July 18, 2024 • 57 mins
Could the Federal Reserve's next moves be politically driven and potentially reignite inflation? Tune in as we explore this provocative question with Jim Bianco, the president and founder of Bianco Research. Jim provides his expert analysis on the transition from a deflationary cycle to what he calls a "sticky inflation cycle," fueled by remote work, deglobalization, and the political manipulation of energy resources. He predicts a sustained inflation rate of 3-4%, significantly higher than pre-2020 levels, and cautions against potential rate cuts by the Fed.
We also dissect the complexities of quantitative tightening and its impacts on the economy, particularly focusing on interest rates and inflation. Jim highlights the current stock market's concentration in major companies like Nvidia, Microsoft, and Apple, and discusses the implications for traditional diversification. We examine the risks associated with popular ETFs and consider scenarios where diversified portfolios might outperform these concentrated indices. Jim brings a wealth of knowledge, shedding light on the disparity between Main Street and Wall Street and the evolving labor market dynamics post-COVID.
In the latter part of our conversation, we delve into the relationship between the stock market and rising unemployment rates, the demographic impact on investment choices, and the state of the gold market. Jim discusses gold's role as a non-correlated asset and the challenges faced by ETFs in a saturated market. We also touch on strategic bond market positioning and the long-term economic impacts of the 2020 global shutdown. This episode offers a comprehensive analysis of today’s complex financial landscape, providing valuable insights for both seasoned investors and newcomers alike. Join us for this enlightening discussion with Jim Bianco on Lead Lag Live.
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me for the rough houris Mr Jim Bianco, who I know a
lot of people are very familiarwith.
But, jim, for those who are notfamiliar with you, introduce
yourself briefly.
Who are you?
What have you done throughoutyour career?
And talk about some of yourresearch.
Who are you?
What have you done throughout?
Speaker 2 (00:23):
your career and talk about some of your research.
Jim Bianco, president andfounder of Bianco Research.
And in the last year I'm alsothe founder of Bianco Advisors,
which runs its own index, whichthere is an ETF, wtbn Wisdom
Tree, bianco Nancy.
That is a long, only fixedincome ETF.
We can talk about that a littlebit later.
(00:43):
I've been in the financialmarkets now approaching 35 years
actually a little bit longerthan that now.
I was actually employed on WallStreet during the stock market
crash in 87.
That's how far back I go.
Macro research, primarily fixedincome, bent kind of
eclectically, jump around in allkinds of topics from politics
to crypto and everything inbetween.
(01:05):
So that's my, as they like tosay, my TLDR.
Speaker 1 (01:07):
All right let's start very high level, because you're
known for a lot of that macrowork, as you noted.
As we know, the economy is notthe market and it's certainly
not five stocks which we'lltouch on as well.
But where are we on the fightagainst inflation and the Fed
pulling off the soft landingwhich everybody says they pull
(01:29):
off until the hard landing.
Speaker 2 (01:33):
Yeah, I'll go even a little bit more cynical on that
last part.
Wall Street loves to forecast asoft landing because there's no
accepted definition of what asoft landing is.
So I'll say soft landing andthen in a year I'll come back
and I'll torture some definitionand I'll tell you I was right.
But to that end, let me giveyou the high level where I've
(01:55):
gone with the economy.
Every time there's a financialcrisis or recession and we had
both in 2020, the economychanges and I've often argued
change is not worse, change isdifferent, and I think that this
economy changed and I think alot of cycles ended in 2020 and
new cycles have begun.
One of the cycles, I think,that ended in 2020 was the
inflation cycle.
We are not.
(02:17):
We were in a disinflation,maybe deflationary cycle until
2020.
That's over.
We are now in what I'll callthe sticky inflation cycle
combination of remote work,which has fundamentally changed
the labor market,deglobalization, which was in
place before 2020, but it's beenaccelerating since and maybe
(02:38):
using energy more as a politicalweapon.
That's more of a look at Russia.
It probably means that we arein a 3% to 4% inflation world,
not a sub 2% inflation world.
That matters.
That matters a lot.
That keeps interest rates up.
That keeps interest rates high,and so I would argue that that
is the environment that we'vebeen in and that we are going to
(03:01):
continue to be in as far as theeconomy goes in, and that we
are going to continue to be inas far as the economy goes.
Economists like to talk about aterm called potential GDP.
What that is is that is, whatwould the or what should the
economy grow at if no one'strying to stimulate it or
restrain it?
And that's not a measurablenumber, but it's roughly two,
two and a half percent.
(03:23):
We grow above it.
We grow below it, but weaverage around 2.5%.
The second half of 2023, we hadbig numbers on the economy grew
well above potential.
First half of 2024, we'regrowing below potential.
That's the cyclicality of theeconomy.
I'm not in the soft landing orthe recession camp.
I am in the we are continuingto grow a trend camp.
(03:47):
Well, that sounds great.
Where's the problem?
Problem is, that means thatit's probably going to keep us
in that three to four percentinflation world, and while the
Fed wants to cut rates and isprobably going to cut rates,
I'll argue it's a mistake.
They shouldn't cut rates,they'll rue the day that they
(04:07):
did.
It is what my fear is if theywind up cutting rates, because
they'll put at risk ignitinginflation when it's already at a
sticky level.
So that's kind of the highlevel of where I've been with
the economy for the last coupleof years.
Speaker 1 (04:24):
I will say it is odd to me that they want to cut
rates with the credit spreads astight as they are I mean most
of the time right when the Fedis acting.
They're acting because they'retrying to crush default risk,
which is being priced into thehigh yield part of the bond
market.
Speaker 2 (04:39):
You know you're right , it is, it is, and it's very
difficult to get an answer fromthem.
I think it's political.
And I think it's political forthe following reason March 31st
2022 was the last time JayPollitt met with President Biden
if he saw any cognitive declinein the president, and he said
(05:04):
he hasn't met with him in personsince that meeting on March
31st in 2022.
So that was his way to punt onthe question, but that was an
important meeting.
That was when he was in theWhite House with Yellen and with
the president, and effectively,I've talked about this for the
last couple of years.
Joe Biden pointed at Jay Powelland said he's your man.
(05:25):
He's your man who's going toget inflation down to 2%.
So don't worry, america, he'sgoing to fix it.
And the Fed has been underenormous pressure to get the
inflation rate down and they'reunder enormous pressure to show
that the inflation rate is down.
That's what I mean by beingpolitical.
We want to cut rates.
They want to cut rates becausethey want to say see, we're on a
(05:48):
glide path, 2%.
See, we're the professionals,we know how to do this.
See, we fixed this inflationproblem, as opposed to being
able to look at it objectivelyand see what they want.
They're looking at itpolitically and saying we have
to convince everybody that wefixed this problem.
We have to convince everybodythat we've fixed this problem.
Now, in fairness to Paul, theinflation rate on March 31st
2022 is 8.6%.
(06:08):
That's over your CPI.
Today it's 3%.
So it is down a lot from thatperiod and they could take if
you want to argue, they couldtake credit that at least while
they've been fighting inflationit's gone lower.
I just question whether or notit's going to continue to go
lower from here.
So I think that there's a lotof politics in there.
And then the other thing I'llgive Paul a little bit of a pass
(06:30):
on.
When he does his pressconferences, he's standing there
and he is describing theconsensus among the Fed
officials.
If you look at the dot chartremember the dot chart is where
do they think each one of the 19Fed officials, where do they
think the funds rates can be atthe end of 2024, 2025, 2026, and
(06:53):
the long term?
If you look at that 25, 26 orlong, especially the 25, 26
chart those dots are all overthe place.
And in 2025, there's a memberof the Fed that thinks that they
will not cut rates one timebetween now and the end of the
year.
There's another two members ofthe Fed that think they will cut
rates 10 times 1025 basis pointcuts between now and the end of
(07:17):
next year and everywhere inbetween.
So when Powell stands there atthe podium and he tries to talk
about what the committee isthinking and where the committee
is going, there's no agreementamong those members in the
committee.
They are all over the place,and so he's trying to present it
as yeah, we all agree on whatwe're supposed to.
No, you don't.
You don't agree on what you'resupposed to do.
(07:38):
So that further complicates hismission right now.
Speaker 1 (07:46):
A question off of YouTube.
I'll show on the screen hereand I'll say it loud for those
listening.
Can Jim explain howquantitative tightening brings
inflation down?
All right, so we have this 3%4% sticky range you think that
we're going to be in.
How does QT factor intoanything?
Speaker 2 (08:00):
So quantitative tightening in simple terms.
So quantitative tightening insimple terms, quantitative
tightening is the size of theFed's balance sheet.
It peaked at about $8.5trillion.
It is down now under $8trillion.
What does that mean with theFed's balance sheet?
Remember that the central bankwe use the vernacular but it's
(08:22):
not specific the central bankcan create money.
Print money is what we call it.
They're not actually printingdollar bills, the Bureau of
Engraving does that but they canelectronically create money.
When they electronically createthat money, what happens with
it?
It purchases treasurysecurities and at its peak I
(08:45):
don't know what the number isright now, but at its peak it
was nearly 30% of the treasurymarket was owned by the Fed.
Through quantitative easing, asthey do quantitative tightening,
they are reducing the amount ofmoney that they've created.
They're actually extinguishingit, if you want to use that term
.
So that means that they're notselling treasury securities.
(09:06):
What they wind up doing isremember, bonds mature and as
they mature they just buy backless.
So the amount of buying power,buying pressure that comes from
the Fed to hold interest ratesdown dissipates and that should
help keep interest rateselevated, and it's higher
interest rates that is supposedto restrain the economy, and
(09:29):
that restraint of the economythen puts downward pressure on
inflation.
So that's kind of the simpleanswer of what they're trying to
do with quantitative tightening.
Now it gets a lot morecomplicated than that how
they're doing it, what theirtargets are, how successful are
they, and the like.
Speaker 1 (09:49):
So I remember back in my college days and CFA
studying days the narrative thatstocks are the hedge to
inflation.
This has been a strangeenvironment for stocks to be
hedged to inflation because ofhow much concentration there is
in the stock market now.
(10:09):
So I want to share on thescreen something that you put
out on X where, if you look atgive me a second folks, there we
go, and this is a post that Jimput out that went fairly viral
around 300,000 views, at least a60-year extreme.
This is looking at the fivelargest S&P 500 stocks and one
(10:30):
day it's the opposite Fivestocks are killing the index
funds while everything elseoutperforms.
I myself have called this theconcentration bubble, really for
like eight, nine months.
So you look at the S&P 500, itlooks like a bull market.
That's clearly been a you canargue a hedge of sorts against
inflation, but most stocks, as Ikeep referencing, are still
below their 22-month highs.
So it's a very odd hedge inthat it's a concentration type
(10:54):
of dynamic.
Do you find that to besomething that, in your view, is
actually really bad or is thatjust the way way in quotes the
stock market is?
Speaker 2 (11:08):
Yeah, it's kind of the way the stock market is, but
we need to understand what'shappening with it.
As I commented on, this is so29% of the S&P is five stocks.
I've only got data back to 64,and this is the highest in at
least 60 years.
I don't know if there's everbeen a period higher than that.
What does it mean?
(11:31):
Well, first of all, why do youbuy SPY or VOO or IVV?
Those, by the way, are the threelargest ETFs in the world and
they're all S&P 500 trackers.
One is StageStreet, one isBlackRock and the other is
Vanguard.
Why do you buy those?
Because you believe in theconcept of diversification.
(11:52):
I want to own a broad mix ofthe stock market.
So what does it mean?
When the stock market'sconcentrated, you're getting the
least amount of diversificationin 60 years.
So your portfolio, or anybody'sportfolio, is Nvidia, it's
Microsoft, it's Apple.
Now, maybe it's working.
(12:14):
I looked the stock markets upon the early percent today.
It's working and it will workuntil it doesn't.
But understand, I'm not bullishon the stock market.
I'm bullish on Apple, nvidia,microsoft, amazon, meta, tesla.
That's what's bullish on.
Speaker 1 (12:30):
That's so well said, because so much of the
frustration I see from trollsthat are coming at me with my
own views on things is definingthe market.
Speaker 2 (12:41):
Right, exactly.
And so those are the stocksthat are driving the rally.
Now I'm not making anystatement about how much longer
they're going to drive the rallyor when it's going to end or
what is the catalyst for itbeing ended.
But understand, that's your bet, is what you've got.
And what I also said is I cansee a period in the future when
(13:08):
you could do the Dave Portnoything and randomly pick letters
out of a Scrabble bag and youwill outperform the S&P 500
because those seven stocks willbe dragging it down and dragging
it down and any random letteryou bought will do better.
That's the other side of thisequation.
Now, when that happens, we canargue, but right now that's
really what you're playing on.
(13:29):
And what is the theme aroundall of that?
The theme around all of that isAI.
So we're all playing the AItheme, whether we like it or we
don't.
Now, if you've ventured awayfrom that, you bought the equal
weight S&P RSP, you bought themid cap.
You bought the Equal Weight S&PRSP.
You bought the MidCap, youbought the Russell 2000,.
You're mid-single digits onyour returns and a money market
(13:55):
fund's up 3% for the year.
So you're not that far ahead ofa money market fund for the
rest of the year.
So the rest of the market isn'tdoing a whole lot.
These big companies are suckingeverything up.
Last thing what's differentabout this cycle than everyone
else?
Now you go back to 2000,.
You go back to any of the otherbubbles.
(14:15):
We've had these bubbles before.
The difference is these bubblesusually start with very small
companies.
We called them B2B and internetcompanies.
You know the hours of the world.
They were tiny companies in 97and 98.
And they take off and then theyswell, and they swell, and they
swell.
What's different about this oneis we're going to start a mania
(14:36):
with the largest companies inthe United States and make them
even larger.
I don't know if we've reallyseen an example of where we
started with the largest andmade them larger.
We usually start with small tomedium-sized companies and then
they end up as the largest andthen the bubble pops.
So that's what's a little bitdifferent and that's why the
market is so concentrated andthat's why I think the next time
(14:58):
somebody buys SPY, just say I'mbuying NVIDIA, because that's
essentially what you're doing.
And I'm not saying that's bad.
I'm just saying understand thetrade that you're making.
Speaker 1 (15:08):
Yeah, no, I love that .
And you are exactly right.
Everybody's in the exact sametrade.
I've used that analogy we'reall on the same side of the boat
holding an anvil, whether yourealize it or not.
Now I guess the questionbecomes what's the catalyst for
that to change, for thatbursting of the concentration
bubble which, similar to whatyou just said, I myself have
argued we've never seen it inthis way before.
It seems to me there's twothings that can take place.
(15:31):
I want to get your thoughts onthis.
One is and we may be startingto see it now which is that
inflation comes in much lowerover time, in which case the
bets are the Fed starts to cutaggressively.
That gives the lifeline tosmall caps which have been held
back from refinancing.
Risk concerns.
Small caps are working big timeright since last week.
The other catalyst, I think,could be just a recession right,
(15:53):
because every recession,unemployment picks up.
Unemployment picks up.
People start having to selltheir assets.
Their assets are primarilymarket cap weighted Vanguard
type products At the margin.
That happens you don't have theautomatic flows coming in from
401k buys and that creates thatsort of decline, meaning the
large caps catch down toeverything else.
Is there another scenario,another catalyst that could just
(16:16):
cause a bigger rotation tobreak this strangle.
Speaker 2 (16:20):
Well, yeah, I mean there is.
But let me go through yourcatalyst.
The first catalyst is the Feddeclares victory.
We're professionals.
Do not attempt this at home.
We got the inflation rate downto 2% with a soft landing.
Everybody hails the new godking, jay Paul.
Problem with that argument, as Isee it, is we're already at
(16:42):
about 190% of market cap to GDP.
The size of the stock market isthe largest relative to the
economy it's ever been, evenabove the 2000 peak.
Where's this new dollar that'sgoing to go into the stock
market?
What you might wind up seeingis it will go up marginally but
(17:02):
it'll be just kind of a bigrotation zero-sum game.
If you want everybody to gointo small caps, well, we're
going to take it out of the magseven, we're going to sell the
mag seven and we're going to goin the small caps.
And that could be problematicfor the S&P because that small
cap rotation out of the magseven will actually make the S&P
decline, even though thosesmall cap stocks are going up.
(17:23):
We sort of saw that on Thursdaywith the beat in the CPI number
for one day and then kind ofpetered out after that.
The recession scenario yes, therecession scenario is
definitely on the table.
Let me make a quick commentabout recession.
I've been using this line a lotand I want to keep using it a
lot.
There was an economist of noteRudy Dornbush was an MIT
(17:48):
economist in the 1970s and wasvery influential at the Fed and
he said a very famous lineeconomic expansions do not die
of old age, they're murdered.
What he meant by that was Ihear people talk about will the
economy roll over?
Will the economy pop?
Are we going to go intorecession?
(18:08):
If you look at every recessionfor at least the last 50 or 60
years, there's always been acatalyst, a murder.
Covid was the last one.
Housing was the one before thatthe tech bubble, the Gulf War,
spiking oil prices from $10 to$40.
You actually had $145 crude oilin July of 2008.
(18:28):
In terms of with the housingbubble too, something has to
murder the economy.
They don't just roll over.
Now you could argue that theeconomy is more vulnerable to
being murdered because of itscurrent state, with the high
debt levels and everything, andI'll agree with that.
Murdered because of its currentstate, with the high debt
levels and everything, and I'llagree with that.
So a recession would do it, butit would most likely come with
(18:50):
a murder weapon.
Now, to be fair, I thought themurder weapon was 18 months or
15 months ago when SiliconValley Bank failed.
I thought there it is, there'sthe murder weapon.
It turned out not to be, butthat doesn't mean that the
concept doesn't work.
So, yes, we could be veryvulnerable to something along
those lines.
Let me throw in another scenariofor you.
(19:10):
I don't know if a lot of peoplerecognize this.
About NVIDIA, I said you know,if you bought the S&P, you buy
NVIDIA.
Did you know I'm saying thisrhetorically that five customers
are 50% of NVIDIA's revenues?
Five customers it's Microsoft,it's Tesla, tesla's bought over
(19:33):
a billion dollars of NVIDIAchips so far.
It's Supermicro, it's OpenAI,it's Microsoft, and that their
cost of goods sold 20% of theircost of goods sold is from TSMC,
taiwan Semiconductor.
It's a very close circle.
I mean, you know, the funnything about NVIDIA is yeah, do
you own any NVIDIA chips?
Do I own any NVIDIA chips,michael, do you own any NVIDIA
(19:54):
chips?
Nope, none of us do.
It's a specialized product forspecialized customers.
Now they run twovulnerabilities customers.
Now they run twovulnerabilities.
Vulnerability one is Intel andMatt Fico devices and even
Taiwan semi are looking going.
Man, they're worth $3 trillion.
Maybe we should try and createa better product than them, or
the same product that at a lowerprice, and undercut them, and
(20:16):
we only have to make five phonecalls to basically sell this
product.
And the second one is kind of astory that's kind of coming into
the fray.
You know what's AI doing for us, where is it going?
What is the great hope for AI?
Now, in 25 years, the greathope for AI might be everything
(20:39):
we say, just like in 1999, thegreat hope for the internet was
realized by 2024, 25 years later.
But in March of 2000, theNASDAQ peaked and it took 16
years to make a new high afterthat peak.
So maybe a realization thatwe're buying forward the AI
(21:03):
scheme, but it's got to happenin one or two or three years.
If it's more of a long tail 10,15 year type of story that we
eventually get there, we're toofar ahead of ourselves with
these prices.
That's the other thing you'vegot to be careful of as well too
.
Like I said, I believe the AIstory.
I believe AI is going to beeverything it's going to be.
(21:24):
It's got to be that in a year.
It's got to be that in twoyears, it cannot be 10 years.
You've already bought, you'vealready discounted it now for
the next 10 years, and thereinlies the problem.
And that's exactly what we didwith the internet in 99 and 2000
.
It eventually realized all ofthose hypes and dreams.
It just took 20 years.
(21:45):
It did not take 20 months likeeverybody was hoping.
It was going to be in 99 or2000.
Speaker 1 (21:54):
Another comment from a listener on YouTube.
Jim Hockaday was sayingrecession is the only way to get
inflation back 2%, but themarket is never high enough for
the billionaires.
Main Street versus Wall Street,billionaires, main Street
versus Wall Street.
Is there anything that couldget us back to 2%?
That would prove that thesiswrong?
(22:15):
On three to four, where itwould not involve some degree of
pain or economic hardship.
Speaker 2 (22:20):
Yeah.
So you're right.
A recession would get us backto 2% or maybe lower, and we
would stay there as long aswe're in recession and then when
we come out of recession, thenwe go back up.
The story that gets us back to2% or lower is what most
mainstream economists believethat the cycle did not turn in
(22:42):
2020, that this is acontinuation of the pre-COVID
cycle and that this is just abunch of temporary long tail,
one-off supply chain problems,post-covid adjustments, too much
stimulus, excess savingsgetting run off, and when all of
that goes run off, we go backto that 2% inflation world.
(23:05):
That is always a possibilitythat it isn't a different cycle
like I'm arguing it is.
It's back to the pre-2020 cycleis what it would be, if I'm
right, and this is a new cycleof three-ish percent.
How long will this last?
To the next recession?
(23:25):
When you have a recession or afinancial crisis, it shocks the
system and it changes.
When you have a recession or afinancial crisis, it shocks the
system and it changes, and maybewe shock the system and we
change it in a way that wouldalleviate the chronic supply
problems that we would kind ofrectify.
I think remote work is thebiggest one.
I think that, just to go off ona quick tangent, I think that
(23:46):
most people are not fullyappreciating how much the labor
market has changed and that itis a very, very different labor
market.
And, to put it in thisperspective, labor workers have
more power over demanding wagesthan management anytime maybe in
the last generation, if notlonger and that is keeping wages
(24:07):
up.
And, as I like to say, ifyou're getting a 4% or 5% raise
every year, you could pay 3% to4% inflation.
You could pay 3% to 4%inflation.
So that's part of why I thinkthe inflation is up.
But if the mainstream argument,the Fed's argument, that we're
on the last mile to 2%, meaningnothing changed in 2020, it was
(24:29):
just a big one-off.
We shut down the global economy, we restarted it and then
everything went back to the wayit was Well, the labor market
didn't because of remote workThen, yes, we could go right
back to 2%.
Finally, if I could make aHockaday's comment about the
rich and the billionaires, thisis a K-shaped economy, more so
(24:52):
than ever, and the reason it'sK-shaped the letter K, one going
down, one leg going up, and youcould argue isn't it always a
K-shaped economy?
Yes, the haves do better thanthe have-nots, sort of.
But what's changed?
This one is inflation.
2010 to 2020, the inflation ratewas under 2%.
The average wage increase was aslightly over 2%.
(25:15):
To use a tennis metaphor, 2010to 2020, if you're in the lower
half of income you held serve.
You got 2% more at your jobevery year and everything costs
2% more.
So when you go to the store youcan buy the same things that
you bought a year ago.
Didn't get worse.
You held serve Rich.
Money got richer because thestock market kept going up and
(25:35):
home prices kept going up orsomething like that.
Sure, they didn't get worse.
But since 2020, cumulatively,the bottom half has gotten worse
because wages have not kept upwith the cumulative inflation.
That's why everybody's so angryabout inflation right now.
Top end, you could argue therich.
Maybe their wage increaseshaven't kept up with inflation,
(25:56):
but they have portfolios.
They own real estate, theirhome, if nothing else, and that
they've benefited from thoserecovering as well.
Bottom end bottom end doesn'thave a home.
They rent.
They don't have a stockportfolio.
Bottom end doesn't have a home.
They rent.
They don't have a stockportfolio.
They're not debating whether ornot their SPY holding is NVIDIA
.
They don't own any stocks, sothat's why they're so angry.
(26:20):
Last thing, two things to keepin mind about this too, is about
75% of all consumer spending isthe top 50% of income.
So if the top 50% of income seetheir homes go up, see their
portfolios go up and they feelbetter and they start spending,
the economy stays strong.
And the other thing is rememberone person, one vote.
(26:42):
Jeff Bezos might get a millionvotes or 10 million votes when
it comes to the economy becauseof his net worth, or Elon Musk,
but they get one vote at theballot box.
And so does somebody Musk, butthey get one vote at the ballot
box.
And so does somebody on hispublic assistance get one vote
at the ballot box.
That's why the president'sapproval rating slowed down so
much and that's why people saythat the economy is terrible.
It is terrible for a bigsegment of the population, the
(27:05):
lower half.
It isn't for the upper half,but the upper half do all the
spending so that the economicstatistics look okay, but the
broad population, the K-shapedeconomy, it isn't for them in
the bottom half, and that's thestress point that we're seeing
with this economy right nowwhere he says I have a question
(27:33):
If 5.5% Fed fund rate isrestrictive, which it is for the
bottom 90%, what would happenif next time they try to raise
rates and 3.5% becomes toorestrictive and the bond market
says no?
Speaker 1 (27:39):
I guess the implication there is we just
keep leveraging higher andhigher, so now you're going to
have a lower high because it'sjust too much of a choking point
.
Speaker 2 (27:47):
Right.
So let me answer the question alittle bit generically.
Is five and a half restrictive?
Yes, and this is, by the way,when I talked about earlier the
Fed dot chart that they're allover the lot.
Some members think they'regoing to have 10 rate cuts by
the end of next year.
One member thinks that they'regoing to have none and they're
all in between.
It really comes down to a verysimple question what is the
(28:10):
neutral funds rate?
The neutral funds rate is whatis the rate that neither
stimulates or restrains theeconomy.
According to the Fed, becausethat's their long-term shot,
it's 2.75%.
It's under 3%.
This is why they keep talkingabout wanting to cut rates,
because they say look, we're at5.
Half.
We got to get to 275.
(28:31):
That's 10 rate cuts.
That's the 10 rate cuts.
Right there.
We got to get going here.
We got a lot of work to do.
We got to do 10 of these.
But if you look at the market,there are various metrics that
measure it in the market.
Back in my timeline from aboutthree weeks ago I did this.
I'll try and update it againthis week.
The marketplace thinks that theneutral funds rate is closer to
(28:53):
four, meaning five rate cuts,maybe four rate cuts is all you
need to get back to neutral.
That explains why has it beenthat we've been at five and a
quarter five and a half for ayear.
Stock market's going up theeconomy, we're debating whether
or not there's a soft landingafter all those rate hikes and
holding for five and a quarter,five and a half a year.
(29:13):
There's no recession at thispoint because maybe that's, I'll
agree, restrictive, but notthat restrictive.
It's not 200 basis points or250 basis points of
restrictiveness, it's maybe 125to 100 basis points of
restrictiveness.
Why does that matter?
Because if the Fed is intent oncutting rates sooner rather
(29:35):
than later, because the Fedthinks they got 10 rate cuts to
go and they do chop the threeand a half and that turns out to
be stimulative and that turnsout to reignite inflation, we
could have a real problem in ourhands.
Watch the bond market.
Watch the bond market on thisone.
In July 26th, one year ago of2023, was the last rate hike.
(30:00):
Excuse me, last rate hike wasone year ago, july 26th last
year.
Where was the 10-year yield?
It was at 380.
And everybody said that's it.
The Fed's done 100% right.
The Fed was done.
This is it.
The Fed's done.
100% right, the Fed was done.
This is it.
Everything's going to turn andit's going to go better.
What happened in the next threemonths?
Stock market fell 10% and bondyields went to five.
Why?
(30:21):
Because the bond market wassaying, oh, you're not going to
stay restrictive anymore.
Well then you're going to riskinflation.
I don't want to own your bonds.
And the next move in the bondmarket was straight up in yield
and that actually put a lot ofpressure on the stock market and
the stock market wound up goingdown.
(30:42):
If the Fed starts cutting rates,do not assume that the bond
market will rally.
You could wind up producingmuch higher interest rates,
because it would be a rejectionof the Fed's policy.
Because the bond market wouldsay look, we're still not sold
on this idea that we've gottenpast this inflation problem.
And now you're going to startfeeding sugar to this thing and
(31:03):
hype it up even more.
Maybe I don't want to own yourbonds anymore.
Rates go up and that could putpressure on the stock market.
I might add, in the last 18months we had a 10% correction.
As I mentioned, july to Octoberlast year, march, april this
year.
We had a 6% correction in theS&P.
What was the consistent themebetween both of those Was?
(31:23):
The 10-year yield was over 4.5%.
So higher rates coulddefinitely be something that
could really pressure the stockmarket, because it has.
Now we're 420.
Right now we're not at 450.
But if you wind up making morenoise about cutting rates,
cutting rates, cutting rates andeverybody says it's the most
(31:44):
bullish thing ever leverageyourself up and get in the stock
market and rates go up.
Because the bond market hasdecided that if you're not
serious about the inflation rateI'm not serious about owning
your bonds it winds up drivingrates up and the stock market
doesn't like that and it windsup going down.
They make it worse.
So you have to be careful.
So what I'm arguing here isthere's this saw, and cutting
(32:05):
rates is always good.
Raising rates is always bad.
That's not always the case.
Cutting rates is good when themarket is convinced there is no
inflation problem.
Raising rates is bad when themarket is worried that there is
no inflation problem becauseyou're getting too restrictive.
So you got to put that into thecontext.
(32:26):
I happen to think that cuttingrates would be a mistake.
I said that before because Idon't think we cutting rates
would be a mistake.
I said that before because Idon't think we've finished with
the inflation fight.
Let's see how the marketresponds to it as we get closer
and closer to that potentialSeptember rate cut.
Speaker 1 (32:42):
And presumably a big part of that is going to be how
the market interprets whathappens next to unemployment.
Elias from LinkedIn put aquestion here.
What are your thoughts aboutthe nonlinear relationship
between job openings and theunemployment level?
So job openings have obviouslybeen dropping, they're inverse,
unemployment rate rises andtypically I think when you get
(33:03):
past this stage is when it'shard to turn around.
From the research I've seen, isthere a chance that the stock
market, oddly enough, may like arising unemployment rate
because it means the Fed isgetting that lagged response in
just in time, the bond marketdoes not revolt and everything
you just said gets countered.
Speaker 2 (33:23):
Sure, I mean the stock market could be looking at
the unemployment rate andcreeping up to 4.1% and saying,
good, this will keep the Fed oncutting rates, keeping rates
down, and we like it when ratesgo down.
By the way, why is the stockmarket, I've argued?
Why is the stock market likerates going down?
(33:45):
Other than the obvious casethat it lowers the cost of
capital.
That's a big one.
Cost of money gets cheaper andthat helps company profitability
and the like, but it's also acompetition thing too.
Real quick, dr Jeremy Siegelwrote an update to his famous
book Stocks for the Long Runlast year.
In it he said what is thelong-term potential for the
(34:07):
stock market?
In other words, giveneverything we understand about
the stock market, what shouldyou expect it to do every year?
About an 8% return.
In other words, it might be 16%one year, zero the next year,
but over a long period of timeit averages eight.
That sounds about right.
Well, in 2019, when moneymarket rates were zero and bond
(34:28):
rates were two, we would screamTina, there is no alternative.
What are you sitting aroundwith no yield?
Why don't you get into riskierthings like stocks, and at least
get a return?
And that worked until 2020.
Well, in 2024, money marketrates are 5.3%.
The bond index the investmentgrade bond indexes are 5%.
(34:49):
So a lot of people are lookingaround going.
So I'll use the money marketexample.
That's 70% of what I shouldexpect out of the stock market
and it gives me a $1 NAV everyday.
So, no risk.
Okay, I'll take 70% for no risk.
Sure, it doesn't look like agood trade now.
Look like a great trade in 2022.
(35:11):
We don't know what that's goingto be going in the future.
So when rates go up, a lot ofpeople will conclude I'll just
take those bond yields, thankyou very much, as opposed to
risking the stock market.
And why is that?
Because most of the money isowned by older people Now,
typically as a cohort, as ademographic group.
(35:32):
The richest a demographic groupwill be is the day before they
retire and then they startdrawing down on their money.
So most of the money is ownedby boomers, and I've often liked
to describe a bear market astime.
Could the stock market have abear market?
Yes, could it go down 50%?
(35:52):
Sure, just to use an example,okay, great, but doesn't it
always come back?
Yes, that's historically beenthe case.
But if you're 65 years old andyou buy all the way into SPY and
it starts a bear market thatmight last five, six, eight
years.
You're thinking that's half myexpected life expectancy.
(36:15):
I don't want to spend half ofwhat I got left waiting to get
back to my high watermark.
I'll take bond yields.
Thank you very much.
If you're 35 years old, wavethem in all the way down,
because if it's 45 or 47, theyget back to the old high.
You got a good 20-year run tomake a lot of money before
retirement then at that point.
(36:36):
But the problem is the35-year-olds don't have the
money.
It's the 65-year-olds that havethe money.
So that's why bond yields thatthey also matter as well too as
well.
Speaker 1 (36:49):
too Curious to get your thoughts on gold.
I'd argue that I think thismove is really more driven on
anticipation of negative realrates to come, because that's
the kind of environment thatgold tends to do well in.
But this time it's actuallytrying to anticipate it as
opposed to react to that.
Any thoughts on gold and whyit's been doing as well?
(37:10):
Is it the negative real estate?
Is it some positioning toalternative, non-correlated
defensiveness?
Because people are skepticalabout treasuries?
There's not that manylong-running options.
Speaker 2 (37:20):
What do you describe it to.
Gold has been a very, veryfrustrating asset.
But I would argue your secondargument people are in search of
a.
Everybody right now is insearch of an uncorrelated asset
(37:43):
that what they want is they wantto own something so that, at
the end of the day, if they say,or like right now, or something
like that stock market's up 1%,Okay, then I kind of know what
all the other assets are doing.
If you tell me that that stockmarket's up 1%, Okay, then I
kind of know what all the otherassets are doing.
If you tell me that the S&P isup 1%, I'd like to own an asset.
That if you told me the S&P isup 1%, I don't know what the
other assets are going to do.
And, by the way, crypto may notbe that case either.
(38:06):
It's got a correlation to theups and downs of the stock
market A little less so recently, but it's still holding.
It's having a good day today,like the stock market's having a
good day.
So the hope is that people arebuying gold because they think
it's going to be an uncorrelatedasset.
Now there's been stories aroundit the end of the dollar's
hegemony that the dollar's goingto stop being a reserve
(38:27):
currency, I'll ask.
The only problem with thatargument is replace it with what
?
As soon as you give me a viablealternative to the dollar, it's
gone in three seconds as thereserve currency.
And don't make me laugh bytelling me it's crypto.
Crypto can be it in about 10years, when the ecosystem not
(38:53):
the price of the coin, theecosystem is like 100x larger
than it is right now.
It could be it.
It could be the euro, it couldbe the yuan.
They don't have the rule of law.
The Saudis aren't going totrade oil in the Saudi dinar
because it's too small acurrency.
It would just so distort theircurrency.
What you need is you need acurrency that trades trillions
(39:16):
of dollars a day, a currencythat has established rule of law
and a currency that has alegacy.
Of all that, there's only one.
There's only one, and that'swhy, like it or hate it, the
dollar is going to remain thereserve currency and it's going
to remain its status until analternative is created.
So all this talk about that.
The Saudis ended the 50-yearagreement about petrodollars.
(39:40):
Fine, it's just a piece ofpaper.
They've got no other choice butto leave the system the way it
is.
So instead of telling me what'swrong with the dollar, you need
to tell me what's going toreplace it.
Now that I've kind of went offon that tangent, let me come
back to gold.
I think that gold is benefitingfrom a lot of those kinds of
(40:01):
stories the perception thatwe're going to have a weak
dollar, the search for anuncorrelated asset.
The other thing about what goldis benefiting from is its
relative size Stock market's $47trillion in the United States.
If you add in world stockmarkets it's about 80 trillion,
over half of it's in the UnitedStates.
The bond market's well over$100 trillion.
(40:23):
Gold's like two.
So if you're going to put thatin that asset class with stocks
and bonds, a tiny movement outof stocks and bonds will have
enormous implications for gold.
But let me come back to myoriginal comment, single most
frustrating asset that I've everfollowed over the last several
years.
What's your opinion about gold,Michael?
Speaker 1 (40:40):
I tend to think of it much more as that point about
the non-correlated demand.
I think the breakout whichoccurred and I said that
repeatedly on X I said gold wassending a warning.
As you know, jim, I like to bea little bit bombastic in some
of the ways that.
I've read things and that wasbefore some of the dynamics of
the intervention from Japan withthe end, and also, obviously,
iran and Israel, which everyoneforgot about.
World War VII, I think is thenumber we were at at that point,
(41:03):
but it does seem like it's likeSuper Bowls at this point.
Yeah, exactly, it's like, butit does seem like that.
That is the case.
I wonder if that's, if that'ssmart money or not in quotes or
institutional money which youcan consider smart money.
I say that because I'm going toshow a comment from Mike Gannon
on LinkedIn here.
I think central banks have beenbuying the gold, not retail.
There's a lot of evidencearound that, not in play yet,
(41:28):
but if, when it comes, theminers might catch up.
Speaking about frustrating goldis frustrating, but miners can
be especially frustrating.
Speaker 2 (41:35):
Oh yeah, because sometimes their correlation to
the price is zero.
Buy the junior miners becausegold's going to leverage and it
does, and the junior minersdon't do anything and stuff like
that.
That happens to a lot in thosemarkets.
Speaker 1 (41:49):
So is there anything in that space that gets you
excited?
We're going to talk about yourindex shortly, but beyond that,
and what you're doing alongsideyour own personal investing, do
you play with the gold miners atall?
Do you play with gold itself?
Speaker 2 (42:01):
In and out.
I've played with gold foreverand a day.
I'm old enough to go all theway back to Central Fund of
Canada that I used to own thatthing for forever and a day.
Ian McCavity's a closed endfund that traded in Toronto.
Boy, there's some old namesright there as well.
So currently I'm not in goldand it's not because I don't
(42:23):
like it, it's just, you know,maybe it's neglect.
I just been looking at otherplaces and other things and, as
you mentioned, tied up with myown fund and stuff like that,
that I haven't really venturedoff into gold.
But I just don't have a goodfeel for what should be the next
move in gold and that'sprobably the biggest reason why
(42:44):
I'm not playing it so, uh, youhave an index, you have an etf
that seeks to track that index.
Speaker 1 (42:54):
Yep, uh, you are getting a taste of the challenge
of raising assets, you know,and getting people to be aware
of a product in a very saturatedworld.
I always go back to I thinkwhat people don't understand
about the fund world is um, inorder to compete, you have to do
something different, becauseyou're not going to compete
against the vanguards of theworld, so you've got to have
something that's unique which,hopefully, when it works, it
(43:15):
works really well.
When it doesn't work, itdoesn't get crushed, depending
upon the cycle you're in.
Talk about the index on theshare my screen just to show it,
jim's got it on his pinned posthere as well as his Q2 letter.
Etf WTBN index has done quitewell.
I get the sense that peoplestill don't want bonds in
(43:40):
general.
So you're maybe hitting upagainst some asset class demand
issues, but talk about the indexand talk about where you see
demand maybe shifting, becauseif the Fed is going to be
cutting rates, it seems likethey're going to.
I'd bond you and do well goingto be cutting rates.
Speaker 2 (43:51):
It seems like they're going to I'd bunch and do.
Well, let me talk aboutstructure and then I'll talk
about what I do and exactlyabout the.
So structure I technically amnot an ETF manager.
What I am is I'm an indexmanager.
We have the Bianco ResearchTotal Return Index.
Biancoadvisorscom explains theindex.
It's a discretionarily managedfixed income index.
We're always long the bondmarket.
(44:12):
We change our weightings,whether duration, whether we
want a position for yield curve,flattening or steepening,
whether or not we want toposition overweight or
underweight, corporatesoverweight or underweight,
structure or mortgages, someother index bets like high yield
, the dollar tip, securitiesemerging and the like.
(44:33):
So we manage the index.
I'll tell you where it is.
In a second Wisdom Tree is ourpartner.
They brought up a tracker ETFto our index.
If you want an example, the S&Pindex committee manages the S&P
500 and SPY just tracks the S&P500.
We're set up the same way.
I'm the head of the BiancoResearch Index Committee and
(44:56):
WTBN tracks us.
So what you see up on thescreen is the orange line is the
Bloomberg US aggregate index.
It's like the S&P 500 at thebond market and the blue line is
our index and the black lineshows that we've outperformed
the Bloomberg aggregate index byalmost 100 basis points 98 to
(45:18):
be exact, through the end of thesecond quarter.
So, yeah, we're off to a goodstart, relatively speaking.
You're right, it's a challengeto get people to notice you when
there's 5,000 other these fundsas well too, but we've been
getting a little bit morenoticed and a little bit more
inflows recently, so that's beenencouraging for us.
(45:41):
And you're right, we areoffering you have to offer
something a little bit different.
What we're trying to argue, andwhat we've argued on our website
and stuff is no one can beat anindex is what everybody says.
Well, that's true in equities.
The equity data shows that it'svery, very difficult to beat an
(46:01):
index.
But in fixed income, it's verydifferent.
About half the active managers,if not more, can beat an index,
and we're beating an index aswell too.
Now, why is that?
I'll give you one simple answer.
In equity land, your biggestweightings, your mag seven, are
your all-stars.
If you are a stock picker, youbetter pick seven stocks or five
(46:25):
of those seven stocks,otherwise you have no chance to
outperform an index.
But in fixed income land, yourbiggest weightings are your
problem children.
It's your countries that haveborrowed too much debt, it's
your over-levered companies,it's your bad structures and
mortgages.
You can see those and you canavoid those or go towards the
(46:47):
ones that have better structuresand set up to outperform an
index.
An index can't change even ifthe structure is bad.
That's why we've argued that infixed incomes, you should be
looking for an active managerand in equities, you should be
looking for a passive manager,and that's what we're holding
ourselves out.
As for anybody who's looking foractive money, why did I pick
(47:09):
fixed income?
Because, as my friend, jimGrant liked to say, who writes
the newsletter, grants interestrate observer.
It's nice to have an interestrate, to observe again that, now
that we've got a four or five5.3% yield on cash, there's
things to do and there'sopportunities again in the bond
(47:30):
market In 2019, 2018,.
When you were sitting therewith a 2% yield and zero on
money market funds, it wascollect very small coupons and
wait for the bond market toexplode.
Well, it did, and a lot ofpeople have said well, isn't the
last three years been like theworst total return in the bond
market in the last 100 years?
(47:50):
Yes, we started a fund inDecember because we said, okay,
we needed to get from zero to 5%.
That was an excruciatingprocess for the bond market to
get there, but it's there now.
That's why we decided to startthis fund late last year, or the
index and then the tracker fundto be more exact year, or the
index and then the tracker fundto be more exact, because then
(48:11):
we wanted to try to takeadvantage of it.
So anybody who's looking for a40-legged and a 60-40 portfolio
or a fixed income alternative,that's who we're holding
ourselves out for.
So yeah, thanks for letting meexplain it.
Now, where are we?
If you go back to that websitethat you had up or the tweet you
(48:33):
had up a little bit ago on theright-hand side, my buddy, eric
Hale, sent me that little graphwith the roller coaster on the
right and I said we had beenshort duration, thinking that
rates were going to rise.
We had gone to neutral durationat the end of April at 4.7%.
(48:55):
We had a bet on risinginflation break-evens, which
worked out well for us.
Currently we're kind of neutralacross the board, with a small
bet long the dollar through somecurrency swaps.
So I said you know, okay, we'rean active manager, but we're
(49:16):
pretty much positioned like theindex.
Everything's neutral and I usedthe analogy.
We're kind of like at the topof the roller coaster, where we
want up to the top and nowthere's a whole bunch of tracks
up here that the roller coastercan pick as to which direction
it wants to go.
And that's why I decided that Iwanted to move to neutral and
I'm waiting to see.
(49:36):
Is the Fed going to cut rates?
Is the economy going to reallydecelerate?
Are we going to go to 2% or arewe going to go more towards my
thinking that we're going tohold 3% on inflation and that
it's just a cyclical downturnand the economy stays strong and
that even if the Fed cuts rates, that that might be a mistake.
That's my belief.
I'm not ready to go there yet.
(49:57):
I was waiting for a little bitmore evidence.
So we're kind of neutral, but Isuspect by Labor Day we won't
be neutral.
I'm just throwing that out.
Conceptually.
I don't plan on staying here atthis neutral position for a
long time, but that's kind ofhow we really look at investing
in the bond market.
Again, you can look at ourwebsite and you can look at our
(50:18):
fund.
If you've got any questions youcan ask me.
I'll answer any questions thatanybody has about it.
Speaker 1 (50:25):
Jim, as we wrap up, where can people find some of
your work and some of yourresearch?
Where can people find some ofyour work and some of your
research?
And maybe the thing which, toclose off, that you think most
people need to pay moreattention to, that's not getting
a lot of media hype that youare starting to focus on.
Speaker 2 (50:42):
So, to answer the first part of your question, I
told you about Bianco Advisorsand WTBN.
Biancoresearchcom is my website.
I've been in the researchproviding business for 30 years.
I also am very active on socialmedia in three places
Biancoresearch at Biancoresearchon X at Biancoresearch on
YouTube and under my name, jimBianco, on LinkedIn.
(51:05):
So I tried to post some stuffand I got some ideas.
I'm going to post the next dayor two up there as well so you
can request a free trial for ourresearch.
You can follow me on socialmedia.
The thing that I would arguethat people are not focused the
most on is that thing I talkedabout at the beginning.
When Jay Powell gives hisspeech, at the beginning of
(51:29):
every one of his pressconferences he says well, the
economy is broadly returning topre-pandemic levels and you know
you hear a lot of economistsgoing we're reverting back to
normal.
Their argument is there wasn'ta cycle change, there wasn't a
huge shock to the system.
You shut down the globaleconomy and you had some of the
(51:51):
most wild financial markets inhistory in 2020.
That didn't leave a legacyeffect.
I think the legacy effect is itended the inflation cycle and
some others.
Now maybe I'm wrong, but whatI'd like you to do, jay, is tell
me why that event in 2020didn't matter, that everything
that was will be.
Even though one third of thepeople have not returned back to
(52:14):
the office Doesn't matter.
Everything that was will be,that the cycle that we had
before 2020 will continue.
I think that's the thing thatpeople have to start thinking
about.
Are we in a different cycle?
Now I'll point out one otherquick thing.
1981 was the end of a cycle,the inflation cycle Old enough
to be around back then.
But as late as 1985, thesmartest and best people were
(52:37):
telling you we're going back to15% inflation one more time.
That inflation cycle did notend in 1981.
It took them four or five yearsto finally realize that that
cycle changed.
Right now, you hear everybodytalking about deflation going
back down.
We're going to seemicroscopically low interest
(52:58):
rates.
That cycle is over is what Ibelieve.
Now, if I'm wrong on that, makethe case that the cycle is not
over.
Make the case that what was in2019 will continue as we go
forward from here.
People just assume that, and Ithink that that's where, well,
(53:18):
if you're just going to assumewe're in the same cycle.
When we're not, theneverything's going to go haywire
.
Now I'm hoping the idea thatmaybe I'm wrong, that the cycle
didn't change, but make the case, make the case.
They don't even want to makethe case.
That's why they broadlypre-pandemic levels.
Returning to normal as ifeverything has happened since
2020 is not a new cycle.
(53:39):
It's abnormal for the cyclethat we all understand that we
should be in.
That's what I think people havegot to start thinking about.
What changed about 2020?
It was from an economicstandpoint.
It was as momentous of aneconomic event the complete
shutdown of the global economyand restart of the global
economies anything we've seen ineconomic history and I'm making
(54:02):
my case it will and is having alegacy impact on the way that
things work.
Speaker 1 (54:08):
Avery, please make sure you check out Jim, as well
as his index and index trackingfund ETF, and hopefully I will
see you all on the next episodeof Lead Lag.
Live, jim.
Always a pleasure, thank you,sir, enjoyed it.
Cheers everybody, thank you.
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me for the rough houris Mr Jim Bianco, who I know a
lot of people are very familiarwith.
But, jim, for those who are notfamiliar with you, introduce
yourself briefly.
Who are you?
What have you done throughoutyour career?
And talk about some of yourresearch.
Who are you?
What have you done throughout?
Speaker 2 (00:23):
your career and talk about some of your research.
Jim Bianco, president andfounder of Bianco Research.
And in the last year I'm alsothe founder of Bianco Advisors,
which runs its own index, whichthere is an ETF, wtbn Wisdom
Tree, bianco Nancy.
That is a long, only fixedincome ETF.
We can talk about that a littlebit later.
(00:43):
I've been in the financialmarkets now approaching 35 years
actually a little bit longerthan that now.
I was actually employed on WallStreet during the stock market
crash in 87.
That's how far back I go.
Macro research, primarily fixedincome, bent kind of
eclectically, jump around in allkinds of topics from politics
to crypto and everything inbetween.
(01:05):
So that's my, as they like tosay, my TLDR.
Speaker 1 (01:07):
All right let's start very high level, because you're
known for a lot of that macrowork, as you noted.
As we know, the economy is notthe market and it's certainly
not five stocks which we'lltouch on as well.
But where are we on the fightagainst inflation and the Fed
pulling off the soft landingwhich everybody says they pull
(01:29):
off until the hard landing.
Speaker 2 (01:33):
Yeah, I'll go even a little bit more cynical on that
last part.
Wall Street loves to forecast asoft landing because there's no
accepted definition of what asoft landing is.
So I'll say soft landing andthen in a year I'll come back
and I'll torture some definitionand I'll tell you I was right.
But to that end, let me giveyou the high level where I've
(01:55):
gone with the economy.
Every time there's a financialcrisis or recession and we had
both in 2020, the economychanges and I've often argued
change is not worse, change isdifferent, and I think that this
economy changed and I think alot of cycles ended in 2020 and
new cycles have begun.
One of the cycles, I think,that ended in 2020 was the
inflation cycle.
We are not.
(02:17):
We were in a disinflation,maybe deflationary cycle until
2020.
That's over.
We are now in what I'll callthe sticky inflation cycle
combination of remote work,which has fundamentally changed
the labor market,deglobalization, which was in
place before 2020, but it's beenaccelerating since and maybe
(02:38):
using energy more as a politicalweapon.
That's more of a look at Russia.
It probably means that we arein a 3% to 4% inflation world,
not a sub 2% inflation world.
That matters.
That matters a lot.
That keeps interest rates up.
That keeps interest rates high,and so I would argue that that
is the environment that we'vebeen in and that we are going to
(03:01):
continue to be in as far as theeconomy goes in, and that we
are going to continue to be inas far as the economy goes.
Economists like to talk about aterm called potential GDP.
What that is is that is, whatwould the or what should the
economy grow at if no one'strying to stimulate it or
restrain it?
And that's not a measurablenumber, but it's roughly two,
two and a half percent.
(03:23):
We grow above it.
We grow below it, but weaverage around 2.5%.
The second half of 2023, we hadbig numbers on the economy grew
well above potential.
First half of 2024, we'regrowing below potential.
That's the cyclicality of theeconomy.
I'm not in the soft landing orthe recession camp.
I am in the we are continuingto grow a trend camp.
(03:47):
Well, that sounds great.
Where's the problem?
Problem is, that means thatit's probably going to keep us
in that three to four percentinflation world, and while the
Fed wants to cut rates and isprobably going to cut rates,
I'll argue it's a mistake.
They shouldn't cut rates,they'll rue the day that they
(04:07):
did.
It is what my fear is if theywind up cutting rates, because
they'll put at risk ignitinginflation when it's already at a
sticky level.
So that's kind of the highlevel of where I've been with
the economy for the last coupleof years.
Speaker 1 (04:24):
I will say it is odd to me that they want to cut
rates with the credit spreads astight as they are I mean most
of the time right when the Fedis acting.
They're acting because they'retrying to crush default risk,
which is being priced into thehigh yield part of the bond
market.
Speaker 2 (04:39):
You know you're right , it is, it is, and it's very
difficult to get an answer fromthem.
I think it's political.
And I think it's political forthe following reason March 31st
2022 was the last time JayPollitt met with President Biden
if he saw any cognitive declinein the president, and he said
(05:04):
he hasn't met with him in personsince that meeting on March
31st in 2022.
So that was his way to punt onthe question, but that was an
important meeting.
That was when he was in theWhite House with Yellen and with
the president, and effectively,I've talked about this for the
last couple of years.
Joe Biden pointed at Jay Powelland said he's your man.
(05:25):
He's your man who's going toget inflation down to 2%.
So don't worry, america, he'sgoing to fix it.
And the Fed has been underenormous pressure to get the
inflation rate down and they'reunder enormous pressure to show
that the inflation rate is down.
That's what I mean by beingpolitical.
We want to cut rates.
They want to cut rates becausethey want to say see, we're on a
(05:48):
glide path, 2%.
See, we're the professionals,we know how to do this.
See, we fixed this inflationproblem, as opposed to being
able to look at it objectivelyand see what they want.
They're looking at itpolitically and saying we have
to convince everybody that wefixed this problem.
We have to convince everybodythat we've fixed this problem.
Now, in fairness to Paul, theinflation rate on March 31st
2022 is 8.6%.
(06:08):
That's over your CPI.
Today it's 3%.
So it is down a lot from thatperiod and they could take if
you want to argue, they couldtake credit that at least while
they've been fighting inflationit's gone lower.
I just question whether or notit's going to continue to go
lower from here.
So I think that there's a lotof politics in there.
And then the other thing I'llgive Paul a little bit of a pass
(06:30):
on.
When he does his pressconferences, he's standing there
and he is describing theconsensus among the Fed
officials.
If you look at the dot chartremember the dot chart is where
do they think each one of the 19Fed officials, where do they
think the funds rates can be atthe end of 2024, 2025, 2026, and
(06:53):
the long term?
If you look at that 25, 26 orlong, especially the 25, 26
chart those dots are all overthe place.
And in 2025, there's a memberof the Fed that thinks that they
will not cut rates one timebetween now and the end of the
year.
There's another two members ofthe Fed that think they will cut
rates 10 times 1025 basis pointcuts between now and the end of
(07:17):
next year and everywhere inbetween.
So when Powell stands there atthe podium and he tries to talk
about what the committee isthinking and where the committee
is going, there's no agreementamong those members in the
committee.
They are all over the place,and so he's trying to present it
as yeah, we all agree on whatwe're supposed to.
No, you don't.
You don't agree on what you'resupposed to do.
(07:38):
So that further complicates hismission right now.
Speaker 1 (07:46):
A question off of YouTube.
I'll show on the screen hereand I'll say it loud for those
listening.
Can Jim explain howquantitative tightening brings
inflation down?
All right, so we have this 3%4% sticky range you think that
we're going to be in.
How does QT factor intoanything?
Speaker 2 (08:00):
So quantitative tightening in simple terms.
So quantitative tightening insimple terms, quantitative
tightening is the size of theFed's balance sheet.
It peaked at about $8.5trillion.
It is down now under $8trillion.
What does that mean with theFed's balance sheet?
Remember that the central bankwe use the vernacular but it's
(08:22):
not specific the central bankcan create money.
Print money is what we call it.
They're not actually printingdollar bills, the Bureau of
Engraving does that but they canelectronically create money.
When they electronically createthat money, what happens with
it?
It purchases treasurysecurities and at its peak I
(08:45):
don't know what the number isright now, but at its peak it
was nearly 30% of the treasurymarket was owned by the Fed.
Through quantitative easing, asthey do quantitative tightening,
they are reducing the amount ofmoney that they've created.
They're actually extinguishingit, if you want to use that term
.
So that means that they're notselling treasury securities.
(09:06):
What they wind up doing isremember, bonds mature and as
they mature they just buy backless.
So the amount of buying power,buying pressure that comes from
the Fed to hold interest ratesdown dissipates and that should
help keep interest rateselevated, and it's higher
interest rates that is supposedto restrain the economy, and
(09:29):
that restraint of the economythen puts downward pressure on
inflation.
So that's kind of the simpleanswer of what they're trying to
do with quantitative tightening.
Now it gets a lot morecomplicated than that how
they're doing it, what theirtargets are, how successful are
they, and the like.
Speaker 1 (09:49):
So I remember back in my college days and CFA
studying days the narrative thatstocks are the hedge to
inflation.
This has been a strangeenvironment for stocks to be
hedged to inflation because ofhow much concentration there is
in the stock market now.
(10:09):
So I want to share on thescreen something that you put
out on X where, if you look atgive me a second folks, there we
go, and this is a post that Jimput out that went fairly viral
around 300,000 views, at least a60-year extreme.
This is looking at the fivelargest S&P 500 stocks and one
(10:30):
day it's the opposite Fivestocks are killing the index
funds while everything elseoutperforms.
I myself have called this theconcentration bubble, really for
like eight, nine months.
So you look at the S&P 500, itlooks like a bull market.
That's clearly been a you canargue a hedge of sorts against
inflation, but most stocks, as Ikeep referencing, are still
below their 22-month highs.
So it's a very odd hedge inthat it's a concentration type
(10:54):
of dynamic.
Do you find that to besomething that, in your view, is
actually really bad or is thatjust the way way in quotes the
stock market is?
Speaker 2 (11:08):
Yeah, it's kind of the way the stock market is, but
we need to understand what'shappening with it.
As I commented on, this is so29% of the S&P is five stocks.
I've only got data back to 64,and this is the highest in at
least 60 years.
I don't know if there's everbeen a period higher than that.
What does it mean?
(11:31):
Well, first of all, why do youbuy SPY or VOO or IVV?
Those, by the way, are the threelargest ETFs in the world and
they're all S&P 500 trackers.
One is StageStreet, one isBlackRock and the other is
Vanguard.
Why do you buy those?
Because you believe in theconcept of diversification.
(11:52):
I want to own a broad mix ofthe stock market.
So what does it mean?
When the stock market'sconcentrated, you're getting the
least amount of diversificationin 60 years.
So your portfolio, or anybody'sportfolio, is Nvidia, it's
Microsoft, it's Apple.
Now, maybe it's working.
(12:14):
I looked the stock markets upon the early percent today.
It's working and it will workuntil it doesn't.
But understand, I'm not bullishon the stock market.
I'm bullish on Apple, nvidia,microsoft, amazon, meta, tesla.
That's what's bullish on.
Speaker 1 (12:30):
That's so well said, because so much of the
frustration I see from trollsthat are coming at me with my
own views on things is definingthe market.
Speaker 2 (12:41):
Right, exactly.
And so those are the stocksthat are driving the rally.
Now I'm not making anystatement about how much longer
they're going to drive the rallyor when it's going to end or
what is the catalyst for itbeing ended.
But understand, that's your bet, is what you've got.
And what I also said is I cansee a period in the future when
(13:08):
you could do the Dave Portnoything and randomly pick letters
out of a Scrabble bag and youwill outperform the S&P 500
because those seven stocks willbe dragging it down and dragging
it down and any random letteryou bought will do better.
That's the other side of thisequation.
Now, when that happens, we canargue, but right now that's
really what you're playing on.
(13:29):
And what is the theme aroundall of that?
The theme around all of that isAI.
So we're all playing the AItheme, whether we like it or we
don't.
Now, if you've ventured awayfrom that, you bought the equal
weight S&P RSP, you bought themid cap.
You bought the Equal Weight S&PRSP.
You bought the MidCap, youbought the Russell 2000,.
You're mid-single digits onyour returns and a money market
(13:55):
fund's up 3% for the year.
So you're not that far ahead ofa money market fund for the
rest of the year.
So the rest of the market isn'tdoing a whole lot.
These big companies are suckingeverything up.
Last thing what's differentabout this cycle than everyone
else?
Now you go back to 2000,.
You go back to any of the otherbubbles.
(14:15):
We've had these bubbles before.
The difference is these bubblesusually start with very small
companies.
We called them B2B and internetcompanies.
You know the hours of the world.
They were tiny companies in 97and 98.
And they take off and then theyswell, and they swell, and they
swell.
What's different about this oneis we're going to start a mania
(14:36):
with the largest companies inthe United States and make them
even larger.
I don't know if we've reallyseen an example of where we
started with the largest andmade them larger.
We usually start with small tomedium-sized companies and then
they end up as the largest andthen the bubble pops.
So that's what's a little bitdifferent and that's why the
market is so concentrated andthat's why I think the next time
(14:58):
somebody buys SPY, just say I'mbuying NVIDIA, because that's
essentially what you're doing.
And I'm not saying that's bad.
I'm just saying understand thetrade that you're making.
Speaker 1 (15:08):
Yeah, no, I love that .
And you are exactly right.
Everybody's in the exact sametrade.
I've used that analogy we'reall on the same side of the boat
holding an anvil, whether yourealize it or not.
Now I guess the questionbecomes what's the catalyst for
that to change, for thatbursting of the concentration
bubble which, similar to whatyou just said, I myself have
argued we've never seen it inthis way before.
It seems to me there's twothings that can take place.
(15:31):
I want to get your thoughts onthis.
One is and we may be startingto see it now which is that
inflation comes in much lowerover time, in which case the
bets are the Fed starts to cutaggressively.
That gives the lifeline tosmall caps which have been held
back from refinancing.
Risk concerns.
Small caps are working big timeright since last week.
The other catalyst, I think,could be just a recession right,
(15:53):
because every recession,unemployment picks up.
Unemployment picks up.
People start having to selltheir assets.
Their assets are primarilymarket cap weighted Vanguard
type products At the margin.
That happens you don't have theautomatic flows coming in from
401k buys and that creates thatsort of decline, meaning the
large caps catch down toeverything else.
Is there another scenario,another catalyst that could just
(16:16):
cause a bigger rotation tobreak this strangle.
Speaker 2 (16:20):
Well, yeah, I mean there is.
But let me go through yourcatalyst.
The first catalyst is the Feddeclares victory.
We're professionals.
Do not attempt this at home.
We got the inflation rate downto 2% with a soft landing.
Everybody hails the new godking, jay Paul.
Problem with that argument, as Isee it, is we're already at
(16:42):
about 190% of market cap to GDP.
The size of the stock market isthe largest relative to the
economy it's ever been, evenabove the 2000 peak.
Where's this new dollar that'sgoing to go into the stock
market?
What you might wind up seeingis it will go up marginally but
(17:02):
it'll be just kind of a bigrotation zero-sum game.
If you want everybody to gointo small caps, well, we're
going to take it out of the magseven, we're going to sell the
mag seven and we're going to goin the small caps.
And that could be problematicfor the S&P because that small
cap rotation out of the magseven will actually make the S&P
decline, even though thosesmall cap stocks are going up.
(17:23):
We sort of saw that on Thursdaywith the beat in the CPI number
for one day and then kind ofpetered out after that.
The recession scenario yes, therecession scenario is
definitely on the table.
Let me make a quick commentabout recession.
I've been using this line a lotand I want to keep using it a
lot.
There was an economist of noteRudy Dornbush was an MIT
(17:48):
economist in the 1970s and wasvery influential at the Fed and
he said a very famous lineeconomic expansions do not die
of old age, they're murdered.
What he meant by that was Ihear people talk about will the
economy roll over?
Will the economy pop?
Are we going to go intorecession?
(18:08):
If you look at every recessionfor at least the last 50 or 60
years, there's always been acatalyst, a murder.
Covid was the last one.
Housing was the one before thatthe tech bubble, the Gulf War,
spiking oil prices from $10 to$40.
You actually had $145 crude oilin July of 2008.
(18:28):
In terms of with the housingbubble too, something has to
murder the economy.
They don't just roll over.
Now you could argue that theeconomy is more vulnerable to
being murdered because of itscurrent state, with the high
debt levels and everything, andI'll agree with that.
Murdered because of its currentstate, with the high debt
levels and everything, and I'llagree with that.
So a recession would do it, butit would most likely come with
(18:50):
a murder weapon.
Now, to be fair, I thought themurder weapon was 18 months or
15 months ago when SiliconValley Bank failed.
I thought there it is, there'sthe murder weapon.
It turned out not to be, butthat doesn't mean that the
concept doesn't work.
So, yes, we could be veryvulnerable to something along
those lines.
Let me throw in another scenariofor you.
(19:10):
I don't know if a lot of peoplerecognize this.
About NVIDIA, I said you know,if you bought the S&P, you buy
NVIDIA.
Did you know I'm saying thisrhetorically that five customers
are 50% of NVIDIA's revenues?
Five customers it's Microsoft,it's Tesla, tesla's bought over
(19:33):
a billion dollars of NVIDIAchips so far.
It's Supermicro, it's OpenAI,it's Microsoft, and that their
cost of goods sold 20% of theircost of goods sold is from TSMC,
taiwan Semiconductor.
It's a very close circle.
I mean, you know, the funnything about NVIDIA is yeah, do
you own any NVIDIA chips?
Do I own any NVIDIA chips,michael, do you own any NVIDIA
(19:54):
chips?
Nope, none of us do.
It's a specialized product forspecialized customers.
Now they run twovulnerabilities customers.
Now they run twovulnerabilities.
Vulnerability one is Intel andMatt Fico devices and even
Taiwan semi are looking going.
Man, they're worth $3 trillion.
Maybe we should try and createa better product than them, or
the same product that at a lowerprice, and undercut them, and
(20:16):
we only have to make five phonecalls to basically sell this
product.
And the second one is kind of astory that's kind of coming into
the fray.
You know what's AI doing for us, where is it going?
What is the great hope for AI?
Now, in 25 years, the greathope for AI might be everything
(20:39):
we say, just like in 1999, thegreat hope for the internet was
realized by 2024, 25 years later.
But in March of 2000, theNASDAQ peaked and it took 16
years to make a new high afterthat peak.
So maybe a realization thatwe're buying forward the AI
(21:03):
scheme, but it's got to happenin one or two or three years.
If it's more of a long tail 10,15 year type of story that we
eventually get there, we're toofar ahead of ourselves with
these prices.
That's the other thing you'vegot to be careful of as well too
.
Like I said, I believe the AIstory.
I believe AI is going to beeverything it's going to be.
(21:24):
It's got to be that in a year.
It's got to be that in twoyears, it cannot be 10 years.
You've already bought, you'vealready discounted it now for
the next 10 years, and thereinlies the problem.
And that's exactly what we didwith the internet in 99 and 2000
.
It eventually realized all ofthose hypes and dreams.
It just took 20 years.
(21:45):
It did not take 20 months likeeverybody was hoping.
It was going to be in 99 or2000.
Speaker 1 (21:54):
Another comment from a listener on YouTube.
Jim Hockaday was sayingrecession is the only way to get
inflation back 2%, but themarket is never high enough for
the billionaires.
Main Street versus Wall Street,billionaires, main Street
versus Wall Street.
Is there anything that couldget us back to 2%?
That would prove that thesiswrong?
(22:15):
On three to four, where itwould not involve some degree of
pain or economic hardship.
Speaker 2 (22:20):
Yeah.
So you're right.
A recession would get us backto 2% or maybe lower, and we
would stay there as long aswe're in recession and then when
we come out of recession, thenwe go back up.
The story that gets us back to2% or lower is what most
mainstream economists believethat the cycle did not turn in
(22:42):
2020, that this is acontinuation of the pre-COVID
cycle and that this is just abunch of temporary long tail,
one-off supply chain problems,post-covid adjustments, too much
stimulus, excess savingsgetting run off, and when all of
that goes run off, we go backto that 2% inflation world.
(23:05):
That is always a possibilitythat it isn't a different cycle
like I'm arguing it is.
It's back to the pre-2020 cycleis what it would be, if I'm
right, and this is a new cycleof three-ish percent.
How long will this last?
To the next recession?
(23:25):
When you have a recession or afinancial crisis, it shocks the
system and it changes.
When you have a recession or afinancial crisis, it shocks the
system and it changes, and maybewe shock the system and we
change it in a way that wouldalleviate the chronic supply
problems that we would kind ofrectify.
I think remote work is thebiggest one.
I think that, just to go off ona quick tangent, I think that
(23:46):
most people are not fullyappreciating how much the labor
market has changed and that itis a very, very different labor
market.
And, to put it in thisperspective, labor workers have
more power over demanding wagesthan management anytime maybe in
the last generation, if notlonger and that is keeping wages
(24:07):
up.
And, as I like to say, ifyou're getting a 4% or 5% raise
every year, you could pay 3% to4% inflation.
You could pay 3% to 4%inflation.
So that's part of why I thinkthe inflation is up.
But if the mainstream argument,the Fed's argument, that we're
on the last mile to 2%, meaningnothing changed in 2020, it was
(24:29):
just a big one-off.
We shut down the global economy, we restarted it and then
everything went back to the wayit was Well, the labor market
didn't because of remote workThen, yes, we could go right
back to 2%.
Finally, if I could make aHockaday's comment about the
rich and the billionaires, thisis a K-shaped economy, more so
(24:52):
than ever, and the reason it'sK-shaped the letter K, one going
down, one leg going up, and youcould argue isn't it always a
K-shaped economy?
Yes, the haves do better thanthe have-nots, sort of.
But what's changed?
This one is inflation.
2010 to 2020, the inflation ratewas under 2%.
The average wage increase was aslightly over 2%.
(25:15):
To use a tennis metaphor, 2010to 2020, if you're in the lower
half of income you held serve.
You got 2% more at your jobevery year and everything costs
2% more.
So when you go to the store youcan buy the same things that
you bought a year ago.
Didn't get worse.
You held serve Rich.
Money got richer because thestock market kept going up and
(25:35):
home prices kept going up orsomething like that.
Sure, they didn't get worse.
But since 2020, cumulatively,the bottom half has gotten worse
because wages have not kept upwith the cumulative inflation.
That's why everybody's so angryabout inflation right now.
Top end, you could argue therich.
Maybe their wage increaseshaven't kept up with inflation,
(25:56):
but they have portfolios.
They own real estate, theirhome, if nothing else, and that
they've benefited from thoserecovering as well.
Bottom end bottom end doesn'thave a home.
They rent.
They don't have a stockportfolio.
Bottom end doesn't have a home.
They rent.
They don't have a stockportfolio.
They're not debating whether ornot their SPY holding is NVIDIA
.
They don't own any stocks, sothat's why they're so angry.
(26:20):
Last thing, two things to keepin mind about this too, is about
75% of all consumer spending isthe top 50% of income.
So if the top 50% of income seetheir homes go up, see their
portfolios go up and they feelbetter and they start spending,
the economy stays strong.
And the other thing is rememberone person, one vote.
(26:42):
Jeff Bezos might get a millionvotes or 10 million votes when
it comes to the economy becauseof his net worth, or Elon Musk,
but they get one vote at theballot box.
And so does somebody Musk, butthey get one vote at the ballot
box.
And so does somebody on hispublic assistance get one vote
at the ballot box.
That's why the president'sapproval rating slowed down so
much and that's why people saythat the economy is terrible.
It is terrible for a bigsegment of the population, the
(27:05):
lower half.
It isn't for the upper half,but the upper half do all the
spending so that the economicstatistics look okay, but the
broad population, the K-shapedeconomy, it isn't for them in
the bottom half, and that's thestress point that we're seeing
with this economy right nowwhere he says I have a question
(27:33):
If 5.5% Fed fund rate isrestrictive, which it is for the
bottom 90%, what would happenif next time they try to raise
rates and 3.5% becomes toorestrictive and the bond market
says no?
Speaker 1 (27:39):
I guess the implication there is we just
keep leveraging higher andhigher, so now you're going to
have a lower high because it'sjust too much of a choking point
.
Speaker 2 (27:47):
Right.
So let me answer the question alittle bit generically.
Is five and a half restrictive?
Yes, and this is, by the way,when I talked about earlier the
Fed dot chart that they're allover the lot.
Some members think they'regoing to have 10 rate cuts by
the end of next year.
One member thinks that they'regoing to have none and they're
all in between.
It really comes down to a verysimple question what is the
(28:10):
neutral funds rate?
The neutral funds rate is whatis the rate that neither
stimulates or restrains theeconomy.
According to the Fed, becausethat's their long-term shot,
it's 2.75%.
It's under 3%.
This is why they keep talkingabout wanting to cut rates,
because they say look, we're at5.
Half.
We got to get to 275.
(28:31):
That's 10 rate cuts.
That's the 10 rate cuts.
Right there.
We got to get going here.
We got a lot of work to do.
We got to do 10 of these.
But if you look at the market,there are various metrics that
measure it in the market.
Back in my timeline from aboutthree weeks ago I did this.
I'll try and update it againthis week.
The marketplace thinks that theneutral funds rate is closer to
(28:53):
four, meaning five rate cuts,maybe four rate cuts is all you
need to get back to neutral.
That explains why has it beenthat we've been at five and a
quarter five and a half for ayear.
Stock market's going up theeconomy, we're debating whether
or not there's a soft landingafter all those rate hikes and
holding for five and a quarter,five and a half a year.
(29:13):
There's no recession at thispoint because maybe that's, I'll
agree, restrictive, but notthat restrictive.
It's not 200 basis points or250 basis points of
restrictiveness, it's maybe 125to 100 basis points of
restrictiveness.
Why does that matter?
Because if the Fed is intent oncutting rates sooner rather
(29:35):
than later, because the Fedthinks they got 10 rate cuts to
go and they do chop the threeand a half and that turns out to
be stimulative and that turnsout to reignite inflation, we
could have a real problem in ourhands.
Watch the bond market.
Watch the bond market on thisone.
In July 26th, one year ago of2023, was the last rate hike.
(30:00):
Excuse me, last rate hike wasone year ago, july 26th last
year.
Where was the 10-year yield?
It was at 380.
And everybody said that's it.
The Fed's done 100% right.
The Fed was done.
This is it.
The Fed's done.
100% right, the Fed was done.
This is it.
Everything's going to turn andit's going to go better.
What happened in the next threemonths?
Stock market fell 10% and bondyields went to five.
Why?
(30:21):
Because the bond market wassaying, oh, you're not going to
stay restrictive anymore.
Well then you're going to riskinflation.
I don't want to own your bonds.
And the next move in the bondmarket was straight up in yield
and that actually put a lot ofpressure on the stock market and
the stock market wound up goingdown.
(30:42):
If the Fed starts cutting rates,do not assume that the bond
market will rally.
You could wind up producingmuch higher interest rates,
because it would be a rejectionof the Fed's policy.
Because the bond market wouldsay look, we're still not sold
on this idea that we've gottenpast this inflation problem.
And now you're going to startfeeding sugar to this thing and
(31:03):
hype it up even more.
Maybe I don't want to own yourbonds anymore.
Rates go up and that could putpressure on the stock market.
I might add, in the last 18months we had a 10% correction.
As I mentioned, july to Octoberlast year, march, april this
year.
We had a 6% correction in theS&P.
What was the consistent themebetween both of those Was?
(31:23):
The 10-year yield was over 4.5%.
So higher rates coulddefinitely be something that
could really pressure the stockmarket, because it has.
Now we're 420.
Right now we're not at 450.
But if you wind up making morenoise about cutting rates,
cutting rates, cutting rates andeverybody says it's the most
(31:44):
bullish thing ever leverageyourself up and get in the stock
market and rates go up.
Because the bond market hasdecided that if you're not
serious about the inflation rateI'm not serious about owning
your bonds it winds up drivingrates up and the stock market
doesn't like that and it windsup going down.
They make it worse.
So you have to be careful.
So what I'm arguing here isthere's this saw, and cutting
(32:05):
rates is always good.
Raising rates is always bad.
That's not always the case.
Cutting rates is good when themarket is convinced there is no
inflation problem.
Raising rates is bad when themarket is worried that there is
no inflation problem becauseyou're getting too restrictive.
So you got to put that into thecontext.
(32:26):
I happen to think that cuttingrates would be a mistake.
I said that before because Idon't think we cutting rates
would be a mistake.
I said that before because Idon't think we've finished with
the inflation fight.
Let's see how the marketresponds to it as we get closer
and closer to that potentialSeptember rate cut.
Speaker 1 (32:42):
And presumably a big part of that is going to be how
the market interprets whathappens next to unemployment.
Elias from LinkedIn put aquestion here.
What are your thoughts aboutthe nonlinear relationship
between job openings and theunemployment level?
So job openings have obviouslybeen dropping, they're inverse,
unemployment rate rises andtypically I think when you get
(33:03):
past this stage is when it'shard to turn around.
From the research I've seen, isthere a chance that the stock
market, oddly enough, may like arising unemployment rate
because it means the Fed isgetting that lagged response in
just in time, the bond marketdoes not revolt and everything
you just said gets countered.
Speaker 2 (33:23):
Sure, I mean the stock market could be looking at
the unemployment rate andcreeping up to 4.1% and saying,
good, this will keep the Fed oncutting rates, keeping rates
down, and we like it when ratesgo down.
By the way, why is the stockmarket, I've argued?
Why is the stock market likerates going down?
(33:45):
Other than the obvious casethat it lowers the cost of
capital.
That's a big one.
Cost of money gets cheaper andthat helps company profitability
and the like, but it's also acompetition thing too.
Real quick, dr Jeremy Siegelwrote an update to his famous
book Stocks for the Long Runlast year.
In it he said what is thelong-term potential for the
(34:07):
stock market?
In other words, giveneverything we understand about
the stock market, what shouldyou expect it to do every year?
About an 8% return.
In other words, it might be 16%one year, zero the next year,
but over a long period of timeit averages eight.
That sounds about right.
Well, in 2019, when moneymarket rates were zero and bond
(34:28):
rates were two, we would screamTina, there is no alternative.
What are you sitting aroundwith no yield?
Why don't you get into riskierthings like stocks, and at least
get a return?
And that worked until 2020.
Well, in 2024, money marketrates are 5.3%.
The bond index the investmentgrade bond indexes are 5%.
(34:49):
So a lot of people are lookingaround going.
So I'll use the money marketexample.
That's 70% of what I shouldexpect out of the stock market
and it gives me a $1 NAV everyday.
So, no risk.
Okay, I'll take 70% for no risk.
Sure, it doesn't look like agood trade now.
Look like a great trade in 2022.
(35:11):
We don't know what that's goingto be going in the future.
So when rates go up, a lot ofpeople will conclude I'll just
take those bond yields, thankyou very much, as opposed to
risking the stock market.
And why is that?
Because most of the money isowned by older people Now,
typically as a cohort, as ademographic group.
(35:32):
The richest a demographic groupwill be is the day before they
retire and then they startdrawing down on their money.
So most of the money is ownedby boomers, and I've often liked
to describe a bear market astime.
Could the stock market have abear market?
Yes, could it go down 50%?
(35:52):
Sure, just to use an example,okay, great, but doesn't it
always come back?
Yes, that's historically beenthe case.
But if you're 65 years old andyou buy all the way into SPY and
it starts a bear market thatmight last five, six, eight
years.
You're thinking that's half myexpected life expectancy.
(36:15):
I don't want to spend half ofwhat I got left waiting to get
back to my high watermark.
I'll take bond yields.
Thank you very much.
If you're 35 years old, wavethem in all the way down,
because if it's 45 or 47, theyget back to the old high.
You got a good 20-year run tomake a lot of money before
retirement then at that point.
(36:36):
But the problem is the35-year-olds don't have the
money.
It's the 65-year-olds that havethe money.
So that's why bond yields thatthey also matter as well too as
well.
Speaker 1 (36:49):
too Curious to get your thoughts on gold.
I'd argue that I think thismove is really more driven on
anticipation of negative realrates to come, because that's
the kind of environment thatgold tends to do well in.
But this time it's actuallytrying to anticipate it as
opposed to react to that.
Any thoughts on gold and whyit's been doing as well?
(37:10):
Is it the negative real estate?
Is it some positioning toalternative, non-correlated
defensiveness?
Because people are skepticalabout treasuries?
There's not that manylong-running options.
Speaker 2 (37:20):
What do you describe it to.
Gold has been a very, veryfrustrating asset.
But I would argue your secondargument people are in search of
a.
Everybody right now is insearch of an uncorrelated asset
(37:43):
that what they want is they wantto own something so that, at
the end of the day, if they say,or like right now, or something
like that stock market's up 1%,Okay, then I kind of know what
all the other assets are doing.
If you tell me that that stockmarket's up 1%, Okay, then I
kind of know what all the otherassets are doing.
If you tell me that the S&P isup 1%, I'd like to own an asset.
That if you told me the S&P isup 1%, I don't know what the
other assets are going to do.
And, by the way, crypto may notbe that case either.
(38:06):
It's got a correlation to theups and downs of the stock
market A little less so recently, but it's still holding.
It's having a good day today,like the stock market's having a
good day.
So the hope is that people arebuying gold because they think
it's going to be an uncorrelatedasset.
Now there's been stories aroundit the end of the dollar's
hegemony that the dollar's goingto stop being a reserve
(38:27):
currency, I'll ask.
The only problem with thatargument is replace it with what
?
As soon as you give me a viablealternative to the dollar, it's
gone in three seconds as thereserve currency.
And don't make me laugh bytelling me it's crypto.
Crypto can be it in about 10years, when the ecosystem not
(38:53):
the price of the coin, theecosystem is like 100x larger
than it is right now.
It could be it.
It could be the euro, it couldbe the yuan.
They don't have the rule of law.
The Saudis aren't going totrade oil in the Saudi dinar
because it's too small acurrency.
It would just so distort theircurrency.
What you need is you need acurrency that trades trillions
(39:16):
of dollars a day, a currencythat has established rule of law
and a currency that has alegacy.
Of all that, there's only one.
There's only one, and that'swhy, like it or hate it, the
dollar is going to remain thereserve currency and it's going
to remain its status until analternative is created.
So all this talk about that.
The Saudis ended the 50-yearagreement about petrodollars.
(39:40):
Fine, it's just a piece ofpaper.
They've got no other choice butto leave the system the way it
is.
So instead of telling me what'swrong with the dollar, you need
to tell me what's going toreplace it.
Now that I've kind of went offon that tangent, let me come
back to gold.
I think that gold is benefitingfrom a lot of those kinds of
(40:01):
stories the perception thatwe're going to have a weak
dollar, the search for anuncorrelated asset.
The other thing about what goldis benefiting from is its
relative size Stock market's $47trillion in the United States.
If you add in world stockmarkets it's about 80 trillion,
over half of it's in the UnitedStates.
The bond market's well over$100 trillion.
(40:23):
Gold's like two.
So if you're going to put thatin that asset class with stocks
and bonds, a tiny movement outof stocks and bonds will have
enormous implications for gold.
But let me come back to myoriginal comment, single most
frustrating asset that I've everfollowed over the last several
years.
What's your opinion about gold,Michael?
Speaker 1 (40:40):
I tend to think of it much more as that point about
the non-correlated demand.
I think the breakout whichoccurred and I said that
repeatedly on X I said gold wassending a warning.
As you know, jim, I like to bea little bit bombastic in some
of the ways that.
I've read things and that wasbefore some of the dynamics of
the intervention from Japan withthe end, and also, obviously,
iran and Israel, which everyoneforgot about.
World War VII, I think is thenumber we were at at that point,
(41:03):
but it does seem like it's likeSuper Bowls at this point.
Yeah, exactly, it's like, butit does seem like that.
That is the case.
I wonder if that's, if that'ssmart money or not in quotes or
institutional money which youcan consider smart money.
I say that because I'm going toshow a comment from Mike Gannon
on LinkedIn here.
I think central banks have beenbuying the gold, not retail.
There's a lot of evidencearound that, not in play yet,
(41:28):
but if, when it comes, theminers might catch up.
Speaking about frustrating goldis frustrating, but miners can
be especially frustrating.
Speaker 2 (41:35):
Oh yeah, because sometimes their correlation to
the price is zero.
Buy the junior miners becausegold's going to leverage and it
does, and the junior minersdon't do anything and stuff like
that.
That happens to a lot in thosemarkets.
Speaker 1 (41:49):
So is there anything in that space that gets you
excited?
We're going to talk about yourindex shortly, but beyond that,
and what you're doing alongsideyour own personal investing, do
you play with the gold miners atall?
Do you play with gold itself?
Speaker 2 (42:01):
In and out.
I've played with gold foreverand a day.
I'm old enough to go all theway back to Central Fund of
Canada that I used to own thatthing for forever and a day.
Ian McCavity's a closed endfund that traded in Toronto.
Boy, there's some old namesright there as well.
So currently I'm not in goldand it's not because I don't
(42:23):
like it, it's just, you know,maybe it's neglect.
I just been looking at otherplaces and other things and, as
you mentioned, tied up with myown fund and stuff like that,
that I haven't really venturedoff into gold.
But I just don't have a goodfeel for what should be the next
move in gold and that'sprobably the biggest reason why
(42:44):
I'm not playing it so, uh, youhave an index, you have an etf
that seeks to track that index.
Speaker 1 (42:54):
Yep, uh, you are getting a taste of the challenge
of raising assets, you know,and getting people to be aware
of a product in a very saturatedworld.
I always go back to I thinkwhat people don't understand
about the fund world is um, inorder to compete, you have to do
something different, becauseyou're not going to compete
against the vanguards of theworld, so you've got to have
something that's unique which,hopefully, when it works, it
(43:15):
works really well.
When it doesn't work, itdoesn't get crushed, depending
upon the cycle you're in.
Talk about the index on theshare my screen just to show it,
jim's got it on his pinned posthere as well as his Q2 letter.
Etf WTBN index has done quitewell.
I get the sense that peoplestill don't want bonds in
(43:40):
general.
So you're maybe hitting upagainst some asset class demand
issues, but talk about the indexand talk about where you see
demand maybe shifting, becauseif the Fed is going to be
cutting rates, it seems likethey're going to.
I'd bond you and do well goingto be cutting rates.
Speaker 2 (43:51):
It seems like they're going to I'd bunch and do.
Well, let me talk aboutstructure and then I'll talk
about what I do and exactlyabout the.
So structure I technically amnot an ETF manager.
What I am is I'm an indexmanager.
We have the Bianco ResearchTotal Return Index.
Biancoadvisorscom explains theindex.
It's a discretionarily managedfixed income index.
We're always long the bondmarket.
(44:12):
We change our weightings,whether duration, whether we
want a position for yield curve,flattening or steepening,
whether or not we want toposition overweight or
underweight, corporatesoverweight or underweight,
structure or mortgages, someother index bets like high yield
, the dollar tip, securitiesemerging and the like.
(44:33):
So we manage the index.
I'll tell you where it is.
In a second Wisdom Tree is ourpartner.
They brought up a tracker ETFto our index.
If you want an example, the S&Pindex committee manages the S&P
500 and SPY just tracks the S&P500.
We're set up the same way.
I'm the head of the BiancoResearch Index Committee and
(44:56):
WTBN tracks us.
So what you see up on thescreen is the orange line is the
Bloomberg US aggregate index.
It's like the S&P 500 at thebond market and the blue line is
our index and the black lineshows that we've outperformed
the Bloomberg aggregate index byalmost 100 basis points 98 to
(45:18):
be exact, through the end of thesecond quarter.
So, yeah, we're off to a goodstart, relatively speaking.
You're right, it's a challengeto get people to notice you when
there's 5,000 other these fundsas well too, but we've been
getting a little bit morenoticed and a little bit more
inflows recently, so that's beenencouraging for us.
(45:41):
And you're right, we areoffering you have to offer
something a little bit different.
What we're trying to argue, andwhat we've argued on our website
and stuff is no one can beat anindex is what everybody says.
Well, that's true in equities.
The equity data shows that it'svery, very difficult to beat an
(46:01):
index.
But in fixed income, it's verydifferent.
About half the active managers,if not more, can beat an index,
and we're beating an index aswell too.
Now, why is that?
I'll give you one simple answer.
In equity land, your biggestweightings, your mag seven, are
your all-stars.
If you are a stock picker, youbetter pick seven stocks or five
(46:25):
of those seven stocks,otherwise you have no chance to
outperform an index.
But in fixed income land, yourbiggest weightings are your
problem children.
It's your countries that haveborrowed too much debt, it's
your over-levered companies,it's your bad structures and
mortgages.
You can see those and you canavoid those or go towards the
(46:47):
ones that have better structuresand set up to outperform an
index.
An index can't change even ifthe structure is bad.
That's why we've argued that infixed incomes, you should be
looking for an active managerand in equities, you should be
looking for a passive manager,and that's what we're holding
ourselves out.
As for anybody who's looking foractive money, why did I pick
(47:09):
fixed income?
Because, as my friend, jimGrant liked to say, who writes
the newsletter, grants interestrate observer.
It's nice to have an interestrate, to observe again that, now
that we've got a four or five5.3% yield on cash, there's
things to do and there'sopportunities again in the bond
(47:30):
market In 2019, 2018,.
When you were sitting therewith a 2% yield and zero on
money market funds, it wascollect very small coupons and
wait for the bond market toexplode.
Well, it did, and a lot ofpeople have said well, isn't the
last three years been like theworst total return in the bond
market in the last 100 years?
(47:50):
Yes, we started a fund inDecember because we said, okay,
we needed to get from zero to 5%.
That was an excruciatingprocess for the bond market to
get there, but it's there now.
That's why we decided to startthis fund late last year, or the
index and then the tracker fundto be more exact year, or the
index and then the tracker fundto be more exact, because then
(48:11):
we wanted to try to takeadvantage of it.
So anybody who's looking for a40-legged and a 60-40 portfolio
or a fixed income alternative,that's who we're holding
ourselves out for.
So yeah, thanks for letting meexplain it.
Now, where are we?
If you go back to that websitethat you had up or the tweet you
(48:33):
had up a little bit ago on theright-hand side, my buddy, eric
Hale, sent me that little graphwith the roller coaster on the
right and I said we had beenshort duration, thinking that
rates were going to rise.
We had gone to neutral durationat the end of April at 4.7%.
(48:55):
We had a bet on risinginflation break-evens, which
worked out well for us.
Currently we're kind of neutralacross the board, with a small
bet long the dollar through somecurrency swaps.
So I said you know, okay, we'rean active manager, but we're
(49:16):
pretty much positioned like theindex.
Everything's neutral and I usedthe analogy.
We're kind of like at the topof the roller coaster, where we
want up to the top and nowthere's a whole bunch of tracks
up here that the roller coastercan pick as to which direction
it wants to go.
And that's why I decided that Iwanted to move to neutral and
I'm waiting to see.
(49:36):
Is the Fed going to cut rates?
Is the economy going to reallydecelerate?
Are we going to go to 2% or arewe going to go more towards my
thinking that we're going tohold 3% on inflation and that
it's just a cyclical downturnand the economy stays strong and
that even if the Fed cuts rates, that that might be a mistake.
That's my belief.
I'm not ready to go there yet.
(49:57):
I was waiting for a little bitmore evidence.
So we're kind of neutral, but Isuspect by Labor Day we won't
be neutral.
I'm just throwing that out.
Conceptually.
I don't plan on staying here atthis neutral position for a
long time, but that's kind ofhow we really look at investing
in the bond market.
Again, you can look at ourwebsite and you can look at our
(50:18):
fund.
If you've got any questions youcan ask me.
I'll answer any questions thatanybody has about it.
Speaker 1 (50:25):
Jim, as we wrap up, where can people find some of
your work and some of yourresearch?
Where can people find some ofyour work and some of your
research?
And maybe the thing which, toclose off, that you think most
people need to pay moreattention to, that's not getting
a lot of media hype that youare starting to focus on.
Speaker 2 (50:42):
So, to answer the first part of your question, I
told you about Bianco Advisorsand WTBN.
Biancoresearchcom is my website.
I've been in the researchproviding business for 30 years.
I also am very active on socialmedia in three places
Biancoresearch at Biancoresearchon X at Biancoresearch on
YouTube and under my name, jimBianco, on LinkedIn.
(51:05):
So I tried to post some stuffand I got some ideas.
I'm going to post the next dayor two up there as well so you
can request a free trial for ourresearch.
You can follow me on socialmedia.
The thing that I would arguethat people are not focused the
most on is that thing I talkedabout at the beginning.
When Jay Powell gives hisspeech, at the beginning of
(51:29):
every one of his pressconferences he says well, the
economy is broadly returning topre-pandemic levels and you know
you hear a lot of economistsgoing we're reverting back to
normal.
Their argument is there wasn'ta cycle change, there wasn't a
huge shock to the system.
You shut down the globaleconomy and you had some of the
(51:51):
most wild financial markets inhistory in 2020.
That didn't leave a legacyeffect.
I think the legacy effect is itended the inflation cycle and
some others.
Now maybe I'm wrong, but whatI'd like you to do, jay, is tell
me why that event in 2020didn't matter, that everything
that was will be.
Even though one third of thepeople have not returned back to
(52:14):
the office Doesn't matter.
Everything that was will be,that the cycle that we had
before 2020 will continue.
I think that's the thing thatpeople have to start thinking
about.
Are we in a different cycle?
Now I'll point out one otherquick thing.
1981 was the end of a cycle,the inflation cycle Old enough
to be around back then.
But as late as 1985, thesmartest and best people were
(52:37):
telling you we're going back to15% inflation one more time.
That inflation cycle did notend in 1981.
It took them four or five yearsto finally realize that that
cycle changed.
Right now, you hear everybodytalking about deflation going
back down.
We're going to seemicroscopically low interest
(52:58):
rates.
That cycle is over is what Ibelieve.
Now, if I'm wrong on that, makethe case that the cycle is not
over.
Make the case that what was in2019 will continue as we go
forward from here.
People just assume that, and Ithink that that's where, well,
(53:18):
if you're just going to assumewe're in the same cycle.
When we're not, theneverything's going to go haywire
.
Now I'm hoping the idea thatmaybe I'm wrong, that the cycle
didn't change, but make the case, make the case.
They don't even want to makethe case.
That's why they broadlypre-pandemic levels.
Returning to normal as ifeverything has happened since
2020 is not a new cycle.
(53:39):
It's abnormal for the cyclethat we all understand that we
should be in.
That's what I think people havegot to start thinking about.
What changed about 2020?
It was from an economicstandpoint.
It was as momentous of aneconomic event the complete
shutdown of the global economyand restart of the global
economies anything we've seen ineconomic history and I'm making
(54:02):
my case it will and is having alegacy impact on the way that
things work.
Speaker 1 (54:08):
Avery, please make sure you check out Jim, as well
as his index and index trackingfund ETF, and hopefully I will
see you all on the next episodeof Lead Lag.
Live, jim.
Always a pleasure, thank you,sir, enjoyed it.
Cheers everybody, thank you.
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