Episode 188

full
Published on:

19th Jan 2024

Jim Bianco: Inflation is Dead - Long Live Inflation! How YOU Can Profit NOW

In this episode, we have the pleasure of hosting James A. Bianco, Founder of Bianco Research Advisors. Bianco shares his insights on a wide range of topics, from his macroeconomic framework to the impact of inflation on the global economy. This conversation also delves into the implications of the current political and military climate outside the U.S. and the workings of the Bianco Total Return Index.

Topics Discussed

• A brief introduction to James A. Bianco's career trajectory and the establishment of Bianco Research Advisors

• Understanding Bianco's macroeconomic framework, including his approach to analyzing the macro space and the key indicators he focuses on

• An in-depth discussion on inflation, its current state, and its potential

implications on the global economy

• Exploring the role of the Federal Reserve in managing inflation expectations and the potential risks associated with their strategies

• A look at the current political and military landscape outside the U.S., and its potential impact on the global economy

• Discussion on the potential impact of shipping disruptions in the Red Sea on the global supply chain and inflation

• Insights into the bond market, including the potential impact of higher

interest rates on the equity market

• An exploration of the Treasury Borrowing Advisory Committee's role in advising the Treasury on bond and note issuance

• A discussion on the potential signals for a hard economic landing or recession, and what could indicate a stronger economy than anticipated

• An introduction to the Bianco Total Return Index and a discussion on the future of actively managed ETFs in the equity market

This episode is a must-listen for anyone interested in macroeconomics, inflation, and the global economy. Bianco's insights provide a comprehensive understanding of the current economic landscape and offer valuable strategies for navigating potential future scenarios.

This is “ReSolve Riffs” – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick, and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
James Bianco:

If you believe inflation is not a problem.

2

:

It's not a problem.

3

:

If you believe it's a

problem, it is a problem.

4

:

I get the theory and the

theory is probably right.

5

:

The problem with the theory is

that it's hard to measure it.

6

:

I liken it to sentiment

in the stock market.

7

:

When everybody's bearish, the market

peaks when everybody's, when everybody's

8

:

bearish to market bottoms, when

everybody's bullish, the market peaks.

9

:

It's a great idea and it works.

10

:

The problem is, how do you

know when everybody's bearish

11

:

or when everybody's bullish?

12

:

That's really hard to figure out.

13

:

Hello and welcome to the Resolve Rifts

Investment Podcast, where the science of

14

:

investing meets real world application.

15

:

Join Adam Butler, Mike Philbrick, Rodrigo

Gordillo, and Richard Latterman of Resolve

16

:

Asset Management as they bring their

extensive investment experience to bear

17

:

on deep dives into the current market

trends, optimal portfolio construction,

18

:

and risk management techniques helping

animate the world of quantitative

19

:

investing with a global macro perspective.

20

:

This podcast is a must listen for

professional capital allocators seeking

21

:

to navigate the complexities of global

markets with skill and confidence.

22

:

Welcome to the journey.

23

:

Adam Butler, Mike Philbrick, and

Rodrigo Gordillo are principals of

24

:

Resolve Asset Management Global.

25

:

All opinions expressed by

the principals are their own.

26

:

And do not express the opinion

of resolve asset management.

27

:

This podcast is for informational purposes

only, and should not be relied upon

28

:

as a basis for investment decisions.

29

:

For more information, visit investresolve.

30

:

com.

31

:

Rodrigo Gordillo: All right.

32

:

Hello everyone.

33

:

Once again, to another

episode of resolve riffs.

34

:

And today we have a

very special guest, Mr.

35

:

Jim Bianco.

36

:

This is the first time that he's on our

podcast even though we've been Thinking

37

:

about you for a long time here at Resolve.

38

:

For those of you who don't know Jim,

he runs Bianco Research Advisors.

39

:

You can find him at Biancoresearch.

40

:

com.

41

:

And we're going to be talking

about everything macro where

42

:

the markets are, inflation.

43

:

What's going on the political front

and the military front outside

44

:

of the U S and maybe a little bit

about his Bianco total return index,

45

:

which I find very interesting.

46

:

Welcome Jim.

47

:

Thank you for coming today.

48

:

How are you doing?

49

:

James Bianco: I'm doing fine.

50

:

Thanks for having me.

51

:

Looking forward to the conversation.

52

:

Adam Butler: We might even

touch on a little Bitcoin too.

53

:

I know Jim's got some

thoughts there as well.

54

:

James Bianco: Yeah, I've heard of Bitcoin.

55

:

Yeah, we can talk about it.

56

:

Yeah, that's right.

57

:

Rodrigo Gordillo: And Jim, maybe because

our listeners might be new to you, maybe

58

:

just a quick five minute intro your past

and what you've done in your career,

59

:

and then we can get into the magic.

60

:

James Bianco: Yeah, so I came

out of Wall Street in the:

61

:

I worked at Lehman Brothers when it was

Lehman Brothers, and Shearson Lehman, it

62

:

changed its name to, and I worked at First

Boston before it became Credit Suisse.

63

:

I was there for the 1987 crash

that, you know, so now you

64

:

can back into how old I am.

65

:

from there, I moved back to my

hometown of Chicago and started

66

:

working for a brokerage firm

called Arbor Research and Trading.

67

:

And in 1998, I spun myself

off within Arbor Research and

68

:

Trading into Bianco Research.

69

:

26 years old right now.

70

:

We provide macro and fixed income

research for Institutional investors,

71

:

mainly throughout the world right now

through our either directly through

72

:

Bianco Research or through Arbor

Research and Trading, our affiliated

73

:

partner and earlier or late last year.

74

:

Now I should say we started

Bianco Advisors, which is an

75

:

advisory company that provides

the Bianco Total Return Index.

76

:

And that is an index where it is our

estimate as to changing factors as

77

:

to overweighting and underweighting

various sectors to outperform, say,

78

:

the Bloomberg aggregate or the J.

79

:

P.

80

:

Morgan broad investment grade.

81

:

And a couple of, about a month ago now

WisdomTree brought up a ETF on it, WTBN

82

:

for WisdomTreeBianco N for Nancy, WTBN.

83

:

And it trades on that as well.

84

:

Pretty busy.

85

:

We've got two businesses going here and

we've got a research business, which we'll

86

:

spend most of the time talking about,

and we've got an advisory business in a

87

:

tracker ETF following our index as well.

88

:

Rodrigo Gordillo: Amazing.

89

:

Amazing.

90

:

Lots going on.

91

:

I want to touch upon that, that

how you run that later on in

92

:

the podcast, but let's first

start with the, with your macro

93

:

framework just broadly speaking,

everybody, every macro player that

94

:

I know has a wide, different lens

by which to look at the macro space.

95

:

Before we get into your views, how

is it that your macro lens works?

96

:

What are you, how do you

look at the macro space?

97

:

And what are the major indicators

that you like to look into?

98

:

James Bianco: I like to start

off very broad and then I like

99

:

to narrow it down from there.

100

:

On the very broad aspect of

the markets in the place.

101

:

I like to look at what are the

economic trends and what could come

102

:

about to change the economic trends.

103

:

And then from there, I try to,

focus it down more narrow and best

104

:

way to explain it is maybe to tell

you broadly where I'm at right now.

105

:

I think that 2020 was one of the biggest

economic events And that was the shutdown

106

:

restart, or as I like to call it, the

reboot of the economy, the global economy.

107

:

When it was rebooted, it didn't

come back quite the same way as

108

:

it was going into it in 2019.

109

:

And as I like to always, warn,

different is not dystopian, different

110

:

is not worse, it's different.

111

:

The biggest thing we know about

difference is remote work.

112

:

If you go to YouTube.

113

:

The television show 60 minutes last

night did a very good episode, probably

114

:

three years too late because they

should have done it three years ago

115

:

about the nature of offices and the

nature of cities are going to have

116

:

to be rethunk because of remote work.

117

:

That is probably the most obvious exit.

118

:

And then you can throw into that an

acceleration of deglobalization using

119

:

energy as a weapon, and the like,

and you've got a different cycle.

120

:

What is that cycle?

121

:

I think the.

122

:

Bull market and bonds that

started in:

123

:

I think we're in a multi year bear

market and bonds now within a multi year

124

:

bear market and bonds, you can have a

two or three year rally within that.

125

:

But I think if you were to ask me in

10 years, 15 years, I think rates will

126

:

be much higher than they are today.

127

:

But like I said, there could be a

peak in a rally and a peak in a rally.

128

:

And I think what's changed is the

inflation cycles changed that the low

129

:

sub 2 percent inflation world has now

given way to a more friction world higher

130

:

inflation, saying the 3 to 4 percent

range has given way to a world of more

131

:

transactional nature of jobs, which will

lead to faster nominal growth, which

132

:

will lead to higher interest rates.

133

:

So within that I've been advocating the

idea that interest rates have turned.

134

:

They're going much higher.

135

:

That made me look like a genius

till around November 1st.

136

:

And then they proceeded

to rally 120 basis point.

137

:

And then I doesn't look so smart

anymore, but I stuck with this bearish

138

:

call and I am still sticking with it.

139

:

And I think that interest

rates are going to go higher.

140

:

I think within that, we could

flesh this out if you want.

141

:

I think that inflation, everybody on

wall street talks about inflation.

142

:

is going to the last mile to 2%.

143

:

If you want to use the sports metaphor

there, I think we've already hit

144

:

the finish line on the last mile,

somewhere in the high twos to around 3%.

145

:

And that inflation might be, starting

to bottom here ish and start back up.

146

:

I've got various reasons to think that

goods inflation might be moving higher.

147

:

I think that housing inflation

might be bottoming as well.

148

:

And I think that services inflation

is going to stay stickier than

149

:

people think, and that's going to

help to bring up interest rates.

150

:

Like I said, I start big picture.

151

:

I think the cycle turned in 2020.

152

:

I think that there's a lot of economic

things that are changed since:

153

:

then I try to focus it down from there.

154

:

But really what I think is driving

all of this right now is inflation.

155

:

Prior to 2020, what drove

everything was real growth.

156

:

You could ignore inflation.

157

:

Let's focus on whether the economy

is speeding up or slowing down.

158

:

Let's focus on employment.

159

:

Post 2020, it's all about prices.

160

:

And what is to a lesser extent

important is about real growth.

161

:

And I think Wall Street's had a

very difficult time making that

162

:

adjustment because they still want

to focus on let's talk about the

163

:

economy, let's talk about real growth,

and then we'll get to inflation.

164

:

And I think the way you should

be discussing it post:

165

:

inflation, and then real growth.

166

:

Rodrigo Gordillo: It's just one of

those things that who's asking, right?

167

:

And it's the allocators that have

had their own personal experience

168

:

to be in a period of 40 years where

inflation really has been less and

169

:

less of a problem up until 2020.

170

:

And we always liken it to most of

people's careers has been about

171

:

balancing on a barrel, a two dimensional

kind of balancing act, whether it's

172

:

growth, low growth, and whether you

need to inject money in order to

173

:

increase the economic growth or take

it away in order to decrease it.

174

:

All of a sudden, when you inject a real

inflation thrust, Then you're trying

175

:

to balance on the top of a ball, right?

176

:

It's a three dimensional game that

nobody has any real experience

177

:

except for veterans like you and

historians that have gone back to

178

:

the 40s to the 70s to, to the 20s to

really understand what inflation is.

179

:

So I think there's a, there's

not a lot of demand from the

180

:

analysts for, to get insight into

what's going on with inflation.

181

:

But I do think it's going to be

the dominant factor going forward.

182

:

We like to say that it's not

going to be a period of inflation.

183

:

It's going to be a period

of inflation volatility.

184

:

These ups and downs, right?

185

:

James Bianco: Yeah.

186

:

And Dan Tirillo was a Fed

governor from:

187

:

And I like to say that the best Fed

officials to listen to the ones that

188

:

recently leave, because then they

tell you what they really think.

189

:

They're just not reading the talking

points that they were handed.

190

:

And so after he left in 2017.

191

:

He went to the Brookings Institute

in October of 17 and gave a speech.

192

:

And a paper, and it was basically

the Fed has no theory on inflation.

193

:

And if I was to summarize it

for everybody, why, what do

194

:

you think moves inflation?

195

:

Is it money?

196

:

Is it velocity of money?

197

:

Is it rational expectations?

198

:

Is it some other theory?

199

:

Is it monetary theory?

200

:

Go ahead and backtest it.

201

:

Your correlation to inflation is going

to come up to zero in all of these.

202

:

And his point was inflation is

extraordinarily difficult to understand.

203

:

That's not a problem.

204

:

If the Fed would just start with that,

but no, the Fed likes to say, we've

205

:

got these levers and these dials that

we could turn and push and you want it

206

:

to the 3rd the 4th quarter, we gotcha.

207

:

We could put it right

there wherever we want.

208

:

Bernanke's favorite line that we could

get rid of inflation in 15 minutes.

209

:

We could just raise interest rates.

210

:

It, it doesn't work that way.

211

:

It's a lot more complicated.

212

:

It's complicated.

213

:

Then everybody thinks and because

it's a lot more complicated.

214

:

That's the other impatient

here on Wall Street.

215

:

I think inflation is a problem.

216

:

Okay, fine.

217

:

Where's the model?

218

:

And I want to know out to the 4th

decimal place where it's going

219

:

to be at the end of the year.

220

:

Oh, you can't do that.

221

:

Okay, then forget the inflation thing.

222

:

Let's go back to talking about

payrolls because we've been talking

223

:

about payrolls for 30 years and

we think we understand that.

224

:

That makes sense.

225

:

Adam Butler: I think the Fed

always has a major challenge, which

226

:

is to a meaningful extent, they

also need to anchor expectations.

227

:

The Fed comes out and says, we

have no model for inflation.

228

:

We have a variety of dials.

229

:

We don't know which way

to turn them to manage.

230

:

Inflation shocks in one direction

or the other, then there's a

231

:

much greater potential that the

economy becomes unanchored, right?

232

:

Because, every company is going to

interpret their own inflation picture.

233

:

They'll lose faith in the Fed's

ability to manage things, and

234

:

it may lead to a a change or an

accelerating sort of inflation.

235

:

Expectations cycle, which, I think that

really is the only weapon that the fed

236

:

really has to bring to the table to fight

inflation, which is rhetoric, right?

237

:

Just how are they going to jawbone?

238

:

Inflation expectations lower and

follow a playbook that is simple

239

:

enough that everybody can understand.

240

:

And even though there's no historical

calibration between the playbook

241

:

and reality, there's a theoretical.

242

:

And just the theoretical connection

alone can do some of the heavy lifting.

243

:

James Bianco: Yeah, I agree.

244

:

There's two things about that

st of:

245

:

So about 18 months ago, 19 months

ago Jay Powell was in the White House

246

:

with Janet Yellen and president Biden.

247

:

And that's when the

inflation rate was nearly 9%.

248

:

It was like 8.

249

:

7 percent and president Biden.

250

:

Literally in the Oval Office with the

cameras rolling, pointed at Jay Paul.

251

:

And I'm summarizing, he said,

America, this is the guy who's

252

:

going to make inflation go away.

253

:

It's not me, the President.

254

:

It's not the Treasury Secretary.

255

:

Here's your man.

256

:

He's got all the answers and

he's going to make it go away.

257

:

And of course, Jay has taken that

mantle on and he immediately started

258

:

by raising rates, 75 basis points and

a meeting right after that, in order

259

:

to start to tackle that inflation.

260

:

In that the Fed does use

this theory about inflation

261

:

expectations being well anchored.

262

:

If you believe inflation is not a problem.

263

:

It's not a problem.

264

:

If you believe it's a

problem, it is a problem.

265

:

I get the theory and the

theory is probably right.

266

:

The problem with the theory is

that it's hard to measure it.

267

:

I liken it to sentiment

in the stock market.

268

:

When everybody's bearish, the market

peaks when everybody's, when everybody's

269

:

bearish to market bottoms, when

everybody's bullish, the market peaks.

270

:

It's a great idea and it works.

271

:

The problem is, how do you

know when everybody's bearish

272

:

or when everybody's bullish?

273

:

That's really hard to figure out.

274

:

What is the sentiment?

275

:

What is the expectations about inflation?

276

:

The Fed has used things like the

Michigan survey or the tips break evens

277

:

and they said, it's well anchored,

it's under control, but then you

278

:

go look at the political surveys.

279

:

And the President's approval

rating is in the tank.

280

:

And when you ask people why it's in

the tank, they're very pessimistic

281

:

about the economy because prices

have risen for the last three years.

282

:

And what they see is a 20 percent

or 25 percent rise in the last

283

:

three or four years where the Fed

is saying no, the year over year

284

:

expectation for inflation is mid twos.

285

:

So therefore we've got the problem solved.

286

:

Again, the theory of inflation

expectations is right on.

287

:

But we could spend the rest of

our life trying to figure out

288

:

how to properly measure it.

289

:

And I don't think they're

measuring it properly.

290

:

I think that those expectations are

a little bit more, to use their term,

291

:

unanchored than they think, because

everybody anchored themselves off the last

292

:

big event in their life, 2020 shutdown.

293

:

And they know now that it cost them 120

to buy something that cost them 100.

294

:

In the middle of 2020, and that's

what's driving the mentality, not that

295

:

the inflation rate was 9 percent year

over year in June of 22, and it's 3.

296

:

4 percent if you use

CPI, at the end of:

297

:

They don't think of it that way.

298

:

Rodrigo Gordillo: No, and look,

as a Latin American, inflation

299

:

expectations indeed are what works.

300

:

It is what ultimately breaks the back

of hyperinflation when somebody new

301

:

comes in and creates a new currency and

says, we're not gonna do it this time.

302

:

And that tends to cause in that type of

scenario, it tends to cause deflation.

303

:

Not disinflation, but deflation.

304

:

I think a lot of the issues here is

people in their minds think, okay, my a

305

:

hundred dollars now only buys 80, right?

306

:

So in other words.

307

:

It costs you 120 to buy the same thing.

308

:

So now I thought inflation was licked.

309

:

Why is everything

costing me 124 this year?

310

:

But this inflation just means that

you're, the cost of purchasing

311

:

things is coming in at a lower rate.

312

:

It doesn't give you back what you've

already lost in terms of purchasing

313

:

power, especially if you have no

ability to increase your own income.

314

:

And so it, that kind of anchoring to

expectations works in Latin America

315

:

when you actually create a little bit

of deflation so that people can feel.

316

:

Good again, that's not

going to happen here.

317

:

And so it just it's a complicated

thing to deal with in the environment.

318

:

And I find funny that you said that

the president pointed at Powell and

319

:

said, you're going to fix inflation.

320

:

Do you then point at Yellen and say,

you're going to create, you're going to

321

:

cause inflation once again in November?

322

:

Like what was he saying to the

treasury about all of this?

323

:

James Bianco: That's the

big, that's the big question.

324

:

I was going to say, you're right

about understanding inflation.

325

:

No less than the president's staff.

326

:

And I'm going to say president staff,

cause let's just assume that every

327

:

tweet that comes out of the white

house, Jim, it's not him and he doesn't

328

:

even know what they're coming out.

329

:

We're saying that inflation is

down and they would criticize

330

:

companies for not lowering prices.

331

:

Okay.

332

:

Tell me you don't understand what

inflation is without telling me you

333

:

don't understand what inflation is.

334

:

Yeah.

335

:

And but again, you set those expectations.

336

:

Oh, so the inflation rates down so prices

should be falling and they're not falling.

337

:

So something's wrong, so yeah, I

get that it's a complicated thing.

338

:

It sounds easy on the surface because you

see this on social media all the time.

339

:

You talk about inflation.

340

:

Oh, just look at money supply.

341

:

That, that's it done, takes four seconds

to figure out what inflation is, but

342

:

when you start to really dig into it,

it's far more complicated than that.

343

:

Rodrigo Gordillo: Velocity

of money and all that.

344

:

Adam Butler: It's yeah.

345

:

You sadly in all of these

economic terms are subject to

346

:

this syntactic ambiguity, right?

347

:

Every per every, even every

economist that you talk to, you

348

:

say inflation, they hear something.

349

:

At least slightly different than what

you meant when you said that word, right?

350

:

So it's not even, you can't measure it.

351

:

You can't, we don't even have

a common definition for it.

352

:

I think we can all there's a

lot more convergence around a

353

:

definition of growth, right?

354

:

For some reason, there's this massive.

355

:

mosaic of different ways to

interpret this term inflation.

356

:

Why do you think that is?

357

:

James Bianco: I think it's

cause it's a, first of all, the

358

:

corollary of that is deflation.

359

:

And that, if you think inflation

is hard to define, trying to find

360

:

deflation, because I like to joke,

if you ask five economists, what

361

:

is the definition of deflation?

362

:

You'll get seven answers.

363

:

Because some people think it's

a fall in financial assets.

364

:

Others think it's just a, a negative CPI.

365

:

That's deflation.

366

:

As far as inflation goes, I think part

of the problem is that what economists

367

:

are trying to do is Not just try to

tell you what's been happening lately.

368

:

Oh, because that could be subject to food

prices are up or down or gasoline prices

369

:

are up or down because they're volatile.

370

:

They're important.

371

:

They also have a big psyche on

everybody, especially gasoline prices,

372

:

but they want to try and look at what

is the underlying trend of inflation.

373

:

That's why the Cleveland Fed invented

the median CPI, and you've got, the

374

:

multivariate model by the Dallas Fed that

tries to look at what is the undertone

375

:

or the tone or trend of inflation beyond

what we see as far as the last print goes.

376

:

And then when you start thinking

about it in those terms, and

377

:

you start asking people, what

is the definition of inflation?

378

:

You start getting a lot

of different answers.

379

:

Cause one of the pushbacks I get

is I talk about that the economy

380

:

hits constraints and then those

constraints get met by higher prices.

381

:

And then I hear people tell

me but that's not inflation.

382

:

That's constraints being

hit by higher prices.

383

:

And I'm like, yeah, but the

public knows they go to the

384

:

store and it costs more money.

385

:

And they're not thinking, Oh, there's

a shipping problem out of Asia.

386

:

So this is not really inflation.

387

:

This is something different.

388

:

No, to them, it's all inflation.

389

:

And, or you could say that

core inflation is doing X, but

390

:

gasoline prices are up or down.

391

:

They think that inflation is up or down

because of what gasoline prices are doing.

392

:

So that's where it gets to

be really complicated because

393

:

we can't really settle on.

394

:

What is the underlying trend or

what is the underlying cause?

395

:

Going back to Dan Torillo, right?

396

:

There's no underlying theory.

397

:

If there was an accepted theory of how

inflation interacts with the economy,

398

:

and that's it, write it in the textbooks.

399

:

We don't even have to

entertain other ideas.

400

:

Then we could then get to

an accepted definition.

401

:

But since we can't have an

accepted theory, we have several

402

:

theories about inflation.

403

:

We have several ways to measure it

and several ways to argue about it.

404

:

Adam Butler: It's the, the answer

is it's complicated, right?

405

:

It's like trying to measure, am I healthy?

406

:

Or, in defining intelligence,

407

:

James Bianco: I've used the analogy of

weather, is, is the weather good or bad?

408

:

We were talking off camera.

409

:

I'm in Chicago.

410

:

It's six below zero.

411

:

It's January.

412

:

It's the middle of January.

413

:

That's not unusual.

414

:

You guys are in the Caymans.

415

:

It's, 80 degrees.

416

:

That's not unusual.

417

:

Is my weather unusual?

418

:

It would be for the Caymans,

but it's not necessarily

419

:

unusual for Chicago in January.

420

:

So it's all a relative scale

is really what boils down to.

421

:

Rodrigo Gordillo: So I guess the

question then is from your perspective,

422

:

you're coming up with certain

beliefs with regard to inflation

423

:

that were plateaued, maybe going up.

424

:

How do you measure inflation?

425

:

How have you gotten to that conclusion

and what can we expect going forward?

426

:

James Bianco: Yeah the first

conclusion I start with, I'll start

427

:

with housing inflation, because

that's the big one, the most interest

428

:

sensitive sector that there is.

429

:

And the assumption that everybody

makes is that we've got these

430

:

punishingly high interest rates

that are really hurting the economy.

431

:

You've heard Jonathan Gray, he's the CEO

of Blackstone say this when he reported

432

:

disappointing numbers in October,

he said interest rates are too high.

433

:

They're punishing Bill Ackman has

said something similar to that.

434

:

He thinks that the Fed is going to

have to start cutting rates in March

435

:

because interest rates are punishing

and that gets a big reception on Wall

436

:

Street because there's an old adage

on Wall Street that the Fed keeps

437

:

raising rates until something breaks.

438

:

And over the last two years, we've had a

25 percent decline in the stock market.

439

:

We've had at a total return basis.

440

:

One of the worst sell offs we've seen in

the bond market, because we went from 1

441

:

percent to 5 percent on interest rates

and the math shows you that if you held

442

:

like the 30 year bond through that.

443

:

You lost almost half your money.

444

:

We're down about 50 percent

at the lows as well.

445

:

And we had a banking crisis about

a year ago in March of last year

446

:

with a bunch of banks headlined

by Silicon Valley Bank failing.

447

:

So surely something broke, right?

448

:

Those are three things that Yes, but they

didn't necessarily break the economy.

449

:

So I push back on this idea that

we've raised rates to the level that

450

:

we've broken something economy wide.

451

:

Sure, some banks had some problems.

452

:

Sure, the stock market

had some indigestion in 22

453

:

over it, recovered in 23.

454

:

We haven't broken anything.

455

:

So I start with the idea that when

you look at the housing market, It's

456

:

holding up a lot better than people

think it would have if you would

457

:

have asked anybody in the abstract a

year and a half ago, what happens if

458

:

mortgage rates go to eight percent?

459

:

The answer would have been a hell of a

lot worse than what we've actually seen.

460

:

And so it's actually held up okay.

461

:

Now part of that might be because

the average mortgage rate Even though

462

:

the current mortgage rate in the U.

463

:

S.

464

:

is 7 percent down from 8 two months

ago, the average mortgage in the

465

:

United States is still three and three

quarters because so many people still

466

:

own the same mortgage that they had

from three and four and five years ago.

467

:

So I don't think that we've seen that

pain really come into the housing market.

468

:

And if you look at some of the real time

measures like Zillow, Redfin, these are

469

:

the online sites that do some algorithms.

470

:

There's really some evidence that

home prices are bottoming and

471

:

that there's some evidence to that

rents are starting to move higher.

472

:

Now home sales are down a lot,

but the way that I interpret that

473

:

is most people are not stressed.

474

:

I have a home.

475

:

I call a broker.

476

:

I list my house.

477

:

I want X for my house.

478

:

My broker tells me yes, but mortgage

rates are up and the average monthly

479

:

payment for your house is higher.

480

:

Fine.

481

:

I still want my X.

482

:

I don't want to lower my price.

483

:

So if nobody shows up to look

at it, I'm fine with that.

484

:

But I'm not selling it

for less than what I want.

485

:

So home prices are starting to hold up.

486

:

And so I think what you're seeing in

the data is some signs that you might be

487

:

seeing more of a bottom in home prices.

488

:

Then you are seeing further declines.

489

:

Now, add to that, that the

30% of the inflation report

490

:

is owner's equivalent rent.

491

:

That's the way that they impute

rental inflation in the CPI index.

492

:

Now, everybody's on this idea that

has to come down a lot and they

493

:

look at the year over year numbers.

494

:

But again.

495

:

Just like we were talking about with

the public's attitude about inflation,

496

:

look at the cumulative numbers.

497

:

Most of the real time measures

of home prices and rentals since

498

:

2020 are up 30 or 40 percent.

499

:

The Owner's equivalent rent

is up around 23 to 25%.

500

:

It has not risen as much as the real

time measures of the housing market.

501

:

I think it has to rise more

to converge with that gap.

502

:

So that doesn't mean that rental

inflation or OER has to go up.

503

:

I just think it's going to be sticky.

504

:

It's gonna be slow to going down and

it did rise in the last couple of, or

505

:

outperform by going up five tenths of

a percent in the last couple of CPI

506

:

reports and Wall Street's pointing

at that going, oh, that's wrong.

507

:

It's got to come down.

508

:

It's got to come down.

509

:

I keep saying, no, it has under

counted the amount of housing

510

:

inflation we've had to date.

511

:

And it's going to go up.

512

:

Another one that I've been

looking at is services.

513

:

Services are largely service inflation.

514

:

That is about 60 percent of

what we spend is in services.

515

:

That's largely driven by paychecks.

516

:

And there's been an attitude change

in the public, remote work, as I

517

:

mentioned before, about paychecks.

518

:

Jobs are more transactional.

519

:

If you look at the JOLTS report,

job opening labor turnover report.

520

:

If you're old enough, like I am, you

remember the old newspaper wanted

521

:

reports, no newspaper ads for jobs.

522

:

They used to measure that, but

we don't use those anymore.

523

:

So they invented Help

Wanted Index or whatever.

524

:

The Help Wanted, that's

what I was thinking of.

525

:

Yes.

526

:

The Help Wanted Index, that, that

went away with the dinosaurs.

527

:

So the Joltz Report replaced it.

528

:

And if you look at the, also what they

added in their report is the number

529

:

of people that turn over their jobs.

530

:

It's really high.

531

:

Now, Wall Street likes to talk about

the number of jobs that have turned over

532

:

has come down from the previous month.

533

:

But if you look at where we are,

like something like 2 percent or 2.

534

:

5 percent of jobs a month turnover, that's

higher than anything we saw pre pandemic.

535

:

Sure, it's lower than it was a year ago or

18 months ago, But it's still much higher.

536

:

And if you look at, we've invented

words like quiet quitting, and labor

537

:

hoarding, and we've seen big wage gains.

538

:

We've seen the biggest amount of strike

activity in at least 20 years, headlined

539

:

by the UAW and the Hollywood strike.

540

:

Those are the two most headline

strikes that everybody's familiar with.

541

:

Workers feel comfortable.

542

:

I have a job.

543

:

I get a paycheck.

544

:

I will spend money.

545

:

What if I lose my job?

546

:

Eh, I'll find another job.

547

:

We'll go to the Caymans

for a weekend vacation.

548

:

And then when I get back,

I'll find another job.

549

:

I am not concerned about my job status.

550

:

That's what you're seeing, I

think, in the labor market.

551

:

I think Wall Street's got this backwards,

that they keep focused on this idea

552

:

of how much pandemic savings is left.

553

:

I think it's really comfort about the

labor market that's got people spending

554

:

because that's one of the big surprises

of:

555

:

kept going and they kept trying to

force it into all this excess pandemic

556

:

savings, which there that is true.

557

:

And that's there.

558

:

But I think it's about jobs.

559

:

And then finally.

560

:

Goods.

561

:

Goods, inflation is around zero.

562

:

It has really decelerated

in the last couple of years.

563

:

But what did we find from 2020 that

really drove goods inflation was shortages

564

:

and shortages relative to demand.

565

:

Could we be seeing that again?

566

:

I think that we're really underestimating

what's happening in the Red Sea now.

567

:

I'm not talking about Israel Gaza,

I'm talking about In the Red Sea

568

:

with what the Houthis are doing.

569

:

Oh, they're a ragtag bunch that are

firing off homemade rockets into the

570

:

Gulf of, into the Gulf of Aden or into

the Red Sea around the Bab el Mandeb.

571

:

That's the 16 miles of

water between Djibouti.

572

:

And Yemen where they're

attacking all the shipping.

573

:

From the Houthi standpoint, it's

been enormously successful because

574

:

hundreds of billions of dollars of

shipping goods has been diverted

575

:

around Africa on the Cape of Good Hope.

576

:

That adds 10 days or so, one way,

20 days round trip back to Asia.

577

:

We were, we work in a just in time world.

578

:

I need my stuff scheduled

to show up on time.

579

:

What they're doing by

shutting down the Red Seas.

580

:

Commercial shipping is they're putting

all of the just in time behind schedule.

581

:

Volvo and Tesla have already announced

that they're going to idle their plants

582

:

at the end of this month, because they're

looking at their inventory schedules.

583

:

And they're saying the parts we need at

the end of January and early February

584

:

are not going to arrive on time.

585

:

And we're not going to be able

to finish making cars because

586

:

we're going to be missing parts.

587

:

So we're just going to idle.

588

:

And the longer this goes on and the

longer we have to send ships around

589

:

Africa and add time and add friction and

more cost, the more that we're going to

590

:

see that we're going to have a problem

in a just in time inventory world.

591

:

And we're also finding out that

the world is relatively inelastic.

592

:

Shipping, shipping rates.

593

:

We all look at these container prices and

that's become a new parlor game on Wall

594

:

Street that container rates are going up.

595

:

What does that mean?

596

:

70 percent of shipping is on a contract.

597

:

I have a big container ship.

598

:

It's contracted for the year.

599

:

It goes back and forth

between Asia and Europe.

600

:

It may be six times a year because

it takes, so many, it's an 8, 000

601

:

mile trip if you go through the Suez

canal, and then it has to go back.

602

:

But now that you're sending my ship

around Africa, it might only be able

603

:

to do four or five trips a year.

604

:

That extra one or two trips it's

missing, I will contract out excess

605

:

in excess shipping in the spot market.

606

:

Those prices are up 80

percent in two weeks.

607

:

So what the shippers are telling you

is people want their stuff now, whether

608

:

they're Tesla or Volvo or consumers,

and they will pay extra to get it now.

609

:

So pay up, get those ships online,

fill them with containers and

610

:

start sending them around Africa in

order to get them where they were.

611

:

So if there's going to be a general

slowdown and a stalling of goods.

612

:

Because of what's happening in the

Red Sea, the first thing people are

613

:

going to say is what's available and

how much is it going to cost me to

614

:

get it, and I will pay that to get it.

615

:

That's what we saw in 2021 and into 2022.

616

:

Goods prices, when CPI was up

9%, CPI goods was up nearly

617

:

16 percent year over year.

618

:

So I think all of these are

suggesting for listening.

619

:

That the inflation rate, like I said,

the last mile might be here right now,

620

:

and that I'm not saying we're going

to get anywhere near 9 percent because

621

:

it's not nearly as bad as that, but

we can stay in a 3 to 4 percent world

622

:

is what we can wind up staying in.

623

:

And yes, that's a big problem for a Wall

Street that thinks inflation's licked,

624

:

we're going to 2%, the Fed's going to

cut rates six or seven times this year.

625

:

Not if we stay in a 3 4

percent inflation world.

626

:

That, that, that reality won't happen.

627

:

Rodrigo Gordillo: Yeah, it looks the

inelasticity of it is very interesting

628

:

because like you said, you have a tight

job market, you continue to have demand,

629

:

housing is sticky, as you mentioned,

but also, the there's a discussion

630

:

to be made of whether inflation is

going to be much worse for Europe.

631

:

United States, just because most of the

shipping that's being disrupted is in

632

:

the European is for European delivery.

633

:

But of course, that raises rates

everywhere, as you mentioned,

634

:

because just there's just less

capacity to do less trips.

635

:

The The interesting thing is that

what needs to happen for that to

636

:

calm down is not a less rockets

being thrown at these ships.

637

:

It has to calm down completely because

you just can't get your shipment insured.

638

:

It's the insurers that simply will not

Ensure your, or if they will ensure

639

:

it, the costs are so astronomical

that you're better off going around.

640

:

So it has to end completely

for it to go back to normal.

641

:

James Bianco: Yeah.

642

:

So a couple of things about that.

643

:

There's big ports in the Eastern

half of the United States.

644

:

Savannah, Charleston.

645

:

Norfolk, New York, New Jersey,

just to name a couple of them.

646

:

About 30 to 40 percent of the goods that

come to those ports come through Europe.

647

:

So the Asian manufacturers put

it on a boat through the Suez.

648

:

It stops at Rotterdam or Felixstowe,

which is the largest port in the UK,

649

:

and then it gets put on another ship

and it's sent to New York or it's

650

:

sent to, Savannah or Charleston.

651

:

And the reason that is because

another technical thing is the

652

:

Panama Canal, which would be

another way that they could send it.

653

:

The water levels on the lake and

the Panama Canal are so low that

654

:

it's running at around two thirds

capacity and there's a big backlog

655

:

to get through the Panama Canal.

656

:

So they've been actually

sending stuff through Europe.

657

:

So the shortage of stuff will show up.

658

:

On the East coast of the United States.

659

:

Now, maybe we can mitigate that by

increasing shipments to the West

660

:

coast and putting them on rails.

661

:

But again, in a just in time inventory,

I'm sitting here in Detroit and

662

:

I am making a car and on February

17th, I need these 20 parts to show

663

:

up so I can finish this car, you're

telling me I'll get those parts.

664

:

It's just some time after February 17th.

665

:

What am I going to do

with this half built car?

666

:

Is, is what's going to

happen at that point.

667

:

That's the problem.

668

:

And I remind everybody that in 2020, in

September of:

669

:

after the recession ended, car production

in the United States was 200, 000 units.

670

:

A month all car production and truck

production in the United States.

671

:

By the fourth quarter of 2021, it

had fallen to 84, 000 units a month.

672

:

That was not because demand was

down because demand was increasing

673

:

during that period because we were

already past the lockdowns and

674

:

we were restarting the economy.

675

:

It was just in time inventories

couldn't finish making the cars.

676

:

Chips, Silicon chips out of Asia

and everything was a big problem.

677

:

And that's why by 2021 90% of people

were buying cars over sticker price.

678

:

Yeah, they're in elastic.

679

:

I want a car, I want a deal, except

when there is no deal and I need a car.

680

:

What?

681

:

What do I have to write down on

this check in order to get this car?

682

:

And that's what people wound up

doing and that's what could wind up

683

:

happening this time is sure, everything

you've ordered you will get, but you

684

:

need it at the time you expected.

685

:

Otherwise it creates all kinds

of problems that produces goods

686

:

inflation because of the inelasticity.

687

:

I want what is available and

what do I have to pay to get it?

688

:

And prices go up.

689

:

Adam Butler: Reinforcing this de

globalization theme that was talked

690

:

about a lot in 2022 re emerged with

this, with the Ukraine conflict.

691

:

Every time there's conflict and some,

the supply of some major good is

692

:

threatened to be disrupted in Ukraine

situation, obviously it was commodities

693

:

and in the Houthi situation, it's now

694

:

James Bianco: shipping

goods, industrial goods,

695

:

Adam Butler: Then there's this major

potential for an uptick in inflation.

696

:

The interesting thing about.

697

:

Logistics, and like you say, the sort

of just in time world, is that it's

698

:

subject to queuing theory, right?

699

:

Where, you've got this idea where, and

there's great models on this, where

700

:

you've got a lineup for the bank, and

there's a certain number of tellers.

701

:

You take away one teller, and it's not

just that it slows down by one third,

702

:

it slows down by 80 percent because the

line keeps getting bigger and bigger.

703

:

And, we saw that play out.

704

:

That's a big reason why we did get

to that 9 percent inflation, right?

705

:

It's not just that, Oh,

it slows down for awhile.

706

:

And then once it's it stops slowing

down, everything catches up.

707

:

It doesn't catch up.

708

:

It takes a very long time to get

back to that equilibrium again.

709

:

And in the meantime.

710

:

Everybody's got to live with

too much money chasing too few

711

:

goods, which leads to inflation.

712

:

And I totally still, one of the

things we haven't really covered.

713

:

Is the demand side, there's a lot going

on the fiscal side that I think also

714

:

may contribute substantially to a higher

than expected growth rate and a higher

715

:

expected rate of in demand coupled

with potential supply constraints.

716

:

You're back to the same cocktail

we were looking at in:

717

:

James Bianco: No.

718

:

Yeah, no, you're right on the demand

side, what you've got happening right now.

719

:

is you've got enormous, you've got

an enormous 2 trillion, 6 percent

720

:

of GDP deficit in the United States.

721

:

I saw a statistic and I believe it to be

correct that whenever the deficit has been

722

:

this big, we've never had a recession.

723

:

And the reason is that what deficit

spending is, first of all, let me back up.

724

:

What borrowing to spend is pulling

forward future consumption to the current.

725

:

The great example I like

to use is a mortgage.

726

:

When I'm in, when I'm 30 years old.

727

:

And I'm freshly married and

going to start a family.

728

:

I need a house then.

729

:

Now I can afford the house when I'm 60,

after I've served, saved for 30 years.

730

:

It's too late then for

me to buy the house.

731

:

So I pull that consumption forward

to right now by borrowing the

732

:

money in the form of a mortgage

and paying it off slowly over time.

733

:

And so what deficit spending is that we

have all of this spending in the economy.

734

:

That is going on by the government

and that is creating demand and

735

:

it's creating, economic activity.

736

:

On top of everything else that's

been going on and that demand makes

737

:

prices a little bit more inelastic.

738

:

People want to buy it.

739

:

They want to pay up for it.

740

:

They want to get it right now.

741

:

What would slow the economy a lot would

be if we were to stop the government

742

:

spending as much as that we've seen.

743

:

But the problem with that is,

is then if you were to slow the

744

:

economy, we would risk recession.

745

:

If you keep the government spending going,

we could be risking The idea of inflation

746

:

right now, and I think really what is it

comes back to when it comes to demand, it

747

:

comes back to an attitude change, right?

748

:

Because people would say prior to 2020.

749

:

You didn't have maybe the massive

government deficits that we had

750

:

then, but you had massive wealth

creation through financial markets.

751

:

Why didn't that wealth creation through

financial markets create inflation?

752

:

I think it was the legacy of

the financial crisis of:

753

:

When I looked at my brokerage statement,

keep the example simple, when I looked

754

:

at my brokerage statement at the end

of the month or the end of the quarter

755

:

and I saw that My portfolio went up in

value and I went on Zillow and I saw

756

:

that my home price went up in value.

757

:

I said, okay, good.

758

:

I've got extra savings.

759

:

I feel comfortable.

760

:

I feel a little bit more secure.

761

:

But that's all.

762

:

I just wanted to feel

more secure about it.

763

:

I'm happy.

764

:

I have extra savings.

765

:

That's why I didn't see inflation.

766

:

Today, and we saw this in 2021, when I get

extra money, either the government mails

767

:

it to me, or meme stocks boom, or Bitcoin

booms, or the government spends it, and I

768

:

see that I have extra wealth in my pocket.

769

:

checking account or my brokerage account.

770

:

I book a trip to the Caymans.

771

:

I spend it.

772

:

I buy a new car or something like that.

773

:

That attitude changed.

774

:

We saw that in 2021.

775

:

When we saw that the government

was mailing people money, they

776

:

didn't put it in the bank and say,

good, the rainy day fund is there.

777

:

We could exhale and relax.

778

:

We know we spent it.

779

:

We spent it.

780

:

We paid over sticker for cars.

781

:

We invented the word YOLO.

782

:

You only live once.

783

:

Let's go for it.

784

:

And we speculated in the markets with it.

785

:

So that's been the big attitude

change coming out of:

786

:

with the attitude change.

787

:

Coming out of 2009 was

a lot more conservative.

788

:

I want to make sure that

my savings is higher.

789

:

Now the attitude changes.

790

:

I want to live a little bit more

and maybe it's a PTSD from what

791

:

happened in 2020, but I'm willing

to spend and that will fuel demand.

792

:

And that will fuel.

793

:

More inflation and ultimately

higher interest rates.

794

:

Rodrigo Gordillo: So let's talk about

the rubber meeting the road here.

795

:

So clearly there, if this is all

correct, there's a mispricing between

796

:

where inflation is and where it's

going and the belief that there's

797

:

going to be a bunch of rate cuts

going to happen next year, right?

798

:

It's not, yeah,

799

:

James Bianco: let me just say but

the first part of your question.

800

:

A mispricing between what

the market expects and what

801

:

actually happens is not unusual.

802

:

That's almost kind of standard fare

that we see this happen all the

803

:

time that the market prices in a

reality, if you go back two years ago.

804

:

I can remember.

805

:

The, when everybody, I'm talking

about February of 22, when everybody's

806

:

jaw hit the floor, because Wall

Street was saying that the Fed would

807

:

raise rates three, maybe four times.

808

:

Now, three rate hikes,

that's 25 basis points.

809

:

So three would be, they'll raise rates

to a hundred basis points in:

810

:

Three or four rate hikes.

811

:

Jamie Dimon came out and said,

I could see them doing six.

812

:

Six?

813

:

Man, what's this guy smoking that

he thinks they're going to do?

814

:

Six rate hikes.

815

:

They wound up doing 21.

816

:

Is what they wind up doing in 2022.

817

:

Deutsche Bank has pointed out, they

got a piece they put out about a month

818

:

ago, that we're all talking about

the Fed pivoting to cutting rates.

819

:

This is the seventh time in the

last two years that the market

820

:

is now priced in a Fed pivot.

821

:

The first six times it never happened.

822

:

Maybe the seventh time is a charge.

823

:

My point is, yes, the

rubber meets the road.

824

:

There is a mispricing, but that's

always the way it is on Wall Street.

825

:

So the first part is that's

not unusual that you get the

826

:

market pricing in a reality.

827

:

That may not come to pass the

828

:

Rodrigo Gordillo: second part of the

impact then so you totally agree.

829

:

What's the impact to?

830

:

Assets bonds equities given your

framework in the next three to six months

831

:

James Bianco: If i'm right in that

interest rates go up of course, there's

832

:

two things to keep in mind about bonds

is As we sit here now in January of

833

:

2024, there's a yield again, or as my

friend, Jim Grant, he runs the newsletter,

834

:

Grant's Interest Rate Observer, says,

it's nice to have an interest rate to

835

:

observe again because we've got a 4.

836

:

7 percent yield on the investment grade

index, as opposed to something under 1.

837

:

So there is a yield again.

838

:

And if prices go down, you

are cushioned by the yield,

839

:

and that needs to be managed.

840

:

So the bond market will struggle, but

not nearly like it did in 21 or 22.

841

:

Because what happened then was you had

massive rises in rates of hundreds of

842

:

basis points with no yield to cushion you.

843

:

Now you'd probably see I've been,

vocal about the idea that we can go

844

:

to five and a half percent in 2024.

845

:

We hit five percent in late October,

so that's 50 basis points above the old

846

:

peak, but that's only about 150 basis

points away from here, not 400 like we

847

:

did from 21 to 23, and there's a yield.

848

:

Stocks.

849

:

Stocks, on the other hand, is an

interesting game because what I'm

850

:

arguing is, the economy stays a

little bit stronger than people think.

851

:

Demand stays up.

852

:

That means earnings comes back.

853

:

That at the face of it sounds like

that should be okay for stocks.

854

:

Stocks should be doing well in that.

855

:

You're talking about earnings.

856

:

You're talking about growth.

857

:

You're talking about opportunity.

858

:

Yes, all of the above.

859

:

But what have we learned about

stocks in the last two years?

860

:

They trade on their competition.

861

:

Their competition is interest rates.

862

:

When interest rates go

up, the alternative.

863

:

is to just park it in a money market fund.

864

:

And when interest rates go down,

stocks look relatively more attractive.

865

:

Dr.

866

:

Jeremy Siegel, who wrote the book

Stocks for the Long Run, put out

867

:

a new edition of it this year.

868

:

And I'll summarize it real quick.

869

:

The long term potential of

the stock market from here

870

:

forward is 8 percent a year.

871

:

So like he said, if you do

the Buffett thing buy SPY.

872

:

Don't even value it for five years.

873

:

Expect that it'll give you

about an 8 percent return.

874

:

Okay.

875

:

That sounds about right.

876

:

2019, if you were going to

get an 8 percent return, your

877

:

alternative was to keep it simple.

878

:

A money market fund is zero.

879

:

That's why we coined the term TINA.

880

:

There is no alternative.

881

:

You can't sit a money market fund at zero.

882

:

You got to put your money in

something that's gonna give you a

883

:

return like the stock market and

flows one into the stock market.

884

:

In January 2024.

885

:

The money market fund is

yielding five, maybe 5.

886

:

3, depending on the money market

fund you're in, it's giving you

887

:

roughly two thirds of the gain you

would get in a stock market without

888

:

any market risk money market funds.

889

:

Don't have any market risk.

890

:

There are any of these always 1.

891

:

There is an alternative.

892

:

It's interest rates.

893

:

So if you were to look at the way the

market traded last year, you could give

894

:

the market hundreds of good earnings

reports, decent economic reports, and

895

:

antidotes that everything's okay, or

you can give it falling interest rates.

896

:

And the market said to you, you can

keep your earnings reports and good

897

:

economic reports and antidotes.

898

:

I want falling interest rates.

899

:

That's why the market, the

stock market struggled all the

900

:

way through the end of October.

901

:

The S& P was only up 7 percent

at the end of October finished

902

:

up 26 percent for the year.

903

:

And if you took out the magnificent seven

stocks, it was still down on the year.

904

:

At the end of October, as was

mid cap, as was small cap stocks,

905

:

everything, but seven stocks was down

in the year at the end of October

906

:

and in the 10 year yield was at 5%.

907

:

Then at the end of the year, the

10 year yield went to 380 and all

908

:

those stocks took off 15 to 20

percent in the next two months.

909

:

So you can spend your time looking

at earnings reports and figuring

910

:

out what the economy is going to

do and talking to management and

911

:

understanding what they are going to do.

912

:

Or you can just pine for lower

interest rates and it's lower interest

913

:

rates that's going to drive it.

914

:

But if I'm right and interest

rates are going to go up, then the

915

:

competition stays with stocks.

916

:

I'm not suggesting like some

terrible bear market, suggesting

917

:

more of what we saw in 23.

918

:

Looks good, looks okay, but why is

the stock market going anywhere?

919

:

Because a trillion and a half

dollars went into money market funds.

920

:

And it's getting most of what you

should expect out of the stock market.

921

:

I know people are trying to say

cash is trash again, cause stocks

922

:

were up 26 percent last year.

923

:

Are they going to go up

26 percent every year?

924

:

Then, yeah, then I'll be in the

stock market, but they're not going

925

:

to go up 26 percent every year.

926

:

All last year was an offset to 22.

927

:

The, actually the two year gain in

the stock market is zero right now.

928

:

And so I think really the problem with,

if you want to go back to cash is trash.

929

:

You have to get the Fed to pretty much

halve the funds rate to take those money

930

:

market funds down to two and a half The

only way they're going to do that is

931

:

if we have a recession and then you're

back to earning bad earnings reports.

932

:

So if we see higher interest rates,

I think that's going to be a powerful

933

:

headwind for the equity market.

934

:

And I'm using that word carefully,

headwind, not a disaster.

935

:

Rodrigo Gordillo: Yeah, look, you

still have an inverted yield curve.

936

:

So it's bad for equities.

937

:

It's also bad for bonds.

938

:

And at some point we're probably

having a very yield curve because

939

:

people are waiting for the Fed to

reduce rates and if it does happen.

940

:

Adam Butler: Let's also not forget about

Janet Yellen's role and what's going on.

941

:

She.

942

:

To what extent are you paying attention to

the supply dynamics out of the treasury?

943

:

She obviously came out and surprised

everybody with much fewer or

944

:

much, much lower coupon issuance

than the market expected in Q4.

945

:

And to what extent do you think

that played a role in bolstering

946

:

equities and how do you expect her

to react given that, already we're

947

:

way out of our historical balance.

948

:

Between bonds and bills given their

issuance over the last couple of years.

949

:

Do you think she's going to try and

make up some lost ground, bring that

950

:

back into balance, or is she happy to

sustain a new paradigm of that mix?

951

:

Do you think?

952

:

James Bianco: Yeah, no, you're right.

953

:

The quarterly refunding

announcement on November 1st.

954

:

Next one will be February on February 1st.

955

:

So in a couple of weeks really turned

the whole bond market around because what

956

:

the market was worried about was she was

going to issue a lot more bonds and notes,

957

:

more supply on the back end of the curve.

958

:

And what she wound up doing was she

wound up issuing less supply, but

959

:

more treasury bills on the front end

of the curve, and it sparked a rally.

960

:

Now I wasn't surprised by the rally.

961

:

I was surprised by the

extent of the rally.

962

:

I don't know what way

further than I thought it, it

963

:

should have or needed to go.

964

:

Now that we come into 20, where we are

now moving forward, there's a 2 trillion

965

:

deficit, and that has to be financed.

966

:

And that has the bonds have to,

treasury, let me say this, treasury

967

:

securities have to be issued to

finance that 2 trillion deficit.

968

:

Now the treasury can, continue, she

could continue to try and issue short

969

:

term bonds, but she's putting the

taxpayer at an enormous disadvantage.

970

:

That's the highest point

of the yield curve.

971

:

That is the most interest expense

that they'd have to pay is to,

972

:

but is to be buying into those

short term bonds right now.

973

:

I, the history of the treasury is they

can be counted on to do the wrong thing

974

:

at the wrong time from 2010 to 2020.

975

:

When interest rates were at 200 year

lows, I used to joke that if I was the

976

:

treasury secretary, the yield curve

would be 30 year, 50 year, a hundred

977

:

year in perpetual bonds, and I should

just be jamming them down everybody's

978

:

throat, and then I turn to you in 2024

when the funds rates at 5 percent and go.

979

:

Aren't you glad you got another 98

years of one and a half percent.

980

:

And only Argentina did it, right?

981

:

And but you can be counted on to do

the treasury can be counted on to do

982

:

the wrong thing at the wrong time.

983

:

But I ultimately think that as we go

throughout:

984

:

we have, that the number of notes and

bonds are going to have to be increased.

985

:

She cannot just continue to just jam.

986

:

Treasury bills down everybody's

throat because she puts the

987

:

treasury at an enormous invest

in an enormous reinvestment risk.

988

:

If the inflation rate does stay sticky,

if the funds rate doesn't come down, this

989

:

is going to cost many billions of dollars

of extra interest expense by issuing at

990

:

the highest point in the yield curve.

991

:

I think better off.

992

:

They're better off shifting out.

993

:

And smoothing things out.

994

:

But, that's what I think.

995

:

She thinks something different.

996

:

We'll find out in two weeks what they are.

997

:

Adam Butler: I agree.

998

:

Everything, that all makes a ton of sense.

999

:

The reality is, as we both know that,

the treasuries is responding to what the

:

00:51:07,241 --> 00:51:09,541

primary dealers are saying is in demand.

:

00:51:09,561 --> 00:51:11,591

They're doing it, sending out a survey.

:

00:51:11,771 --> 00:51:14,601

The primary dealers are saying, yeah,

we want more bills than coupons.

:

00:51:15,101 --> 00:51:19,371

And so the treasurer responds it's

not surprising that if the treasurer

:

00:51:19,601 --> 00:51:22,601

is going to do the bidding of the

primary dealers, that they're always

:

00:51:22,601 --> 00:51:26,361

going to be offside on what would

be best for the taxpayers, right?

:

00:51:26,471 --> 00:51:27,451

There's clearly a,

:

00:51:27,621 --> 00:51:28,231

Rodrigo Gordillo: That's interesting.

:

00:51:28,731 --> 00:51:30,111

James Bianco: I'll go

you one step further.

:

00:51:30,111 --> 00:51:34,191

There is this thing called the treasury

borrowing auction committee advisory

:

00:51:34,191 --> 00:51:40,776

committee, the TBAC, and this is a bunch

of wall Street hedge funds and bankers

:

00:51:41,066 --> 00:51:45,956

that get together with the treasury once

a quarter to advise them on the most

:

00:51:45,956 --> 00:51:48,906

efficient way to, issue bonds and notes.

:

00:51:49,216 --> 00:51:50,846

It's all bankers and hedge funds.

:

00:51:51,221 --> 00:51:55,341

That are on that committee, as I've

often argued, who is the representative

:

00:51:55,351 --> 00:51:58,131

for the taxpayer on that committee?

:

00:51:58,541 --> 00:52:01,781

The bankers and the hedge funds will

tell you what's in their best interest.

:

00:52:02,121 --> 00:52:05,811

I've argued throughout:

was enormously critical of that.

:

00:52:06,131 --> 00:52:10,371

Committee, because I said, who on that

committee is arguing for 100 year bonds

:

00:52:10,551 --> 00:52:14,911

when interest rates were under 2%, we

should have been issuing them as much as

:

00:52:14,921 --> 00:52:18,991

humanly possible, but nobody was on that

committee arguing for 100 year bonds.

:

00:52:19,311 --> 00:52:20,751

The bankers didn't want them.

:

00:52:21,081 --> 00:52:22,611

Because they're long duration.

:

00:52:22,611 --> 00:52:23,621

It's a new market.

:

00:52:23,621 --> 00:52:25,201

They have to take them on their inventory.

:

00:52:25,401 --> 00:52:27,351

They have to be subject to taking losses.

:

00:52:27,391 --> 00:52:30,341

They didn't want them, but there should

have been somebody saying, I don't

:

00:52:30,341 --> 00:52:33,901

care what JP Morgan wants or what

Goldman Sachs wants, I'm here to tell

:

00:52:33,901 --> 00:52:36,961

you what the taxpayer wants, and if

you want to remain a primary dealer,

:

00:52:36,961 --> 00:52:40,381

you're going to do this, we had it

the other way around, so you're right.

:

00:52:40,881 --> 00:52:44,241

They're never advised as to what's

in the best interest of the taxpayer.

:

00:52:44,281 --> 00:52:47,161

They're only advised as to what is

in the best interest of Wall Street.

:

00:52:47,361 --> 00:52:48,591

I don't blame Wall Street.

:

00:52:48,861 --> 00:52:49,871

That's what they should do.

:

00:52:49,901 --> 00:52:51,461

They should tell you what's

in their best interest.

:

00:52:51,961 --> 00:52:54,751

The treasury should have other

voices on that committee.

:

00:52:55,111 --> 00:52:58,021

Rodrigo Gordillo: What's funny is that

I've always the way that committee has

:

00:52:58,021 --> 00:53:01,741

been described to me is a committee

of academics and technocrats that

:

00:53:01,751 --> 00:53:05,251

weigh things very critically in

order to provide their guidance.

:

00:53:05,751 --> 00:53:09,631

This is the first time I've heard that

it's filled with the Wall Street interests

:

00:53:09,631 --> 00:53:11,451

that obviously don't align with the tax.

:

00:53:11,481 --> 00:53:14,321

James Bianco: Oh, until last year,

Beth Hammack, who is the treasurer

:

00:53:14,321 --> 00:53:17,341

of Goldman Sachs, was the head

of the committee, for many years.

:

00:53:17,351 --> 00:53:20,021

You had a Goldman Sachs managing

director running the committee.

:

00:53:20,441 --> 00:53:24,671

And it's got PIMCO and it's got a

couple of hedge funds, JP Morgan, Bank

:

00:53:24,681 --> 00:53:28,301

of America, all the usual suspects

are on that committee as well.

:

00:53:28,301 --> 00:53:32,831

But you're right they're backed up

in research by the academics over

:

00:53:32,831 --> 00:53:36,781

at the Treasury Department that

work in domestic finance that help

:

00:53:36,781 --> 00:53:38,741

them with making their decisions.

:

00:53:38,801 --> 00:53:38,901

Because

:

00:53:38,901 --> 00:53:41,501

Rodrigo Gordillo: up until this very

second, I had no idea and I didn't

:

00:53:41,501 --> 00:53:45,011

look into it too much, but I had no

idea why Yellen would do such a thing.

:

00:53:45,151 --> 00:53:46,391

Now it makes a lot more sense.

:

00:53:46,701 --> 00:53:48,011

So I guess.

:

00:53:48,436 --> 00:53:53,826

Is there any way that one can get a line

on what that committee is leaning towards?

:

00:53:53,826 --> 00:53:57,826

Or is it one of those things that

once a quarter it's, dark period,

:

00:53:57,906 --> 00:54:00,546

send it to Yellen and then she

makes a decision based on that.

:

00:54:00,556 --> 00:54:02,506

What do we know about that

committee and how they're

:

00:54:02,506 --> 00:54:03,576

thinking that we could replicate?

:

00:54:04,076 --> 00:54:07,476

James Bianco: We could read the minutes of

the committee and you could surmise what

:

00:54:07,476 --> 00:54:09,046

is in the best interest of wall street.

:

00:54:09,046 --> 00:54:12,656

I will say this in fairness

to the treasury department.

:

00:54:13,156 --> 00:54:18,226

Under the treasury secretary, there are

some staffers that work in the treasury

:

00:54:18,226 --> 00:54:24,616

department, and what I argued that

no one is representing the taxpayer

:

00:54:24,696 --> 00:54:27,896

gets a very sympathetic ear by a

lot of the staffers at the treasury.

:

00:54:28,176 --> 00:54:31,926

They're fully aware of the problems

with this committee, and they are

:

00:54:31,926 --> 00:54:36,076

fully aware that there is another

side to the equation, and they do

:

00:54:36,106 --> 00:54:38,861

present that to the treasury secretary.

:

00:54:39,321 --> 00:54:43,821

So it's not that she never ever hears

that side of the argument in theory.

:

00:54:43,871 --> 00:54:48,201

She should, or he should, if we have a

different treasury secretary, it's in

:

00:54:48,201 --> 00:54:51,051

theory, what is it that they want to do?

:

00:54:51,551 --> 00:54:55,591

Now, the problem is, if you go back the

last seven years, we've had Janet Yellen

:

00:54:55,591 --> 00:54:59,911

as the Treasury Secretary for three years

in a rising rate environment that wants to

:

00:54:59,921 --> 00:55:05,231

mitigate the impact of interest rates on

the economy for her boss, the president.

:

00:55:05,701 --> 00:55:09,111

And before her, we had a hedge fund

manager and Steve Mnuchin for four

:

00:55:09,111 --> 00:55:11,191

years as the Treasury Secretary.

:

00:55:11,461 --> 00:55:16,581

And there, there's always been a very

sympathetic ear to what Wall Street

:

00:55:16,581 --> 00:55:21,701

wants on that, at the treasury secretary

level for many years now, maybe the next

:

00:55:21,701 --> 00:55:23,511

treasury secretary that could change.

:

00:55:23,791 --> 00:55:27,331

I doubted I doubted that it will because

if Trump becomes president, Trump.

:

00:55:27,361 --> 00:55:29,571

So Trump is an overlevered

real estate guy.

:

00:55:29,581 --> 00:55:32,321

He thinks that zero on

interest rates is too high.

:

00:55:32,591 --> 00:55:36,171

He thought the greatest invention

known since the, since fire was

:

00:55:36,171 --> 00:55:38,871

negative interest rates as an

overlevered real estate guy.

:

00:55:38,981 --> 00:55:41,211

What a great idea are

negative interest rates.

:

00:55:41,391 --> 00:55:44,581

And why didn't we have them here

in the United States for commercial

:

00:55:44,581 --> 00:55:47,921

real estate in Manhattan is really

what he was basically thinking about.

:

00:55:48,241 --> 00:55:51,011

Rodrigo Gordillo: It's just, how much

of this is politically motivated?

:

00:55:51,021 --> 00:55:51,791

We're coming into an election.

:

00:55:51,801 --> 00:55:52,411

James Bianco: A lot of it.

:

00:55:52,891 --> 00:55:53,721

A lot of it is.

:

00:55:53,721 --> 00:55:55,211

Absolutely a lot of it is.

:

00:55:55,711 --> 00:55:58,581

Yes, just like the Fed, Wall Street.

:

00:55:58,631 --> 00:56:04,701

I've made the argument too that

Wall Street is Basically looking

:

00:56:04,701 --> 00:56:07,691

like they're not going to move

interest rates on January 31st.

:

00:56:07,781 --> 00:56:09,421

That's the next FOMC meeting.

:

00:56:09,921 --> 00:56:10,901

There's eight meetings a year.

:

00:56:10,901 --> 00:56:13,111

That means there's seven

meetings left this year.

:

00:56:13,421 --> 00:56:16,001

How many rate hikes or rate

cuts, excuse me does, do the

:

00:56:16,001 --> 00:56:17,181

markets have priced in seven?

:

00:56:17,191 --> 00:56:18,211

How many more meetings are there?

:

00:56:18,261 --> 00:56:18,671

Seven.

:

00:56:18,981 --> 00:56:21,301

So they're going to cut rates

at every single meeting.

:

00:56:21,801 --> 00:56:24,271

In an election year, have

they done that before?

:

00:56:24,271 --> 00:56:26,521

Yes, they've done that in:

:

00:56:26,621 --> 00:56:30,121

They did that in:

usually they cut rates in an

:

00:56:30,121 --> 00:56:33,821

election year because there's a

crisis that forces them to do it.

:

00:56:34,241 --> 00:56:37,661

They usually don't voluntarily

say, let's cut rates every single

:

00:56:37,661 --> 00:56:38,731

meeting in an election year.

:

00:56:39,181 --> 00:56:42,841

This year they are, and you just

have to wonder, why is it that

:

00:56:42,841 --> 00:56:46,431

they're wanting to be so zealous in

cutting rates in an election year?

:

00:56:46,931 --> 00:56:51,401

Could Jay Powell remember when he

was the Fed Chairman under Trump

:

00:56:51,401 --> 00:56:52,851

and all the mean tweets that he got?

:

00:56:52,871 --> 00:56:54,001

He doesn't want him coming back?

:

00:56:54,091 --> 00:56:58,531

I'll just throw that idea out as one

possible reason as to why they want to

:

00:56:58,531 --> 00:57:00,481

be uber accommodated for the economy.

:

00:57:00,601 --> 00:57:03,911

The problem with that argument,

though, is you could cut rates,

:

00:57:04,161 --> 00:57:05,241

and you could help Biden.

:

00:57:05,741 --> 00:57:08,441

But if you wind up having

inflation It could backfire.

:

00:57:08,911 --> 00:57:10,621

It could backfire in a big way.

:

00:57:10,721 --> 00:57:13,331

Rodrigo Gordillo: Like you need

to have, you need to manufacture

:

00:57:13,331 --> 00:57:15,381

that, that destruction demand.

:

00:57:15,881 --> 00:57:16,611

That's the next step.

:

00:57:16,611 --> 00:57:18,021

That needs to happen one way or another.

:

00:57:18,521 --> 00:57:19,671

And if you inflate

:

00:57:19,681 --> 00:57:21,271

James Bianco: You don't want to do

that in an election year, though.

:

00:57:21,281 --> 00:57:23,331

Rodrigo Gordillo: If you stimulate

the economy you're done, right?

:

00:57:23,501 --> 00:57:25,581

Getting that genie back in the

model would be much, much harder.

:

00:57:25,591 --> 00:57:30,811

I think there was an IMF paper that went

back to:

:

00:57:30,821 --> 00:57:33,501

types of inflation regimes that they

were, what different governments did,

:

00:57:33,501 --> 00:57:39,321

and the clear winners were the ones that

actually hit inflation hard and their

:

00:57:39,351 --> 00:57:43,521

growth trajectory from point to point

was much higher if you got the job done.

:

00:57:43,911 --> 00:57:46,361

But most governments didn't

get the job done, right?

:

00:57:46,491 --> 00:57:51,321

They vacillated in order for political

reasons and those that didn't do

:

00:57:51,321 --> 00:57:55,221

it correctly the first or second

time had much longer inflation

:

00:57:55,221 --> 00:57:58,031

regimes and had much lower growth.

:

00:57:58,111 --> 00:58:00,641

Hopefully somebody there is

doing, is thinking about it

:

00:58:00,641 --> 00:58:02,261

that way for this coming year.

:

00:58:02,401 --> 00:58:02,981

Otherwise,

:

00:58:03,481 --> 00:58:09,221

Adam Butler: I think Jay Powell, McChesney

Martin is going to deliver for Biden

:

00:58:09,221 --> 00:58:14,971

and team this year, and he's going to

look like he delivered a smooth landing.

:

00:58:15,471 --> 00:58:18,871

But:

the error of that pivot.

:

00:58:19,011 --> 00:58:23,641

But to, to Jim's point, we may

see inflation begin to pick

:

00:58:23,641 --> 00:58:28,481

up in advance of that, which

would confound that trajectory.

:

00:58:28,541 --> 00:58:32,241

So it really is a really

interesting macro environment.

:

00:58:32,331 --> 00:58:37,931

Clearly equities and bonds

are still indicating.

:

00:58:38,231 --> 00:58:42,231

A very substantial amount of confidence

and optin optimism in a soft landing.

:

00:58:42,501 --> 00:58:46,771

What are you looking for from markets

to signal a shift in sentiment?

:

00:58:47,271 --> 00:58:48,731

James Bianco: There's a couple

of ways you can look at the

:

00:58:48,731 --> 00:58:49,981

markets to shift sentiment.

:

00:58:50,021 --> 00:58:52,891

Let's talk about on the downside,

if things were to go South.

:

00:58:53,101 --> 00:58:56,901

on the economy and maybe get

something worse than a soft landing

:

00:58:57,251 --> 00:58:59,411

into a hard landing or recession.

:

00:58:59,661 --> 00:59:01,351

By the way, real quick

about a soft landing.

:

00:59:01,571 --> 00:59:06,221

I always joke too, soft landing

does not have a definition.

:

00:59:06,671 --> 00:59:08,111

Is it below trend growth?

:

00:59:08,111 --> 00:59:09,221

Is it a mild recession?

:

00:59:09,221 --> 00:59:10,631

Is it somewhere in between?

:

00:59:10,901 --> 00:59:12,361

Hard landing is a recession.

:

00:59:12,361 --> 00:59:14,251

That's a, that's a harder definition.

:

00:59:14,251 --> 00:59:17,791

And in no landing, to keep with

the airplane metaphor, It's just

:

00:59:17,791 --> 00:59:20,951

the economy keeps growing a trend

or higher, which is about two and

:

00:59:20,951 --> 00:59:23,841

a half percent or more, which is

what it's done over the last year.

:

00:59:24,341 --> 00:59:27,821

And I like to joke, Wall Street

loves to forecast a soft landing

:

00:59:28,221 --> 00:59:29,781

since it has no definition.

:

00:59:29,801 --> 00:59:32,611

I will give you the definition in a

year and tell you why I was right.

:

00:59:33,111 --> 00:59:35,821

It's the way that they, it's the way, it's

the way that they like to work that one.

:

00:59:36,311 --> 00:59:40,671

But what would signal to us that

we are going to go into a hard

:

00:59:40,671 --> 00:59:42,581

landing and into a recession?

:

00:59:43,081 --> 00:59:46,001

A lot of people have noted that,

the yield curve is 8 for 8.

:

00:59:46,501 --> 00:59:48,091

in predicting recessions.

:

00:59:48,591 --> 00:59:53,701

Except maybe this time it's been

inverted now for well over a year

:

00:59:54,031 --> 00:59:57,491

and there's no real indication that

we might be having a recession.

:

00:59:57,991 --> 01:00:02,361

I've argued, as others have argued

actually it hasn't been the yield curve

:

01:00:02,361 --> 01:00:05,081

inversion that signaled a recession.

:

01:00:05,461 --> 01:00:07,911

It was the un inversion

that signaled the recession.

:

01:00:08,311 --> 01:00:12,431

The thing about the past was the

time between the inversion and the

:

01:00:12,431 --> 01:00:14,221

un inversion was a couple of months.

:

01:00:14,591 --> 01:00:17,831

So whichever you could pick

either one, and it looked like

:

01:00:17,831 --> 01:00:19,201

it was a good leading indicator.

:

01:00:19,701 --> 01:00:24,191

But like in the seventies, when the yield

curve inversion and un inversion could

:

01:00:24,191 --> 01:00:27,591

have been up to two years in difference,

we were inverted for two years.

:

01:00:28,061 --> 01:00:31,271

You gotta designate that

maybe it is the un inversion.

:

01:00:31,771 --> 01:00:33,361

That signals the end of the recession.

:

01:00:33,361 --> 01:00:37,361

And to be clear, I'm talking about the

three month treasury bill to the 10 year

:

01:00:37,361 --> 01:00:42,081

note, that's where all the and that one

is still, still very inverted, nearly

:

01:00:42,081 --> 01:00:43,891

a hundred minus a hundred basis points.

:

01:00:44,391 --> 01:00:46,731

So what typically happens is.

:

01:00:47,196 --> 01:00:51,116

The yield curve un inverts last

the last time it did that was

:

01:00:51,116 --> 01:00:54,096

:

:

01:00:54,326 --> 01:00:59,346

So short rates, which are higher than long

rates, fall more, fall below long rates.

:

01:00:59,626 --> 01:01:01,236

That un inverts the curve.

:

01:01:01,736 --> 01:01:05,646

But what is causing that to

happen is the Fed is aggressive.

:

01:01:05,996 --> 01:01:06,896

In cutting rates.

:

01:01:06,906 --> 01:01:08,686

So I'm going to use a

technical term here for you.

:

01:01:09,006 --> 01:01:11,786

The Fed is shitting its pants

that the economy is falling

:

01:01:11,786 --> 01:01:15,516

apart and they're cutting rates

aggressively to try and stop it.

:

01:01:15,876 --> 01:01:20,256

So it would be the un inversion

of the curve that would signal

:

01:01:20,256 --> 01:01:21,986

to us something's going on.

:

01:01:22,006 --> 01:01:25,386

And again, it's the three month

tenure curve that I'd be looking at.

:

01:01:25,406 --> 01:01:28,356

Not necessarily, I know the

two thirties curve un inverted.

:

01:01:28,666 --> 01:01:31,896

The week before we're talking,

but that's far different from the

:

01:01:31,896 --> 01:01:33,966

three month tenure curve right now.

:

01:01:33,986 --> 01:01:37,926

That would be the signal to me

that something's going bad on

:

01:01:37,926 --> 01:01:40,006

the South side of the equation.

:

01:01:40,026 --> 01:01:43,596

On the North side of the equation,

what if the economy is staying

:

01:01:43,596 --> 01:01:45,206

much stronger than people think?

:

01:01:45,496 --> 01:01:47,476

I think the curve gets

more inverted because.

:

01:01:47,671 --> 01:01:52,361

What happens then is we get the bear

flattener, the bear more, more inverted,

:

01:01:52,361 --> 01:01:56,581

if you want to think bear meaning higher

interest rates that the 10 year yield

:

01:01:56,781 --> 01:02:01,991

starts marching again towards 5%, maybe

even more, because it's starting to

:

01:02:02,001 --> 01:02:08,231

worry that there is an inflation problem

at that point again, if the, as I like

:

01:02:08,231 --> 01:02:13,211

to say, If the Fed is not going to

be vigilant about fighting inflation,

:

01:02:13,221 --> 01:02:14,441

then I don't want to own your bonds.

:

01:02:14,841 --> 01:02:18,961

So if the market believes there's

an inflation problem and the market

:

01:02:18,961 --> 01:02:24,821

believes that the Fed is not sufficiently

on the case, then it's going to

:

01:02:24,961 --> 01:02:26,421

sell off the long end of the curve.

:

01:02:26,421 --> 01:02:29,551

And the long end of the curve is

going to go up and up in yield.

:

01:02:29,561 --> 01:02:31,741

So that's the leading

indicators that I look at.

:

01:02:31,751 --> 01:02:34,251

My bias, of course, is that

the economy stays stronger.

:

01:02:34,646 --> 01:02:35,826

The deficits stay large.

:

01:02:35,826 --> 01:02:36,906

That's more spending.

:

01:02:37,196 --> 01:02:39,076

Demand pushes prices up.

:

01:02:39,446 --> 01:02:43,646

Move on through the idea that, you've got

a bottom in potentially housing prices,

:

01:02:43,656 --> 01:02:49,286

maybe in wages and possibly in goods and

that you get that sticky inflation and

:

01:02:49,286 --> 01:02:52,496

that those interest rates go up, but don't

be afraid of the bond market now because

:

01:02:52,496 --> 01:02:54,386

there's a yield in the bond market.

:

01:02:54,386 --> 01:02:57,426

And that yield can be managed

to still get a positive return.

:

01:02:57,436 --> 01:02:59,686

or:

:

01:03:00,056 --> 01:03:03,406

When you're talking about higher rates

with no yield, and you were talking

:

01:03:03,406 --> 01:03:06,876

about hundreds and hundreds of basis

points, where rates were going to go up.

:

01:03:06,886 --> 01:03:10,066

We're talking about a

hundred to 150 with a 4.

:

01:03:10,116 --> 01:03:11,386

7 percent coupon.

:

01:03:11,646 --> 01:03:13,976

So that's a very different

world for the bond market.

:

01:03:14,226 --> 01:03:17,556

But yet I do think that those

are the leading indicators that

:

01:03:17,556 --> 01:03:20,346

I would be looking at is to what

the yield curve winds up doing.

:

01:03:20,846 --> 01:03:24,476

Adam Butler: So the base case

for you is bear steepener.

:

01:03:24,556 --> 01:03:30,776

On, in, in bonds and a wide

range choppy equity market.

:

01:03:30,796 --> 01:03:31,726

Would you buy us?

:

01:03:31,801 --> 01:03:39,051

James Bianco: Yes, I would say that and

as far as equities go, I could go back

:

01:03:39,051 --> 01:03:43,431

to the early:

know where I was and I was used to

:

01:03:43,431 --> 01:03:48,551

advocate to the chagrin of a lot of my

ents at the time in the early:

:

01:03:49,041 --> 01:03:54,471

that stock picking was a dead art form,

just buy SPY, buy IWM, which is the

:

01:03:54,471 --> 01:03:57,111

Russell:

:

01:03:57,466 --> 01:04:01,336

Stock picking cannot add enough

alpha in order to do that.

:

01:04:01,746 --> 01:04:04,656

And I held that position

until about two years ago.

:

01:04:05,156 --> 01:04:10,966

And I think now what's happening with the

change in the economy is ultimately, I

:

01:04:10,966 --> 01:04:15,636

believe that we're going back to a stock

picking world and that it isn't so much is

:

01:04:15,636 --> 01:04:17,406

the stock market going to go up or down?

:

01:04:17,836 --> 01:04:20,326

It's do you have the right

themes and the right stocks?

:

01:04:20,771 --> 01:04:22,751

Last year, you needed to own seven stocks.

:

01:04:22,851 --> 01:04:24,221

That's really all you needed to do.

:

01:04:24,611 --> 01:04:28,801

And maybe just avoid, and maybe just

avoid some REITs and you would have,

:

01:04:28,831 --> 01:04:30,531

you'd be getting paid like Bill Ackman.

:

01:04:30,561 --> 01:04:33,741

If you wind up doing those two

things, it's easier said than done.

:

01:04:34,121 --> 01:04:38,631

I understand that, but I also don't think

that this is going to be the world of.

:

01:04:38,821 --> 01:04:41,311

Just buy SPY or sell SPY.

:

01:04:41,581 --> 01:04:44,351

People come back to me and say you

don't know what you're talking about.

:

01:04:44,356 --> 01:04:46,211

SPY is up 26% last year.

:

01:04:46,211 --> 01:04:47,291

I should have owned SPY.

:

01:04:47,351 --> 01:04:50,941

Yeah, okay, you should have, but

then don't come crying to me.

:

01:04:51,001 --> 01:04:55,131

If in another year, maybe this year,

maybe next year or the year after that,

:

01:04:55,136 --> 01:04:56,481

the magnificent seven are down Aton.

:

01:04:56,981 --> 01:05:00,071

And that you could have done the Dave

Portnoy thing where you picked the

:

01:05:00,071 --> 01:05:03,701

letters out of a Scrabble bag and

you would outperform the S& P because

:

01:05:03,701 --> 01:05:08,851

everything, all those other 493 stocks

were up and these big seven stocks are

:

01:05:08,851 --> 01:05:10,751

just dragging the whole index down.

:

01:05:11,251 --> 01:05:13,251

So you could see the

inverse of that coming.

:

01:05:13,251 --> 01:05:16,781

So I do think it's going to be

more of a stock picking world.

:

01:05:17,211 --> 01:05:19,171

Ultimately, I think what

you're going to see.

:

01:05:19,406 --> 01:05:23,266

If I was to just go into the financial

business a little bit more is

:

01:05:23,276 --> 01:05:28,406

you're starting to see a lot more

active fixed income ETFs show up.

:

01:05:28,866 --> 01:05:32,496

BlackRock's got some, Vanguard's

bringing some, PIMCO even

:

01:05:32,496 --> 01:05:34,306

rolled out one as well too.

:

01:05:34,636 --> 01:05:36,976

Heck, I am to some extent with my index.

:

01:05:36,976 --> 01:05:39,356

Rodrigo Gordillo: I imagine that's

the motivation for the Bianco Total

:

01:05:39,386 --> 01:05:43,226

Return Index that you feel like

you have an edge after 20 years of,

:

01:05:43,306 --> 01:05:47,176

James Bianco: I think you're going

to see the same thing in equities.

:

01:05:47,226 --> 01:05:52,786

I think you're going to see more actively

managed stock picking ETFs come to market.

:

01:05:53,116 --> 01:05:57,076

Don't buy the index by the

manager or by the concept that

:

01:05:57,076 --> 01:05:58,666

you can, pick the right stocks.

:

01:05:59,056 --> 01:06:00,456

That's where I think we're going to go.

:

01:06:00,456 --> 01:06:03,526

So that's why when I say that,

higher interest rates are going to

:

01:06:03,526 --> 01:06:07,126

be competition for the indexes and

the indexes are going to struggle.

:

01:06:07,416 --> 01:06:09,536

And I still believe that to be the case.

:

01:06:10,036 --> 01:06:14,146

Within that, there is going to

be themes that if you capture the

:

01:06:14,146 --> 01:06:16,826

right theme, that you will do fine.

:

01:06:17,096 --> 01:06:20,596

I used to, and I'm saying, everybody

says that, but I used to not say

:

01:06:20,596 --> 01:06:22,326

that until about two years ago.

:

01:06:22,376 --> 01:06:24,826

But now I think that is

the type of world we're in.

:

01:06:25,106 --> 01:06:28,786

You said, with the restructuring

of the economy, with remote work,

:

01:06:29,076 --> 01:06:33,436

with the restructuring of the

office, with the re imagining of

:

01:06:33,566 --> 01:06:38,526

cities, because If you don't have to

physically be located in an office.

:

01:06:38,966 --> 01:06:40,646

You could live anywhere you want.

:

01:06:40,906 --> 01:06:41,656

Look at this interview.

:

01:06:41,746 --> 01:06:45,046

You're in a foreign country compared

to me that we're doing this interview.

:

01:06:45,076 --> 01:06:49,946

As well, it changes a lot of things

that may not be captured by just

:

01:06:49,956 --> 01:06:53,476

buy the index or sell the index.

:

01:06:53,756 --> 01:06:58,806

And that a manager that understands

those trends can really have a leg up.

:

01:06:58,946 --> 01:07:03,746

Whereas from about:

was really difficult to beat the index.

:

01:07:04,126 --> 01:07:07,466

I think from going forward, and

I'm talking about from here over

:

01:07:07,466 --> 01:07:10,746

the next several years, I think

you're going to see the percentage

:

01:07:10,746 --> 01:07:15,176

of active managers that beat on the

stock market side is going to go up.

:

01:07:15,246 --> 01:07:20,606

Now, currently it's about 5 to 10

percent on a long term basis can beat.

:

01:07:20,956 --> 01:07:22,136

I think that number is going to go up.

:

01:07:22,166 --> 01:07:26,446

By the way, In fixed income land, and

it's always been the case, and I think

:

01:07:26,446 --> 01:07:27,636

it's always going to be the case.

:

01:07:28,026 --> 01:07:32,956

The index itself falls around the

50th percentile among active managers.

:

01:07:33,366 --> 01:07:36,716

If you didn't study it, if you didn't

study it, you would have thought the index

:

01:07:36,716 --> 01:07:38,486

should be somewhere around the middle.

:

01:07:38,886 --> 01:07:40,086

It isn't fixed income.

:

01:07:40,526 --> 01:07:43,556

It isn't necessarily in equities,

but I think it's going to be moving

:

01:07:43,556 --> 01:07:45,326

more towards that in equities.

:

01:07:45,336 --> 01:07:47,356

Cause if you go back and look

in the seventies and eighties

:

01:07:47,656 --> 01:07:51,686

among active managers, then the

index was closer to the middle.

:

01:07:51,686 --> 01:07:56,126

It was still like in the 66th percentile

of the 60th percentile, meaning the

:

01:07:56,126 --> 01:07:59,726

majority of managers underperformed

the index, but it wasn't in a 95th

:

01:07:59,746 --> 01:08:02,046

percentile, like we've seen recently.

:

01:08:02,046 --> 01:08:03,446

I think it's going to shift back.

:

01:08:03,716 --> 01:08:07,586

So stock picking is going to become a

big deal, I think, as we go forward.

:

01:08:07,751 --> 01:08:09,551

Rodrigo Gordillo: So just to put

it, put this all in a bow, so

:

01:08:09,781 --> 01:08:13,741

we're looking at curve steepeners,

we're looking at a volatile equity

:

01:08:13,741 --> 01:08:16,551

market, possibly down commodities.

:

01:08:16,821 --> 01:08:18,970

You've already mentioned

a lot about inflation.

:

01:08:19,201 --> 01:08:23,121

I imagine commodities are likely

to be strong in this next cycle.

:

01:08:23,621 --> 01:08:27,071

James Bianco: Especially commodities

that are associated with Inflation like

:

01:08:27,231 --> 01:08:29,541

industrials that, that would be a big one.

:

01:08:29,591 --> 01:08:30,211

Energy.

:

01:08:30,551 --> 01:08:33,560

I know energy isn't working

right now, but I still think that

:

01:08:33,560 --> 01:08:37,501

energy would be a, another good

one as well to take a look at.

:

01:08:37,981 --> 01:08:40,861

Precious metals is a funky kind of thing.

:

01:08:40,881 --> 01:08:44,890

Cause I think that their competition

is cryptocurrency and that's why

:

01:08:44,951 --> 01:08:46,411

they're losing a sapping at demand.

:

01:08:46,421 --> 01:08:49,220

Even though I understand

gold is at an all time high.

:

01:08:49,515 --> 01:08:52,356

Boy, it took forever to get

back to that all time high.

:

01:08:52,746 --> 01:08:58,006

And then you've got other commodities

like sauce and grains, oil seeds.

:

01:08:58,176 --> 01:09:01,086

They're going to go with the weather

cycle and a lot of other different

:

01:09:01,086 --> 01:09:05,725

things as well too that may not be

just driven by the inflation cycle.

:

01:09:05,725 --> 01:09:07,916

But I think the industrial

commodities and energy.

:

01:09:08,281 --> 01:09:11,421

Probably be the two better ones

that will be driven more by the

:

01:09:11,421 --> 01:09:12,911

inflation cycle within industrials.

:

01:09:12,911 --> 01:09:16,091

I you know also include

lumber in there, too as well

:

01:09:16,591 --> 01:09:17,081

Rodrigo Gordillo: amazing.

:

01:09:17,151 --> 01:09:17,541

Okay.

:

01:09:17,541 --> 01:09:19,431

That's a good macro picture jim.

:

01:09:19,431 --> 01:09:24,171

Thank you so much for taking the time

again Everybody here should go visit.

:

01:09:24,251 --> 01:09:25,401

Jim's website.

:

01:09:25,411 --> 01:09:26,821

It is biancoresearch.

:

01:09:26,921 --> 01:09:28,301

com Is that correct?

:

01:09:28,801 --> 01:09:29,741

James Bianco: Yes, I actually have two.

:

01:09:29,741 --> 01:09:31,301

There's biancoresearch.

:

01:09:31,301 --> 01:09:34,011

com, which is my traditional

research site, and biancoadvisors.

:

01:09:34,020 --> 01:09:36,810

com, which is the index

that explains our ETF.

:

01:09:36,821 --> 01:09:37,821

So we've got two of them.

:

01:09:37,821 --> 01:09:41,431

WTBN is the ETF that tracks our index.

:

01:09:41,501 --> 01:09:42,961

And where can people

follow you on Twitter?

:

01:09:43,461 --> 01:09:47,571

Yeah, I'm active on Twitter

biancoresearch, at biancoresearch.

:

01:09:47,841 --> 01:09:49,051

I'd like to give this warning.

:

01:09:49,051 --> 01:09:50,201

You guys will appreciate it.

:

01:09:50,571 --> 01:09:52,041

There's a lot of scammers out there.

:

01:09:52,486 --> 01:09:54,836

I have about 375, 000 followers.

:

01:09:54,836 --> 01:09:57,706

And the reason I mentioned that is that

if you're going to follow me, make sure

:

01:09:57,706 --> 01:10:01,476

it's the one with the blue check mark,

but 375, 000 followers, not somebody

:

01:10:01,476 --> 01:10:06,536

with 14 followers and I'm also available

at LinkedIn at my name, Jim Bianco.

:

01:10:07,036 --> 01:10:09,986

And also we have a YouTube

page at Bianco Research.

:

01:10:10,486 --> 01:10:10,796

Amazing.

:

01:10:10,806 --> 01:10:11,416

Love it.

:

01:10:11,916 --> 01:10:12,536

Rodrigo Gordillo: Thank you, Jim.

:

01:10:12,586 --> 01:10:16,946

Adam Butler: As usual, Jim, a tour

de force on the economic front.

:

01:10:17,146 --> 01:10:20,286

Really appreciate you sharing your

time and wisdom with us today.

:

01:10:20,696 --> 01:10:21,336

James Bianco: Thank you, guys.

:

01:10:21,836 --> 01:10:22,716

. RIFFS OUTRO BUILT:

Thank you for listening.

:

01:10:22,876 --> 01:10:25,906

You will find all the information

we highlighted in this episode

:

01:10:25,916 --> 01:10:27,366

by visiting investresolve.

:

01:10:27,376 --> 01:10:28,926

com forward slash podcasts.

:

01:10:29,426 --> 01:10:32,056

We also encourage you to engage

with us on Twitter by searching

:

01:10:32,056 --> 01:10:33,726

the handle at investresolve.

:

01:10:34,226 --> 01:10:37,176

If you're enjoying the series, please

take the time to share us with your

:

01:10:37,186 --> 01:10:39,036

friends through email or social media.

:

01:10:39,356 --> 01:10:40,306

And if you really learned

Next Episode All Episodes Previous Episode

Listen for free

Show artwork for Resolve Riffs Investment Podcast

About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.