposite. They’re actually tightening restrictions on cryptocurrencies like bitcoin and launching their own central bank digital currencies instead. Centralising power over that. So, why do you think countries are taking such radically different approaches to this?

Erica: I think you have to ask yourself, what does the country see as the problem and what they see as the problem will determine what their solution is. So, for instance, if the issue is facilitating payments at high speeds and at low cost, then a blockchain-based solution works, but we don’t need to abandon our national currency. Because we could put our national currency on the blockchain, if we still believe in the value of our currency.

But if the problem is access to fast and cheap payments and we don’t have confidence in our national currency, or we want to abandon, for instance, we’re pegged to the US dollar, or we have the US dollar as our legal currency that’s when I think we’re going to see a solution like El Salvador where they said we’re also going to adopt bitcoin because it gives us the blockchain solution and an entirely new legal tender. So I think it really depends on what the country sees as the problem.

Gemma: Thank you so much Erica for sharing all that with us.

Erica: Appreciate it. Thanks for having me on the show.

Gemma: It feels like this is a real area to watch in 2022 and you can read a story Erica wrote on what might happen in cryptoland this year on The Conversation. We’ll pop a link in the show notes.

Dan: For our next story we’re moving away from virtual money to something a little more philosophical, but still potentially virtual and that’s the question of whether we’re all living in a simulation.

Gemma: Like The Matrix?

Dan: Yes exactly, actually, like The Matrix – the latest instalment of which, The Matrix Resurrections was just released.

This idea that we might all be living in a simulation is not new. Actually it’s been something preoccupying philosophers for millennia. I talked to one, to find out more about that history.

Ben: I’m Dr Benjamin Curtis, currently a senior lecturer in philosophy at Nottingham Trent University in the UK. I’ve been in the game for 20 years now, published relatively widely in logic, decision theory, metaphysics, ethics, philosophy of religion, philosophy of mind and other topics. So I guess I’m what you would call a generalist or perhaps a Jack of all trades.

Dan: Alright, so Ben, you wrote us a story on The Conversation not so long ago that basically asked a pretty simple question. Are we living in a simulation, more or less kind of like The Matrix or some other version of it?

Ben: I guess my short answer really to that is no, I don’t think we are in fact living in a simulation. But I do think that reality as we perceive it is not as it really is. So I do think we’re all living in some sense in a illusory reality, but I don’t think that it’s a simulation.

Dan: Good to know you don’t think we’re living in a simulation, but this idea has been around for a really long time, for millennia before The Matrix came along. Where did it first come from?

Ben: One of the earliest philosophers called Parmenides, who was writing in 500 BC, he wrote this poem called On Nature, and it’s got these two parts in it, The Way of Opinion and The Way of Truth. And in The Way of Opinion, he describes how things appear to us to be. But then in the Way of Truth, he goes on to argue that in fact, things are nothing like how they appear to be. And in particular, he’s got this argument that time doesn’t exist. There’s no such thing as the past and the future in objective reality. Probably the most famous one, though, is Plato. He made this sharp distinction between appearance and reality, and he’s got his famous theory of the forms.

Dan: So what does Plato’s theory of the forms refer to here?

Ben: It’s a bit obscure, but the basic idea is that the world that we see around us is not genuine. It’s not real. It has in some sense, got less reality than the real reality, which is the realm of the forms. And the realm of the forms is some sort of a weird abstract realm. And you can think about it like this: the world that we see around us is made up of particular things like human beings, tables, chairs, cats, curries and so on, but these are all meant to be sort of shadows or images of the genuine reality, which consists of these perfect abstract versions of all these things.

So in the realm of the forms, there’s not any particular table, but there’s rather a single thing, the perfect abstract form of the table. So there’s a sense in which the world that we see around us is an imitation of reality, but it’s not how reality really is.

Dan: At least my philosophical first inoculation with something like this idea came from Plato’s allegory of the cave, right? Can you give us a bit of a refresher and tell us how relevant the allegory of the cave might be to the question of whether we’re living in a simulation?

Ben: There, what he does is he likens human beings on earth to being like prisoners who are held captive in a cave whose heads are kind of in a vice and fixed, looking at wall where there are shadows cast by a fire. And they’re looking at the shadows, the prisoners, and they think that these shadows are the genuine reality, the real world. And he thinks of the philosophers as being those who managed to escape from the cave. They get out into the outside the cave, where they see the sun. He thinks a lot of people who are not philosophers are blinded by the sun and scared, and they run back in, you know. But the philosophers get out there, they see how things really are.

I mean it ties in with the forms precisely because it’s meant to be an analogy for this theory of the forums. The philosophers are meant to be the ones who, in some sense, grasp the eternal forms – that is how reality really is – whereas the rest of the plebs, as it were, are the people who are walking around thinking that tables and chairs and cats and curries are the genuine reality, when they’re not.

Dan: This idea has not died. Take me up to kind of the next big moment in history, in philosophical history, when the idea of a simulation kind of popped its head back up.

Ben: The next sort of central bit round about the 16th century is when modern science begins to flourish. There’s one kind of central figure there and that’s the French philosopher, René Descartes. And in his most famous book called the Meditations on First Philosophy, we’re talking 1641 this was written, he placed his knowledge at the centre of philosophy and science, and he asks the question, well, how do we know anything at all? He says, isn’t it possible that everything that you take to be real isn’t real at all? And that instead, all that exists is you or your mind and an evil demon who is deceiving you into thinking that all of this is real.

His point is not really that there is such a demon. His point is that we can’t know that there isn’t one. So we haven’t got any evidence that completely rules it out, and so we can’t truly know that the world is around us because we can’t rule out that possibility.

Dan: Did Descartes go from there? He broke it all down and then did he build it back up over the course of the text?

Ben: He does, yeah. So after this first meditation where he’s broken it all down and said, maybe there’s this demon deceiving me, he then gets to this idea that there is something that he can know for certain and that is his own existence. A demon couldn’t fool you into thinking that you don’t exist because, you know, we’d have to make it that you do exist in order to do so. So that’s, that’s where he comes up with his famous line, cogito, ergo sum, translated, “I am thinking, therefore I am.” And yes, he thinks that he exists or he can know that with certainty, it’s a demon-proof proposition as it were.

Dan: What is the next iteration of this “we’re living in a simulation” idea?

Ben: People don’t talk about evil demons anymore; instead they talk about brains in vats. So this gives Descartes’s thought experiment a more kind of a scientific twist and it’s been used sort of at least since the 1950s, by many philosophers. The idea is the same. Instead of the world around you being real, imagine that instead you are a brain inside a vat of nutrients being fed by electrodes by some sort of nefarious neuroscientist who’s making it seem to you that everything is real when it’s not.

Dan: Can you talk about the origins of the idea that we’re living in a computer simulation?

Ben: I think the first thing we need to mention in this regard is a kind of a change that occurred in the 1950s in philosophy of mind. And, I mean Descartes, he was a dualist, which means he thought that the mind and the brain are two separate things so that in principle, you know, even if you destroyed the body, the mind could still continue. I guess that many people with religious belief also think that this is true.

But in the 1950s materialism or physicalism as it’s sometimes called became the more prevalent view, I think in philosophy at least. And this is the thought that the mind and the brain are in fact one and the same thing. And you can think about the brain a bit like a computer, it’s like the hardware. And then there’s a sort of a biological programme running in the brain, you know, with the neurons firing and an electrical impulse is running through it.

And that, in some senses, is supposed to give rise to the mind. So with the advent of computers, this opened up the idea that perhaps a mind could be run on a different type of hardware, ie on a computer rather than the wet, sloppy stuff inside our skulls. The brain is seen as an input-output device. It takes in information from the senses and it spits out behaviour, and thoughts come along the way. And the thought is that you can get a computer that’s powerful enough you can replicate the functioning of the brain on a computer and thus produce a sort of thinking, feeling mind, just like the brain does.

Dan: So I want to talk about a little bit about pop culture here because you’ve written about this a little bit, and it’s really fascinating. Obviously The Matrix was the big one that first burst upon the scene in at least most recent history. How did that change the debate among the public?

Ben: What it certainly did was to introduce these ideas to a much wider audience. And importantly, together with that idea that we mentioned previously, the one that it might be possible to run minds on computers, that gave rise to a host of philosophical articles that discussed these possibilities.

And Nick Bostrom’s 2003 article is a kind of notable example in this regard. So it’s called, Are You living in a Computer Simulation? He thinks that there’s a sense in which if we think that humanity will survive long enough to develop a computing power, that’s powerful enough to simulate human minds, and the future persons or the future human beings have the desire to do so, then they will.

And he thinks that if those two assumptions hold, then we’ve got in fact good reason to believe that we are in fact living in a simulation because there’ll be a far greater number of simulated minds than there are actual human minds. And it’s been picked up by many outside of philosophy, loads of YouTube videos discussing it. There was an article in the Scientific American that discussed it, even Elon Musk, I think mentioned it in one of his speeches.

Dan: And Free Guy, this is a cool new movie that came out not so long ago. This kind of works in that realm of a simulation, computers. It puts this character as an non-player character, so one of the background people in a video game. What are the lessons that are pulled out from that story of the main character there?

Ben: The thought … there, I think the main issue is to do with free will. And it’s the question of, uh, well, if you’re running a mind on a computer, presumably it’s just a series – as we kind of put it earlier – of input and output devices, a series of rules, and it raises the question of whether you can really choose to do anything or whether you are determined by your inner programming or something along those lines. So a lot of people get worried about this kind of idea. If the brain is just like a computer, then it’s the same. So even if we’re not in a simulation, well, how far have we got free will anyway, if what’s going on in our brain is effectively the same as what goes on inside a computer? All the things that I think that I freely choose to do seem to be a result of my inner programming, and as such, I don’t really have any free choice over it.

Read more: Free Guy's philosophy: could we just be lines of code in a grand simulation?

Dan: Fundamentally to me or you or anyone listening, does it matter whether what we think of as free will is deterministic or not, or any of this? Or do we just go about our lives and have fun and shoot some billiards and go for a walk?

Ben: Yeah, there’s a lot of people who want to make that move. They want to say, look, even if we are brains in vats or being deceived by an evil demon, well, should that make any difference to your practical everyday life? How you live it and so on. No, I think the answer is no.

Dan: Ben, thank you for an incredibly fun, if a twisty conversation here.

Ben: No problem at all, thank you as well.

Dan: You can read a story Ben Curtis wrote about this philosophical history on The Conversation. We’ll give you a link in the show notes.

Gemma: Elsewhere on The Conversation this week, we’ve been covering the worldwide spike in cases of the omicron COVID-19 variant. Here’s Rob Reddick with some of his highlights.

Rob Reddick: Hello, this is Rob Reddick, health editor covering COVID-19 for the Conversation in London. Throughout the pandemic the coronavirus has evolved, and when it changes, so too do its effects on us. Thanks to a research project called the Zoe COVID Study – in which millions of participants in the US, UK and Sweden log their COVID symptoms via an app – we can see how the disease is changing.

The leader of the study, Tim Spector, who is based at King’s College London, tells us that increasingly COVID is presenting like a common cold. Symptoms such as a runny nose and sore throat have become commonplace, while loss of smell and fever are no longer the frequent symptoms that they once were.

But why does omicron appear to be causing less severe disease? We don’t yet know for sure, but there are several factors that could be at play. This is what Paul Hunter, a professor of medicine at the University of East Anglia, explores in another recent article.

Different parts of the immune system target different parts of the virus. With omicron, the areas targeted by antibodies are heavily mutated, which explains why they are less effective against this form of the virus. But parts of the virus that attract the attention of T cells – which are another part of our immune protection – are largely unchanged. This suggests that T cell immunity built up from earlier infections or vaccinations still works strongly against omicron.

There are other factors too. Omicron has several mutations near to a part of its structure called the furin cleavage site, which is thought to influence the severity of disease. Omicron also appears to be less effective at infecting the cells of the lungs compared to earlier variants. We shouldn’t get ahead of ourselves, but these could be the sort of changes that help push the coronavirus towards becoming endemic, like the common cold.

Gemma: Rob Reddick in London in England. That’s it for this week. Thanks to all the academics who’ve spoken to us for this episode, and thanks to the Conversation editors Lee-Anne Goodman, Steven Vass, Stephen Khan and Alice Mason for our social media promotion.

Dan: You can find us on Twitter @TC_Audio, on Instagram at theconversationdotcom or via email. And you can also sign up to The Conversation’s free daily email by clicking the link in the show notes.

Gemma: If you’re enjoying The Conversation Weekly please leave a rating or review where podcast apps allow you to. If you listen to us on Spotify, they’ve just added the ability to rate podcasts on their app too, so do give it a try.

Dan: And don’t forget to tell your friends and family about us too.

Gemma: The Conversation Weekly is co-produced by Mend Mariwany and me, Gemma Ware, with sound design by Eloise Stevens. Our theme music is by Neeta Sarl.

Dan: And I’m Dan Merino. Thank you so much for listening.

Iwa Salami and Erica Pimentel do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointments.

Benjamin Curtis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says “Economic Slack Now Absorbed”

Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"

For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analyst



Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"

For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analysts expected. The bank also said that while it is keeping holdings on its balance sheet constant, once it begins rising interest rates, it "will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."

In its statement, the Bank of Canada said that with overall economic slack now absorbed, "the Bank has removed its exceptional forward guidance on its policy interest rate" but the Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant

Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.

Some more from the BoC:

The global recovery from the COVID-19 pandemic is strong but uneven. The US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector. Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions. As well, oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19. Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions. Overall, the Bank projects global GDP growth to moderate from 6¾ % in 2021 to about 3½ % in 2022 and 2023.

On inflation, the BoC said that "CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation."

The central bank also said that it will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.

A redline comparison of the BoC statement:

Commenting on the move, Bloomberg's Ven Ram writes that this is a lot more dovish outcome from the Bank of Canada than one might have imagined. Not only did the central bank hold its rate, but it didn’t paint itself into a corner on when it may push the button: “Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.”

Add to that this guidance on balance-sheet runoff: “The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”

Net-net this isn’t screaming, “Buy the loonie” and sure enough, in immediate reaction, the canada 2Y yields declined and the loonie weakened, dropping from 1.2560 before the BOC to 1.2640 before paring some of the losses, amid some trader disappointment that the bank did not hike.

* * * Earlier:

In what may be a teaser of what to expect from the Fed later today, the Bank of Canada rate decision is due at 10:00am EST followed by Governor Macklem press conference at 11:00am EST. While the bank is expected to leave rates unchanged, there is the risk of a surprise rate hike. Indeed, about a quarter, or 7/31 analysts, surveyed by Reuters expect a hike. If left unchanged, attention turns to guidance.

Below is a recap of what to expect from the BOC courtesy of Newsquawk


  • The Bank of Canada is expected to leave rates unchanged at 0.25% although there is the risk for a hike with 7/31 surveyed analysts expecting a 25bp hike to 0.50% at the January meeting, ahead of the current BoC guidance for the middle quarters of 2022.
  • If the rate is left unchanged, attention turns to guidance to see whether this is bought forward to the end of Q1 (ie March).
  • Market pricing looks for rates to be left unchanged, although this has unwound heavily from last week which saw up to a 90% chance of a 25bp hike in January after the BoC survey and CPI data.
  • The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised 0.1% higher for 2022 but revised down by 0.1% in 2023.

LIFT-OFF: The latest Reuters survey saw analysts generally believe the BoC will leave rates unchanged in January, although 7 of 31 surveyed expect a hike will occur. Therefore, the expectation for January is for rates to be left unchanged, although the risk of a hike is there. If the rate is left unchanged, attention will turn to its forward guidance, which currently looks for lift-off “sometime in the middle quarters of 2022”. If it is bought forward to the end of Q1, it will signal a March lift-off is coming. Analysts are currently split on whether the BoC will hike in March with 16/31 calling for rates to be left unchanged again, while the other 15 expect it will rise to 0.50% or more, however, all analysts noted the risk to the pace of rate hikes this year is that they come faster than expected. The median forecast is for the BoC to raise rates to 0.75% by the end of Q2 2022.

SURVEYS: The Business Outlook Survey sounded the alarm on inflation with 67% of firms expecting inflation to be above 3% over the next two years, although most predict it will return to target within one to three years. It also noted that demand and supply bottlenecks are expected to keep upward pressure on prices over the year ahead. However, the overall survey saw a continued improvement in business sentiment to see the indicator hit a record high, although it was held back by labour shortages and supply chain issues. Note, the Canadian labour market is back at pre-pandemic levels and has been for a while. A separate BoC survey showed consumer inflation expectations hitting a record high of 4.89% over the next year, noting most people are more concerned about inflation post-COVID than before, where consumers believe it is more difficult to control. Analysts at ING highlight that the latest survey saw respondents note they expect supply disruptions through H2 this year and that labour shortages are constraining output. ING write “where the economic outlook is robust, the jobs market is red hot and inflation is at generational highs, we see little reason for the BoC to delay tightening monetary policy.” Meanwhile, ING adds that Ontario has announced a three-step plan to allow a full reopening from COVID restrictions from the end of January “which should be the final green light for the central bank to hike rates 25bps”.

INFLATION: The latest CPI report saw the headline M/M and Y/Y metrics in line with expectations, although the core Y /Y measure saw a sharp rise to 4.0%, while the BoC eyed measures rose to 2.93% from 2.73%. Analysts at RBC, who expect the Bank to leave rates unchanged at this meeting, say “Inflation trends have evolved largely in line with the BoC’ s forecasts from the October Monetary Policy Report (4.8% vs actual 4.7% for Q4)”. However, this still shows price growth above the 2% target rate and RBC’s own tracking suggests not all that pressure can be explained by pandemicrelated distortions. As such, RBC expects rates to rise soon and believe the BoC will use this meeting to signal the start of lift-off.

MPR: The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised higher for 2022, before being revised marginally lower in 2023. In October, the MPR saw 2021 growth at 5.1%, 2022 at 4.3%, and 2023 at 3.7%. CPI was seen at 3.4% for 2021, while 2022 is expected to be revised higher to 3.5% (prev. 3.4%), and 2023 CPI is expected to be revised down to 2.2% from 2.3%. In the October MPR, the output gap was estimated at about -2.25% to -1.25% and is expected to close sometime in the middle quarters of 2022

Tyler Durden Wed, 01/26/2022 - 10:10

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Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem

Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem

Authored by Michael Maharrey via,

The Federal Reserve is talking about raising interest rates. But the US economy is buried under



Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem

Authored by Michael Maharrey via,

The Federal Reserve is talking about raising interest rates. But the US economy is buried under piles of debt. I’ve been asking how this is going to work for months. Apparently, the question has finally occurred to the mainstream.

A CNBC article declared, “Fed rate hikes will intensify a global debt crisis, research warns.”

Well, yeah. Duh.

According to the study came from a UK non-profit the Jubilee Debt Campaign, debt payments rose in developing countries by 120% between 2010 and 2021. They are currently at their highest levels since 2001.

The sharp increase in debt payments is hindering countries’ economic recovery from the pandemic, the report suggested, and rising US and global interest rates in 2022 could exacerbate the problem for many lower income countries.”

The study and the CNBC article are really a pitch for debt cancellation, but their narrative swerves into an unpleasant truth for US policymakers. Raising interest rates in a world awash in red ink is going to be a problem. And not just for “developing countries.”

The US government is closing in fast on $30 trillion in debt with no end to the borrowing and spending in sight. The federal government managed to run a deficit in December despite record receipts.

In December alone, the federal government spent $508 billion. The was the highest December spending level ever. Through the first three months of fiscal 2022, the federal government has already spent $1.43 trillion. That’s a record for the first quarter of any fiscal year.

Raising interest rates will drastically increase the cost of servicing all of that debt. And it will increase the cost of borrowing more money for the Biden spending coming down the pike.

In the fiscal year 2020, Uncle Sam spent $345 billion in net interest payments alone, despite near-zero interest rates. The nonpartisan Committee for a Responsible Federal Budget found that even a 2% increase in interest rates would cause net interest payments to rise to a whopping $750 billion. And this estimate was calculated before the passage of the American Rescue Plan and the Bipartisan Infrastructure Bill. That was followed up with a big surge in interest rates on US Treasuries. In other words, $750 billion underestimates the cost.

On top of that, American consumers are buried under debt. Consumer debt jumped 11% year-on-year in November. It was the biggest single-month jump in consumer debt in 20 years. Total consumer debt now stands at over $4.41 trillion. And that doesn’t include mortgages.

Revolving debt – primarily credit card balances – grew by a staggering 23.4% year-on-year in November. That was the biggest increase since 1998.

And that’s not all. Businesses and corporations are also leveraged to the hilt.

The year 2020 set a record for corporate debt issuance with $2.28 trillion of bonds and loans, comprising both new bonds and bonds issued to refinance existing debt.

All of this debt is a feature of the Fed’s loose monetary policy - not a bug.

The Federal Reserve and the US government have built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards.

Now, the Fed is threatening to turn off that easy money spigot. How is that going to work? How will consumers buried under more than $1 trillion in credit card debt pay those balances down with interest rates rising?  With rising rates, minimum payments will rise. It will cost more just to pay the interest on the outstanding balances.

Overleveraged companies have the same problem.

And so does the US government.

This does not bode well for an economy that depends on borrowing and spending to sustain itself.

The only reason Americans can borrow money is because the Fed is enabling them. It holds interest rates artificially low. That’s how the economy works. And that’s why I think the Fed will ultimately relent on any move it makes toward tighter monetary policy. As Peter Schiff put it, the Fed can’t do what it’s claiming it will do.

Tyler Durden Wed, 01/26/2022 - 08:29

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Futures Surge After Microsoft Reversal With All Eyes On Fed

Futures Surge After Microsoft Reversal With All Eyes On Fed

Yesterday, after Microsoft stock initially slumped despite beating across the board as the skeptical market latched on to even the smallest weakness to hammer the stock, dragging…



Futures Surge After Microsoft Reversal With All Eyes On Fed

Yesterday, after Microsoft stock initially slumped despite beating across the board as the skeptical market latched on to even the smallest weakness to hammer the stock, dragging down both the Nasdaq and S&P futures close to session lows, we said that the reaction was premature and would reverse, as the earnings release did not include guidance and would promptly reverse once the company revealed its cloud guidance in its conference call a little over an hour later. Well, that's precisely what happened and after first tumbling as much as 5% after hours, the 2nd largest US company (MSFT has $2.2 trillion in market cap) reversed all losses and is now trading solidly in the green, sparking broader tech momentum, lifting the Nasdaq as much as 2.1% this morning and (briefly) helping traders forget that today at 2pm the Fed is expected to unveil a March rate hike and balance sheet runoff a few months later.

Indeed, contracts on the Nasdaq 100 led broad-based gains - which would have been gaping losses had MSFT failed to reverse late on Tuesday - as U.S. stock futures rallied, with investors bracing for the Federal Reserve’s decision and preparing for a slew of earnings from companies including Tesla, Intel and Boeing. Nasdaq 100 futures jumped as much as 2.1% while S&P 500 and Dow Jones futures also rallied. The VIX fell from a one-year high, snapping six days of gains. Elsewhere, the Stoxx Europe 600 rose 2% in the biggest jump in seven weeks. 10Y TSY yields rose to 1.79% with the Fed’s policy announcement in the limelight; the dollar was slightly higher, as was Bitcoin while Brent oil traded just shy of $90 on its way to triple digits.

Of course, the big event today is the Fed policy statement at 2pm ET and press conference 2:30pm, which are expected to ratify expectations for rate increases beginning in March

  • Short-term interest rate futures price in just 1bp of rate-hike premium for January meeting but fully price in 25bp for March
  • Commentary on shrinking the central bank’s balance sheet is also anticipated

We will have a detailed post on what to expect from the Fed shortly.

“We expect inflation to remain high and interest rates to rise more than investors are expecting today,” said Norbert Frey, head of portfolio management at Fuerst Fugger Privatbank. “A rising interest rate environment is leading to a revaluation of all business models and we think 2022 can be a year of value stocks.”

While equities have had had a rocky start to 2022 as bond yields rose with investors anticipate tighter policy from the Fed, while Russia-U.S. tension added to investor concerns. Now, strategists from Goldman Sachs Group Inc. to Citigroup Inc. are saying it’s time to buy the dip.

“Any further significant weakness at the index level should be seen as a buying opportunity, in our view,” Goldman strategists including Peter Oppenheimer wrote in a note on Wednesday. 

In U.S. premarket trading, Microsoft Corp rose, with analysts positive on the software maker’s outlook for growth for its Azure cloud-computing services. Shares gained 4.1% in U.S. premarket trading after initially tumbling before the market heard the company's strong cloud guidance, with analysts positive on the software maker’s outlook for growth for its Azure cloud-computing services. Analysts also highlighted the company’s commercial bookings and a supportive IT spending backdrop. Texas Instruments shares also rose 4% after the chipmaker gave a first-quarter forecast that was stronger than expected, with analysts noting the company’s conservatism amid a still supportive demand backdrop. Texas Instruments also reported its fourth-quarter results. Other notable premarket movers:

  • Cryptocurrency-exposed stocks in Europe and the U.S. are trading higher as Bitcoin kept regaining ground ahead of the Federal Reserve decision. Marathon Digital (MARA US) +6%, (RIOT US) Riot Blockchain +5%, (COIN US) Coinbase +3.4%.
  • Electric vehicle stocks climb in U.S. premarket trading ahead of Tesla’s fourth-quarter results due Wednesday after the market close. Rivian (RIVN US) +3.5%; Tesla (TSLA US) +4.4%; Nikola (NKLA US) +3.6%.
  • Moderna’s (MRNA US) stock valuation “makes a lot more sense” after more than halving since Deutsche Bank initiated in October, prompting the broker to upgrade the vaccine maker to hold from sell. Shares gain 4.6% premarket.
  • Capital One (COF US) reported adjusted earnings per share for the fourth quarter that beat the average analyst estimate. Shares dropped postmarket, with higher expenses “the only wrinkle” in the bank’s quarter, according to Vital Knowledge.
  • Stride (LRN US) shares gained 7% postmarket Tuesday after the technology-based education company boosted its revenue forecast for the full year. The guidance beat the average

Global stocks have shed about 7% in January, on track for the worst month since the pandemic roiled markets back in 2020. Some strategists are optimistic about the outlook following the declines.

“The growth-policy trade-off may be less favourable, yet we think a lot of bad news is now priced in,” Emmanuel Cau, head of European equity strategy at Barclays Plc, wrote in a note. “Starts of policy normalisation typically bring higher volatility but rarely terminate bull markets, although higher-than-usual P/E multiples mean equities are more rates-sensitive this time.”

In the latest developments involving Russia and Ukraine, president Joe Biden said he would consider personally sanctioning Vladimir Putin if he orders an invasion of Ukraine, escalating efforts to deter the Russian leader from war. In response, Russian Foreign Minister Sergei Lavrov signaled that Moscow will respond to any “aggressive” action by the U.S. and its European allies as Germany and France pursue efforts to broker a peaceful resolution to the tensions over Ukraine.

European equities rally, brushing off geopolitical tensions, with most indexes clawing back roughly 3/4 of Monday’s sharp sell off to rise over 2%. Europe’s Stoxx 600 adds as much as 2% with travel, energy, miners and autos leading what is broad sectoral support. Here are some of the biggest European movers today:

  • Vestas Wind Systems shares rise as much as 6%, reversing an earlier decline, after guidance for 2022 was met with relief. Handelsbanken analysts said the guidance miss was unsurprising, and the market likely feared it would be worse.
  • Other European renewables stocks -- which have been hit hard in the recent selloff -- gain after Vestas’ update, rebounding after declines triggered by Siemens Gamesa’s profit warning last week.
  • Travel and leisure is the best-performing sector among Stoxx 600 groups on Wednesday. Airlines including Lufthansa and IAG lead gains, with the German carrier upgraded to buy at Stifel.
  • AutoStore advances after being raised to buy at Citi. The upgrade follows a slump of more than 50% amid uncertainty regarding patent litigation and a broader sell-off in tech stocks.
  • De Longhi rises as much as 8.9%, the most intraday since March 2021, after Equita upgrades to buy from hold, citing recent underperformance and more confidence in the company’s coffee business.
  • Essity falls the most since Oct. 2020 after the Swedish hygiene products manufacturer reported weaker-than-expected earnings and announced further price hikes in 2022.
  • Orpea shares continued their descent after its CEO was summoned to the French minister for elderly policy. The French nursing home operator also denied reports it had offered a journalist money to not publish a book critical of the company.
  • Barry Callebaut shares fell, reversing earlier gains, after reporting 1Q sales. Citi noted “some more caution” on commodities amid waning supply of cocoa beans.

Earlier in the session, stocks in Asia were mixed after slumping across the board in the previous session, as investors awaited the Federal Reserve’s policy decision. The MSCI Asia Pacific Index was down 0.1%, on track to fall for a fourth day, with advances in communication services and financials offsetting losses in technology shares. Benchmarks in China, Hong Kong and Singapore were among the gainers, while Japan’s Topix Index fell deeper into correction territory. Asian equities have tumbled this month amid heightened volatility on the prospect of U.S. monetary-policy tightening, with the Fed expected to telegraph a March interest-rate hike on Wednesday. Worries over rising rates sent a gauge of the region’s tech hardware stocks to its lowest in months on Wednesday, with chipmakers TSMC and Samsung Electronics among the biggest drags. “There’s a lot of noise in the market right now, and I don’t think anyone’s confident that this is the bottom, because we aren’t sure about Fed policy yet,” said Kyle Rodda, analyst at IG Markets. Despite the broader drop in tech shares, Tencent advanced on dip-buying, helping to boost the Hang Seng Tech Index. The CSI 300 Index whipsawed to narrowly avoid entering a bear market

Fixed income takes a back seat. Curves adopt a modest bear steepening theme with gilts underperforming both bunds and USTs by 1-2bps. Eurodollars bear flatten a touch ahead of today’s FOMC meeting. Peripheral and semi-core spreads narrow with Italy, Belgium and France outperforming.

Treasuries are under pressure in early U.S. trade with U.S. stock index futures higher by 1%-2%, European benchmarks by 2%-3%, with travel, energy, miners and autos leading a broad advance. Front-end yields cheaper by more than 2bp with most curve spreads within 1bp of Tuesday’s close; 10-year yields around 1.785%, outperforming gilts by ~1bp. Focal point of U.S. day is Fed policy decision and Chair Powell news conference. Auction cycle pauses for Fed, concluding with 7-year notes Thursday. The stellar 2Y & 5Y auctions are underwater after stopping through (the 5Y produced record-low dealer award), There is no Fed POMO today. IG dollar issuance slate empty so far and expected to remain slim; Treasury auctions resume with $53b 7-year note sale on Thursday, following strong demand for 2- and 5-year notes earlier this week.

In FX, Bloomberg Dollar Spot is little changed but mixed price action across much of G-10. USD/JPY rises through 114, EUR/USD dips back onto a 1.12-handle. Commodity currencies trade well as crude futures drift back toward Monday’s highs.

Bitcoin extended its gains for the week, trading near $38,000. 

In commodities, WTI adds 0.6%, regaining a $86-handle after the latest APIR report showed a draw in U.S. stockpiles and investors tracked tensions over Ukraine for signs the conflict may disrupt supplies. Brent climbs to about $89. Spot gold trades a tight range near $1,846/oz. Most base metals are well bid, lead by LME copper and tin; aluminum underperforms.

Looking at the day ahead now, the main highlight will be the aforementioned Federal Reserve decision and Chair Powell’s subsequent press conference, whilst there’s also a policy decision from the Bank of Canada. On the data side, we’ve got US new home sales for December, along with the preliminary December reading of wholesale inventories. Meanwhile earnings releases include Tesla, Abbott Laboratories, Intel, AT&T and Boeing.

Market Snapshot

  • S&P 500 futures up 1.2% to 4,399.50
  • STOXX Europe 600 up 1.8% to 467.79
  • MXAP down 0.1% to 186.79
  • MXAPJ little changed at 612.28
  • Nikkei down 0.4% to 27,011.33
  • Topix down 0.3% to 1,891.85
  • Hang Seng Index up 0.2% to 24,289.90
  • Shanghai Composite up 0.7% to 3,455.67
  • Sensex up 0.6% to 57,858.15
  • Australia S&P/ASX 200 down 2.5% to 6,961.63
  • Kospi down 0.4% to 2,709.24
  • German 10Y yield little changed at -0.08%
  • Euro down 0.2% to $1.1284
  • Brent Futures up 0.8% to $88.92/bbl
  • Gold spot down 0.1% to $1,846.69
  • U.S. Dollar Index up 0.15% to 96.09

Top Overnight News from Bloomberg

  • Federal Reserve policy makers are poised to signal plans for their first interest rate hike since 2018 and discuss shrinking their bloated balance sheet as they seek to restrain the hottest inflation in nearly 40 years
  • The Treasury market appears more likely to respond in a logical way to Wednesday’s Federal Reserve communications because of indications that the past week’s U.S. stock-market bloodbath cleared out a crowded camp of bets on higher yields
  • The employment cost index, which Federal Reserve Chair Jerome Powell cited in December as a key reason for the central bank’s pivot to a more aggressive stance on inflation, is seen registering a fourth-quarter gain nearly on par with the record increase in the prior three months
  • Lithuanian Central Bank Governor Gediminas Simkus warned that Europe’s economy would suffer a significant blow if tensions escalate further between Russia and Ukraine, urging politicians to step up efforts to deter hostilities
  • OPEC and its allies are expected by delegates to stick to their plan and ratify another modest production increase next week as they try to satisfy rebounding oil demand

A more detailed look at global markets courtesy of Newsquawk

In Asian trading, APAC markets were subdued ahead of the FOMC and holiday-quietened conditions. Nikkei 225 (-0.4%) oscillated around the 27k level after record daily COVID-19 cases. KOSPI (-0.4%) faded opening gains with attention on earnings. Hang Seng (+0.2%) and Shanghai Comp. (+0.7%) were mixed as PBoC liquidity efforts and government support signals were offset as Evergrande default woes resurfaced.

Top Asian News

  • Foreigners Cash Out of Key Asian Emerging Markets Before Fed
  • China to Start Three-Year Crackdown on Money Laundering
  • China Criticizes U.S. Diplomats Seeking Exit Over Covid Rules
  • China South City Bonds Rally as Consent Given to Extend 2022s

European bourses are firmer in an extension of yesterday's upside, with the Stoxx 600 +2.0% on the session but still lower on the week. US futures are firmer across the board with the NQ, +2.0%, outpacing and benefitting from MSFT post earnings, +4.0% in pre-market. European sectors are all in the green with Travel & Leisure outperforming amid broker action while Oil & Gas is a relatively close second given crude action. EU antitrust decision against Intel (INTC) has been annulled in part by the EU General Court. Microsoft (MSFT) Q2 2022 (USD): EPS 2.48 (exp. 2.31), Revenue 51.73bln (exp. 50.88bln). Co. sees Q3 product revenue between USD 15.6bln-15.8bln and expects Azure revenue growth to increase significantly, while it guides Q3 rev. USD 48.5bln-49.3bln (implied) vs exp. USD 47.7bln. +4.0% in the pre-market.

Top European News

  • Inflation Outlook No Reason for ECB to Change Track: Simkus
  • Italy Asks Firms Not to Meet With Putin Amid Ukraine Crisis
  • Finland ‘Wise’ to Sell Long-Maturity Debt Ahead of ECB Tapering
  • Europe Travel Stocks Gain on Airlines Boost; Lufthansa Upgraded

In FX, Loonie loving risk recovery and WTI revival in run up to likely BoC hike. Aussie rebounds in absence of those away for a national holiday. Greenback stands firm awaiting something hawkish from the Fed. Kiwi hovering ahead of NZ CPI. -Pound pensive before Partygate findings are published. Rouble unable to benefit from Brent bounce as Russia begins big drills in Black Sea to keep geopolitical tensions elevated.

In commodities, WTI and Brent March futures have continued grinding higher despite quiet news flow as focus remains on geopolitics and the benchmarks also benefit from equity action. At best, WTI and Brent have surpassed USD 86.00/bbl and USD 89.00/bbl respectively thus far. Spot Gold remains contained amid relatively rangebound USD action while Silver is buoyed ahead of USD 24.00 /oz and touted resistance marks. US Private Energy Inventory Data (bbls): Crude -0.9mln (exp. -0.7mln), Gasoline +2.4mln (exp. +2.5mln),
Distillates -2.2mln (exp. -1.3mln), Cushing -1.0mln. Qatar's Emir is to meet US President Biden on Monday to discuss Afghanistan and contingency plans to supply natural gas to Europe in the event of a Russian invasion of Ukraine. Qatar Emir and US President Biden are to discuss additional Qatari gas supplies to Europe in the case of a Russian-Ukraine conflict at next week's discussions, via Reuters sources; Qatar has little spare gas for Europe as most gas is pre-sold.


  • US State Department said the US hasn't seen the de-escalation that is necessary if diplomacy and dialogue with Russia is to prove successful, while US Department of Defense Spokesman Kirby said the US will not rule out adding further troops to the already 8,500 on alert.
  • Ukraine Foreign Ministers says the proposals the US will send to Russia do not raise Ukraine's objections; subsequently, Moscow says received some answers to security guarantee proposals, but not in written form - awaiting further details.
  • Ukrainian President Zelensky said the situation in the east is under control and they are working to establish that the meeting of Presidents of Ukraine, Russia, Germany, and France takes place as soon as possible.
  • Russian navy has commenced large-scale training in the Black Sea, according to Ifax.
  • UK Foreign Minister Truss, when question if they would sanction Russia's Putin, says they are not ruling anything out.
  • Ukraine envoy to Japan said that they are fully committed to a diplomatic solution to the current tensions with Russia, while the envoy also stated that a full-scale war is very difficult to expect although they may see more localised conflict.

US Event Calendar

  • 7am: Jan. MBA Mortgage Applications, prior 2.3%
  • 8:30am: Dec. Advance Goods Trade Balance, est. -$96b, prior -$97.8b, revised -$98b
  • 8:30am: Dec. Retail Inventories MoM, est. 1.5%, prior 2.0%;  Wholesale Inventories MoM, est. 1.2%, prior 1.4%
  • 10am: Dec. New Home Sales MoM, est. 2.1%, prior 12.4%; New Home Sales, est. 760,000, prior 744,000
  • 2pm: FOMC Rate Decision

DB's Jim Reid concludes the overnight wrap

With markets awaiting today’s policy decision from the Federal Reserve, yesterday marked another volatile session that saw the resumption of the equity selloff as investor jitters remained at the prospect of monetary policy tightening alongside burgeoning geopolitical tensions. Indeed, in many ways it was a repetition of Monday’s session with a further bout of wild intraday swings. At the start, the S&P 500 sold off heavily after the US open to hit an intraday low of -2.79%, with the index back in correction territory. Then it recovered to actually move back into the green for a few minutes, before selling off in the last hour to finish the day down -1.22%, closing -9.18% off its all-time highs reached at the start of the year. With Fed policy so acutely driving risk assets in recent weeks, it sets up an interesting day of communications ahead for the FOMC.

On that front, the Fed are expected to telegraph the start of their latest hiking cycle today, and our US economists write in their preview (link here) that the meeting statement and Chair Powell’s subsequent press conference should confirm that lift-off in the policy rate is likely at the following meeting in March. It comes as the unemployment has now fallen back beneath 4% for the first time since the pandemic began, while CPI in December hit +7.0% year-on-year for the first time since 1982. Our economists’ baseline is for that March hike to be the first of 4 this year, although as they’ve written recently (link here) there is the tail risk of a more aggressive pace still. The market agrees: pricing liftoff for March and 3.96 total hikes through the rest of the year. Balance sheet policy will be of particular focus. Our US econ team believes the Fed will begin QT in Q3. The year-to-date selloff of real rates and equity markets began with the Fed surprising markets by how much they were already considering an early and aggressive use of QT to augment their tightening of policy, so any incremental information will be devoured. While it’s likely too early for the Fed to deliver specific QT details today, our economists believe it’s possible Chair Powell begins to socialise a range of potential QT outcomes to start the give-and-take involved with guiding market expectations. Also of interest will be whether Powell is asked about the possibility of a larger +50bps increase in rates at some point, which had been the topic of some speculation before the latest selloff should the Fed need to tighten financial conditions quickly.

Back to the equity selloff, and there wasn’t a consistent sectoral revival story to tell yesterday, with the volatility sending the VIX higher for a 6th consecutive session to 31.16pts, the longest run of gains in over a year. Tech ended the day as the worst performer, down -2.34%, after rallying in the middle of the session, and the NASDAQ finished the day down -2.28%. Energy (+3.96%) was the key outperformer on the other hand, followed by financials (+0.47%) as the only other sector that managed to finish the day higher. Those moves came as oil rebounded from Monday’s losses, with Brent crude (+2.24%) and WTI (+2.75%) both advancing. After the close we also got earnings from Microsoft, which beat analyst sales and earnings expectations. The stock was slightly higher in after-hours trading on the growth prospects of the company’s cloud computing services. Later today we’ll get Tesla’s earnings and Apple’s tomorrow.

Amidst the equity volatility, sovereign bonds were comparatively subdued again yesterday, with yields on 10yr Treasuries down a paltry -0.2bps to 1.77%. The yield curve managed to flatten, with the 2s10s slope down -4.8bps yesterday to 74.8bps, its lowest closing level in almost a month. This is one of a number of classic late-cycle indicators Jim mentions in the chartbook, and it’s worth noting that on average the 2s10s curve has flattened by around 80bps following the first year of a hiking cycle, so if the Fed does hike in March and the curve follows that historic playbook, we could be looking at an inversion within the next 12-18 months.

Overnight in Asia, equities are putting in a more mixed performance, with the Nikkei (-0.21%), the Kospi (-0.33%) and the Hang Seng (-0.14%) seeing modest falls, whilst the Shanghai Comp is up +0.14%. Futures are pointing to a more positive session in the US and Europe today however, with those on the S&P 50 (+0.20%) and the DAX (+0.49%) both moving higher.

Back in Europe, markets followed a very different playbook yesterday. Having not been open at the time of the late US recovery on Monday, European equities advanced across the board following their rout at the start of the week, and the STOXX 600 rose +0.71%. Meanwhile, with the ECB’s Governing Council not meeting until next week, sovereign bonds also diverged from the US, with yields on 10yr bunds (+2.7bps), OATs (+2.7bps) and gilts (+3.8bps) all moving higher on the day.

With tensions remaining high between Russia and the West over Ukraine, President Biden said in response to a question that the US would consider personal sanctions against President Putin in the event of a Russia invasion. Sanctions against heads of state are an extremely rare step, but the US and others have already threatened severe sanctions if an invasion took place.

On the data side, the Conference Board’s consumer confidence index for January fell a bit less than expected to 113.8 (vs. 112.2 expected). It came as the present situation reading rose to 148.2, but the expectations measure fell to 90.8. Separately in Germany, the Ifo’s business climate indicator in January rose to 95.7 (vs. 94.5 expected), marking the first increase in the indicator after a run of 6 consecutive monthly declines.

Finally, the IMF released their World Economic Outlook update yesterday, in which they downgraded their global growth forecast for 2022 to +4.4% (vs. +4.9% in October). That included cuts to the projections for both the advanced and emerging market economies, with the US and China among those seeing the biggest downgrades. Indeed, the US forecast for this year was cut to +4.0% (vs. +5.2% in October), and China’s was cut to +4.8% (vs. +5.6% in October). One marginal respite was that 2023 did see a modest upgrade, with global growth now projected at +3.8% (vs. +3.6% in October).

To the day ahead now, and the main highlight will be the aforementioned Federal Reserve decision and Chair Powell’s subsequent press conference, whilst there’s also a policy decision from the Bank of Canada. On the data side, we’ve got US new home sales for December, along with the preliminary December reading of wholesale inventories. Meanwhile earnings releases include Tesla, Abbott Laboratories, Intel, AT&T and Boeing.

Tyler Durden Wed, 01/26/2022 - 08:09

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