May 25, 2025 • 52 mins
The financial world stands at a critical juncture as Treasury yields approach 18-year highs and markets wrestle with conflicting economic signals. In this riveting conversation between macro strategists Jim Bianco and Jay Hatfield, hosted by Michael Gayed, we explore the counterintuitive relationship between Fed policy and market reactions that has left many investors scratching their heads.
When the Fed cut rates last September, yields went up. This paradox forms the backdrop for a fascinating debate about whether higher rates might actually be the cure for higher rates. Hatfield advances his "Hopfield Rule"—the observation that housing starts falling below 1.1 million units have preceded 11 of 12 post-WWII recessions—suggesting we may be closer to economic trouble than many realize. Meanwhile, a 20% drop in oil prices this year has created what Hatfield calls "stag-deflation" rather than the stagflation many fear.
The conversation takes a surprising turn when examining market influences. Bianco reveals that retail investors purchased $4.1 billion worth of stocks in just four hours following the Moody's downgrade, effectively stabilizing the market. This "do-it-yourself" investor revolution has fundamentally changed market dynamics, with retail traders wielding unprecedented influence despite focusing on just a handful of popular stocks and ETFs.
Both experts offer nuanced perspectives on tariffs, inflation expectations, and the global bond sell-off. While the immediate outlook suggests continued volatility, they highlight that today's fixed income market structure offers significantly more favorable characteristics than during the initial rate hiking cycle of 2022-2023.
Whether you're concerned about spiking Treasury yields, curious about the impact of retail traders, or trying to position your portfolio for what comes next, this discussion provides crucial insights from two of the sharpest minds in macro investing. Subscribe for more illuminating conversations that help you navigate these complex market conditions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Jim, let me start off with you on that.
Should the Fed maybe hike rates, do the exact opposite of what
the market thinks?
Speaker 2 (00:07):
Well, when they cut rates in September, yields went
up, and so that should tell us alot right there.
And what it tells us is so wesort of feel the opposite.
Speaker 3 (00:18):
The best cure for higher rates is higher rates.
Speaker 1 (00:21):
This will be a nice back and forth with Jay Hatfield
, who is one of the great macrovoices out there, alongside Mr
Jim Bianco, also one of thegreats in the industry.
I've also had the pleasure ofgetting to actually meet Jim in
person, like I met Jay in person, and Jim's a lot taller than
you think.
For those that are watchingthis across Instagram, linkedin,
(00:42):
my name is Michael Guy, apublisher of the Lead Lag Report
.
This podcast, lead Lag Live, issponsored by Infrastructure
Capital, one of my clients.
I want Jay to quickly introducehimself, and then, of course,
mr Bianco, for those who don'tknow who the hell Jim is.
They're living in Iraq.
But, jay, go ahead.
Speaker 3 (00:57):
Great.
Thanks, michael, and thanks Jimfor being on.
That definitely makes it muchmore interesting, and so our
firm.
We have six ETFs.
We have $2.6 billion undermanagement, three fixed income
funds, three equity income funds.
All yield over 6%, up to about10%, and you know, we think
(01:23):
they're well-positioned.
We'll get into it, but for thesecond half of the year when we
expect a rally in both stocksand bonds.
Speaker 1 (01:31):
And, of course, Mr Bianco, who also has a product,
I believe.
Speaker 2 (01:34):
Yes, I do, jim Bianco .
I'm located in Chicago, twobusinesses I run Bianco Research
, which is an institutionalmacro slash fixed income
research shop probably more onthe macro than the fixed income
shop and we have an activelymanaged ETF that we run through
our partners with WisdomTree.
Wtbn is its ticker.
Speaker 1 (01:55):
So I put out a post yesterday or the day before and
I said in my usual dramatic wayon X that the Fed has to do an
emergency rate hike.
And I said that given the waythe 10-year yield has been
behaving.
And I know, jay, you've got aparticular view on where yield
should be by end of year.
But I want to kind of go withthis topic around what the Fed
(02:16):
does in the context of what thebond market itself is doing
outside of the short end of thecurve.
Jim, let me start off with youon that.
Should the Fed maybe hike rates, do the exact opposite of what
the market thinks?
Speaker 2 (02:28):
Well, when they cut rates in September, yields went
up, and so that should tell us alot right there.
And what it tells us is, Ithink is underlying this is
inflation and the fear ofinflation and the fear,
specifically, of tariff driveninflation.
Right now, jay Powell, I thinkhas been pretty clear in making
(02:51):
the statement that if you tellme we're going to have higher
unemployment and weaker growthand you tell me that prices are
going to go up because oftariffs or inflation in general,
we're not going to cut rates.
Good luck with your recessionor good luck with your higher
unemployment.
And I think that you know tothat end, if the market is
concerned about inflation and itreacted negatively to easing
(03:15):
last year it might reactpositively to a rate hike by
seeing the 10-year yield go down.
Now I could say that you mightagree with that.
Good luck trying to getPresident Trump to buy into that
kind of argument right now.
Speaker 1 (03:29):
Jay, I'm curious your thoughts on what Jim said.
Speaker 3 (03:31):
So we have a differentiated view.
We think the money supplymatters, the Fed does not.
Money supply is shrinking.
So they've made comments ago.
We're close to neutral.
Complete lie in our models.
Neutral is about 3%, maybe twoand three quarters.
Housing market's slowing,construction's slowing, so we
(03:53):
sort of feel the opposite.
The best cure for higher ratesis higher rates.
So at a 450 10-year we're at454 right now.
The 30-year mortgage is at over$7.
Could cause housing starts togo below $1.1 million.
We somewhat tongue-in-cheekcalled our recession rule the
(04:17):
Hopfield rule.
You might've heard the Psalmrule.
So what people don't realize isit's free country so you can
have a Bianco rule and a Guyadrule, but ours is that when
housing starts to go below 1.1million, that's precipitated 11
out of 12 post-World War IIrecessions.
So we think the Fed's playingwith fire.
(04:38):
Our models show inflation isgoing to be continuing to
decline.
We would ignore a one or twomonth blip because of tariffs,
because it's more sales taxwhich should be ignored.
It's not going to recur.
The Fed thinks it might.
So that's what they may not cut.
They're not going to cut untilunemployment rises and or they
(05:00):
see that there's only one or twomonths of higher CPI and then
lower CPI because energy isplummeting.
So we're far more bullish aboutinflation than almost anyone
bullish about rate cuts andthink it would be an unmitigated
disaster to raise, because thenyou'd be shrinking the money
supply faster and almostcertainly precipitating a
(05:24):
recession.
And I would also say that thereal key driver of rates is not
the last thing the Fed did.
So they cut rates, but thenthey got super hawkish.
So it's really the path offuture cuts, expectations that
drives the tenure, and right nowthey're dropping every day.
I think we're down to like oneto two cuts this year, so that's
(05:48):
one of the key drivers ofhigher rates.
There's also a lot ofdisinformation about the tax
bill because people are usingswamp math.
So in other words, if you don't, if you let something, don't
let something expire, thenthat's increasing the deficit by
(06:09):
$4 trillion, when we all knewthat they probably would extend
these.
So actually the tax bill is notgreat for the deficit, but it's
kind of neutralish and it'sprobably positive when you take
into consideration likelytariffs.
So we think this bond pessimismis going to peak out, maybe not
(06:31):
this quarter, but secondquarter when it becomes more
obvious the FUD's going to cut.
Speaker 1 (06:52):
You had mentioned's housing weakness.
You're starting to see some ofthose prices drop.
I would expect the 10-year isgoing to drop and yet you're not
seeing that right.
There's seemingly some kind ofpressure that's happening that's
not allowing for demand beingsoft on the housing side to be
reflected in mortgage rates.
Speaker 2 (07:13):
Yeah, the problem with the housing market and I'll
quote Redfin statistics becauseI like the Redfin stats,
because they look at it on a persquare foot basis, so it kind
of adjusts for the size of thehouse is that on a per square
foot basis, home prices are atan all time high and listing
prices are consistently makingnew, all time highs.
(07:33):
So one of the problems withhousing is put it in parlance if
you think $3,000 a month is toomuch for a mortgage and the Fed
were to cut rates, well,homeowners are just going to
raise the price of the house andyou're still going to wind up
paying $3,000.
There's no getting around it.
The only way that you wind upgetting to pay less is if they
(07:55):
cut rates into weakness andhousing starts or, excuse me,
housing sales dramatically slowdown In this environment right
now.
If J-PAL you know, if DonaldTrump pulled out his little
voodoo dial and started stickingpins in J-PAL and got him to
cut rates this afternoon, yeah,mortgage rates would come down.
(08:16):
But I think every homeownerwould call their broker and say
raise the price of my house andyou're still going to be back to
the same monthly payment.
And until that, dynamic changes, I think that we need to
understand that we are in ahigher rate environment for
right now.
Now maybe Jay's right and thatthings dramatically slow down,
(08:38):
and if they dramatically slowdown and change that equation
then fine, but right now I don'tthink they do.
Speaker 1 (08:44):
Jay, from your perspective, I think we should
also talk about how commoditiesand oil prices might throw
things off.
There was that CNN headlineyesterday of a potential Israel
attack on Iranian nuclearfacilities.
Oil had a bit of a move thereon that.
Oil is a big driver ofinflation expectations, as we
all know.
How could commodities factorinto whatever happens pathwise?
(09:07):
Next for the Fed.
Speaker 3 (09:09):
Well, keep in mind in the 70s that 80% of inflation
came from the energy market, andso that's when you get.
Stagflation is when you haveskyrocketing energy prices and
that's why we're calling it stagdeflation, because we have 20%
drop this year.
And actually you know you'reright about that, you know about
(09:31):
that headline on attacking Iran.
But just to show you like, wedowngraded oil and we're pretty
negative on oil.
We have a, to be fair, we havea 60 to 80 target, so somebody
will probably bottom fish inhere.
But to have that headline andnow oil's down about 10 basis
point, not a big deal.
But if you can't rally on thatkind of headline, then that's
(09:52):
not a good market for oil.
And the reason is that the Trumpadministration has a great
relationship with the Saudis, oryou could even say they kind of
own the Saudis because theygive them weapons and they bomb
the Houthis and oppose Iran ontheir behalf.
And so OPEC?
Well, really, the Saudis haveabout 3 million barrels of exit
(10:17):
capacity, so they're going tokeep a lid on prices and that's
super bullish for inflation andnobody cares.
I don't know why they don'tcare.
They don't understand it.
The Fed doesn't understand it.
But core, so it's not justheadline inflation either.
Lower energy prices bleeds inthe core because everybody,
every business, uses energy.
So that's why we have such adifferentiated view on inflation
(10:41):
is that our models weightenergy much higher than like Fed
models, which essentiallyignore it.
Speaker 2 (10:48):
One thing about energy I might throw out, jay,
maybe even ask it to you as aquestion.
You're right.
The price of crude oil, youknow, taking the May contract in
WTI, was $75 back in Januaryaround inauguration day.
It's about $62 now and it'sbeen into the low mid-50s at
various times in the last monthor so.
But the price of gasoline ishigher than it was on
(11:10):
inauguration day.
The price of gasoline hasn'tmoved.
In fact it's been rising overthe last couple of weeks.
So the lower energy price isnot filtering in to the price of
the pump.
So it's not showing up therejust yet.
Do you have any thoughts onthat as to why that might be?
So it's not showing up therejust yet.
You got any thoughts on that asto why that might be?
Speaker 3 (11:28):
Well, it's important to look at seasonality with oil.
So we're going into summerdriving season.
So when you look at CPI,actually you're right that
gasoline prices are higher, butthey're normally higher.
So it's actually detractingfrom reported inflation and CPI.
And if you just look at normalspreads, there is a lag too, and
(11:54):
so I'm just looking up wherethe wholesale is gasoline is
right now.
See if I can do that quickly,put on my glasses.
The last time I checked therewas about a 15 cent likely
decline because you know oil hascome down and also gasoline's
come down but hasn't fed throughto the value chain.
(12:15):
Takes about three weeks.
So, okay, our Bob's at 214.
I think the national average islike 318.
So maybe just a little bit moredownside.
But in terms of reportedinflation, the seasonal
adjustment is going to showdeclining prices.
It's not going to be greatpolitically as you would have
(12:39):
thought for Trump, but after thesummer you'll get plummeting
prices and retail users will bemore happy about where it stands
.
Speaker 2 (12:52):
How about inflation?
There's two high-frequencymeasures of inflation that are
very popular.
One is Truflation and the otherone is PriceStats.
Pricestats is the old billionprices project.
Both of them take TruflationTruflation since May 1st is now
they do a measure where theycalculate what they think your
(13:14):
CPI is going to be it's up 60basis points in the last three
weeks and PriceStats so BertoCovello, harvard University,
developed it.
Pricestats is owned by Stateweeks and price stats, so Berto
Covello at Harvard Universitydeveloped it.
And the price stats is owned byState Street and they've
actually broken it out by originof product and they're saying
that all products that originateout of China in the last five
(13:36):
weeks are now 2% higher andcontinuing to rise.
So what we're going to seewithin the statistics and you
mentioned this before CPI isgoing to go up.
Now it's going to go up becauseof tariffs.
Then the next question is is ita step function higher?
What should be the properresponse to a step function
(13:56):
higher, or does it continue togo from there or does it
continue to go from there?
Speaker 3 (14:04):
Well, so we, as you indicated, do acknowledge that
there's going to be one or twomonths of increases, because the
same thing kind of feeds slowlythrough the value chain, just
like oil does natural oil andgasoline.
But then the third month, say,let's say we have two more
months of increases and I don'tthink they're going to be huge,
(14:27):
they'll just be, you know, likeyou're indicating maybe 60 base
points, then you're going to getpretty muted prints like 0.1,
0.2, 0.3, depending on volatilecomponents.
So the Fed, if they have alphabrain, which a lot of times they
don't, will start to say okay,we saw the tariff impact, now
it's out of the mark, out of thedata, it's clearly one time,
(14:50):
it's not going to happen againthe following year and probably
the employment market'ssoftening and they'll cut.
But what they think which Ithink is completely ridiculous,
is that because you have aone-time time increase and a lot
of people don't.
So if you don't, I'm not tryingto be too pejorative, but I
don't believe in theexpectations theory of inflation
(15:11):
at all.
It's been discredited.
It was maybe true 20 years agowhen you have unionization, and
so the Fed fears thatexpectations will become
unanchored or anchored, but wehave it on our website.
There's many, many researchpapers that debunk the
expectation theory of inflation.
But that's why you get thesedivergent views is, the Fed is
(15:35):
focused on that and, by the way,they repeat it every day.
So I'm sure most people believein it.
But just when you really lookat the data and think about the
structure of the economy,there's no market power, so
expectations don't matter.
It's endogenous variables, theway we treat it, so, in other
words, a dependent variable.
So if inflation comes down,expectations go down.
If inflation goes up,expectations go up, but they
(15:56):
don't create their own inflation.
So that's kind of a coredifferentiator between our view
and the Fed.
Is this expectations theory ofinflation.
Speaker 2 (16:06):
I agree with you on the expectations theory of
inflation.
I've never bought into thatidea in the first place.
I know that the Fed does buyinto that idea.
Speaker 3 (16:14):
They seem to live by it.
It's like their second religion.
Speaker 2 (16:20):
Well, yeah, I mean, now that they got rid of the
Phillips curve as their firstreligion, they've moved on to
their second religion.
But let me, let me ask youabout the other.
So tariffs are going to lead toa one or two month rise in
inflation and inflation flattensout.
The concern is is that Trumpcomes out and says look, I found
a magic bullet.
(16:40):
And a magic bullet is calledtariffs.
We raise tariffs, the Chineseeat it.
Maybe Walmart eats it.
Trump tweeted over the weekendhe wants Walmart to eat tariffs.
There was a story today thatretailers might raise prices
around the world to kind ofcushion the rise in tariffs.
In other words, trump is goingto say I found this magic bullet
.
We need more income into theUnited States to lower the
(17:02):
deficit.
We're not going to tax the richin the United States.
We're not going to tax themiddle class, tax the middle
class United States.
We're going to tax foreignersand it's working because we've
got all these tariffs coming inand we don't have inflation.
So we're going to do moretariffs and we're going to do
more tariffs after that andwe're going to do more tariffs
after that because they're notinflationary and we're going to
(17:22):
get these.
You know, like the old IBM whenthey used to give their you
know one time charges toearnings and it happened to
every quarter, we're going toget these one time increases of
tariffs all the time, becauseTrump's going to keep going and
going and going with tariffsunless we see a bad outcome that
forces him to stop.
And what forced him to stop inApril was the sell-off in the
(17:44):
stock market.
Speaker 1 (17:45):
Well, I'd argue it was specifically the risk that
week of delayed margin callshitting left and right.
I mean there was chatter aroundsome real systemic risks there.
Speaker 2 (17:55):
Right.
If we didn't have any of that,do you think China would be at
30% tariffs right now, or they'dstill be at 145%?
I think they'd still be at 145percent, I think they'd still be
at 145.
I would agree.
Yeah, so my point is is thatour tariffs are one time
increase?
Yes, Then Trump's going to saylook at how brilliant I am.
I raised tariffs.
It didn't cause inflation.
I'm going to raise them againand again and again until we get
(18:17):
a bad reaction to make themstop.
Speaker 3 (18:30):
What's your thought about that idea?
Well, I think that they did.
If you look, navarro has beensidelined yeah, thankfully.
So I haven't seen him in likethree weeks and happy about that
.
So I do think Besson's incharge, because a lot of my you
know associates or friends, Iguess acquaintances they're
super negative about the market.
Oh God, the administration'sterrible.
Could do stupid things forever,but they don't recognize that
Besant's kind of taken over andhe's far more reasonable than
(18:53):
Navarro and Trump himself.
So I'm pretty optimistic.
It's going to take way longerthan expected, but we're going
to get some trade agreements,we'll get it pushed forward.
But it's definitely to take waylonger than expected, but that
we're going to get some tradeagreements, we'll get it pushed
forward.
It's definitely a risk.
So if you don't believe our bullthesis that you know nabarro is
out then, then that certainlyis a risk, because that was that
(19:14):
tariff introduction wasflat-out, stupid, uh,
unambiguously flat-out, stupid.
No reason for it.
You could have threatened it inprivate.
So if that sort of behaviorcontinues, it's definitely a
risk for the market.
And with high and high tariffsI mean it's nice to think that
(19:35):
all of them will be absorbed.
Some of it will, but it's veryhard to have all of it absorbed
unless the dollar isskyrocketing.
So you're going to have lessconsumer spending, slowing
economy, lower rates, fed ratecuts.
So there will be a reaction.
I think it's pretty unlikelyincreasing tariffs significantly
(19:55):
over time is going to get fullyabsorbed.
Speaker 1 (19:59):
Jim, I'm curious what are your thoughts on how?
I mean?
There's been a lot of chatteraround deregulation in general
and lowering leverage ratiorequirements on several banks,
that being sort of another forcefor liquidity for the system.
Could we see that suddenlyunlock even more inflationary
potential just from banks nowputting more capital out there?
Speaker 2 (20:21):
Yeah, we're talking about the supplementary leverage
ratio that they're going towind up trying to rescind.
That's a financial crisis erainstrument where, if a bank buys
a security, like a treasurysecurity, they have to set aside
a certain amount of capital forpotential haircuts on that.
(20:43):
So when you buy a billiondollars worth of treasuries, you
have to put $40 million intoyour capital account to margin
against those, and that has beena disincentive for banks to buy
treasuries.
So now that the Fed is talkingabout doing away with the
supplementary leverage ratio,the idea behind that is to
(21:06):
incentivize the banks to buytreasuries.
I don't think it'll incentivizethem to do more loans, because
it's really meant to be aboutsecurities ownership.
But the problem there is andwe've all seen the FDIC charts
the banks are sitting onunrealized losses hundreds of
billions of dollars ofunrealized losses.
We've already had a financialcrisis because of unrealized
(21:26):
losses in the banking system,and you know that was Silicon
Valley Bank two years ago.
So let me put it to you simplyIf somebody turned to you and
said here's an investment,you've been getting the shit
kicked out of you on thisinvestment.
You've been losing money.
I'm going to make it easier foryou to double down on it.
And who's going to really wantto double down on it?
I don't think they're going towant to double down on it now,
(21:49):
with yields at 5% in the 30-yearand the like.
But if they rescind that ratiolater in life, if you get a bond
rally, their attitude wouldchange.
But I don't think if they gotrid of that ratio today, banks
are going to say, gee, look atall these losses we have in
treasuries, let's buy some moreof them.
They're not going to do thatuntil we see some upside
(22:10):
momentum.
Speaker 1 (22:11):
Jay, any thoughts on that?
To me it's like what I alwaysgo back to.
The surprise would be that wethrow everybody off.
Suddenly you have a real pickupin the velocity of money.
Everyone's always looking atthe pure amount of money that's
out there.
The velocity has beendowntrending for a long long
time.
Could banks maybe cause somekind of a counter trend there?
Speaker 3 (22:30):
Well, I would say I don't disagree.
I don't think there's justchanging regulation that's going
to create big demand fortreasuries and that markets tend
to overshoot, like actually,the stock market is melting down
right now, I think, because ofthe treasury auction.
Speaker 2 (22:50):
Yeah, the 20-year wasn't good.
Speaker 3 (22:52):
Yeah, it was poorly received so that seemed to be
the time the market melted down.
So we are in a bit of amomentum sell-off that does
normally occur in this May, june, more of the stock market, but
it can also include the bondmarket time frame, so I wouldn't
catch the falling knife here.
On rates, our call is reallysecond half, when all this data
(23:17):
is shaking out of the tariffdata but also real impacts on
the economy and I do think we'regoing to get incremental
slowing in housing because ofthis rate rise where we just
moved up another three basispoints or 4.58 on the 30-year.
But it's not going to happenright away and I wouldn't catch
(23:39):
the knife either on the stockmarket right now.
We're kind of neutral in thestock market right now with the
5,500 to 6,000 target, nor onthe bond market, Just to jump in
on that very short term.
Speaker 2 (23:54):
we had a 20-year auction.
That was announced 25 minutesago.
The results it was the firstcoupon auction since the Moody's
downgrade on Monday.
Results it was the first couponauction since the Moody's
downgrade on Monday.
It was not well received.
It wasn't a disaster.
It was below average is the wayI would say it.
And so it's right.
We've shot the interest ratesup to 508 on the 30-year, 458 on
(24:18):
the 10-year.
So that's going to get peoplechattering, that there's a
general buyer strike in thetreasury market between that and
the trend lower in rates and alot of other concerns that
everybody has right now.
But that's just short-termthinking.
I mean that will probablycontinue for a while.
(24:39):
But the question is you'reright, in the long run the
fundamentals will win out, butin the short run, you know the
voting machine here could getthemselves all worked up into a
hissy fit about rates goinghigher.
Speaker 1 (24:52):
In fairness, you're seeing that also, not just in
the US.
I mean that that's probably agood transition to Japan, which
every single night in when Ilook on my X feed, I see a chart
of Japan's GGB yields spikingup further and further Now very
different dynamic, because weknow the Bank of Japan basically
owns all that with Japanesepeople.
But is there any kind ofspillover with what's going on
(25:14):
with Japan's bond markets twohours?
I mean, everyone knows I talkabout the reverse carry trade
all the time, but I'm curious tohear your thoughts on that, Jim
.
Speaker 2 (25:21):
Yeah, I was going to ask you to comment on the carry
trade.
You're the guy but you know.
By the way, here's aninteresting statistic for you
For all of our career, thelowest interest rate in Asia has
been Japan.
It's no longer the case now.
It's China.
The 30-year in Japan is now ahigher yield than China.
(25:43):
The 10-year was within about 10basis points of China and we
always used to view that as whywere the interest rates in Asia
or Asian interest rates?
I'm talking about Asia alone.
Why are their interest rates inJapan so low relative to
everybody else?
Because they had the weakesteconomy.
Okay, what does that tell usabout China?
Now that China's got the lowestor is about to get the lowest
(26:04):
interest rates and I think it isthat they've got the weakest
economy.
But you're right as far as Japangoes, why are their rates
shooting higher.
They're a highly controlledmarket that the central bank
owns over half of the securitiesout there.
They have yield curve control orthey still have some version of
yield curve control out therethat they're trying to hold
(26:25):
yields in a certain range andthey can't because, for the
first time in a decade, whatyou're seeing is they're getting
actually real positive growthand they've got about 2.
Half percent inflation.
Now, two and a half percentinflation to us doesn't sound
like a lot, but if you've hadbeen at zero for 30 years and
(26:48):
you go to two, two and a halfpercent, that's a lot of
inflation and I think what we'reseeing is their bond market is
adjusting to that.
But because it's in a chaoticway that it's been adjusting to
it, it's been shooting up higherin yields more and more, as
we've seen.
And, like I said, I think thesignaling is the Japanese
economy might be getting out, orclose to getting out, of its
(27:10):
deflation and maybe the Chineseeconomy is going to come, you
know, replace it as the sick manof Asia because of its falling
interest rates.
Speaker 1 (27:19):
Jay.
I mean, does that impactanything as far as anything that
you're looking at, whether it'son the energy side for AMSA or
the small cap side?
I mean to the extent thatthere's any kind of spillover.
Speaker 3 (27:31):
Well, definitely so.
The other thing I'm looking ata screen on Bloomberg.
Our rates are, our bonds aredown and rates are up, but it's
true across the board, everysingle country in the world.
So what most investors miss isthat the bond market's way more
global than the stock market,because these bonds are much
(27:53):
more fungible than you know.
There's no fungible investmentin NVIDIA in Europe, but
European bonds and US bonds havesimilar default risks like,
namely, zero, close to zero, andthe differentials and yields.
So when one market sells off,it drags the whole bond market
(28:15):
down.
And what a lot of people misstoo is, like you said, oh, rates
are going higher, so I don'twant to be in bonds or like our
preferred stock fund, but thetruth is it makes equities way
less attractive, and you'reseeing that today, where this
bond auction has tanked themarket pretty dramatically, like
all over 100 S&P points.
(28:36):
So it's a significant concernand, like I said, it's normal
for markets to overshoot,particularly in May and June.
So we wouldn't catch eitherknife.
This I mean maybe at 5,500 orsomething lower.
We've had a huge rally up untilyou know whatever.
30 minutes ago I would havesaid this is a remarkably
(28:59):
resilient market.
But in these type of marketsbig run up, seasonally terrible
you get plunges like this.
So it's time to be cautious forour next month or two.
Speaker 2 (29:10):
So I agree with you, jay, that in this environment,
one of the things I've beenarguing to people that is being
underappreciated is the move inyields and and that that has
been also in the last two months, a problem.
Because when we saw the stockmarket plunge in early April
after Liberation Day and we wereall focused on the idea that it
(29:34):
was about tariffs, I wasraising my hand, going Dave, you
guys looked at what the 10-yearwas doing I'm talking about
mid-April.
It was going straight up, theyield was going straight up and
that was not what everybodyexpected, and I think that
that's the problem.
Now we're very close.
I'll throw this out at youright now we're very, very close
.
We're 509 on the 30-year.
(29:56):
If we close above 512 on the30-year any day today, tomorrow,
next week, that'll be a new18-year closing high and that
will be a big red headlinethat'll get everybody to start
breathing in their paper bagsagain that we've got an 18-year
high in 30-year rates.
So we're very, very close tothat right now.
So the point I'm trying tobring up is you're right that in
this environment right now, thecenter of the universe for
(30:24):
stocks, for commodities, forgold, for a lot of these things.
It might be even before Bitcoin, with it making its new
all-time high is rates, and thatrates are trending higher and
that has been the thing that'sgot everybody's attention.
Speaker 1 (30:35):
I will say it's like the best place to hide in a day
like this is high yield, whichis more of a duration thing,
you'd argue, obviously, but youknow the junk issues is
obviously there's some widening,but nothing really that major.
At what point do we get bullishon duration?
I mean credit risk.
(30:55):
Jay has been, has been has notbeen almost non-existent
throughout this entire period.
Speaker 3 (31:02):
Well, it did gap out.
It does trade with the stockmarket, so it gaps out when the
market's down.
So we'd be bullish on spreadsand treasuries in the second
third quarter.
Sorry, because these overreacts.
It happens in oil as well.
Everybody forgets that there'selasticities of demand, and it's
true in.
Happens in oil as well.
(31:22):
Everybody forgets that there'selasticity of the demand, and
it's true in the treasury marketas well.
So everybody, when oil goes to60, everybody predicts it's
going to 30, but nobody does themath and says well, at 30,
there's going to be a lot lessproduction and way more
consumption.
And same thing with treasuriesit's easy to sell.
I'm like we don't have anypositions in Treasury, but I'd
(31:42):
rather be short them here thanlong.
But then there's going to bethe rally that blows everybody's
head off, probably after.
Either we get a weak employmentreport or we get a couple of
CPIs that are a little bithigher, maybe because of tariffs
, but not very much and then thethird CPI is down, even Like,
if you really look, theinflation data has been super
(32:06):
bullish the last two months andnobody cares.
So at some point the shortswill get their heads blown off
and then we'll get the rally,but I wouldn't step in right
here.
Speaker 1 (32:15):
Let's talk about what else we should be looking at
outside of inflationexpectations and the bond market
.
Any signals, Jim, to you whenyou look at different asset
classes that are maybe causingyou to scratch your head a
little bit?
I've talked about gold a lot asa signal that maybe now has
become more of a speculativemomentum trade.
A lot of people have beensaying Bitcoin is starting to
(32:36):
diverge from the Nasdaqcorrelation, which has been so
strong for so many years.
Anything that you're observingthat's worth pointing out.
Speaker 2 (32:43):
Yeah, all of that.
I think that if we could pivota little bit to the stock market
, what is not being appreciatedover the last couple of years is
the dominant player in thestock market is now becoming a
retail trader, and when I saythat, people will throw back at
(33:03):
me oh, but the statistics sayretail doesn't buy stocks.
You're right, they don't.
They buy seven stocks.
That's all they're interestedin.
And they buy ETFs, and they buylevered ETFs and they buy zero
DTE options and that forces theassociated person of the ETF to
buy stocks in their proxy.
And so when you want to talkabout the whales that are moving
(33:24):
the market, let's talk aboutretail and the great example
that was what JP Morgan said onMonday.
Let's go back all the way twodays ago.
Monday, we had the Moody'sdowngrade.
The stock market was down aboutone and a half percent, about
as much as it is now, and itwound up finishing up the day
slightly positive positive.
(33:47):
What jp morgan pointed out wasthat in the first four hours of
buying on monday, our first fourhours of trading on monday,
retail investors bought 4.1billion dollars worth of stocks
in three hours and took themarket from minus one and a half
percent to almost unchangedisn't that?
Speaker 1 (34:00):
isn't that utterly wild, by the way, like I'm and I
don't, but I don't, I don'tunderstand where the money's
coming from.
I actually just did aninterview with the president of
Tasty Trade and asked him thatvery question.
It's like you're buy the dip,buy the dip, okay, but you have
to have cash to buy the dip with, so where is it coming from?
Speaker 2 (34:15):
You know, to be honest with you, I'm kind of at
the same point too, because I'verhetorically asked the question
I'm all in, I'm all in, I'm allin.
Okay, the market sold off, buythe dip With what You're already
in.
Where did you get this money tobuy?
But apparently there is anumber.
There is a big part of moneythat is sitting out there.
Now the problem with retail istwofold.
(34:39):
One, when you tell people thatit's retail, everybody
pooh-poohs it because they're soingrained with it's Citadel.
It everybody pooh-poohs itbecause they're so ingrained
with it's Citadel.
It's Bridgewater, it's all thebig hedge funds, it's the state
of California pension fund,because they're the big players
in the market.
Well, they are still bigplayers, but they're not the
buyer at the margin.
And the other problem withretail is it's millions of
(34:59):
people and it's hard to get yourhead around.
How big is it?
How much money do they have?
What do they have in thesidelines?
How bullish are they?
We have certain measures of itAII, investors, intelligence,
put call ratios, but they onlymeasure small segments of the
market.
We really don't know where itis.
But I think that what peopleare failing to recognize is to
(35:22):
use a home improvement term isto use a home improvement term.
The do-it-yourselfers are nowtaking over, as I pointed out,
2025,.
If you're a retail investor andyou're sitting here listening
to us, you probably have abrokerage account with zero
commissions.
You've got the vast majority ofthe internet to your disposal.
(35:43):
What does the top equityportfolio manager Bridgewater
have over you in investing?
He's got maybe two things.
Maybe he's got experience andskill, because he's the top
portfolio manager Bridgewater,and he's got some resources to
acquire publicly availableinformation faster.
But you have all thatinformation and you can trade at
(36:06):
the same commission.
He trades at zero and you areand you're not being encumbered
by strategies.
20 years ago, the Bridgewaterportfolio manager could engage
in strategies like I want to buyall my stocks equal weighted,
well, rsp, you can do ityourself now in one second.
(36:26):
So that's really changed thegame that there's a lot,
especially in the youngercohorts, a lot of
do-it-yourselfers that areplaying in this game more than
we ever thought.
So, after we've written offretail investors that their job
was to hand their money to aprofessional manager, they're
now making a comeback and doingit to them for themselves, and
that's why we've seen thismushrooming of ETF issuance to
(36:49):
meet that need and I think thata lot of people are really
having a hard time understandingit.
Speaker 1 (36:54):
Yeah, I like this direction because the point
about they buy seven stocks andthen ETFs makes me immediately
think.
That goes back to my othertheme, which is we're in a bit
of a passive bubble, right,because if retail is driving so
much of the flows at the marginand they're going to passive
funds largely, then you wouldthink that there are going to be
more anomalies for activemanagers to take advantage of.
(37:15):
What are your thoughts on that?
Speaker 3 (37:17):
Well, I think there is.
You know that short-term buythe dip.
But the great thing aboutretail investors is I talked to
them a lot of them over the lastmonth or two.
Most of them have figured outthat you just need to stay
invested.
So they are a source ofstability in the market.
You know whether I share thesort of.
(37:39):
I mean it's hard to imagineexactly.
I know how steve cohen'swhipping around stocks and you
know with puts and futures andstuff, but it is a little bit
hard to imagine how they'reactually stabilizing the market
after a Moody's downgrade.
But they're really stabilizingit more gradually, usually by
not selling when we went to5,000, maybe reinvesting
(38:01):
dividends, doing an incremental.
That's what we see in our fundsis reinvestment of dividends,
which is a good way to capturethat down volatility.
So I would be a little moreconstructive on retail that
maybe it wasn't rational to buythat dip Although it really was
because Moody's wasn't.
There's no information contentin the downgrade, but not a
(38:21):
great time of year to do that.
But they're probably of a yearor two perspective, so they
don't care.
So it's probably why I mean wespiked down 100 handles or so
Now we're spiking back up.
Why are the markets soresilient?
Because normally this time ofyear, with this bigger run, we
(38:41):
would be like headed straightdown to 5,500 in short order.
Speaker 2 (38:45):
I'll say a quick comment about Steve Cohen.
He's doing a better job tradingstarting pitchers than he is
with the stock market latelyhe's actually retired, so he's
not.
Speaker 1 (38:53):
He follows me on X.
Don't say that he might bewatching this.
I don't want to get in troublewith me.
Speaker 2 (38:57):
Well, I just told him he's doing a good job with his
starting pitchers.
Speaker 3 (39:01):
He's in first place, that's good and he's not trading
, so he's not the one whippingaround all those futures and
puts, but there's plenty ofother hedge funds doing it.
So, anyway, retail's not surethey're going to always
stabilize the market like that,but they're going to be a source
of stability.
Speaker 1 (39:21):
That's a good question, which is a good
direction actually to go to,also from DJ Distraction Jackson
, which is a nice name, I lovethat name.
Canada and the UK recentlyloaded up on treasuries and I
saw that stat right, the UK isnow the biggest hold, is bigger
than China as far as holdings oftreasuries.
Do they believe then thatyields will drop and they will
appreciate, or are they justloading up to prepare to defend
(39:42):
their currencies?
Up to prepare to defend theircurrencies?
Let's talk about the currencyside, jim, for a bit, because
it's been a recurring theme ofmine as well that I think we're
in a currency war and nobody'sreally framing it in that way,
but treasuries are a componentof that war.
Speaker 2 (39:55):
Yeah, treasuries are cash.
I mean, they're the reservecurrency and they're cash.
And just those numbers.
Uk did surpass China as thenumber two largest holder of
treasuries Foreign owner.
Only Japan is is larger thanthem.
Speaker 1 (40:11):
Oh.
Speaker 2 (40:11):
Japan.
Again, that's what I'm saying,right, but now there's a big
difference.
There's a big difference.
A lot of those treasuries thatare held by the UK are actually
held by American banks andinvestment banks in their UK
arms.
So it's really it's Jamie Dimon, you know, and it's Goldman
(40:32):
Sachs, and it's all you know,and it's Millennial, the big
hedge fund.
It's.
Those players in London is whoit is, whereas with the bank,
with Japan, it's largelyconsidered to be the bank of
Japan.
It's largely considered to bethe bank of japan.
It's not considered to be thebank of england.
When it comes to the uk, um,canada is kind of the same way.
(40:54):
It's not the bank of canada.
That's the big buyer of those,like you would think it would be
like the people's republic bankor people's bank of china,
which is their central bank, butit's a lot of their hedge funds
.
It's a lot of their hedge funds.
It's a lot of their insurancecompanies.
It's their big four banks.
It's those types of playersthat have been buying into those
(41:15):
securities.
Now, why they're doing it isstill a mystery in Canada.
I mean, you know they, they'vebeen plowing into them and I
haven't seen a compelling reasonfor why they're doing it.
So, but you're right, there hasbeen big buyers, big buyers out
of those two countries.
Speaker 3 (41:34):
Yeah, well, I was just going to point out the
obvious to this group, I guess.
But the, you know, the sellingtreasuries is the opposite side
of the currency trade.
You know, selling treasuries isthe opposite side of the
currency trade, right?
Because, as Jim was pointingout, everybody thinks, oh, the
reserve currency and everybody'ssitting on trillions of actual
US dollars.
They're not.
(41:54):
They're buying treasuriesbecause they want to have income
and they don't.
It's really difficult to getthat much in actual reserves or
currency for that matter,reserves or currency for that
matter.
So if you want to support yourcurrency, then you need to make
treasury transactions to do that.
So we may not, it may not be somuch.
Oh, we love the, the, uh, youknow us treasury here, just like
(42:19):
we're trying to intervene inthe, in the currency markets.
And the other side of the tradeis if you're like the Japanese
bond or BOJ and they're tryingto support the yen, so then you
buy yen but you need to selldollars, so you sell your
treasuries and do the oppositeside.
(42:40):
So a lot of the times thecurrency manipulation is what's
driving the purchase, is notnecessarily some fundamental
call that it's great down thelong end of the curve.
Speaker 2 (42:54):
I was just going to say, just for everybody
listening.
Keep in mind a simple questionor a simple point to make
Company X buys company Y for $10billion.
Okay, transaction closes.
How do I get you for $10billion?
Okay, transaction closes.
How do I get you the $10billion?
Are there pallets of $100 billsput in a bunch of Brinks trucks
blocked along to send you $10billion?
(43:14):
No, I have $10 billion worth oftreasuries and usually bills
and treasuries are consideredcash and I send them to you and
that's how I finish off thetransaction.
So treasuries are a form ofcash, is what they are.
Speaker 1 (43:29):
I saw somebody almost seemed like a conspiratorial
response, but it kind of makessense arguing that this whole
tariff you know back and forthis ultimately about Trump trying
to get countries to buy moretreasuries.
That that's sort of the realagenda beneath the surface, and
the more I think about it it'slike there's probably some
degree of truth to that.
(43:49):
But you know what's Trump'sresponse to all this?
I mean, if yields do keep onrising and treasuries keep
selling off, you want to actinvoluntarily like this on the
long end, and it's not really asmuch in the Fed's control than
the pressures on Trump to dosomething.
Speaker 2 (44:11):
Yeah, send SEAL Team 6 into the Echols building and
physically remove Jay Paul andput him in a cage in a basement
somewhere for his punishment.
You know it's all Jay Powell'sfault.
I'm joking, of course, but youknow he'll say it's all Jay
Powell's fault and he'll try andblame Powell.
But to your, you're right.
You know they, early on, saidthat their metric for success is
the 10 year yield, not thestock market.
(44:32):
I don't know if they if thatstill applies because this is
Trump we're talking about, youknow got to keep checking back
every 10 minutes to make sure itstill applies, but their metric
has been the 10 year.
What their ultimate goal, Ithink, was with the 10-year was
they wanted to initially relievethe US of the burden of
(44:55):
expenditures, and that's why,before tariffs, the big thing
was when JD Vance went to theMunich Security Summit and gave
that speech.
I'll summarize it for you Since1960, the US has spent $23
trillion in defense.
(45:16):
The total sum of NATO, andthat's 15 or 17 countries, has
spent seven and a half.
We have been the leader ineverything since the end of
World War II, starting with theKorean War, all the way through,
whether it's been a war, thewar on terrorism, the war on
communism, to defeat communisminto the late 1980s, and we've
(45:38):
paid a big price for it, a bigmonetary price for it.
It's cost us a lot of money.
Europe has spent less on it.
That's why the Europeans areable to have national health
care.
Everybody goes to college forfree, because they didn't have
to raise major armies and fightthese wars or fight these
battles.
We did.
Trump is trying to reverse thatand, interestingly, europeans
(46:01):
kind of agree that they want to.
They want to kind of reversethat and raise an army and stuff
like that of agree that theywant to kind of reverse that and
raise an army and stuff likethat.
But that's part of what he'sbeen trying to do is trying to
get rid of the liability and theexpenses for us.
I don't know if he's reallybeen trying to convince
foreigners to buy our securities, because on the other side
(46:22):
Stephen Murin and some of theothers have been talking about
they want a weaker dollar.
You know, and you don't want tobe owning US Treasuries if
you're a foreigner, if you thinkthe dollar is going to be going
down.
So you know.
This has been the mystery oftrying to figure out what it is
that he wants?
I understand what he wants ishe wants lower expenditures.
He wants Europe to pay forsecurity.
(46:43):
He wants Europe to plowtrillions of dollars into
defense.
Additionally, what he wanted todo was pay us the trillions of
dollars to defend them, but theyseem to want to do it on their
own.
Speaker 1 (46:54):
Jay, maybe in the last few minutes here, since
this is a sponsored conversationby Infrastructure Capital, just
talk about firm the funds, anykind of final thoughts you have,
and then I'll send it off toyou, jim Well like I said at the
outset and the market kind ofproved.
Speaker 3 (47:09):
My point is that this is going to be a little bit of
a dicey market because of bothtreasuries and stock market and
uncertainty around tariff policyand what you know.
We launched BNDES and it wasless true a little while ago,
but now it's proving its valuein that the volatility of bonds,
(47:33):
or high yield bonds, is abouthalf of preferreds and about a
third of the stock market andthat's playing out today.
So the equity markets down, orat least the equal weighted is
down 1.6%.
S&p is only down 1% right now,but high yield is only down 0.5%
(47:53):
.
So it's not a bad place to hideout to get good yields At some
point.
This will all turn around.
But if you want to put money towork, it's also fine if you
have some cash to sit on it fora while.
But these fixed incomeinvestments are pretty
all-weather securities to getreally high income that
oftentimes can offset thevolatility in the price.
Speaker 2 (48:16):
If I could jump in and just make a quick comment on
what Jay just said, a lot ofpeople got soured by fixed
income securities because of theexperience of 20 to 23, when we
went from zero to 5% rates.
That was horrible.
The total returns were terribleduring that period.
I understand that.
But now we had to get rates offof zero and now that we've got
(48:38):
them the 30 year five, they're acompletely different instrument
than they were three or fouryears ago.
They now have, you know, inmarket parlance the convexity.
They have less duration becausethey have a higher coupon.
They have the coupon cushion.
So now in the bond market ifyou buy bonds, even if you think
yields are going to go up, badyear could be plus 1% or maybe
(49:01):
zero, and it's not going to beminus 10 like it was in 22 when
we had to get from zero to somehigher yield.
So the structure of the bondmarket is completely different
right now and much morefavorable for investors than it
was just two or three years ago.
Speaker 1 (49:17):
And Jim for those who want to get access to your
research and maybe also learnabout your funds.
Since you're kind enough tospend the time here, might as
well throw it in there.
Speaker 2 (49:25):
Yeah, so BiancoResearchcom.
We do institutional research onmacro and fixed income.
I'm also active on social mediaat Bianco Research, on TwitterX
and on YouTube, and we do runan actively managed total return
fixed income fund, wtbn.
Speaker 1 (49:43):
And I will say, because I can say it, while they
can't, it's worth consideringblending the two.
So, from Infrastructure Capital, from Jay and from Jim,
appreciate everybody that'swatched this.
Thank you, jim for joining,thank you Jay, as always, and
I'll see you all in the nextepisode.
Cheers everybody.
Jim, let me start off with you on that.
Should the Fed maybe hike rates, do the exact opposite of what
the market thinks?
Speaker 2 (00:07):
Well, when they cut rates in September, yields went
up, and so that should tell us alot right there.
And what it tells us is so wesort of feel the opposite.
Speaker 3 (00:18):
The best cure for higher rates is higher rates.
Speaker 1 (00:21):
This will be a nice back and forth with Jay Hatfield
, who is one of the great macrovoices out there, alongside Mr
Jim Bianco, also one of thegreats in the industry.
I've also had the pleasure ofgetting to actually meet Jim in
person, like I met Jay in person, and Jim's a lot taller than
you think.
For those that are watchingthis across Instagram, linkedin,
(00:42):
my name is Michael Guy, apublisher of the Lead Lag Report
.
This podcast, lead Lag Live, issponsored by Infrastructure
Capital, one of my clients.
I want Jay to quickly introducehimself, and then, of course,
mr Bianco, for those who don'tknow who the hell Jim is.
They're living in Iraq.
But, jay, go ahead.
Speaker 3 (00:57):
Great.
Thanks, michael, and thanks Jimfor being on.
That definitely makes it muchmore interesting, and so our
firm.
We have six ETFs.
We have $2.6 billion undermanagement, three fixed income
funds, three equity income funds.
All yield over 6%, up to about10%, and you know, we think
(01:23):
they're well-positioned.
We'll get into it, but for thesecond half of the year when we
expect a rally in both stocksand bonds.
Speaker 1 (01:31):
And, of course, Mr Bianco, who also has a product,
I believe.
Speaker 2 (01:34):
Yes, I do, jim Bianco .
I'm located in Chicago, twobusinesses I run Bianco Research
, which is an institutionalmacro slash fixed income
research shop probably more onthe macro than the fixed income
shop and we have an activelymanaged ETF that we run through
our partners with WisdomTree.
Wtbn is its ticker.
Speaker 1 (01:55):
So I put out a post yesterday or the day before and
I said in my usual dramatic wayon X that the Fed has to do an
emergency rate hike.
And I said that given the waythe 10-year yield has been
behaving.
And I know, jay, you've got aparticular view on where yield
should be by end of year.
But I want to kind of go withthis topic around what the Fed
(02:16):
does in the context of what thebond market itself is doing
outside of the short end of thecurve.
Jim, let me start off with youon that.
Should the Fed maybe hike rates, do the exact opposite of what
the market thinks?
Speaker 2 (02:28):
Well, when they cut rates in September, yields went
up, and so that should tell us alot right there.
And what it tells us is, Ithink is underlying this is
inflation and the fear ofinflation and the fear,
specifically, of tariff driveninflation.
Right now, jay Powell, I thinkhas been pretty clear in making
(02:51):
the statement that if you tellme we're going to have higher
unemployment and weaker growthand you tell me that prices are
going to go up because oftariffs or inflation in general,
we're not going to cut rates.
Good luck with your recessionor good luck with your higher
unemployment.
And I think that you know tothat end, if the market is
concerned about inflation and itreacted negatively to easing
(03:15):
last year it might reactpositively to a rate hike by
seeing the 10-year yield go down.
Now I could say that you mightagree with that.
Good luck trying to getPresident Trump to buy into that
kind of argument right now.
Speaker 1 (03:29):
Jay, I'm curious your thoughts on what Jim said.
Speaker 3 (03:31):
So we have a differentiated view.
We think the money supplymatters, the Fed does not.
Money supply is shrinking.
So they've made comments ago.
We're close to neutral.
Complete lie in our models.
Neutral is about 3%, maybe twoand three quarters.
Housing market's slowing,construction's slowing, so we
(03:53):
sort of feel the opposite.
The best cure for higher ratesis higher rates.
So at a 450 10-year we're at454 right now.
The 30-year mortgage is at over$7.
Could cause housing starts togo below $1.1 million.
We somewhat tongue-in-cheekcalled our recession rule the
(04:17):
Hopfield rule.
You might've heard the Psalmrule.
So what people don't realize isit's free country so you can
have a Bianco rule and a Guyadrule, but ours is that when
housing starts to go below 1.1million, that's precipitated 11
out of 12 post-World War IIrecessions.
So we think the Fed's playingwith fire.
(04:38):
Our models show inflation isgoing to be continuing to
decline.
We would ignore a one or twomonth blip because of tariffs,
because it's more sales taxwhich should be ignored.
It's not going to recur.
The Fed thinks it might.
So that's what they may not cut.
They're not going to cut untilunemployment rises and or they
(05:00):
see that there's only one or twomonths of higher CPI and then
lower CPI because energy isplummeting.
So we're far more bullish aboutinflation than almost anyone
bullish about rate cuts andthink it would be an unmitigated
disaster to raise, because thenyou'd be shrinking the money
supply faster and almostcertainly precipitating a
(05:24):
recession.
And I would also say that thereal key driver of rates is not
the last thing the Fed did.
So they cut rates, but thenthey got super hawkish.
So it's really the path offuture cuts, expectations that
drives the tenure, and right nowthey're dropping every day.
I think we're down to like oneto two cuts this year, so that's
(05:48):
one of the key drivers ofhigher rates.
There's also a lot ofdisinformation about the tax
bill because people are usingswamp math.
So in other words, if you don't, if you let something, don't
let something expire, thenthat's increasing the deficit by
(06:09):
$4 trillion, when we all knewthat they probably would extend
these.
So actually the tax bill is notgreat for the deficit, but it's
kind of neutralish and it'sprobably positive when you take
into consideration likelytariffs.
So we think this bond pessimismis going to peak out, maybe not
(06:31):
this quarter, but secondquarter when it becomes more
obvious the FUD's going to cut.
Speaker 1 (06:52):
You had mentioned's housing weakness.
You're starting to see some ofthose prices drop.
I would expect the 10-year isgoing to drop and yet you're not
seeing that right.
There's seemingly some kind ofpressure that's happening that's
not allowing for demand beingsoft on the housing side to be
reflected in mortgage rates.
Speaker 2 (07:13):
Yeah, the problem with the housing market and I'll
quote Redfin statistics becauseI like the Redfin stats,
because they look at it on a persquare foot basis, so it kind
of adjusts for the size of thehouse is that on a per square
foot basis, home prices are atan all time high and listing
prices are consistently makingnew, all time highs.
(07:33):
So one of the problems withhousing is put it in parlance if
you think $3,000 a month is toomuch for a mortgage and the Fed
were to cut rates, well,homeowners are just going to
raise the price of the house andyou're still going to wind up
paying $3,000.
There's no getting around it.
The only way that you wind upgetting to pay less is if they
(07:55):
cut rates into weakness andhousing starts or, excuse me,
housing sales dramatically slowdown In this environment right
now.
If J-PAL you know, if DonaldTrump pulled out his little
voodoo dial and started stickingpins in J-PAL and got him to
cut rates this afternoon, yeah,mortgage rates would come down.
(08:16):
But I think every homeownerwould call their broker and say
raise the price of my house andyou're still going to be back to
the same monthly payment.
And until that, dynamic changes, I think that we need to
understand that we are in ahigher rate environment for
right now.
Now maybe Jay's right and thatthings dramatically slow down,
(08:38):
and if they dramatically slowdown and change that equation
then fine, but right now I don'tthink they do.
Speaker 1 (08:44):
Jay, from your perspective, I think we should
also talk about how commoditiesand oil prices might throw
things off.
There was that CNN headlineyesterday of a potential Israel
attack on Iranian nuclearfacilities.
Oil had a bit of a move thereon that.
Oil is a big driver ofinflation expectations, as we
all know.
How could commodities factorinto whatever happens pathwise?
(09:07):
Next for the Fed.
Speaker 3 (09:09):
Well, keep in mind in the 70s that 80% of inflation
came from the energy market, andso that's when you get.
Stagflation is when you haveskyrocketing energy prices and
that's why we're calling it stagdeflation, because we have 20%
drop this year.
And actually you know you'reright about that, you know about
(09:31):
that headline on attacking Iran.
But just to show you like, wedowngraded oil and we're pretty
negative on oil.
We have a, to be fair, we havea 60 to 80 target, so somebody
will probably bottom fish inhere.
But to have that headline andnow oil's down about 10 basis
point, not a big deal.
But if you can't rally on thatkind of headline, then that's
(09:52):
not a good market for oil.
And the reason is that the Trumpadministration has a great
relationship with the Saudis, oryou could even say they kind of
own the Saudis because theygive them weapons and they bomb
the Houthis and oppose Iran ontheir behalf.
And so OPEC?
Well, really, the Saudis haveabout 3 million barrels of exit
(10:17):
capacity, so they're going tokeep a lid on prices and that's
super bullish for inflation andnobody cares.
I don't know why they don'tcare.
They don't understand it.
The Fed doesn't understand it.
But core, so it's not justheadline inflation either.
Lower energy prices bleeds inthe core because everybody,
every business, uses energy.
So that's why we have such adifferentiated view on inflation
(10:41):
is that our models weightenergy much higher than like Fed
models, which essentiallyignore it.
Speaker 2 (10:48):
One thing about energy I might throw out, jay,
maybe even ask it to you as aquestion.
You're right.
The price of crude oil, youknow, taking the May contract in
WTI, was $75 back in Januaryaround inauguration day.
It's about $62 now and it'sbeen into the low mid-50s at
various times in the last monthor so.
But the price of gasoline ishigher than it was on
(11:10):
inauguration day.
The price of gasoline hasn'tmoved.
In fact it's been rising overthe last couple of weeks.
So the lower energy price isnot filtering in to the price of
the pump.
So it's not showing up therejust yet.
Do you have any thoughts onthat as to why that might be?
So it's not showing up therejust yet.
You got any thoughts on that asto why that might be?
Speaker 3 (11:28):
Well, it's important to look at seasonality with oil.
So we're going into summerdriving season.
So when you look at CPI,actually you're right that
gasoline prices are higher, butthey're normally higher.
So it's actually detractingfrom reported inflation and CPI.
And if you just look at normalspreads, there is a lag too, and
(11:54):
so I'm just looking up wherethe wholesale is gasoline is
right now.
See if I can do that quickly,put on my glasses.
The last time I checked therewas about a 15 cent likely
decline because you know oil hascome down and also gasoline's
come down but hasn't fed throughto the value chain.
(12:15):
Takes about three weeks.
So, okay, our Bob's at 214.
I think the national average islike 318.
So maybe just a little bit moredownside.
But in terms of reportedinflation, the seasonal
adjustment is going to showdeclining prices.
It's not going to be greatpolitically as you would have
(12:39):
thought for Trump, but after thesummer you'll get plummeting
prices and retail users will bemore happy about where it stands
.
Speaker 2 (12:52):
How about inflation?
There's two high-frequencymeasures of inflation that are
very popular.
One is Truflation and the otherone is PriceStats.
Pricestats is the old billionprices project.
Both of them take TruflationTruflation since May 1st is now
they do a measure where theycalculate what they think your
(13:14):
CPI is going to be it's up 60basis points in the last three
weeks and PriceStats so BertoCovello, harvard University,
developed it.
Pricestats is owned by Stateweeks and price stats, so Berto
Covello at Harvard Universitydeveloped it.
And the price stats is owned byState Street and they've
actually broken it out by originof product and they're saying
that all products that originateout of China in the last five
(13:36):
weeks are now 2% higher andcontinuing to rise.
So what we're going to seewithin the statistics and you
mentioned this before CPI isgoing to go up.
Now it's going to go up becauseof tariffs.
Then the next question is is ita step function higher?
What should be the properresponse to a step function
(13:56):
higher, or does it continue togo from there or does it
continue to go from there?
Speaker 3 (14:04):
Well, so we, as you indicated, do acknowledge that
there's going to be one or twomonths of increases, because the
same thing kind of feeds slowlythrough the value chain, just
like oil does natural oil andgasoline.
But then the third month, say,let's say we have two more
months of increases and I don'tthink they're going to be huge,
(14:27):
they'll just be, you know, likeyou're indicating maybe 60 base
points, then you're going to getpretty muted prints like 0.1,
0.2, 0.3, depending on volatilecomponents.
So the Fed, if they have alphabrain, which a lot of times they
don't, will start to say okay,we saw the tariff impact, now
it's out of the mark, out of thedata, it's clearly one time,
(14:50):
it's not going to happen againthe following year and probably
the employment market'ssoftening and they'll cut.
But what they think which Ithink is completely ridiculous,
is that because you have aone-time time increase and a lot
of people don't.
So if you don't, I'm not tryingto be too pejorative, but I
don't believe in theexpectations theory of inflation
(15:11):
at all.
It's been discredited.
It was maybe true 20 years agowhen you have unionization, and
so the Fed fears thatexpectations will become
unanchored or anchored, but wehave it on our website.
There's many, many researchpapers that debunk the
expectation theory of inflation.
But that's why you get thesedivergent views is, the Fed is
(15:35):
focused on that and, by the way,they repeat it every day.
So I'm sure most people believein it.
But just when you really lookat the data and think about the
structure of the economy,there's no market power, so
expectations don't matter.
It's endogenous variables, theway we treat it, so, in other
words, a dependent variable.
So if inflation comes down,expectations go down.
If inflation goes up,expectations go up, but they
(15:56):
don't create their own inflation.
So that's kind of a coredifferentiator between our view
and the Fed.
Is this expectations theory ofinflation.
Speaker 2 (16:06):
I agree with you on the expectations theory of
inflation.
I've never bought into thatidea in the first place.
I know that the Fed does buyinto that idea.
Speaker 3 (16:14):
They seem to live by it.
It's like their second religion.
Speaker 2 (16:20):
Well, yeah, I mean, now that they got rid of the
Phillips curve as their firstreligion, they've moved on to
their second religion.
But let me, let me ask youabout the other.
So tariffs are going to lead toa one or two month rise in
inflation and inflation flattensout.
The concern is is that Trumpcomes out and says look, I found
a magic bullet.
(16:40):
And a magic bullet is calledtariffs.
We raise tariffs, the Chineseeat it.
Maybe Walmart eats it.
Trump tweeted over the weekendhe wants Walmart to eat tariffs.
There was a story today thatretailers might raise prices
around the world to kind ofcushion the rise in tariffs.
In other words, trump is goingto say I found this magic bullet
.
We need more income into theUnited States to lower the
(17:02):
deficit.
We're not going to tax the richin the United States.
We're not going to tax themiddle class, tax the middle
class United States.
We're going to tax foreignersand it's working because we've
got all these tariffs coming inand we don't have inflation.
So we're going to do moretariffs and we're going to do
more tariffs after that andwe're going to do more tariffs
after that because they're notinflationary and we're going to
(17:22):
get these.
You know, like the old IBM whenthey used to give their you
know one time charges toearnings and it happened to
every quarter, we're going toget these one time increases of
tariffs all the time, becauseTrump's going to keep going and
going and going with tariffsunless we see a bad outcome that
forces him to stop.
And what forced him to stop inApril was the sell-off in the
(17:44):
stock market.
Speaker 1 (17:45):
Well, I'd argue it was specifically the risk that
week of delayed margin callshitting left and right.
I mean there was chatter aroundsome real systemic risks there.
Speaker 2 (17:55):
Right.
If we didn't have any of that,do you think China would be at
30% tariffs right now, or they'dstill be at 145%?
I think they'd still be at 145percent, I think they'd still be
at 145.
I would agree.
Yeah, so my point is is thatour tariffs are one time
increase?
Yes, Then Trump's going to saylook at how brilliant I am.
I raised tariffs.
It didn't cause inflation.
I'm going to raise them againand again and again until we get
(18:17):
a bad reaction to make themstop.
Speaker 3 (18:30):
What's your thought about that idea?
Well, I think that they did.
If you look, navarro has beensidelined yeah, thankfully.
So I haven't seen him in likethree weeks and happy about that
.
So I do think Besson's incharge, because a lot of my you
know associates or friends, Iguess acquaintances they're
super negative about the market.
Oh God, the administration'sterrible.
Could do stupid things forever,but they don't recognize that
Besant's kind of taken over andhe's far more reasonable than
(18:53):
Navarro and Trump himself.
So I'm pretty optimistic.
It's going to take way longerthan expected, but we're going
to get some trade agreements,we'll get it pushed forward.
But it's definitely to take waylonger than expected, but that
we're going to get some tradeagreements, we'll get it pushed
forward.
It's definitely a risk.
So if you don't believe our bullthesis that you know nabarro is
out then, then that certainlyis a risk, because that was that
(19:14):
tariff introduction wasflat-out, stupid, uh,
unambiguously flat-out, stupid.
No reason for it.
You could have threatened it inprivate.
So if that sort of behaviorcontinues, it's definitely a
risk for the market.
And with high and high tariffsI mean it's nice to think that
(19:35):
all of them will be absorbed.
Some of it will, but it's veryhard to have all of it absorbed
unless the dollar isskyrocketing.
So you're going to have lessconsumer spending, slowing
economy, lower rates, fed ratecuts.
So there will be a reaction.
I think it's pretty unlikelyincreasing tariffs significantly
(19:55):
over time is going to get fullyabsorbed.
Speaker 1 (19:59):
Jim, I'm curious what are your thoughts on how?
I mean?
There's been a lot of chatteraround deregulation in general
and lowering leverage ratiorequirements on several banks,
that being sort of another forcefor liquidity for the system.
Could we see that suddenlyunlock even more inflationary
potential just from banks nowputting more capital out there?
Speaker 2 (20:21):
Yeah, we're talking about the supplementary leverage
ratio that they're going towind up trying to rescind.
That's a financial crisis erainstrument where, if a bank buys
a security, like a treasurysecurity, they have to set aside
a certain amount of capital forpotential haircuts on that.
(20:43):
So when you buy a billiondollars worth of treasuries, you
have to put $40 million intoyour capital account to margin
against those, and that has beena disincentive for banks to buy
treasuries.
So now that the Fed is talkingabout doing away with the
supplementary leverage ratio,the idea behind that is to
(21:06):
incentivize the banks to buytreasuries.
I don't think it'll incentivizethem to do more loans, because
it's really meant to be aboutsecurities ownership.
But the problem there is andwe've all seen the FDIC charts
the banks are sitting onunrealized losses hundreds of
billions of dollars ofunrealized losses.
We've already had a financialcrisis because of unrealized
(21:26):
losses in the banking system,and you know that was Silicon
Valley Bank two years ago.
So let me put it to you simplyIf somebody turned to you and
said here's an investment,you've been getting the shit
kicked out of you on thisinvestment.
You've been losing money.
I'm going to make it easier foryou to double down on it.
And who's going to really wantto double down on it?
I don't think they're going towant to double down on it now,
(21:49):
with yields at 5% in the 30-yearand the like.
But if they rescind that ratiolater in life, if you get a bond
rally, their attitude wouldchange.
But I don't think if they gotrid of that ratio today, banks
are going to say, gee, look atall these losses we have in
treasuries, let's buy some moreof them.
They're not going to do thatuntil we see some upside
(22:10):
momentum.
Speaker 1 (22:11):
Jay, any thoughts on that?
To me it's like what I alwaysgo back to.
The surprise would be that wethrow everybody off.
Suddenly you have a real pickupin the velocity of money.
Everyone's always looking atthe pure amount of money that's
out there.
The velocity has beendowntrending for a long long
time.
Could banks maybe cause somekind of a counter trend there?
Speaker 3 (22:30):
Well, I would say I don't disagree.
I don't think there's justchanging regulation that's going
to create big demand fortreasuries and that markets tend
to overshoot, like actually,the stock market is melting down
right now, I think, because ofthe treasury auction.
Speaker 2 (22:50):
Yeah, the 20-year wasn't good.
Speaker 3 (22:52):
Yeah, it was poorly received so that seemed to be
the time the market melted down.
So we are in a bit of amomentum sell-off that does
normally occur in this May, june, more of the stock market, but
it can also include the bondmarket time frame, so I wouldn't
catch the falling knife here.
On rates, our call is reallysecond half, when all this data
(23:17):
is shaking out of the tariffdata but also real impacts on
the economy and I do think we'regoing to get incremental
slowing in housing because ofthis rate rise where we just
moved up another three basispoints or 4.58 on the 30-year.
But it's not going to happenright away and I wouldn't catch
(23:39):
the knife either on the stockmarket right now.
We're kind of neutral in thestock market right now with the
5,500 to 6,000 target, nor onthe bond market, Just to jump in
on that very short term.
Speaker 2 (23:54):
we had a 20-year auction.
That was announced 25 minutesago.
The results it was the firstcoupon auction since the Moody's
downgrade on Monday.
Results it was the first couponauction since the Moody's
downgrade on Monday.
It was not well received.
It wasn't a disaster.
It was below average is the wayI would say it.
And so it's right.
We've shot the interest ratesup to 508 on the 30-year, 458 on
(24:18):
the 10-year.
So that's going to get peoplechattering, that there's a
general buyer strike in thetreasury market between that and
the trend lower in rates and alot of other concerns that
everybody has right now.
But that's just short-termthinking.
I mean that will probablycontinue for a while.
(24:39):
But the question is you'reright, in the long run the
fundamentals will win out, butin the short run, you know the
voting machine here could getthemselves all worked up into a
hissy fit about rates goinghigher.
Speaker 1 (24:52):
In fairness, you're seeing that also, not just in
the US.
I mean that that's probably agood transition to Japan, which
every single night in when Ilook on my X feed, I see a chart
of Japan's GGB yields spikingup further and further Now very
different dynamic, because weknow the Bank of Japan basically
owns all that with Japanesepeople.
But is there any kind ofspillover with what's going on
(25:14):
with Japan's bond markets twohours?
I mean, everyone knows I talkabout the reverse carry trade
all the time, but I'm curious tohear your thoughts on that, Jim
.
Speaker 2 (25:21):
Yeah, I was going to ask you to comment on the carry
trade.
You're the guy but you know.
By the way, here's aninteresting statistic for you
For all of our career, thelowest interest rate in Asia has
been Japan.
It's no longer the case now.
It's China.
The 30-year in Japan is now ahigher yield than China.
(25:43):
The 10-year was within about 10basis points of China and we
always used to view that as whywere the interest rates in Asia
or Asian interest rates?
I'm talking about Asia alone.
Why are their interest rates inJapan so low relative to
everybody else?
Because they had the weakesteconomy.
Okay, what does that tell usabout China?
Now that China's got the lowestor is about to get the lowest
(26:04):
interest rates and I think it isthat they've got the weakest
economy.
But you're right as far as Japangoes, why are their rates
shooting higher.
They're a highly controlledmarket that the central bank
owns over half of the securitiesout there.
They have yield curve control orthey still have some version of
yield curve control out therethat they're trying to hold
(26:25):
yields in a certain range andthey can't because, for the
first time in a decade, whatyou're seeing is they're getting
actually real positive growthand they've got about 2.
Half percent inflation.
Now, two and a half percentinflation to us doesn't sound
like a lot, but if you've hadbeen at zero for 30 years and
(26:48):
you go to two, two and a halfpercent, that's a lot of
inflation and I think what we'reseeing is their bond market is
adjusting to that.
But because it's in a chaoticway that it's been adjusting to
it, it's been shooting up higherin yields more and more, as
we've seen.
And, like I said, I think thesignaling is the Japanese
economy might be getting out, orclose to getting out, of its
(27:10):
deflation and maybe the Chineseeconomy is going to come, you
know, replace it as the sick manof Asia because of its falling
interest rates.
Speaker 1 (27:19):
Jay.
I mean, does that impactanything as far as anything that
you're looking at, whether it'son the energy side for AMSA or
the small cap side?
I mean to the extent thatthere's any kind of spillover.
Speaker 3 (27:31):
Well, definitely so.
The other thing I'm looking ata screen on Bloomberg.
Our rates are, our bonds aredown and rates are up, but it's
true across the board, everysingle country in the world.
So what most investors miss isthat the bond market's way more
global than the stock market,because these bonds are much
(27:53):
more fungible than you know.
There's no fungible investmentin NVIDIA in Europe, but
European bonds and US bonds havesimilar default risks like,
namely, zero, close to zero, andthe differentials and yields.
So when one market sells off,it drags the whole bond market
(28:15):
down.
And what a lot of people misstoo is, like you said, oh, rates
are going higher, so I don'twant to be in bonds or like our
preferred stock fund, but thetruth is it makes equities way
less attractive, and you'reseeing that today, where this
bond auction has tanked themarket pretty dramatically, like
all over 100 S&P points.
(28:36):
So it's a significant concernand, like I said, it's normal
for markets to overshoot,particularly in May and June.
So we wouldn't catch eitherknife.
This I mean maybe at 5,500 orsomething lower.
We've had a huge rally up untilyou know whatever.
30 minutes ago I would havesaid this is a remarkably
(28:59):
resilient market.
But in these type of marketsbig run up, seasonally terrible
you get plunges like this.
So it's time to be cautious forour next month or two.
Speaker 2 (29:10):
So I agree with you, jay, that in this environment,
one of the things I've beenarguing to people that is being
underappreciated is the move inyields and and that that has
been also in the last two months, a problem.
Because when we saw the stockmarket plunge in early April
after Liberation Day and we wereall focused on the idea that it
(29:34):
was about tariffs, I wasraising my hand, going Dave, you
guys looked at what the 10-yearwas doing I'm talking about
mid-April.
It was going straight up, theyield was going straight up and
that was not what everybodyexpected, and I think that
that's the problem.
Now we're very close.
I'll throw this out at youright now we're very, very close
.
We're 509 on the 30-year.
(29:56):
If we close above 512 on the30-year any day today, tomorrow,
next week, that'll be a new18-year closing high and that
will be a big red headlinethat'll get everybody to start
breathing in their paper bagsagain that we've got an 18-year
high in 30-year rates.
So we're very, very close tothat right now.
So the point I'm trying tobring up is you're right that in
this environment right now, thecenter of the universe for
(30:24):
stocks, for commodities, forgold, for a lot of these things.
It might be even before Bitcoin, with it making its new
all-time high is rates, and thatrates are trending higher and
that has been the thing that'sgot everybody's attention.
Speaker 1 (30:35):
I will say it's like the best place to hide in a day
like this is high yield, whichis more of a duration thing,
you'd argue, obviously, but youknow the junk issues is
obviously there's some widening,but nothing really that major.
At what point do we get bullishon duration?
I mean credit risk.
(30:55):
Jay has been, has been has notbeen almost non-existent
throughout this entire period.
Speaker 3 (31:02):
Well, it did gap out.
It does trade with the stockmarket, so it gaps out when the
market's down.
So we'd be bullish on spreadsand treasuries in the second
third quarter.
Sorry, because these overreacts.
It happens in oil as well.
Everybody forgets that there'selasticities of demand, and it's
true in.
Happens in oil as well.
(31:22):
Everybody forgets that there'selasticity of the demand, and
it's true in the treasury marketas well.
So everybody, when oil goes to60, everybody predicts it's
going to 30, but nobody does themath and says well, at 30,
there's going to be a lot lessproduction and way more
consumption.
And same thing with treasuriesit's easy to sell.
I'm like we don't have anypositions in Treasury, but I'd
(31:42):
rather be short them here thanlong.
But then there's going to bethe rally that blows everybody's
head off, probably after.
Either we get a weak employmentreport or we get a couple of
CPIs that are a little bithigher, maybe because of tariffs
, but not very much and then thethird CPI is down, even Like,
if you really look, theinflation data has been super
(32:06):
bullish the last two months andnobody cares.
So at some point the shortswill get their heads blown off
and then we'll get the rally,but I wouldn't step in right
here.
Speaker 1 (32:15):
Let's talk about what else we should be looking at
outside of inflationexpectations and the bond market
.
Any signals, Jim, to you whenyou look at different asset
classes that are maybe causingyou to scratch your head a
little bit?
I've talked about gold a lot asa signal that maybe now has
become more of a speculativemomentum trade.
A lot of people have beensaying Bitcoin is starting to
(32:36):
diverge from the Nasdaqcorrelation, which has been so
strong for so many years.
Anything that you're observingthat's worth pointing out.
Speaker 2 (32:43):
Yeah, all of that.
I think that if we could pivota little bit to the stock market
, what is not being appreciatedover the last couple of years is
the dominant player in thestock market is now becoming a
retail trader, and when I saythat, people will throw back at
(33:03):
me oh, but the statistics sayretail doesn't buy stocks.
You're right, they don't.
They buy seven stocks.
That's all they're interestedin.
And they buy ETFs, and they buylevered ETFs and they buy zero
DTE options and that forces theassociated person of the ETF to
buy stocks in their proxy.
And so when you want to talkabout the whales that are moving
(33:24):
the market, let's talk aboutretail and the great example
that was what JP Morgan said onMonday.
Let's go back all the way twodays ago.
Monday, we had the Moody'sdowngrade.
The stock market was down aboutone and a half percent, about
as much as it is now, and itwound up finishing up the day
slightly positive positive.
(33:47):
What jp morgan pointed out wasthat in the first four hours of
buying on monday, our first fourhours of trading on monday,
retail investors bought 4.1billion dollars worth of stocks
in three hours and took themarket from minus one and a half
percent to almost unchangedisn't that?
Speaker 1 (34:00):
isn't that utterly wild, by the way, like I'm and I
don't, but I don't, I don'tunderstand where the money's
coming from.
I actually just did aninterview with the president of
Tasty Trade and asked him thatvery question.
It's like you're buy the dip,buy the dip, okay, but you have
to have cash to buy the dip with, so where is it coming from?
Speaker 2 (34:15):
You know, to be honest with you, I'm kind of at
the same point too, because I'verhetorically asked the question
I'm all in, I'm all in, I'm allin.
Okay, the market sold off, buythe dip With what You're already
in.
Where did you get this money tobuy?
But apparently there is anumber.
There is a big part of moneythat is sitting out there.
Now the problem with retail istwofold.
(34:39):
One, when you tell people thatit's retail, everybody
pooh-poohs it because they're soingrained with it's Citadel.
It everybody pooh-poohs itbecause they're so ingrained
with it's Citadel.
It's Bridgewater, it's all thebig hedge funds, it's the state
of California pension fund,because they're the big players
in the market.
Well, they are still bigplayers, but they're not the
buyer at the margin.
And the other problem withretail is it's millions of
(34:59):
people and it's hard to get yourhead around.
How big is it?
How much money do they have?
What do they have in thesidelines?
How bullish are they?
We have certain measures of itAII, investors, intelligence,
put call ratios, but they onlymeasure small segments of the
market.
We really don't know where itis.
But I think that what peopleare failing to recognize is to
(35:22):
use a home improvement term isto use a home improvement term.
The do-it-yourselfers are nowtaking over, as I pointed out,
2025,.
If you're a retail investor andyou're sitting here listening
to us, you probably have abrokerage account with zero
commissions.
You've got the vast majority ofthe internet to your disposal.
(35:43):
What does the top equityportfolio manager Bridgewater
have over you in investing?
He's got maybe two things.
Maybe he's got experience andskill, because he's the top
portfolio manager Bridgewater,and he's got some resources to
acquire publicly availableinformation faster.
But you have all thatinformation and you can trade at
(36:06):
the same commission.
He trades at zero and you areand you're not being encumbered
by strategies.
20 years ago, the Bridgewaterportfolio manager could engage
in strategies like I want to buyall my stocks equal weighted,
well, rsp, you can do ityourself now in one second.
(36:26):
So that's really changed thegame that there's a lot,
especially in the youngercohorts, a lot of
do-it-yourselfers that areplaying in this game more than
we ever thought.
So, after we've written offretail investors that their job
was to hand their money to aprofessional manager, they're
now making a comeback and doingit to them for themselves, and
that's why we've seen thismushrooming of ETF issuance to
(36:49):
meet that need and I think thata lot of people are really
having a hard time understandingit.
Speaker 1 (36:54):
Yeah, I like this direction because the point
about they buy seven stocks andthen ETFs makes me immediately
think.
That goes back to my othertheme, which is we're in a bit
of a passive bubble, right,because if retail is driving so
much of the flows at the marginand they're going to passive
funds largely, then you wouldthink that there are going to be
more anomalies for activemanagers to take advantage of.
(37:15):
What are your thoughts on that?
Speaker 3 (37:17):
Well, I think there is.
You know that short-term buythe dip.
But the great thing aboutretail investors is I talked to
them a lot of them over the lastmonth or two.
Most of them have figured outthat you just need to stay
invested.
So they are a source ofstability in the market.
You know whether I share thesort of.
(37:39):
I mean it's hard to imagineexactly.
I know how steve cohen'swhipping around stocks and you
know with puts and futures andstuff, but it is a little bit
hard to imagine how they'reactually stabilizing the market
after a Moody's downgrade.
But they're really stabilizingit more gradually, usually by
not selling when we went to5,000, maybe reinvesting
(38:01):
dividends, doing an incremental.
That's what we see in our fundsis reinvestment of dividends,
which is a good way to capturethat down volatility.
So I would be a little moreconstructive on retail that
maybe it wasn't rational to buythat dip Although it really was
because Moody's wasn't.
There's no information contentin the downgrade, but not a
(38:21):
great time of year to do that.
But they're probably of a yearor two perspective, so they
don't care.
So it's probably why I mean wespiked down 100 handles or so
Now we're spiking back up.
Why are the markets soresilient?
Because normally this time ofyear, with this bigger run, we
(38:41):
would be like headed straightdown to 5,500 in short order.
Speaker 2 (38:45):
I'll say a quick comment about Steve Cohen.
He's doing a better job tradingstarting pitchers than he is
with the stock market latelyhe's actually retired, so he's
not.
Speaker 1 (38:53):
He follows me on X.
Don't say that he might bewatching this.
I don't want to get in troublewith me.
Speaker 2 (38:57):
Well, I just told him he's doing a good job with his
starting pitchers.
Speaker 3 (39:01):
He's in first place, that's good and he's not trading
, so he's not the one whippingaround all those futures and
puts, but there's plenty ofother hedge funds doing it.
So, anyway, retail's not surethey're going to always
stabilize the market like that,but they're going to be a source
of stability.
Speaker 1 (39:21):
That's a good question, which is a good
direction actually to go to,also from DJ Distraction Jackson
, which is a nice name, I lovethat name.
Canada and the UK recentlyloaded up on treasuries and I
saw that stat right, the UK isnow the biggest hold, is bigger
than China as far as holdings oftreasuries.
Do they believe then thatyields will drop and they will
appreciate, or are they justloading up to prepare to defend
(39:42):
their currencies?
Up to prepare to defend theircurrencies?
Let's talk about the currencyside, jim, for a bit, because
it's been a recurring theme ofmine as well that I think we're
in a currency war and nobody'sreally framing it in that way,
but treasuries are a componentof that war.
Speaker 2 (39:55):
Yeah, treasuries are cash.
I mean, they're the reservecurrency and they're cash.
And just those numbers.
Uk did surpass China as thenumber two largest holder of
treasuries Foreign owner.
Only Japan is is larger thanthem.
Speaker 1 (40:11):
Oh.
Speaker 2 (40:11):
Japan.
Again, that's what I'm saying,right, but now there's a big
difference.
There's a big difference.
A lot of those treasuries thatare held by the UK are actually
held by American banks andinvestment banks in their UK
arms.
So it's really it's Jamie Dimon, you know, and it's Goldman
(40:32):
Sachs, and it's all you know,and it's Millennial, the big
hedge fund.
It's.
Those players in London is whoit is, whereas with the bank,
with Japan, it's largelyconsidered to be the bank of
Japan.
It's largely considered to bethe bank of japan.
It's not considered to be thebank of england.
When it comes to the uk, um,canada is kind of the same way.
(40:54):
It's not the bank of canada.
That's the big buyer of those,like you would think it would be
like the people's republic bankor people's bank of china,
which is their central bank, butit's a lot of their hedge funds
.
It's a lot of their hedge funds.
It's a lot of their insurancecompanies.
It's their big four banks.
It's those types of playersthat have been buying into those
(41:15):
securities.
Now, why they're doing it isstill a mystery in Canada.
I mean, you know they, they'vebeen plowing into them and I
haven't seen a compelling reasonfor why they're doing it.
So, but you're right, there hasbeen big buyers, big buyers out
of those two countries.
Speaker 3 (41:34):
Yeah, well, I was just going to point out the
obvious to this group, I guess.
But the, you know, the sellingtreasuries is the opposite side
of the currency trade.
You know, selling treasuries isthe opposite side of the
currency trade, right?
Because, as Jim was pointingout, everybody thinks, oh, the
reserve currency and everybody'ssitting on trillions of actual
US dollars.
They're not.
(41:54):
They're buying treasuriesbecause they want to have income
and they don't.
It's really difficult to getthat much in actual reserves or
currency for that matter,reserves or currency for that
matter.
So if you want to support yourcurrency, then you need to make
treasury transactions to do that.
So we may not, it may not be somuch.
Oh, we love the, the, uh, youknow us treasury here, just like
(42:19):
we're trying to intervene inthe, in the currency markets.
And the other side of the tradeis if you're like the Japanese
bond or BOJ and they're tryingto support the yen, so then you
buy yen but you need to selldollars, so you sell your
treasuries and do the oppositeside.
(42:40):
So a lot of the times thecurrency manipulation is what's
driving the purchase, is notnecessarily some fundamental
call that it's great down thelong end of the curve.
Speaker 2 (42:54):
I was just going to say, just for everybody
listening.
Keep in mind a simple questionor a simple point to make
Company X buys company Y for $10billion.
Okay, transaction closes.
How do I get you for $10billion?
Okay, transaction closes.
How do I get you the $10billion?
Are there pallets of $100 billsput in a bunch of Brinks trucks
blocked along to send you $10billion?
(43:14):
No, I have $10 billion worth oftreasuries and usually bills
and treasuries are consideredcash and I send them to you and
that's how I finish off thetransaction.
So treasuries are a form ofcash, is what they are.
Speaker 1 (43:29):
I saw somebody almost seemed like a conspiratorial
response, but it kind of makessense arguing that this whole
tariff you know back and forthis ultimately about Trump trying
to get countries to buy moretreasuries.
That that's sort of the realagenda beneath the surface, and
the more I think about it it'slike there's probably some
degree of truth to that.
(43:49):
But you know what's Trump'sresponse to all this?
I mean, if yields do keep onrising and treasuries keep
selling off, you want to actinvoluntarily like this on the
long end, and it's not really asmuch in the Fed's control than
the pressures on Trump to dosomething.
Speaker 2 (44:11):
Yeah, send SEAL Team 6 into the Echols building and
physically remove Jay Paul andput him in a cage in a basement
somewhere for his punishment.
You know it's all Jay Powell'sfault.
I'm joking, of course, but youknow he'll say it's all Jay
Powell's fault and he'll try andblame Powell.
But to your, you're right.
You know they, early on, saidthat their metric for success is
the 10 year yield, not thestock market.
(44:32):
I don't know if they if thatstill applies because this is
Trump we're talking about, youknow got to keep checking back
every 10 minutes to make sure itstill applies, but their metric
has been the 10 year.
What their ultimate goal, Ithink, was with the 10-year was
they wanted to initially relievethe US of the burden of
(44:55):
expenditures, and that's why,before tariffs, the big thing
was when JD Vance went to theMunich Security Summit and gave
that speech.
I'll summarize it for you Since1960, the US has spent $23
trillion in defense.
(45:16):
The total sum of NATO, andthat's 15 or 17 countries, has
spent seven and a half.
We have been the leader ineverything since the end of
World War II, starting with theKorean War, all the way through,
whether it's been a war, thewar on terrorism, the war on
communism, to defeat communisminto the late 1980s, and we've
(45:38):
paid a big price for it, a bigmonetary price for it.
It's cost us a lot of money.
Europe has spent less on it.
That's why the Europeans areable to have national health
care.
Everybody goes to college forfree, because they didn't have
to raise major armies and fightthese wars or fight these
battles.
We did.
Trump is trying to reverse thatand, interestingly, europeans
(46:01):
kind of agree that they want to.
They want to kind of reversethat and raise an army and stuff
like that of agree that theywant to kind of reverse that and
raise an army and stuff likethat.
But that's part of what he'sbeen trying to do is trying to
get rid of the liability and theexpenses for us.
I don't know if he's reallybeen trying to convince
foreigners to buy our securities, because on the other side
(46:22):
Stephen Murin and some of theothers have been talking about
they want a weaker dollar.
You know, and you don't want tobe owning US Treasuries if
you're a foreigner, if you thinkthe dollar is going to be going
down.
So you know.
This has been the mystery oftrying to figure out what it is
that he wants?
I understand what he wants ishe wants lower expenditures.
He wants Europe to pay forsecurity.
(46:43):
He wants Europe to plowtrillions of dollars into
defense.
Additionally, what he wanted todo was pay us the trillions of
dollars to defend them, but theyseem to want to do it on their
own.
Speaker 1 (46:54):
Jay, maybe in the last few minutes here, since
this is a sponsored conversationby Infrastructure Capital, just
talk about firm the funds, anykind of final thoughts you have,
and then I'll send it off toyou, jim Well like I said at the
outset and the market kind ofproved.
Speaker 3 (47:09):
My point is that this is going to be a little bit of
a dicey market because of bothtreasuries and stock market and
uncertainty around tariff policyand what you know.
We launched BNDES and it wasless true a little while ago,
but now it's proving its valuein that the volatility of bonds,
(47:33):
or high yield bonds, is abouthalf of preferreds and about a
third of the stock market andthat's playing out today.
So the equity markets down, orat least the equal weighted is
down 1.6%.
S&p is only down 1% right now,but high yield is only down 0.5%
(47:53):
.
So it's not a bad place to hideout to get good yields At some
point.
This will all turn around.
But if you want to put money towork, it's also fine if you
have some cash to sit on it fora while.
But these fixed incomeinvestments are pretty
all-weather securities to getreally high income that
oftentimes can offset thevolatility in the price.
Speaker 2 (48:16):
If I could jump in and just make a quick comment on
what Jay just said, a lot ofpeople got soured by fixed
income securities because of theexperience of 20 to 23, when we
went from zero to 5% rates.
That was horrible.
The total returns were terribleduring that period.
I understand that.
But now we had to get rates offof zero and now that we've got
(48:38):
them the 30 year five, they're acompletely different instrument
than they were three or fouryears ago.
They now have, you know, inmarket parlance the convexity.
They have less duration becausethey have a higher coupon.
They have the coupon cushion.
So now in the bond market ifyou buy bonds, even if you think
yields are going to go up, badyear could be plus 1% or maybe
(49:01):
zero, and it's not going to beminus 10 like it was in 22 when
we had to get from zero to somehigher yield.
So the structure of the bondmarket is completely different
right now and much morefavorable for investors than it
was just two or three years ago.
Speaker 1 (49:17):
And Jim for those who want to get access to your
research and maybe also learnabout your funds.
Since you're kind enough tospend the time here, might as
well throw it in there.
Speaker 2 (49:25):
Yeah, so BiancoResearchcom.
We do institutional research onmacro and fixed income.
I'm also active on social mediaat Bianco Research, on TwitterX
and on YouTube, and we do runan actively managed total return
fixed income fund, wtbn.
Speaker 1 (49:43):
And I will say, because I can say it, while they
can't, it's worth consideringblending the two.
So, from Infrastructure Capital, from Jay and from Jim,
appreciate everybody that'swatched this.
Thank you, jim for joining,thank you Jay, as always, and
I'll see you all in the nextepisode.
Cheers everybody.
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