Bond Inflation Gauge Is Distorted by Fed: Jim Bianco

point four percent. That spiking yields yesterday really spooked markets and I think got some people to kind of think about valuations here, uh, think about asset allocation here. Let's get the lay of the land with Jim Bianco. He's a president and founder Bianco Research. He's also a contributor to Bloomberg Opinion based in Chicago. Jim, thanks so much

for joining us here. What do you make of the action over the past couple of days, again, having yields shoot up here and we saw a lot of commodities flash, maybe some inflations of inflation signs. What do you make about what's going on? I think what you just said is right inflation signs. I've been trying to say that there is two different words that we need to keep our mind on, and that is reflation, which you hear a lot of an inflation if people use those words interchangeably,

but they shouldn't because there are two different concepts. If interest rates are rising because of reflation, that is real growth is coming back, earnings are coming back, people are getting jobs. Then Chairman Paul is right, it reflects higher rates reflect a confidence in the economy. But if we're crossing over to that, it is inflation, and that is

your loss of purchasing power. Your dollar in a year will buy you less than a dollar now if you own a fixed income security by the name fixed income, you don't get any more dollars in a year. You get the same number, but it buys less. You don't want to touch those securities, and that's why rates could be going up and it would be very bad for the stock market. So I think we're canting this push pull is to yes, we know the economies could come

back strong this year. That's not the issue. The issue is how much of that's going to be inflation, how much of that's going to be real wealth. And with the surgeon commodities, as you've mentioned in other measures. People are getting more and more worried that we're going to see something we haven't seen in twenty five years, and

that is an actual inflation boom. Jim, I've been thinking about you all morning, and not just exchange messages earlier today, but I've been thinking about your read on what we've

seen in the bond market. You know, there's a question about whether it's just thin trading, or whether it's potentially leverage positions that are getting unwound, you know, convexity hedging, you name it, technical factor, or whether this is actually a belief in inflation that perhaps isn't being reflected in a tips market, in a in a securities market that is distorted by thin liquidity and a whole host of other issues. Can you just what's going on? Yeah? So,

so two things. Um, There is the treasury real rates market or TIPS securities, Treasury inflay and protective securities, and we look at the difference between those securities and nominal rates to get what's called the inflation break even rate as an indicator of the future of inflation. The biggest buyer in that market is the FED. They have bought more bonds in the last year tips bonds than have been issued, and the amount of outstanding for the public

is actually declining. That's how many they bought. So my point there is they've got a giant footprint all over that market, and I've been doubting the measures that we've been getting out of that market. So that is an inflation indicator that people said, look, there's no problem there. Yeah, but it could also be because the Fed stomping all

over it. But to your other point about what's going on in the bond market, if you're not a bond geek like I am, and I'm gonna put you in the bond, yeah, and you look at yields and you go, oh, they're on their way to one and a half, and some people say they might be a two by the end of the year. I'm an equity investor. I own a business. Who cares it's two percent, it's not a deal. And it goes to two and a half, it's not

a big deal. You know, if your bond investor, it matters a lot because you could wind up with with total return losses that could be very, very big. If you've owned thirty year bonds this year, you're down on the year on the thirty year bond one of the worst first two months of a year in history. And if you're buying bonds on leverage, because you can do that through the repo market, you can leverage your positions

all you want. You could have catastrophic losses. If we have a two percent yield coming in the next few months, and if the bond market is in a bad place, all capital markets are in a bad place as well too, So it's not a worry. I don't think at this point that you know two percent on the tenure Treasury is going to crush the economy with super high interest rates. War is two percent could create havoc in the credit markets,

and that could hurt the economy. The ability to raise money ye to do two things that you're you're comfortable with doing that could come into question. We're not there now, but we've got to stop doing this, so we don't go there. All right, I'm gonna annoy Paul and ask a question that's in the weeds. But you mentioned this

tips market. You mentioned this sort of inflation expectations market, and this is really key because a lot of people keep pointing to it to show that actually inflation expectations are going down over the long term even as treasure yields go up. This doesn't make sense in a lot of ways. Are you saying the inflation expectations as measured by the market are highly inaccurate based on the distortions, based on the amount of that market that's been dominated,

that's been hoovered up by the Federal Reserve. Yes, And I'll even back up one step further. Inflation expectations is a predictor of where inflation is gonna go. We've had these markets for twenty years have not been very good at all. They have not been a very good indicator of what actually happens in the beginning. Now you throw in the fact that the largest single buyer is the Federal Reserve in these markets, and you've seen real interest

rates falling all year long. If the economy is going to boom at five, six or seven percent, which would be if you believe Goldman's forecast, seven percent real, that would be the fastest yearly growth in forty years. If we had that happened this year, real rates should be rising in that kind of environment. But the falling, or at least the tips market has been falling. Why because

the fit is relentlessly buying these every day. In fact, they publish every day how much they buy, and it's in the several billions every single day that they buy of this market. So I'll quote the British economist Charles Goodheart, he's a good friend to John Farrell's. When a measure, when a measure becomes a target, it seeks being a measure. Will look at Yes, we're looking at tips as a measure of where the market things inflation is. But if the FETE is targeting it by all of their buying,

it's no longer a measure. So that's what I've been saying. I think conceptually it's right. You know, over the last few months, tips break evens have been going up. But when you want to get into the weeds and say well they picked three weeks ago and this and that, be careful now because you got that big footprint of the FEDS stomping all over that market, and it might be giving signals that aren't the measure that you think they are. Jim Bianco, thank you so much for being

with us, Jim Bianco of Bianco Research. It's always wonderful having you on Honestly, I was actually really looking forward to hearing what he had to say because he always has such nuanced views pairing but the technical Paul, with the fundamental and really that tips market concept. I know it's in the weeds, but it's really important. It is.

And we hear a lot of strategists and a lot of fun managers talk about that tip tips market and uh, you know it's interesting that you know, kind of bringing in also the FED buying and how that's impacting the market and rates across the rake curve. Yeah, honestly fascinating discussion. And we want to turn our attention to the medical advances that we have seen which have been turbo charged

by the pandemic. And Paul, I do think that one emerging aspect of the pandemic is all the money and all the attention on the need for biopharmaceutical investment as well as research and joining us now is someone very much on the forefront of that. Dr Steve Cutler, chief executive officer of Icon PLC, based in Dublin. Just to give you a sense, Icon had a tie up with p r A Health Sciences. It was the largest healthcare

transaction deal this year. Twelve billion dollars, and both companies help basically run the clinical trials for drug makers and medical device developers, and they've been on the front lines of some of these medical advancements. Dr Cutler, thank you so much for being with us. Can you give us a sense of just how much the pandemic has turbo charged what really has been in the works for a while, which is investment in biopharmaceutical development. Yeah, Good morning, Paul,

Good morning Lisa. The pandemics certainly has been obviously a tragic event, you know, across our society, but there have been some silver linings since, at least for us in our business, and the way in which we've run clinical trials now has has fundamentally changed in terms of approval times, in terms of the types of technology we're able to apply to running clinical trials, and quite frankly, in terms of the awareness of society of clinical trials and the

benefits of clinical trials. We think that all plays into a very positive environment for our organization going forward, and hence one of the reasons that we've we've we've made this union with pr A Okay, doctor, this is a big deal for you guys. Per A is a big company as well. Talked us about the real drivers, the strategic drivers behind putting these two companies together. Here. Yeah,

there's a couple of them. Certainly, we've seen we've been competing with pra A for for a number of years now, twenty thirty years since we've been in existence, and they've been a very strong competitor there and a very a very good competitor over that time. And and they're very strong cultural fits. So so when you bring too large people related businesses together, the culture, the focus, the core values of the organizations are very important. We see a

lot of similarities there. We've made an assessment really over the last few years in terms of our other competitors and the fit we had with p r A really really really brought them to the four in terms of their benefits and the advantages. There's really a couple of them. For us as a large organizer, we moved from being we were six, they were seven, or vice versa in terms of our league table in revenues in the organiz we now move as a combined organization to number two

in the industry. So we are and we're number one in a number of the segments. So we are we have the scale now to really deliver innovative solutions and creative solutions for for our customers across the globe. We have the depth and the breadth of resources, and that's very important in the clinical trials game because we run trials all over the world in all sorts of different therapeutic areas. The other component is the technology side of things.

As I said, through the pandemic, we've realized that applying the new technology is the ability to access patient data remotely and to monitor patient data remotely in a confidential and private manner allows us to be much more efficient. And as we as we run those sort of trials and we run what we call more decentralized clinical trials where patients don't have to go to sites we can we can monitor patients at home. We have those sort of services. Pr A bring a mobile health platform to that.

We can offer a really compelling vision in that space for for our customers, so we can be much more efficient, I believe going forward. And then finally for our shareholders, there's significant value in this in this union. And you know from an accretion point of view, from a long

term revenue and the sustainable growth perspective. Dr Cutler, It's been a real write in twelve months for a lot of people around the world, and I'm trying to find silver linings every day for my children, and one of them that I try to lean upon is that perhaps we'll get biopharmaceutical research that are cure the cold, or cure cancer, cure all sorts of elm ends that we

have with us today. Do you see those kinds of seismic advancements that are made because of the money put behind my pharmaceutical research as a result of the pandemic? So much? Are we're going to cure cancer because of the I think I know, I think we're all very focused on that. That's a very big part of our portfolio. But what we what we have seen is a real focus on clinical trials and the ability to get clinical trials moving much faster and a much less bureaucratic fashion

than we've seen in the past. Of what I'm seeing is it would be much more efficient going forward in the way we run clinical trials, whether they be decentralized or the more traditional And so what we see is our sponsors will have more opportunity to put more drugs through the pipeline, so to speak, to have more shots on goal to get pharmaceuticals and get good drugs to market, whether they be cancer drugs, whether they be pandemic or vaccines,

whether they be other other drugs. That's what we see. The pandemic has really caused us to rethink the way we do things and know that we can do things in very different ways. We were involved in the large Visor biointech trial that was one of our big, big studies. We were able to get that done so much faster than we normally do with these clinical trials, and so that that really lays the groundwork, I think for a very very strong future in our business. Dr Cutler, thank

you so much for joining us. We appreciate that. Dr Stephen Cutler. He's the chief executive officer of Icon PLC. They are based in Dublin. Just announced this week a big deal, the biggest healthcare transactions so far this year, Icon acquiring p r A Health Sciences. That's a company based in Raleigh, North Carolina. Total transaction value of twelve billion dollars um and you know Lisa's As Dr Cutler mentioned, it was really great to see how some of these

how quickly these tests and these trials were done. I gotta say, can you tell where my mind's at? And basically, what is it done? What is it over? Can we end the pandemic? I mean, how many times gonna answer that question from my kids before I start passing it on to every guest that comes on, especially people on the front lines, to know the answer. That's where we all are. And the good news, Lisa is the metrics are really trending in the right direction. So that is

certainly good news at a very difficult year. Yes, it is that time of year again where we hear from Warren Buffett and his faith will parse every single word he has to say. Cat chick Lynsky follows Warren Buffett follows, the finance industry, follows the insurance and Street is really the ace on this. She's from Bloomberg News. Cat, we haven't really heard that much from Mr Buffett over the

last year with all that's been going on. What do you expect is see and hear and read When we do get his letter, well, I think it means it's going to pack more of a punch, because you know, yeah, we heard from him last May at his annual meetings. But during that meeting he sort of expressed caution about the whole situation, about the pandemic and especially about the

econom outcomes from it. So I think its shareholders are really looking to this letter to sort of provide some clarity, because you know, the letter does describe how Berkshire did

over the past year. But people really turned to Buffett too as kind of a business leader and you know, a successful investor, and they want to know his thoughts on lots of issues, including the presidential election, in which he was really actually quite silent about, and the race protests that swept the nation last year, and even more

investing type issues like the Reddit mania. You know, depending on when he put pen to paper um and actually wrote this letter, I think people will be interested to hear if if he has thoughts on kind of where

all that stock market speculations stand. Well, this ninety year old chief executive officer, the Oracle of Omaha, is one of the most famed investors ever to hit Wall Street, and yet I do wonder, especially as he takes a less of a role at the company, how much import his views have at this point given the other companies that have sort of filled the void and entered the front, the front running seat in terms of influence. I mean, has this letter waned with respect to how it's perceived

on Wall Street? Well so, I I you know, I asked that question to these investors who follow him religiously, like why do you keep reading it? Because obviously, you know, you can look back at his letters at the dot com bubble and that sort of gives you a sense of what he might think about with you know, the

current stock market um situation we're seeing. But I do think that investors still look to him because he does have this historical perspective and if you've ever watched him speak at these events, I mean you can tell he really has an incredible memory, an incredible recall of everything he's read and seen and done, and I think that

does lend his words still some weight. You know, he can really he can take all that you know, we've had to kind of ingest over the past year in terms of the news and what's happening, and and he can sort of step back and say, you know, compared to his you know, ninety years of history of being on this planet, here's kind of you know, take on it. So alright, Cat, one of the things that people really are the last several years have really focused on is

what to do with all that cash. I'm looking at the f A function on the Bloomberg terminal for Berkshire Hathway, and you know, four hundred over four undred billion dollars in cash on the balance. Yes, there's a little bit of depth, super super cash rich here. What's the expectation here? Can he put that money to work? Yeah? So we actually have closer to a hundred and forty five billion dollars of cash to work, which is actually close to

a record for Berkshire, and it is hard. I mean, you know, he needs to find bigger deals, bigger stock purchases that actually move the needle and kind of generate even higher returns for the conglomerate. And when you're you know, fighting off private equity firms who are bidding for the same company you are, and now the kind of spack boom, I think it's made it a lot more challenging for Bershire to say, you know, here, here we are as

a clear you know, buyer of these companies. And so I think that's why we've seen trends like he was a massive purchaser of stock, at least through the first nine months. It's one of his biggest years ever for repurchasing stock, which for most companies is so routine, but for Bucket, I think it really underscores this point. But he's he is willing to expand his horizons if he needs to to find ways to deploy that cash. But obviously he would love that elephant size deal to come around.

One thing I'm curious to hear is he's been really adamant about American exceptionalism and the growth of the economy, talking about how lucky it is to be born in America and the growth of the nation uh continuing, and he sort of has had complete faith in that for a long time. He's been right to a large degree. And yet as he tries to diversify his investments, I'm curious to know whether he will change his tune at all when we see some of the dynamism coming out

of other places in the world. What's your sense of that based on the rhetoric out of Warren Buffett's shop, out of his colleagues, UH, just generally at a Berkshire Hathaway, I do agree like He's always been very optimistic about America, and I think that will continue. I think we'll probably still hear from him about, you know, the positive attributes he thinks of this country and our systems and how

they work. Obviously, it'll probably be tempered with, you know, how do you view that in terms of the riots we saw at the capital and some of the other stresses we've had in this democracy over the past year. But I do think he is more willing to venture abroad, and we saw that last year where he piled the billion dollars into Japanese trading house stocks. And I think

this shows not only the influence of his deputies. I think they do have an influence on him kind of expanding through horizons, but I think it shows that if Berkshire is really going to be able to deploy its funds successfully and generate these higher returns, they're going to

have to start looking abroad. They're going to have to figure out different economies and these different types of companies, like these trading companies in Japan, and figure out which ones are actually gonna fit because Berkshire just is fishing in too small of a pond right now. Cat. Thanks very much. We really appreciated Cat Chiglinsky, financial reporter for Bloomberg News, giving us the latest on Bertrad Hathaway, Hathaway,

Warren Buffett. Again, it's that time of the year where we will hear from the Oracle of Omaha with his annual investment letters. Cat was mentioning lots to parse through there. All right, let's turn our attention to fiscal stimulus. It looks like the House is scheduled to take up the stimulus bill on the floor of the Chamber today, with passage expected late in the evening or potentially Saturday. Let's get the latest on what may or may not be included in that bill. We do that with Eric Wasson,

Bloomberg Congressional reporter. Eric, thanks so much for joining us. Talk to us about what are the notable inclusions and maybe exclusions from this one point nine trillion dollar fiscal stimulus bill. Well, you know the big debate here in the last twenty four hours through about minimum wave provision. That was the sort of the lightning rod division in the Senate and a Senate official, obscure Senate official, a seen up parliamentary and rule that they cannot do it.

Through this budget bill. So that's leading to a lot of conflict here. House progressives are really urging the Vice President to possibly try to overrule that something she can do with the right House is reluctant to do. The House will include that provision in the bility passed tonight probably around eight or nine o'clock. However, in the Senate there's now talk of doing a tax penalty to try to force large corporations to raise that wage. So there's

a lot going on there. That's the main thing that's up for change. But as far as the main provision that people know about, the fourteen hundred dollar stimulus checks for those making lessons seventy five thousand dollars a year, that's pretty much locked in as far as I can tell. That's in the House bill and likely to remain in the Senate bill. We're also looking attention of unemployment benefits

and a child tax credit expansion temporarily. So can we get a sense of how committed Democrats are as a whole, and I realize it's not a cohesive group right now, how committed they are to getting a minimum wage increase through, especially now that it would have to tie a two, a tax increase or some other provision that would be more directly tied to the deficit. Well, you know, it's just it's just not really clear if they're going to all be on board. I mean putting a tax increase.

There's a very tiny international tax loophole closer in the bill now, turning two billion dollars of making it a very large descliament of five percent payroll tax on companies. That's very easy for Republicans to demondize. And the portrays at tax increase the middle of a pandemic that caused

some heartburn for moderate Democrats. So this hasn't really been shopped around, put forward by Bernie Sanders and on Widen's progressives on the left, and the Shumer is now weighing it, but you know, we don't really know yet if moderates are going to go for that. Eric, give us a sense of timing here. We're getting very close to, you know, the point in March where a lot of these benefits from the original or the last round of fiscal stilling to start to expire for a lot of people. So

time is of the essence here. Yeah, that's right. The expanded unemployment benefits of for gig workers long term on the board and those getting that three our plus up from the federal government to their state benefits does expire begin to expire March four, team, You know, the Senate has this two more weeks to act. That's probably enough time to get it done. Although the wrinkle was a minimum wage is going to cause a lot of negotiating

and conversations over the weekend early on. If they can resolve that, the Senate could easily pass it on the floor within two weeks. Is a special budget procedures, so the Republicans can't really drag it out. Do we have a sense of how much momentum there would be after this bill gets passed, and the expectation is it will get passed by mid March, how much momentum there is to get working on that infrastructure bill to possibly get

something passed again later in the year. Yeah, that's a story that Chris Confident and I I probably did on the terminal last week. Their infrastructure has a lot of momentum. You know, that could be a Biparson villa, and in fact they can't risk necessarily use this budget procedure for infrastructure for several reasons, including the fact that's the long term spending of proposal. It goes beyond ten years and

violate the Bird rule in the Senate. But there's a lot of talk among Progressive of adding a draft back of other things, some expansion of Obama tire to elder tire, childcare, and so forth, and that's going to make it more controversial and make it potentially more difficulty. All right, So one thing, I just want to get a sense for our listeners in the metro New York area and some other high tax areas state and local tax. Uh, that

issue that's not in this bility hit home for you. Yeah, as I start to do my taxes, it's just just goes crazy that that was left out, that that was proposed, proposed by you know, was proposed by some members, especially the Northeast delegations, but that did not make it into this field. And you know, it's obviously could be a

candidate for the second round. There's there's a lot of talk of doing major tax legislation in the second round, including an increasing capital gains tax for those making more than one million dollars a year to equalize the rates with ordinary and comic etcetera. So we send ull Be a large tax package there you might never of a shot of getting that salt deduction again. Eric Wasson, thank you so much for joining us. Eric quass and Bloomberg

Congressional reporter joining us on congressional matters. Plus the salt text, which is near and dear. Yeah, we need the salt text. Gotta take care of that, and we need the gateway and the gateway. Since you have left the shows, certain things never changed that. I was about to say, have you been to the Mall of America yet? How do you feel about that? I know how you feel about that. Coming up, we've got more talking about municipal finance to get some of these local areas backed up and running.

Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on false Sweeney I'm on Twitter at pt Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio