UGO02: Inequality, Inflation, and the End of Consensus ft. Jim Bianco

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:03):
You got, you got, you got yourtrade. You bet, you bet, you bet,
you bet your money just gotmade convex. Welcome to U Got Options,
an exciting series right hereon Top Traders Unplugged, hosted
by none other than Cem Karsan,one of the sharpest minds when it
comes to understanding what'sreally driving market moves beneath

(00:25):
the surface. In this series,Jem brings his deep expertise and
unique perspective, honed fromyears years of experience on the
trading floor to candidconversations with some of the brightest
minds in the industry.Together they unpack the shifting
tides and underlying forcesthat move markets and the opportunities
they create. A quick reminderbefore we dive in, U Got Options

(00:47):
is for informational andeducational purposes only. None of
the discussions you're aboutto hear should be considered investment
advice. As always, please doyour own research and consult with
a professional advisor beforemaking any investment decisions.
Now, what makes this seriestruly special is that it's recorded
right for from the heart ofthe action on the trading floor of
the cbo. That means you mightcatch a little background buzz. Phones

(01:09):
ringing, traders shouting asCem and his guests unpack real world
insights in real time. Wewouldn't have it any other way because
this is as authentic as itgets. And with that, it's time to
hear from those who live andbreathe this complex corner of the
markets. Here is your host,Cem Karsan.
Welcome back to anotherepisode of U Got Options from the

(01:30):
CBOE Floor, brought to you byKai wealth and Top Traders Unplugged.
Today we talk to Jim Bianco ofBianco Research, one of the most
well respected independentvoices in macro research. Surely
is a macro driven time and weget some real deep dives. We start
with Mayday and the origin ofpopulism right here in Chicago. And

(01:51):
then we get to the next 10years and tariffs and populism. What's
that? What that's doing formarkets? How do you bet it? How do
you play on it? I hope youenjoy the episode. Hello. Welcome
back to you Got Options. It'sour second episode and I can't think
of a better person for oursecond episode than Jim Bianco. Thanks
for joining us, Jim.

(02:11):
Thanks for having me. Lookingforward to the conversation.
Jim's an old Chicago person.So wonderful to have him here on
the floor. We were talking alittle bit about some old Chicago
stories. It's almost Mayday,May 1, and he was giving me a little
bit of background. You mindsharing that story to start here?
Yeah. So May Day is the bigholiday in the communist countries

(02:32):
around the world. It's workersrights, where they celebrate the.
The rise of the worker. Wheredid that come from? It came from
a park about a mile west ofwhere we are, called Haymarket Square
in 1886. There was ademonstration then to invent this
thing called unions. And a lotof the workers in, or a lot of the

(02:52):
business owners in Chicago,the Marshall Fields of the world,
those are the names, wereagainst it. And a bomb went off,
killed a bunch of workers.Turned out that the Chicago Police
Department planted the bomb onbehalf of the business owners in
Chicago. And that was thecatalyst for the entire labor movement
throughout the late 19th andearliest 20th century. That brought

(03:13):
us the eight hour workday,five day work week, which is celebrated
on May 1st in communistcountries around the world. So the
next time you think about whatcommunist countries are for and what
they stand for, it all beganin Chicago. And if, you know, Chicago
politics seems.
Kind of appropriate echoes ofthe past into the future. That's

(03:33):
kind of an interesting kind ofpoint to start this conversation,
which I think will be a wideranging kind of conversation about
macro, where we are at thiscritical time. But before we dive
in, I want to get a little bitof your background too. You know,
tell me about your earlyChicago days and how you got to this
point.
Grew up in Chicago. Grew up inthe western suburbs of Chicago called

(03:54):
Hinsdale. Went to school,Marquette University in Milwaukee,
Wisconsin. Graduated in 1984.You go back into my age. It's old.
84. That means what were youdoing in 87?
87. I was working on Wall Street.
Oh, wow.
So it's gotta be a good story there.
Yeah, there is. So I wasworking at Shearson, Lehman Brothers,
that was their name beforethey became Lehman Brothers, in the

(04:17):
101st story floor of the SouthTower, by the way, which was Canter
Fitzgerald's offices some 16or 17 years later.
Wow.
I accepted a job with a firmcalled First Boston, which became
Credit Suisse, which is nowUBS, on October 16, 1987, in the
equity research department,working for the technical analyst

(04:37):
Joe Generalis. The next Mondaywas the crash. And I called him up
after the end of the crash,that Monday, and I said, do I still
have a job? And he said, atthis point, I don't know if I still
have a job. And it turned outI did have a job. I was the last
person hired. And when I gotthere, my nickname was Lifo, Left
last in, first out. So theyalways used to call me Lifo in all

(05:00):
the staff meetings. And thedirector of research, Al Jackson,
Heard them calling me Lifo oneday, and he starts off the meeting
going, I think, that's great.That's funny that you call him Lifo.
It's fantastic. He goes, butjust remember. And he points at me,
he goes, t doesn't cost me any money.
You do? Yeah. Sometimes it'sfirst in, first out, right? A lot

(05:20):
of times, yeah. Amazing. Andthen that's a crazy way to start.
That must have given you apretty wild perspective on the financial
industry. How to go fromthere. Where did you go from?
Yes, I worked there for acouple of years, shifted with followed
Joe to UBS securities. Thiswas all New York City, by the way.
One of my clients back thenwas a firm called Arbor Trading Group,

(05:41):
which is a bond brokerage firmthat's headquartered here in Chicago.
I wanted to get back toChicago. They hired me in 1990 as
the director of research forFixed Income. Of course, I was the
only person in the wholedepartment. So I gave myself the
title Director of Research,and I worked there for eight years.
And in 1998, I spun myself offthrough them as Bianco Research.

(06:04):
Bianco Research has beenaround for 28 years. Arbor Research
is now their name. They usedto be. Arbor Trading Group is still
my partner to this day and isa shareholder in my company, and
I'm still a shareholder inArbor. So I've been with them now
for 35 years.
I almost have as much grayhair as you do. I started in 98.
And you have, you know, 14years on me. So I'm sure I can learn

(06:27):
a few things from you, as can our.
Listeners today, how toproperly wear suspenders, because
I was in the 80s when we usedto wear suspenders.
But I want to lead today offby really taking a big picture kind
of view. Backing up a littlebit here. You know, you let off with
that Mayday story, which isreally about labor rights and populism,

(06:52):
right?
Yep.
And I think, again, echoes ofthe future here. Here we are amidst
a tariff war and protectionismthat I've been talking about for
some time. And I know you havein your own way about, you know,
where that's come from andwhere that's going. So I'd love to
kind of give you a little freerein to kind of start out and kind

(07:13):
of paint the story as you seethe big picture and where we are
kind of from 30,000ft.
Well, I think, you know, I'llstart off by saying that I think
Trump's got the right idea andI think it's all about the execution,
which we could really start toquestion. What's the right idea?
If you look at the state ofthe US Economy, where it is right

(07:34):
now, its fiscal position, itsdebt position, its deficit position
and the like, you could, youknow, channel like the Muhammad El
Erians and the Ray Dalios thathave said it's unsustainable and
that something has to change.And I think that Trump and Scott

(07:55):
Fessant and Howard Lutnick andSteven Mirren, who's his Council
of Economic Advisors, wouldall agree with that. We could not
continue with the status quo.So they've enacted a bunch of policies
to try and change the statusquo. Now, we can argue whether or
not those are the rightpolicies. But really, what was the

(08:17):
driver of the status quo beingfractured is the inequality at the
top line. You could argue forthe last 40 years that globalization
has been a net benefit to theUS Economy. I completely agree it
has been. But along the way,there's been losers, and those losers
have been the working class.And that's Trump space. And if you

(08:41):
go back to 2016, when Obamasaid, what are you going to do? Wave
A1, those jobs aren't going tocome back? And then Trump says, no,
I got a plan to make thosejobs come back. I think the working
class said, at least he'sgoing to try. And that's where tariffs
come in, and that's where thisdisruption comes in that he's trying
to do. Now, is it the way he'sdoing it? Is it the best, most optimal

(09:03):
way? I'd probably say no. Butwhat I'm trying to push on the idea
is, would Trump just stop,just call it off, just say, I give.
Let's just go back to the wayit was. We can't. I don't think we're
going to go back to the statusquo. So if you don't like this radical
policy that he's beenpromoting, give me another radical
policy to promote. So that'sreally where we have to go forward

(09:28):
and we can't go backwards. Andthat, that's the thing I try to emphasize
is the criticism seems to meto sound like let's go backwards
and we can't.
I think we agree on one thing.It's an intractable situation. It's
a situation that if we don'tdeal with it now, it's only going
to get worse.
I disagree with some of thedetails in terms of. And by the way,

(09:49):
you have a lot of good companythat agree with you. Like the Dalios
of the world or the drunkenMillers. But I tend to really disagree
that the, that the debt is theproblem. The debt here in the us,
much like Japan, monetized allof its external debt. I mean, you
could talk about its 250, 275%debt, but it's all owned by its central
bank. Its effective debt isnow zero. It has monetized all of

(10:13):
its debt, and it could do thatbecause it had the support of the
US and the west broadly. Andso not only did its currency not
collapse, its currency becamemuch stronger in that period. So
I would argue that the UScould solve the debt problem on its
own after a minor kind of fearand crisis or whatever it is. We've

(10:33):
already done that, by the way.That's what 1971, Nixon taking us
off the gold standard was.That was a debt jubilee, essentially.
And what came of that,eventually, a stronger currency again.
And so I don't think that'sthe core problem, but you did touch
on something that's, I think,the core critical issue, which is
inequality. At the end of theday, if you think about why we are

(10:58):
where we are, if you, if youpush, you know, constantly money
to the top of thedistribution, to corporations, to
wealthy individuals, it's thenatural system. You know, it's a,
it's a winner take allsurvival, the fittest system. And
the biggest, most powerful getstronger and stronger and stronger.
You know, in the Mesozoic era,a bunch of oxygen out of the system,

(11:19):
what happened? You got acertain group of dinosaurs or predators,
it just became really big,right? And, and at the end of the
day, you know, that works, butit works for the whole system at
large. It doesn't work foreverybody. And we are not all cogs
in a system. They're humanbeings in the system. And the distribution

(11:40):
of income, the inequality hasgrown dramatically in the last 40
years through supply sidemonetary policy. We took interest
rates from 20% 1982 to 0.3%,the tenured. And that's wonderful
because that drives zeroinflation, actually. Deflation drives
globalization, technologicaldevelopment, great growth. You mentioned

(12:02):
this was good for everybody,right? The problem was it was not
good for everybody. The sameamount, dramatically, dramatically
better for the top of thedistribution and for lowest cost
labor. And who sits in themiddle? Who got decimated? Trump's
base? Yep, that's everybody.It's the middle class. We have completely

(12:26):
hollowed out the middle classin the US and that is an intractable
problem because at some pointpeople vote Some point, people say
this system's not fair. Andthat's what's happening here. It's
a populist move. Echoes yourMayday. This happened in the 1880s.
It happened in the 1930s, youknow, happened in the 70s. Here we

(12:46):
are again. This is not a newstory. The difference is the extent
to which has happened where weare as a, as an empire and where
their debt is, where all thesethings are combined. And how difficult
that makes that situation.
Yeah. So a couple of thingsyou're right about, you know, the
debt, the deficit situation.Let me put this in starker terms.

(13:07):
The US US federal budget isabout $7 trillion. About 5 of that's
covered by taxes. The othertwo we borrow to make up the difference.
So taxes cover roughly 75 or80% of what we spend. We borrow the
other 20 to 25%. We're notgoing to balance the budget by trying
to find more taxes out ofeverybody else. But that's essentially.

(13:31):
It's a spending problem.
I don't know that we need tobalance the budget.
Right. Well, we may have.
I mean, people would arguethat you could just. The Federal
Reserve. I know it seemsirresponsible. The reserve is not
a human being. It does nothave the same. It prints its own
currency, which is the reservecurrency of the world. Again, Japan
did this. This is notsomething that's new. Like, if we
really wanted to, we couldinternalize and buy all of our external

(13:54):
debt. And by the way, I thinkthere will be an effort to do that
in the next five to 10 years.I think that's the only way out,
right? Yeah, it's the only wayout. And it will be assisted by our
allies if we don't alienate them.
Well, that's exactly right.One of the things that Trump has
been pushing on with ourallies, and again, his motivations,

(14:15):
his ideas are right.
Implementation matters.
I'll give you a couplestatistics. Since 1960, the U.S.
has spent $22 trillion ondefense. Since 1960, NATO has spent
seven and a half trilliondollars on defense. Well, the U.S.
has been the leader infighting communism, fighting terrorism,

(14:35):
any kind of conflictthroughout the world. We take a lead
role. Europe has taken lessand less of a role to fast forward
today, we are now fighting theHouthis in Yemen to reopen the Red
Sea. Even the New York Timeshas admitted Europe can't do that.
That the Houthis are too muchfor Europe right now. That's how

(14:56):
bad their. Or how much theirmilitary offense capabilities have
retarded relative to the U.S.they've admitted it, too, that Europe
has said, you're right, weneed to spend more on defense. We're
willing to spend $3 trillionmore. Trump, you got to win. You
know, you said that we need,they need to spend more. They agreed.

(15:18):
And you keep kicking teeth.
No, I completely agree. And.And the reality is it's about power.
It always has been, it alwayswill be. And you have a China, U.S.
kind of problem here. Right.And the U.S. the old empire, Right.
Or whatever, you know, is at apoint where it is still meaningfully

(15:41):
more powerful economically,militarily, in other ways, you can
argue, but particularly sowith its allies. And I think the
problem with the approach,yes, I agree with you about spending
whatever. But if they do startto fall in line, the last thing you
want to do in terms of realpolitic, right. Is, is alienate and
push your allies away in termsof implementation. That, that's the

(16:04):
reality. But we can get awayfrom politics and policy and more
to kind of economics. Youknow, the reality of the situation
is, if we choose to prioritizeas a society, median outcomes instead
of mean outcomes, instead ofmaximizing gdp, but maximizing the

(16:25):
median person, the averageperson's outcome, which is what we're
essentially talking about whenwe talk.
And they're not the same thing.
They're not. They sound verysimilar. They're actually dramatically
different. And this, given howunequal, you know, this is at the
last year, just to give you astatistic, the top 19 families in
America, just 19 families,increase their wealth by $1 trillion.

(16:50):
$1 trillion. I mean, thinkabout that. Think about where this
has gotten. That's enough.That's the same as about the 40,
the bottom 40% of America.We're talking about 19 families.
It's an incredible 120 millionpeople versus 19.
I'll give you anotherstatistic along those same lines
about the concentration ofwealth, actually to 400 for the top

(17:13):
400 taxpayers in New York Citypay nearly half the taxes in New
York City. Trump used to beone of them. And Trump famously said,
you know, you're treating mepoorly. This is well before he was
going to run for election andI'm going to leave and go to Florida.
And Bloomberg was the mayor.And when Trump said, I'm going to
leave and go to Florida,basically everybody's attitude was,
don't let the, you know, whathit you on the way out. We kind of

(17:36):
did that to Ken Griffin herein Chicago when he Left as well.
And Bloomberg said, look, youcan't lose these guys. You know,
you lose two, three, four ofthem, you're going to have a financial
crisis in your city or in yourstate. David Tepper, left, left New
Jersey to move to Florida. Heowns the.
But it didn't used to be thatway. And it doesn't have to be that
way. By the way.
By the way, the otherstatistic, just to give you an idea,

(17:58):
writing it bigger, just is forthe uber wealthy, currently all retail
sales in the United states,the top 10% of income is now 50%
of retail sales. That is themost concentrated it has ever been.
So that when we talk about howretail sales are doing, you're basically
asking how the wealthy aredoing. And this is not the bottom
half.
There's a critical point.You're bringing up the top 10%. The,

(18:22):
the, the spending and theeconomic output. Of that top 10%
is at a record relative to theeconomy. You were telling me a stat
earlier. What's the actualstat? The top 10% is 50% of the.
Of retail sales.
Of retail sales.
Wow. Yeah. Yeah.
I mean, that's an incrediblestatistic. If you think about it.
And at the, at the end of theday, the problem is if you start

(18:45):
taking from that 10% to giveback to the people on the bottom,
those 10% don't spend all themoney they make. They invest the
majority of what they make. Soan incremental dollar to that cohort
is not the same as anincremental dollar to the person
at the very bottom of thedistribution. And if we're going

(19:06):
to start creating jobs here inthe US which are at the bottom of
that distribution, bring themback from China, bring them back
from India, bring them backfrom the rest of the world, you may
actually get unemploymentgrowth. You may get a better median
outcome for, for the majorityof people. But if you're starting
to pull from that 50% ofretail sales, from that top 10%,

(19:27):
you could actually have asituation where GDP declines and
employment hangs in. Becausewe're getting the distribution. Actually,
I think that's probably wherewe're going. Not today, not tomorrow,
not in the next month, but inthe next couple years, you're going
to start seeing a verystagflationary picture. And that's
what that essentially.
And I think that's what themarkets are starting to play out

(19:47):
and starting to sniff out aswell. But to your point, another
set of statistics kind of putthis into perspective about 1/3 of
the American public, 35% to beexact, has a college degree, 30,
65% don't. So if you don'thave a college degree and you want
to make a decent living so youcan raise a family of two in a decent

(20:07):
house, have a, you know, havea decent two cars, have a decent
vacation and stuff, what areyour job opportunities without a
high school, without, withouta college degree? It's usually working
with your hands. It's usuallyheavy manufacturing or it's in construction
or it's in repair or somethingalong those lines. And if those are
the jobs that we're trying tobring back, that is what the majority

(20:29):
of the country is looking for.You know, we've tried. Going to college
is kind of a, it's a culturalthing. It's not good enough for us
to say go to college, learn tocode that, that the people that don't
go to college, it's notbecause they don't lack the intelligence
to go to college. It's notpart of their culture, it's not part
of the way that they grew upto do it, do something like that.

(20:51):
So that's why those loss ofjobs in that middle class, that working
class that got sent overseasbecause of globalization. Yes, at
the GDP maximization it was awin, but at the median there was
a price to be paid by the by globalization.
And I want to walk throughthis for like listeners here. Like,
you know, we did what'sessentially supply side economics

(21:14):
for from 1982 to 2021. Andwhat do I mean by that? If you lower
interest rates from 20% tozero when it got to 0.3 the 10 year
did. That every time there's acrisis, you lower it, you're stimulating,
you're sending money tocorporations. Why is that to corporations
when you lower interest rates?Because the majority of money that

(21:35):
is borrowed is borrowed bywealthy individuals, corporations
and investors. And at the endof the day, that money and the benefits
from it flow to the top. QEalso directly into asset prices.
Which is also owned by all thewealthy. So Federal Reserve policy
is monetary policy. Thatmonetary policy is supply side economics.

(21:57):
If you do that for 40 years,you keep sending money to the top.
You don't get inflationbecause those people don't spend,
you get asset inflation.People invest. But you don't get
goods inflation. And at theend of the day that's great, you
can have growth withoutinflation. But it creates this inequality
we've talked about. And atsome point People say enough is enough.

(22:19):
Not just that doesn't onlycreate inequality because the money's
going to the top. What does acorporation do? There are knock on
effects. A corporationmaximizes profits, so it has to try
and find the lowest means ofproduction. Well, guess what? That
leads to globalization. Youthink it's a coincidence that the
growth of China lines up with1982 to 2021? No, it's not a coincidence.

(22:41):
You get technologicaldevelopment. We've been in a massive
technological boom. You takeinterest rates to 0. Semi to corporations,
they're incentivized to createnew goods and new, new who's it's
and what's it's. And, and sonow importantly, and I wanted to
bring this part in, there's agenerational component. Because if
you were born in 1980 or 81 or82, at the top of that cycle, you're

(23:01):
now 43, 44, 45. And all you'veever known is increasing inequality,
increasing technologicaldevelopment, increasing globalization.
And your parents and yourparents, parents have lost their
jobs and you've lost status.That's what this is about. And that's
why it mattered in terms oftime. This really started with Occupy

(23:22):
Wall street and, and the TeaParty in 2010. But that generation
was 25. Or 30. They didn'thave the power. And the demographic
bubble, I.e. millennials wasstill at the mercy of the last demographic
bubble, which was babyboomers. This is not just about inequality,
like vertical, this isinequality, horizontal, generational.

(23:43):
Because when you leave highschool or college, you are labor
and when you retire you are capital.
You know, so it's the passing of.
A baton really generationally.
And this is what I said at thetop. Trump's got the right idea.
This is a problem what we'rediscussing. And that's why I'd like
to really emphasize. Allright, maybe the way he's going about

(24:05):
doing the tariffs isn't thebest or in the most efficient way.
I get that. I agree with thatto some degree. But what is the alternative?
And the alternative isn't stopand go back. We have to deal with
this intractable problem. Andthat's really where why the markets,
I think, are reacting the waythat they're reacting. Because if
they just thought this wasTrump storing out tariffs, he's kind

(24:27):
of a transactional kind ofguy. If we, if we slap him down enough,
he'll call off the tariffs andthen it'll all go away. No, they're
not going to all go away.Because we'll still be left with
this problem if he was to callit off. That we have to deal with.
Trump is a vehicle. And by theway, this, like I said, it started
in 2010. You know, it wasbefore Biden is before Trump. The

(24:49):
first, you know, versionstarted with Hope and Obama. But
they weren't at the politicaldominance to get to where they are.
And Trump came with a populistmessage. First time the right in
a long time has moved left interms of economics, right towards
that populism. He took theright kicking and screaming. That
move, though, is in line withthe left also going left. And we

(25:12):
could talk about BernieSanders and aoc. People think they're
dramatically different. If yougo look at the policies, they're
the same general policies,right? Not exactly, but definitely
not on social policies, butdefinitely on economics.
You're right. Just like ingeology. You know, every couple of
million years, there's a,there's a pole shift between the
north and south pole. We'veseen that with, with our politics

(25:35):
right now. You know, what isthe, what did the Republicans have
been crowing about that the,the party of the working class. They
used to be the DemocraticParty. What is the Democrat Party?
At least what I see themtalking about. They're talking about
forever wars. They're veryworried that billionaires are losing
money in Wall street andthey're all into free trade and against
tariffs. That's the Democrat Party.

(25:55):
It's amazing.
You know, so we've kind ofpolar shifted both parties.
Right. The truth is they'reboth, you know, trying to be further
left from another, from oneanother, just like slightly varying
ways. Right.
But I think it really goes toa larger issue that they're, that
they're recognizing that we'reseeing in our politics that something's
out of balance and that thestatus quo cannot stay. And that's

(26:15):
really what we've been reallyseeing in our politics and in what
Trump's policies are and whatthe market response is. Something's
going to have to change. Andwe're, we're in the process of trying
to make that change effectivenow. What it's going to be, how it's
going to unfold, that's whatthe next couple of years.
What does this mean about mar.Mean for markets?
That means a period of, Ithink, more volatility for markets.

(26:38):
I've actually argued, I'veused a spiffy little line if you
want me to talk about bigmarkets, that we're going to be in
the 4, 5, 6 markets for thenext several years, cash will return
you 4%, bonds will return you5 and stocks will return you 6. Now
how did I arrive at that? Ithink that we're in a period of more
inflation. Yeah. So we're notin a period of sub 2% inflation.

(27:01):
We're in a period of closer to3% inflation. Not to get too wonky,
but the Fed likes to take, youknow, what's the long run inflation
rate and then they add alittle premium on it called our star.
So that means 3% inflationplus another 1% for our star, 4%
cash. So money market T billswill return you 4% bonds. If you
look at things like theBloomberg aggregate index and the

(27:21):
like, the average yield on thebond market is about 490. That's
all mortgages, Treasuries,mortgages, corporates, investment
grade agencies, it's about490. Let's round that to five. So
over the next several years,if you bought into a big bond fund,
you'll get about 5%. Someyears you'll get a capital appreciation
because yields will go down,prices go up, you'll get eight or

(27:42):
nine. Other years like lastyear, yields go up, you'll get 3,
you'll average 5 stock. Goinginto this year the valuations in
stocks were so high, if youtake like the Shiller PE ratio, the
CAPE ratio was 37. Now peoplewill say valuation is not a timing
tool. I agree, it's anexpectations tool. What is it that

(28:04):
you need if you're going tobuy a Shiller PE of 33 or you're
going to buy a forward 12month PE of 23 to 24. What is it
you need? You need everythingto go right. Well, we're talking
about an out of balanceeconomy. The status quo can't hold.
We're trying to affect change.Everything's not going to go right
now, it's not going to go bad.But at those valuations, what the
Shiller measures tell you isthat you should expect the stock

(28:28):
market over the next severalyears to return you about 1% more
than the bond market. 4, 5, 6,maybe 2, somewhere in 7. Let me restate
that. Cash money market fundwill give you half to two thirds
of what the stock market willgive you. With a $1 Navy every single
day, no volatility, you'll gethalf to two thirds of the stock market.

(28:49):
For some people that'sfantastic. Bonds will give you somewhere
around 66 to 80% of the stockmarket's return with a Little more
volatility, especially if youhave longer durations at the longer
end of the curve. Stocks,they're going to return you six or
seven. Now, people complainabout that to me. Oh, but they return
20. They're supposed to return20 all the time. Well, that's where

(29:11):
I think there's going to be abig shift in the way that we invest.
And the last thought I'd giveyou on that is active management's
gonna return. You know, andthe reason I use the metaphor of
sailing, I'm not a sailor. Butif last year the stock market, the
S and p, returned 25%, if I'min a sailboat and there's a 25 knot
wind, I just can't get my sailin the air just by the index. And

(29:33):
I'm going forward now. You'regonna slow it down, the six knot
wind. Well, if I can tack andI can trim and I've got some skill,
I can move my bow forward.That's active management. Last year
when I would talk to my activemanagement clients, they would make
the case to me, like, here's acase for financials or for small
cap or for health care or forinternational stocks versus domestic

(29:54):
stocks or small cap versuslarge cap. And then they largely
conclude I'm kind ofgeneralizing all of them. No one
gives a shit because the stockmarket's going up 25%. Well, if it's
going up 6 now, they'll give a shit.
This is the passive activething. I just want to hit this real
quick. And we, and we had MikeGreen on here last time.
I know Mike Green. He disagrees.
He and I debate this all thetime. But I think it's so important.

(30:22):
Passive investing did notexist until the 1980s. Why? They
paint it like a technologicalinnovation, like it's a revolution
in finance. No indexing hasexisted for 200 years. It's not an
innovation. The reason that itdidn't. People didn't do it until

(30:44):
19, the 1980s, is because itdidn't work. It didn't work for 20,
30, 40 years before that. Whydidn't it work? Because 1968 to 1982,
interest rates went from 3% to20%. And guess what? The stock market
went nowhere for 14 years.

(31:05):
Yeah, the Dow went from 1,000 to.
1,000, but it lost 70%. Inreal terms, all the numbers that
you just gave in terms ofreturns were nominal. What about
the inflation part? Right. Andwe'll get to that in a second. But
the point is, in real terms, Ithink at this point, given the populist
trends and the rebalancing andeverything we've seen, we've seen
this happen before and forwardduring these periods, right. You

(31:25):
get negative real returns forlong periods of time. And passive
investing is the absoluteworst place to be in a regime change.
What matters is the types ofthings. Last thing I want to say
about Shiller, likefundamentals and you said a lot of
fundamental kind of metricsand why you think we're heading.
I don't think fundamentals,like you said, the CAPE ratio are

(31:46):
not predictive in the shortterm, but what they are, are great
risk management tools. I'veused this metaphor before, but it's
like an airplane. If anairplane's got liquidity, if it's
engines going, it's got gas,how far off the ground it is doesn't
matter. It's how many buyersand sellers, how much lift there
is, you know, to the, to theairplane. But what happens when that,

(32:10):
that engine goes put, put,put, put, put and the liquidity dries
up and that's what inflationis, that's what long term bonds going
higher is. It's liquiditycoming off the table. And when liquidity
comes off the table, what,what happens all of a sudden nobody's
looked at that elevation thingfor a long time, right. All that
matters is how far off theground you are. And that's, those

(32:31):
are the periods where all of asudden we get massive corrections
and fundamentals. And that'swhen Warren Buffett guess when he
got his start. 60s and 70s,right. That's when value investing
works. That's when activemanagement works. So yeah, it hasn't
mattered. Passive investingworks great if you're just liquidity,
liquidity, liquidity if wehave unlimited fuel, where the plan

(32:52):
will just keep going up.
Absolutely. From 66, 82, as Imentioned, the Dow went from a thousand
to a thousand. Does that meanno one made money? No, there was,
there was the go go area inthe late 60s, there's nifty 50 in
the early 70s. There was theenergy boom. There was, you know,
the metals boom. There was,you know, there was, there were big
themes that would go up 2,300%over several years and then bust

(33:13):
out. And another theme wouldcome in and that was the way that
we all invested. But you'reright, when we got to the 80s and
90s, when we got to the Fedlowering interest rates and then
eventually printing money, itwas just get your sale in the air
by the Fed put right Right.
That's the liquidity we'vebeen talking about. That is this.
Whenever something goes wrong,the Fed would stimulate, do supply

(33:34):
side economics and juiceequity markets. That's the liquidity.
And guess what? That justcreates an ever ongoing upward going
plane. Now why wouldn't theFed do that again? Well, the Fed's
kind of stuck now, right?
I think they're stuck for tworeasons. One, I think they, they
got to the, they got to theend, end game of it right in the
late 2020s or late 2010sbecause we not only got the, you

(33:58):
know, the Fed to zero andprinting money, we got Europe to
negative interest rates, wegot Japan to negative interest rates.
By the way, Richard Sala andSidney Homer wrote a book called
A History of interest rates.700 pages of tables showing interest
rates back to 3000 BC. Thelast time that book was updated was
2005. There is now onesyllable in that book about negative

(34:19):
interest rates. That is a newphenomenon that we learned in the
last 10 years which largelydidn't work as far as being a stimulative
to the economy. So one, theyhit their logical limit. Second of
all, what was coincidentalwith that from 20% to zero, falling
inflation. Well, if theinflation cycle has bottomed and

(34:40):
turned with COVID and I'veoften said that whenever you have
a financial crisis or you havea recession, we had both in 2020,
the economy changes. Nowchange. I always like to warn, I'm
not saying it got worse, I'mnot saying it's dystopian, saying
it's different. The economychanged in 2020. If you want one

(35:00):
example. Remote Work is a bigexample. Completely changed the nature
of the labor market. With thatchange we've got higher levels of
inflation. The Fed cannot cutand print in an inflationary environment.
And one example I'll give youis last year, September of last year,
the Fed got worried about thelabor market because we got that

(35:21):
QEW, that revision of minus818,000 jobs in early September we
had the SOM rule that 1 of theunemployment rate went to 4.3% and
that was supposed to trigger arecession. The Fed panicked. They
cut rates 50 basis points inSeptember. What happened right after
that? 10 year yields went up100 basis points.
Correct.

(35:42):
If you're not interested infighting inflation, I'm not interested
in owning your bonds. Whatcould the Fed do right now to destroy
the bond market? Cut rates.
Yeah.
And that's why they're notcutting rates.
Right, Right.
I think this is maybe the mostcritical point of all. What we learned
very recently is when themarket goes down. And it's worried
we could do to tariffs andpopulism and where we're going that

(36:05):
the Federal Reserve likelywon't come to the rescue anymore
because they can't, becausethey're stuck in a box dealing with
inflation on one hand. And onthe other hand trying to support
the economy. And theinflationary problem is the secular
problem. That, that is reallythe big story here.
Yeah. And just to give you anexample of that, the day we're recording,

(36:27):
I put out a tweet thread or Iguess an ex post thread now that
you kind of call it correctly.And what I said was poly market,
the big betting market, has amarket that you could bet on whether
or not there's going to berecession in 2025. It hit 70% this
morning. Now, all that is justas a quick aside, why I cite that.
It's like looking at the pointspread in a football game. Just because

(36:49):
one team is a three pointfavorite over the other team doesn't
mean they're going to win bythree points. But it tells you where,
how people are thinking asopposed to if they're 15 point you
know, favorite in the game.Well, 70% tells you how people are
thinking. And that, I think isan accurate representation of how
they're thinking. It doesn'tmean they're going to be right, but
they're thinking that way.Now, I look over at the Fed fund

(37:11):
futures, I see a 9% chancethat the Fed's going to cut rates
at the May 7 meeting. I see a59% chance they're going to cut rates
at the June meeting. Wait aminute, 70% chance of a recession?
Shouldn't we be talking abouta rate cut this afternoon? Why are
we not talking about a ratecut for the next 90 days? Because
of inflation.
I think recession, that wordis there's so much packed into recession.

(37:35):
Like there can be all kinds ofdifferent kinds of recessions. And
I think this one inparticular, we've only seen the same
kind for 40 years. But, butthis kind of recession, what we're
talking about is really takingfrom that top 10% as we talked about,
and giving to that bottom 40%.And if we're going to do that, that
means employment on the bottomwill actually be quite strong, which

(37:55):
is. Is. Which means demandwill be quite strong. And by the
way, the reason we hadinflation in the 60s and 70s is because
we had an incredibly Strongeconomy. We talked about how poor
equity returns were and longbond returns right to the 60s and
70s. What is going to beconfusing people is is to learn that
GDP growth in real terms wassignificantly stronger from 68 to

(38:20):
82 than it's been in the last40 years. People think the stock
market returns are a functionof GDP and economic growth. Economic
growth was way stronger duringthat time and we lost 70% real time
real terms in the equitymarket. Right. Stocks are not a function
of how strong the economy is.They're a function first and foremost
of the discount rate. What isthe. This is why Cape and Shiller

(38:42):
looks at it relative tointerest rates. Guess what. 1968
was a 24 PE. And record profitmargins. Guess what? In 1982 it was
a four and a half PE. What dothey have in common? Well, the 20
year bond was 20% in 1982.That means a 21 22% earnings yield
for the S&P in 1968, 24 meantokay, foreign. Guess what? The interest

(39:05):
rate was 4 in 1968. Thediscount rate. That long term bond
inflation is what determinesthe outcome first and foremost for
equities.
You know, and what's importantto note about that is a lot of people
will say, Besson said that thefocus of the administration is the
ten year note. And then you'llhear people say, well, the Fed needs
to cut rates because we've gottoo much interest costs. They need

(39:26):
interest rates down. And I'llgo back to that famous Jim carville
line from 30 years ago. When Iget reincarnated. I want to come
back as the bond marketbecause you can intimidate anybody.
The bond market will dowhatever the hell it wants to do
regardless of Besson or Trumpor Powell want it to do. And to that
point, if the economic growthis strong and if inflation is sticky,

(39:49):
it's going up in yield. Andthey can do all they want to try
and stop it. They won't beable to stop it. It will go up that
they will.
Make it worse if theystimulate cyclically, as you mentioned.
I'll give you a quick exampleabout making it worse. In 2022 we
hit 9% inflation. The Fed wasraising rates 75 basis points. A
meeting there for a while.What was the highest 10 year note

(40:12):
the entire calendar year of2022 it was 4.22%. We're at 4.22%
right now. Why is it that wenever got much beyond 4.22%? Because
if you're hiking at75ameeting. You're on the inflation
train. And I can relax. Whenyou back off is when I get worried.
And by the way, let's kind ofGhost of Christmas future here think

(40:35):
about this. Right? We knowthat one of the problems of inflation
during the Nixon era wasArthur Burns being brought into the
administration and them stimulforcing monetary policy. That's what
took inflation sky high.They're already the structural secular
forces driven by Great Societyprogram, Vietnam War, right. OPEC
crisis, all the things we knowabout. But it was really when Arthur

(40:57):
Burns and federal monetarypolicy started stimulating en masse
that things went crazy. Whatis Trump talking about? He's beating
up Powell, trying to get thatyou know best and him are trying
to get supply side economicsand Federal Reserve into the game
so they can support themarkets and they can pull off their
policy. That's going to makethe long term bond. I agree with
you. Go dramatically higherand inflation skyrocketed.

(41:18):
Yeah. And that's, and that'sthe fear that they've, they've got,
you know that what is it that,what is it that the market is worried
about? It's worried aboutprices right now. What is it that
the Fed is? What's holding theFed back is prices. What is the Fed
most concerned about rightnow? And I call this the Main Street
Wall street divide. Whenever Iwatch financial television, I see

(41:39):
Wall Streeters on. They'll saygrowth is going down. There's a high
percentage of inflation of arecession. So the Fed's got a cut.
That's the prescription thelast 40 years. But why isn't that
the Fed's cutting? Becausethere's this inflation problem, Main
Street. When you ask a WallStreeter what's happening with the
economy, they say growth. Thisweek the Fed's got a cut. When you
ask somebody on Main street,the 65% that never went to college,

(42:01):
what are you worried about?These tariffs are going to mean higher
prices and that, that meansinflation. And the Fed is siding
on that side. That's exactlywhat the Fed did in 2022. The first
quarter 2022 was negative GDP.The first quarter 2025 is negative
GDP. What did the Fed do afterthe first quarter 2022? Hike, hike,
hike, hike, hike because ofinflation. And they kept long rates

(42:23):
lower because remember theynever got higher than 422. If they
were to do, if they were toacquiesce to Trump, invest it and
cut rates, I think you'd seethe 10 year skyrocket.
So I think the big differencebetween 22 and now is we're getting
to the five year anniversaryof the low in interest rates and
there is a massive lag tointerest rates. Right. You have to
understand like it's not likeinterest long, long bonds go higher.

(42:44):
And you know, and then youstart to get a slowdown. The effect
is when people, you know thedifference between debt and cash,
they're both money is one hasan expiration date. Well guess what?
The expiration date of allthat debt, all that mal investment,
everything that happened in2021, remember SPACs, right. All
of that 2021 period is, is nowcoming, beginning to come to, just

(43:06):
starting to. So in terms of,never mind predicting out to the
future, but supply and demandalong the curve. There's a massive
amount of refinancing andsupply coming on, on the table. And
right as that's happening bythe way, we have this, guess who
the buyers of that debt are,right? Japan, China, Federal Reserve.

(43:26):
All of a sudden the buyers arebeing either alienated or can't step
into the, to the picture. Andso for the next year, well this is
a very short time. We've beentalking decade, right. For the next
year there is a supply anddemand imbalance that's massive.
On the back end of the curvethere's a supply demand balance for
equity and venture. As well.That's why you're seeing max7 suffering

(43:48):
the most or tech in generaland growth. These are the core problems
underneath the market. And sowhat do you do about that? We've
also by the way during thistime this was a problem before we
started the terraform. Rightnow we've injected all this uncertainty
and volatility into the bondmarket. Swaps have blown out. We
were talking about this beforelike the basis trade gone, has gone

(44:09):
negative. Like those areproblems for liquidity even in a
balanced scenario. So I thinkthere's a real like one year again
there's a reason they'retrying to get the 10 year lower.
It's not working actuallythere and we saw this when the market
declined. What do we see? Wesaw the 10 years start to break out,
right? That's a canary in thecoal mine.

(44:32):
So to give a perspective onabout the 10 year, September 18th
of last year when the Fed cut50 basis points, the 10 year yield
was 360. It's 420 right now.It's been 450 in the last three weeks.
We're at 70% chance ofrecession. I'm going to Repeat myself
here. Worried, you know, we'reall worried that the economy is going

(44:53):
to go down, everybody's goingto lose their job. Why are we at
340? Why are we at 3% rightnow? If we were at 360 last September
and we're 420 right now. Soobviously the bond market is worried
about something. I think it'sprices that it's really was inflation
of prices was worried about.
And to come in like a littlezoom in a little bit closer than

(45:14):
a year, we're in a month here,that's incredibly important. Today
after the close two of the magseven report on the first on Mayday,
you know, Mayday, Mayday,there's, there's two other, you know,
back seven reporting. Then May2nd we get unemployment. And May
13th we get inflation. Nowthese numbers keep coming, but this
one is more important than anyother number because it's the first

(45:34):
one that's going to start to.You're going to start to hear about
the effects of those tariffs.
Exactly. And really whatyou're starting to see is an unusual
economy that I don't thinkI've ever seen. And that is the consensus
opinion right now is today theend of April, the economy is okay.

(45:55):
We've got growth, we've gotjobs, we've got retail sales. But
within 90 days there's thisbig wall we're going to hit when
tariffs kick in and kickprices higher and we're going to
slam into that wall and we'regoing to see job losses, we're going
to see economic contraction.I've never seen it where everybody
said we're okay now. Butshortly, like in a period of weeks

(46:16):
or a month or two, things aregoing to go bad or sideways or pear
shaped real fast. Now whetherthey do or don't is a different issue,
but I've never seen it quitethat way. And that's also part of
the uncertainty. Is that aliberation day? So when people online,
maybe up to online will say tome, I'll say, look, I'm worried about

(46:37):
inflation, they'll say here'sthe inflation data. And I say, look,
nothing that happened beforeApril 2nd matters. That's why you
were saying when we get thesenumbers with the, with the reporting,
what's most interesting aboutthe economic reporting, you know,
just to kind of nuance intothe earnings numbers is not what
the reporting for the firstquarter because that ended two days

(46:57):
before Liberation Day, it'stheir outlook. And exactly what you're
seeing on Wall street issecond quarter earnings are going,
estimates are going straightdown because all these companies
are either not giving you anoutlook or giving you a dire outlook.
And so they're all worried. Soit's almost like when people cite
me statistics, I always liketo say anything you cite me. Well,
look at what happened withtoday. The day we're recording, the

(47:19):
core PCE came out. So what?That's a March number. That's two
days before Liberation.Liberation Day. It's. What is it
going to look like in April?What's it going to look like May
in June when those tariffskick in? That's what everybody's
worried.
So since Liberation Day, whichit was.
August 2nd, 2nd or okay, April2nd, and you know why it was the
2nd? Because he knew he didn'twant to do it on April 4.

(47:44):
But it takes 30 days for ashipping boat to go From China to
LA. Takes 45 days for by trainthat's left to reach Chicago. And
Texas. Takes 60 days for it toget to New York. So there is a one
month to two month lag. Andhere we are, you know, two days begin

(48:08):
before we begin to start tosee the actual.
And the beginning of it. Andthat's what everybody's worried about.
That in the pipeline, what iscoming is all the prices are going
to go way up and that unitsales are going to go down because
65% of the country, you know,doesn't have excess. No, excuse me,
a different statistic now.Bankrate does a statistic every year

(48:32):
asking the public, can youcome up with $1,000 in an emergency,
your car breaks down, you needa new roof, medical emergency and
half the country says no,they'd either have to borrow from
somebody or put it on a creditcard. So if those prices are going
to go up, they're buying lessunits is what they're going to buy.
This is what everybody'safraid of. This is why we see this

(48:52):
volatility in the markets. Andthis is why citing statistics up
until the day we're recordingdoesn't matter because they're all
pre labor, they're all preLiberation day statistics.
And now full circle topopulism and politics. What happens
when all of a sudden you startto see these slowdowns and you know,

(49:13):
the people start to getworried. I mean, Trump's first hundred
days, the approval rating isthe lowest we've seen since World
War II. For the first hundreddays. The angry hordes, which are
already angry, that's kind ofwhat brought kind of Trump to power.
And it's the populism that,you know, for change. What happens
now when we're in recession?Well, guess what? They're already
starting to talk about,whether it's Bannon or Trump himself,

(49:36):
now starting to talk aboutchanging the tax cuts to be more
heavy, not just to thewealthy, but to individuals. Well,
what happens with fiscal,heavier fiscal spending? That's inflationary
as well.
Yeah, exactly.
Right. So we're on thisflywheel that once it gets started,
you know, every time you get aslowdown due to the issues we're

(49:57):
having, then you stimulate,not monetarily, which is what we
used to do, but you stimulatefiscally because that's what people
are demanding.
So your, your statements aretrue. And they beg a question. Why
is Trump doing this? And hesaid it the day before, we're recording,
when he was interviewed inMichigan, is he talked about, well,
prices are going to go upbecause there's going to be, you

(50:19):
know, all these tariffs. Andhe said, no, that's not true. You
watch. I'm paraphrasing whathe said. China's going to eat most
of those tariffs. They'regoing to pay most of those tariffs
so that prices in the UnitedStates won't go up as much. Unpopular
opinion. Whenever you get tobeing an aging empire like we are
now, there's two ways you fixan aging empire. Way one is you plunder

(50:43):
your neighbors. And way too isyou create either a slave class or
an indentured servants class.But we seem to be doing both. Trump
is talking about plunderingour neighbors. Now, he's not talking
about raising an army,invading them, but he's talking about
Canada being the 51st state,taking over Panama. He wants Greenland
back, you know, making, youknow, and China will eat those costs

(51:05):
on tariffs. Plunder ourneighbors. The left, the Democrat
Party, is talking about anindentured service class. We need,
we need migrants. We needpeople to do the jobs that people
won't want to do at low wagesand stuff like that to bring them
in as well. So really, whatwe're hoping or what Trump is hoping
for is that those tariffs at145% on Chinese goods is going to

(51:29):
be borne more by China.Remember what I said earlier? $5
trillion of taxes, $7 trillionof spending. We can't really take
our tax base from 5 to 7.Historically, what economists have
found is we, Historically, forthe last 80 years, our tax rate has
been about 18% of GDP. When itgets much above 20, the economy really

(51:51):
starts to sputter. When itgets much below about 16, you really
start to see overheating.Well, we need about 23% of taxes
to GDP if we want to maintainthe spending. When are we going to
get it? We're going to get itfrom them. We're going to get it
from China. That's where we'regoing to get it from.
I don't think the, thebalancing the budget and spending.
I don't think that rhetoric isas important as I mentioned or as

(52:12):
you make it to be. I don'tthink it's inevitable also that an
empire is in decline. I dothink short termism and the short
political cycle and entitiescontinuously doing what's good short
term and not doing what theyneed to do to maintain power. Look,
at the end of the day,absolute power corrupts absolutely

(52:33):
and power can maintain powerforever. Like Rome was in decline
for 250 years.
Oh yeah, if I said that the USis an empire in decline. Yeah, I'm
talking about decades. Yeah,I'm talking about decades is maybe
a century. I'm not, I'm, I'mtalking, I'm not saying that we're
in decline and we're going tobe in the soup by the end of the
year or in two years,something like that.

(52:53):
But you could argue thatdoesn't have to be in decline even.
I know, I don't agree with RayDalio's necessarily like the, the
end of the empire. Because thereality is you, if you are still
by far the most powerfulcountry in the world, right, there
are forces that are, that arepulling you down, but you have the
tools, if you're able to getthe correct leadership, right, to
reverse those things. But whatit involves is stopping the inertia,

(53:17):
taking your short term pain inorder to fix the long term problems.
And I think that's in a waywhat we're trying to do. The question
is, are we going to be able toattain it and are we willing to take
the pain? By the way, the paincan be a decade, 15 years of real
pain and rebuilding. Andthat's the question. And the problem
is, and you asked about Trump,why is he doing like at the end of

(53:40):
the day, politicians and thecurrent system demands they get reelected
so they cannot take 20 yearbets without addressing the four
year cycle. And that's reallyat the core of the problem here,
you know, and why is Trump, bythe way, Trump came in with Elon
Musk and Besant as this supplyside, Republican, big, you know,

(54:04):
side and simultaneously thislutnick like a side of the party.
And what's happened, you know,as his approval ratings gone down.
As the realities politicallyhave come to the table, Elon's been
pushed out. And the angryhordes have come for eat the rich,
who is the wealthiest man inthe world much more than they've

(54:25):
come for Trump.
But I think what the angryhearts have to realize is that if
you think the answer is, youknow, the, the definition of insanity
is doing the same thing overand over again, expecting a different
result. If you think theanswer is tax the rich, tax the rich,
tax the rich. We've tried thatfor 50 years and it doesn't work.
So really, ultimately, whatTrump is trying to say is there's
somebody rich, there'ssomebody that's got even more money

(54:46):
than the rich, and that'sforeigners, and we want to try and
take it from that.
Right. And you can exert thatpower. As a, you know, but ideally,
you don't alienate yourallies. Otherwise you may be, you
know, and ideally do it soonerrather than later because if you
do it in 10 years, you may nothave that power and it may be too
late. And that is exactly whatwill accelerate the timeline from,
maybe it's not 200 years,maybe it's 20, 30 years. Right. So,

(55:08):
but, but I, I agree that thisis a critical time. We're talking
big picture cycle things here.And so what's the trade? Let's, let's,
you know, as we get to the endand work our way to the exit here,
how do you, how are we goingto make the most amount of money,
you know, and benefit fromthis scenario?
So higher volatilityenvironment is what we're in right

(55:29):
now, because there is going tobe no going back. It's going to be,
when I say higher volatilityenvironment, I mean, we're going
to go, you know, from bigswings to big swings. I said maybe
that the stock market returns6%. That doesn't mean that you can't
have down 21 year, up 30 tonext year, you know, when you average
out to six or something alongthose lines. So I think that that's

(55:50):
going to be the environment. Ialso think the next environment,
too is that if we're in alower absolute return environment,
you know, I know that on the Cboat where we're recording, there's
a heavy concentration of thevolume is in the max seven stocks.
There's 2,000 others outthere. And as we start to unfold
in this period, you might wantto start thinking about those other

(56:12):
1993 stocks.
We've been in a world, right,essentially where it's all linear,
everything goes up together.The Federal Reserve liquidity is
what drives everything. Youmentioned active management. It's
also becoming increasingly nonlinear. Right. And that's why part
of why like volume on optionsis through the roof these days. Right.
It's because it allows you totake bets based on outcomes with

(56:33):
much less risk, with much moreconvexity. And when you're in a regime
change and you're in a bigenvironment change, you can make
those bets much more directly.With options and different parts
of the distribution. You canalso do it in the bond market. I
think the CBO has, you know,bond indexes and options on these
products as well. So I thinkthere's an incredible opportunity
to, to really use some ofthese products to risk manage to

(56:56):
make convex bets on really convex.
And you've got, you've gotfrom zero dte all the way out to
leaps. So you've got a wholematurity spectrum that you can, you
could go with. But that is theenvironment. Because actually for
an institution like the cbo, Iwould argue this is a better environment.
Because what was the lastenvironment? It was three instruments.
It was just by. By spiders in.By spiders and by spiders because

(57:20):
they always go up. Nothingcould beat them. And it was a one
decision era.
Non correlated. Investments.And what are essentially at the end
of the day, if you're playingdifferent parts of the distribution,
different products, right. Innonlinear ways, that is a way. To
get, to get non correlated.
And I also think that theexpectation too, because as a macro

(57:40):
guy, the question I get mostoften, if I could summarize it, is
some big multi trillion dollarasset class is going up 25% this
year. Which one is it? Andit's like, okay, I get why you ask
the question. Because most ofthe time in the past it's always
been some big multi trilliondollar asset class is going up. And
I mean something bigger thangold. And maybe now is the era where

(58:03):
we don't have that. So how doI get those big returns? You have
to start, you know, you haveto start decentralizing your thinking
instead of centralizing yourthinking into the big indexes and
start thinking that way now.The problem everybody faces is a
lot of people go, yeah, yeah,yeah, that makes sense. That makes
sense. You've never had to doit before.
Well, the inertia, right?
Yeah.

(58:23):
You don't want to be the lastone out the door, I'll tell you.
But 60, 40 just being longstocks and long long term bonds,
how'd that work out? 68 to 82or you know, how'd that work out?
You know, all these other times?
It worked great from 2009 to2022. Right. If not there anymore.
Yeah, but yeah, right. From68, 82, that was a disaster. Type
of.
So there's two ways to solvethat. One is to take down your stock

(58:45):
and bond exposure and go intonon correlated investments. Or the
other one is to hedge out yourexposure. To the long term bond and
inflation. And drive nonlinearoutcomes against to offset that exposure.
But either way you need noncorrelated or inversely correlated
kind of.

(59:06):
Right. And the thing is, we'retalking about the markets are in
a state of flux right nowbecause we're shifting from one regime
to another regime and that'sthe volatility we're seeing. And
like I argued, we can't goback. So we're going to continue
to go into this type ofenvironment. Now with that said,
if you don't like thevolatility, you could also look at

(59:27):
very safe investments likecash or you could look at very safe
investments like bonds thatcould give you most of the riskier
market returns with less volatility.
Which bonds though? If you goto long bond, you know, interest
rates go up 3, 4%. You'regoing to lose 80% of, you know, 70,
60, 70, 80% of your money.
And if you go too much intocredit, you're going to wind up losing.
If we have a, which iscorrelated with a long, credit is

(59:49):
very cyclical. Because creditwill wind up being very poor investment
when the economy turns down.If we have a 70% chance of a recession,
then a lot of these companiesare going to have to restructure
their credit, which means youlose, you know, on a restructuring.
So yeah, I think investmentgrade bonds. But mainly, you know,
the benefit you have in thebond market right now is the yield

(01:00:10):
curve is still very flat. Soyou could be in very short term maturities,
very low duration and getabout the same yield as you would
get in long term maturities.The thing of that, you know, you'd
want to be in long termmaturities historically was, well,
if we're going to go intorecession, it'll be a big bond rally.
There isn't one now and that'sthe equity market.
All assets are now correlatedto the long term bond.

(01:00:34):
I've actually argued that ifyou look at the last couple of months
and it's been a bit of a anoutside the box thinking. Everybody
thinks that the whole worldturns on tweets and tariff talk and
to some extent it does. Butreally what I also think is another
constant is what are yieldsdoing? When yields go up, the stock
market struggles and whenyields go down, the stock market

(01:00:57):
does better. Why are we'vebeen recovering for the last couple
of weeks, we've gone from 458in the 10 year note to 420 on the
10 year note. And so what themarket really wants is cheap money.
It always wants cheap money.
Problem is with inflation youcan't keep that unnaturally low,
right? Or you drive more inflation.
Right? That's no inflation. In2010-2022 you could go to zero and

(01:01:18):
print money. You could getaway with it. But with inflation,
as we said with September, youwant to get the long bond. You want
to get the long bond above 6.You want to get the 10 year above
6. Do what Trump is asked. Cutrates. Start talking about cutting
rates. Talk about printingmoney. The long bond will go vertical
in yield if you do it in thisenvironment right now.
Completely agree. Mayday.

(01:01:40):
Exactly.
Wonderful having you here.Great Jim, thanks for joining me.
Incredible conversation andlook forward to staying in touch.
Thank you, thank you.
Thanks for listening to TopTraders Unplugged. If you feel you
learned something of valuefrom today's episode, the best way
to stay updated is to go onover to your favorite podcast platform

(01:02:00):
and follow the show so thatyou'll be sure to get all the new
episodes as they're released.We have some amazing guests lined
up for you and to ensure ourshow continues to grow, please leave
us an honest rating andreview. It only takes a minute and
it's the best way to show usyou love the podcast. We'll see you
next time on Top TradersUnplugged. But before we go, we just
need to remind you that thispodcast expresses the view of Kynexus

(01:02:22):
LLC and the guests appearingon the podcast as of the date of
its recording, and such viewsare subject to change without notice.
Kynexis LLC and Top TradersUnplugged do not have any duty or
obligation to update theinformation contained herein. Furthermore,
Kynexus LLC and Top TradersUnplugged make no representation
to its accuracy and and itshall not be assumed that past investment
performance is an indicationof future results. Moreover, wherever

(01:02:42):
there is a potential forprofit, there is also the possibility
of loss. This content is madeavailable for educational purposes
only and should not be usedfor any other purpose. The information
contained in this podcast doesnot constitute and should not be
construed as investment adviceor an offering of advisory services
or an offer to sell or asolicitation to buy any securities
or related financialinstruments in any jurisdiction.
Certain information containedherein concerning economic trends,

(01:03:02):
performance and other data isbased on or derived from information
provided by independent thirdparty sources. Kynexis LLC and Top
Traders Unplugged may believethat the sources from which such
information are obtained arereliable. However, each of Kynexis
LLC and Top Traders Unpluggedcannot guarantee the accuracy of
such information and has notindependently verified the accuracy
or completeness of suchinformation or the assumptions on
which such information isbased. This podcast, including the

(01:03:24):
information contained herein,may not be reproduced, copied, republished
or posted in whole or in partin any form without the prior written
consent of Kyxis LLC and TopTraders Unplugged.

All Episodes

Episode Transcript

Popular Podcasts

On Purpose with Jay Shetty

Dateline NBC

Cold Case Files: Miami

.css-15opob5{left:0;position:absolute;top:0.8rem;} All Episodes

.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}UGO02: Inequality, Inflation, and the End of Consensus ft. Jim Bianco

Episode Transcript

Popular Podcasts

.css-r6mb8g{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:1;overflow:hidden;}On Purpose with Jay Shetty

Dateline NBC

Cold Case Files: Miami

All Episodes

UGO02: Inequality, Inflation, and the End of Consensus ft. Jim Bianco

On Purpose with Jay Shetty