The Return of Inflation Pushing Up Yields in 2021: Bianco

all the way up to seven basis points. Now, eleven basis points may not be a massive move in so called normal times, but it is these days. So let's bring in Jim Bianco of Bianco Research to tell us what kind of volatility we're seeing and what's it get you. Jim, Hey, thanks for having me um the fine markets volatility normally is not a big deal, but given you know, eleven basis points in a week is not the craziest thing

you would have seen. But given the environment we're in, it is a massively large move, and it came on the back of a stock market that sold off over five That was probably the most surprising part about it was there was no risk off rally in the bond market. Last week, and that's what's got everybody shaking their head right now. So, Jim, you know we have the election coming up tomorrow. How are you kind of I'm not gonna say playing it, but how are you forecasting how

this market is going to react going forward? What's kind of your base case what we're gonn see tomorrow and the days ahead, and how that might impact the credit markets. I have a little different base case than most um. If you if you look at the world of the polls they're giving Trump, I'll go with the incumbent point of view, about a five to ten percent chance of winning. If you look at the betting markets, they're giving him at chance of winning. The betting markets seem to align

with the financial markets. I think the financial markets think that Biden is leading, but it's very very close where the polls are saying it's going to be a very

lopsided race. If the polls turn out to be right and it is as lopsided as they say it is, I think there's gonna be a lot of discounting in the market tomorrow or Wednesday and the Thursday as they start to price in more of a Biden victory than they have right now, and I think ultimately how the markets priced that in it's gonna come down to how the Senate goes. The Senate, I think is going to probably be the real story as we go forward from here, because that's kind of touch and go as to which

way it can go. Wall Street wants a blue wave because it wants fiscal stimulus um and I think if it gets that blue wave, there's probably going to be a rally based on the knee jerk reaction. But I don't think that that blue waves is completely priced and it's a lot of people think right now, well, there's also a very real possibility of the presidency turning over, but not the Senates in that situation. Jim, what are we looking at in terms of policy for the next

four years? Well, for the next four years. History says that that should be bullish because Wall Street is always liked gridlock of any kind. That seems to be the best scenario for it over the next several years. Over the short term, it wor like grid luck because what it wants right now as it wants a fiscal deal, and if we get we were to get the Senate to be held by the Republicans. Uh, then what we would wind up having happen is um the lessing of

less likelihood of a fiscal deal at that point. So, Jim, I mean, if you look at the ten year it's been trading after that volatility in March, and ten years kind of been in this range of six basis points. Is there a scenario in your analysis where we get the ten ure to you know, one one and a quarter percent something like that in a reasonable timeframe. Sure, And I think there's a likely scenario with that, and

that is the return of inflation. With all of the pump timing that we've done with the fiscal stimulus and the monetary stimulus, and the contraction of the economy meaning we're making less stuff less gross domestic product. That is a prescription for higher prices, otherwise known as inflation. If the market thinks that inflation is coming back and coming back in a big way, yeah, you'll see investors run away from the bond market and you could see higher yields.

In fact, I think that might be one of the things that's been bothering the market the last couple of weeks. Even though the stock market is stumbled and the and the bond market has been unable to rally on. That is, I think that there is this fear of inflation. If you add to that one other and uh, and that is a vaccine. If you keep sending people money and you keep pumping the priming the pump, and then you get a vaccine and tell everybody, Okay, now we can

go back to normal. There really underscores the idea that you could get a return of inflation. So I do see that is a plausible scenario for much higher yields as we move into So interestingly, Jim, the person we maybe should be watching that is your own power, because he has basically and his fellow Reserve is basically promised ultra loose Masuri policy for years to come. But in the scenario you just described, the bond market would be telling the Fed to actually raise rates. Now, yes, that's

exactly right. Um. We all have been looking at Paul and seeing thinking that he's been the guy that saved the markets, and that's largely been the case for twenty twenty. And he's promised not to raise rates for years with an s on the end of it to come. The only thing that changes that is the market itself if

it decides that it wants a change of policy. It did so in the fourth quarter of two eighteen when the FED was reducing the balance sheet and it said stop sold off the stock market really hard until Paul changed his mind and said he'd be patient and flexible if we get inflation. We could see something like that in one where the market does in a buffets and it demands a change of policy and eventually the Fed wal chorus and and give it to it. Hey, Jim,

thanks so much for joining us. We appreciate it as always always appreciate your thoughts and opinions. Jim Bianco, President and founder Bianco Research. He's also a contributor to Bloom Opinion, joining us and he's based in Chicago. Well, certainly a better start to this week then we saw trading last week here as we go into the election, let's see if this has some legs so we can do that with Phil Orlando, chief equity market strategist inhead of client

portfolio Management at Federated Hermes, he joins us. Phil, thanks so much for joining us here. What do you make of last week's trading? Again one of the rougher weeks. Uh, this market is seen going into an election. Well, you had a bunch of things that were going on. I guess there was a realization that we were not going to get this Phase four stimulus package that Congress has

been negotiating on for months now. We've got this third wave of infections that that have spiked here as we sent our kids back to school, and you know, late August, early September, and then um, you know, investors were starting to think, well maybe we could get this this blue wave in the election this week, which means taxes and

regulations are going higher. So for all those reasons, you know, you're probably down you know, let's call it ten percent excuse me from where the market peaked out on September two, where we you know, sort of bottomed out on Friday. Uh. And we're getting a little bit of a snap back today. That's good, you know, we we've gotten some better data. Um, but the big anchilada, of course, is going to be the election tomorrow and whether it turns out to be

contested or not. So fell, if you're buying the market today and many people are with the S and D at one, what is your reasoning? Um, I'm not quite sure, because we've got a two thirds chance of a contested election tomorrow and the last time we had a contested election was Bush Gore in two thousand with the hanging chads in Florida, and stocks were down about from from election day into the middle of December when the Supreme

Court finally came in resolved the issue. Um. So, certainly the markets over sold here in your term, but you've got to respect the fact that this is an extraordinarily contentious election. There's any number of things that can happen, some of them not particularly good in terms of the contested nature of the election, and at this point, the most prudent thing to do, in our opinion, is to just sort of stand back, um, see how it plays out,

and then figure out what to do from an investment standpoint. So, what's the source of that that two thirds number. That's an interesting number, and kind of how does that How do you define a contested election? Well, the fact that we're not going to know who won the election tomorrow night, and the logic behind that very simply is this. We had thirty three million mail in ballots out of a hundred and thirty nine million total ballots cast in the election.

This cycle is going to be very different because of the coronavirus. People are scared to death of showing up at their their polling place and getting infected. So the experts are telling us that instead of thirty three million mail in ballots this cycle, we're gonna double that. We're gonna be at seventy or eighty million million mail in ballots out of a hundred and fifty or hundred and sixty total million ballots cast. Literally half of the ballots

could be mail in. As a result, a lot of the states are by law, are not going to be starting to count those ballots until you know tomorrow. We're not going to have those results tomorrow night. Um. And and you've got you've got a number of key swing states that that based upon the polling data, are going to be really close. We may not know the results

for a couple of weeks. Um. And So given that uncertainty and equity markets hate uncertainty, that that suggests we could drift down to you know, let's call it the two hundred day moving average, you know, which is another couple hundred points below where we are right now. Where else is there a possible trade that might pay off hedging trade or some kind of a trade that works

in either instance, and even if there is a contestation. Well, what we did back in I guess the middle of August, anticipating all of this, because we spent a lot of time studying, you know, the intersection between politics and Washington is we thought that technology stocks had simply run too far, too fast, and and here we are. You know, at the beginning of September, the equity market was sitting just

at about the thirty six hundred level. Our full year forecast was so so and and most of that rally is being driven by tech. So we took some profits in that area, domestic large cap growth technology and and rotated those dollars into value stocks, small cap stocks, and international stocks. We think, now that the economy is back on the growth mode, that they'll start to be generating

positive revenues and earnings. Again. The valuation gap between growth stocks and these other categories was massive, and we felt that that that was going to close over time. So we're going into this. We decided to lock in some profits, play defense a little bit, and then see how how this election plays out. I feel just real quickly seconds here. What's a blue wave mean for you? Well, it would mean that that the Democrats would have a legislative mandate.

We're probably looking at significantly higher corporate and individual tax rates and regulations. That means that economic growth, corporate earnings growth, stock prices are going to come down. Um, so as we look at the longer term cycle, that would be less less beneficial, less favorable for equity investors. Well, Phil, we shall see. Thank you so much as always for giving us all of your ideas and your analysis. That is Phil Orlando, chief equity market strategist at Head of

Client Portfolio Management at Federated Hermes. It's going to be so interesting to speak to more guests post election and see what actually happened. And Paul, I'm also looking at cmds today, the commodity pricing, and it seems like we're

seeing some kind of a propane bids exactly. You know, we was out at dinner over the weekend, eating outside and boy, there are this propane heating all over the place and they were all being used and I could just see the demand for propane going through the roof here over the next several weeks. Well, it is time

for Bloomberg Opinion. We're joined today by Jonathan Bernstein. He's a Bloomberg Opinion columnist covering politics and policies, out with a fascinating column today entitled Tomorrow won't be a normal election dead. It sounds like an understatement to me, Jonathan, thanks so much for joining us here. I guess I want to start with, will this election, in your opinion, be contested by President Trump? And to what extent do you think? Well, of course, first of all, he could win.

I mean that is um. So put that aside about I don't know five ten percent chance that he'll actually just flat out win. If he doesn't win, Here's what we know. We know he'll claim that there's voter fraud, without evidence, without anything, because we know he'll do that because he did that four years ago, even though he won, he claimed that there was fraud against him. So pretty

confident that he'll claim all kinds of fraud. He's been saying, without any evidence and against all the evidence, that mail in absentee voting is fraudulent. It isn't. Um. He's been saying that, uh, the vote should stop, the counting should stop midnight or on election day, which has never been the case before. That's not how the system works. So yeah, I mean, at the very least, he's going to complain

that he was that it was stolen from him. What he will do in addition to that, he's claiming that he's gonna send out he we know he is sending out a team of lawyers to put lawsuits against the count everywhere. Can whether that will actually mount amount to anything, that's still to come. Jonathan. What a states that you're looking at in terms of a difficult process, if the

count is very close, or if something needs to be contested. Well, we know that, UM, Pennsylvania in particular, which is a most likely tipping point state that is the one that puts one of the canidates or the other over the top up, is expecting to have a slow count. Um. They're doing that because Republican legislature in the state mandated a slow count. They said you can't start, um opening the envelopes and even checking to see if they're legitimate

votes until election day morning. In many states, in Arizona and California, that's been going on for days already. UM. In fact, the votes are being counted in a lot of states, and so as soon as the polls closed Florida, for example, of all of the count of the early vote UM that will have it. In Texas also, But in Pennsylvania it's gonna go slow. They stay they've got enough counters that they're gonna go twenty four or seven

until that the county has done. Jonathan, as you talk to folks in the political world if this is a close election, is there a sense of how long this could drag on? I guess the only real experience we have is two thousand and when it went weeks. Well, the count itself could take UM one or two weeks in the slowest states, UM. That's typical in California. If you know Pennsylvania, Wisconsin, Michigan and the states we're really looking at that might affect the outcome of the presidential

election that are expected to be slow. Then lawsuits could take weeks the way that they did in UH two thousand. There could be recounts, UM, and you know, we'll see how that goes. There are constitutional and UM statutory limits as to when the electors are supposed to be appointed and then when Congress is supposed to open the electoral votes and count them and all that and that happens in December and January to come. So those are sort of, you know, guide posts that we have that we can

go by. Jonathan, Voter fraud is extremely rare. We know that. We've been told that, and yet it's sometimes hard to believe when you see some reports of of something that might be fraud. Explained to us why it is rare? What what what's in place to make sure that fraud

can't happen very easily? Well, for example, on you know, mail in ballots, they have the signature match and they have UM A lot of most states have it, you know, a code so they know that the ballot that came back as the same one that was sent and it was properly sent UM. And again you know, some states have been doing UM vote by mail exclusively Washington, Oregon, Utah UM for several cycles now and they haven't any problem with it, so, you know, and including Republican states.

So you know, one thing that happens is young voters tend to vote last. And so because young voters these days are more likely to vote Democratic, as those votes get counted, the election night totals will start shifting. Over the next several days to Democrats, and you know, Republicans say, oh, there's something wrong with that, but that happens in Republican run states like Utah and Arizona, which have a lot

of absentee voting, the same thing happened. So obviously Republicans are not cheating in favor of Democrats in those days. It's just how the system works. Jonathan, is it fair to assume, I mean, if it's a close election, I guess the default is it will be contested. What's the scenario where you know the whole contestability of it. It really kind of goes away that, in fact, we will know something late tomorrow night. Well, it could get contested

even though we know something. You know, Trump is going to say that he was ripped off no matter what. Um so. But it is certainly possible. You know, Florida counts its balance very quickly. They could have a result very quickly tomorrow night. And if Joe Biden wins in Florida, there's no realistic chance that Trump is going to win

the electoral College after that. So, and there's other states that also have quick counts, and if Biden wins, you know, right now, Biden looks like he's winning by about eight and a half points nationally. If it turns out that that's the case, he almost certainly is going to win the electoral College by a comfortable margin. And we'll basically know that at that point, there's a question of, well, to what extent does Trump try to throw out legitimate balance,

which they're trying to do. For example, in Texas right now some Republicans are UM and so it could be contested without having a really good chance of succeeding. Jonathan, you do say in your column that President Trump's bark is often worse than his bite. How does that play out here, because you know, if he barks here there's

a great chance of goes to the Supreme Court. Well, it all depends on what exactly he does and what happens, so that you know, for example, if Florida comes in quickly for Biden, if Biden wins by you know several states, Trump may continue to say it's fraud, it shouldn't ever, you know, he shouldn't have been allowed to run in the first place, and all that. He will probably say that up to elect up to inauguration day and past that, um but he may not actually be doing much about him.

It's possible the courts will look at some of these absurd lawsuits um saying that legitimate votes just shouldn't count just because Trump doesn't like them to be counted, and they may toss them out, and it may not go to the Supreme Court. It may not go anywhere at all. You know, it could turn out that it goes to the courts and the courts make um new rules as they go along, as they did in the Wisconsin case last week or Minnesota case last week. UM. So we'll see,

you know, what will happen. But the other part of this is we're gonna hear a lot of rumors about fraud and all that on election day. Trying not to get ahead of ourselves. Yes, Jonathan, thank you great reminder in today's column. Tomorrow won't be a normal election day. Jonathan Bernstein, Bloomberg Opinion. Clearly there's a lot on the line for the selection. Everybody, it seems like, has a very very keen interest on the outcome of the selection.

That includes environmentalists as well. To get the latest on that, we welcome our next guest, Dr a Shot Rathi, Climate and Enjury Porter for Bloomberg Green based in London. UM, actually, thanks so much for joining us here. It seems, I guess cut and dry that if you're an environmentalist, if you're thinking about the environment, you're pulling really hard for not just former Vice President Joe Biden, but a blue

wave in the Senate. Is that as clear as it convey is that is easy to analyze as it conveyors or other differences there? I think you nailed it. That is really the clearest distinction in this election, and I don't think it has ever been as clear as you've laid it out. Give us a little more detail on that. So what we know is that Joe Biden has put forth with what is the most ambitious climate plan that

any US presidential candidate has put forth so far. Among the details are that he's going to spend about it about two trillion dollars trying to reduce emissions. First step will be to get carbon free electricity by twenty five across the United States, build out a charging network for electric cars, and to retrofit homes with better installations so

that their energies falls and their emissions decline. On Trump's side, what we've known from the past four years is that much of the work that has gone on through the administration is to roll back regulations for fossil fuel industries and open up new areas around the country for extraction

of fossil fuels. Among the few things that it has done to try and reduce emissions um is to try and create this plan to plant a trilliant trees or at least join a global plan of planting trees, and to support a technology called carbon capture, where you capture emissions from a power plant and then bury them deep underground. But the distinction is very very clear. The science says we need to cut emissions really quickly, and Joe Biden's

plan gets us some way towards that. Under Trump administration, we get away from that task. So what's the most immediate and most impactful thing you would expect a bid the administration to do. Biden has promised that on his first day in office, he will rejoin the Paris Climate Agreement. That's something that Trump has pulled out of. He had his intention made clear in twenty seventeen, and actually officially the US will be out of that agreement on November four,

which is a day after the election. So Biden is elected first day back sometime in January, the US is back into the Paris Climate Agreement, and that has a number of ramifications because US, as a leader in global politics, carries a lot of weight when it comes to deciding which direction different countries should go in. So a very recent example from my reporting has been that Japan, for instance, has a signal that is going to target net zero

emissions by twenty fifty. That's a line at the primary has put forth right now, but it has to go through their legislative system before it becomes law. If Biden is elected, Japan has all the reasons to support it. If Trump is elected, the lawmakers might did there a little bit. And that's the kind of impact that will play out across many, many countries. Will it be just that easy, you just call up a bunch of countries

and decide. Yeah. In case of the Paras Climate Agreement, Actually it is easy because it is a voluntary agreement that countries have come together and have agreed upon trying to reduce emissions. Of course, it will be much harder to actually cut emissions when it comes to the United States itself. So a goal to reach carbon free electricity by twenty thirty five is something that none of the countries in the world have yet committed to. So what Biden will have to do to reach that is going

to be really really hard. Academics say you can get up to but the last ten percent is going to be very hard. Equally, he's going to have to deal with the tensions that the US has had to deal within the past, which is, if you're going to move away from the fossil fuel industry or move away from fossil fuels, how are you going to help the people

in those industries transition away. It's a really hard question that many countries outside Germany, China, Australia are starting to struggle with, but the US hasn't done as much, and that will be on Biden if he gets elected. Actually, I just real quick twenty seconds. How what's been the cost of the four years of the Trump presidency in terms of the environment. How bad has it been? Well, Luckily, renewable energy has been cheap and so um Trump hasn't

been able to reverse that trend. But what we know is that for the first time emissions have gone back up in the US under a Trump presidency. That is sort of adding a year or two words of damage in the long terms, in the long long scheme of terms. Yeah, actually,

thanks so much. We really appreciate getting your thoughts and insights dr ox Shot Rothy Heasy, climate and energy reporter for Bloomberg Green based in London, giving it the thoughts that, uh, you know, on day one, if President Biden were to win the presidency, the day one of his presidency, he would uh try, he would look to get back into the Paris Agreement as it relates to global environmental curbs and and you know, so we'll have to see how

that plays out, but that's clearly on his focus. Thanks for listening to Boomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn, I'm on Twitter at Bonnie Quinn, and I'm Paul Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio