Why Fed Yield Curve Control Is Price Fixing: Jim Bianco

there something real underpinning this. We're seeing a real beginning of a of a reopening and a lot of people gaining optimism that perhaps we will get a sharper rebound than some people had expected. It's sort of a V shaped recovery and in V shaped recovery expectations um Joining us now to discuss Jim Bianco, President and founder of Bianco Research based in Chicago, also a contributor to Bloomberg Opinion.

I love speaking with Jim. You always have a great contrarian but apt view of multi asset class perspective, but with a focus the bond market right now, what you're seeing is it more hope than reality? I'm afraid that there's a little bit more hope in here than the reality.

And here's why. If you go back to two thousand eight, at the worst point of that recession, you had output at nine of what it was in two thousand seven, you only had a four percent contraction, and output um in the Great Depression, you actually had a sevent of the output that you had at high. If you go with the consensus figures, we should have about an eleven or twelve percent contraction at the end of the second quarter. Then comes the rebound. Okay, we got to get back

to where we were. We gotta get back to night and that's would just put us at a two thousand eight type recession. We gotta get back to percent of where we were to have a garden variety recession. So when I look at things like the mobility numbers, the open table numbers, the consumption of gasoline numbers, these numbers are nowhere near getting back to just two percent of where they were in January. There's still twenty or thirty percent below. And I'm worried that we're not going to

get all the way back. And I'll give you one more um uh statistics Yesterday we had two point one million people file for initial unemployment claims. If you add in the pandemic insurance for the gig workers, it's more like three million. And I got this from Mike McKee. He tweeted this out yesterday. Look, we're ten weeks into the pandemic, and last week the Connecticut became the fiftieth state to be in some stage of restarting their economy.

If we still had two million people file for claims last week when everybody restarted, those are probably permanently lost jobs. Those are probably not temporarily furlough jobs because of the pandemic that happened leer in the pandemic. That really leads up me to believe, yeah, we'll get back to where we were. But that's still a bad recession, and I think that's gonna be a big disappointment for a lot of people. So, Jim, I guess a new term for me and for many UH investors this week was yield

curve control. What does yield curve control? Me to you, and you think it's a good idea slash strategy, yield curve control, it goes by another phrase called price fixing. That's the price they set the price. They've already done it on the front end of the yeld curve. They set it at zero, and now we're talking about them setting the price further out the yeld curve, and then they would say with their balance sheet they would use it in an unlimited way. Hopefully wouldn't be unlimited, that

they would ensure that that price would be set. Price fixing has never worked. Now to be charitable about it, the day you set the price is probably close to the proper value um, just like Japan did in two thousand and sixteen when they set the price of their

tenure yield at zero. But then over time, the economy will, you know, expand contract investor preferences will change, things will be different, But what won't change is the interest rate that will be the same every single day, and eventually, over time it becomes the wrong interest rate and it winds up causing more problems than it's worth. So I'm

very worried. I think if the FED words to study the Japanese example of yield curve control, or the example that they did during World War two from seven they

did yield curve control, it largely didn't work. But yet I think the reason they're doing it is because they don't want to go to negative interest rates, another scheme that doesn't work, and this one is kind of like a negative interest rates light, you know, and it just gets them to be able to say that they're doing something, but they're not doing the draconian thing of negative interest rates. But nevertheless, it's still not a good policy, and I

hope that they don't follow through on it. Well's showing the limits of monetary policy at a time when people are saying fiscal policy is necessary. And we've gotten that, and this was evident in the consumer income numbers that we received today, where we actually saw saw incomes rise by ten and a half percent in April, people attributing this to the enhanced unemployment benefits. When will we start to see this in spending which actually was worse than expectations.

We're seeing people put this money in savings or by basic necessities, but it really isn't bleeding into overall consumption yet. Yeah, you know what's consistent with that. Number two is the University of Chicago study that said scent of the people that are now getting unemployment insurance, and remember there's an extra six hundred dollars a week from the federal government. In there are actually making more money off of unemployment insurance than they did in their job, and that's what

you see in those personal consumption numbers. I think really the reason that you're seeing the spending is are the spending not kick in is we know that that's going to end in a couple of months unless it's renewed. Uh. And so yeah, I'm you know, I'm I'm happy that I'm getting more money on unemployment than I didn't, uh, than when I was working. But I know that that's not forever. And I think once there's a permanent resolution to that, either it gets extended for a long period

of time or doesn't, is going to determine how people spend. Hey, Jim, thanks much for joining us. We always appreciate your perspective. Jim Bianco, President and founder Bianco Research. Jim is also a contributor to Bloomberger Opinion, giving us his thoughts on kind of the FED, the economy, and what is to come for the US economy. This is Bloomberg Markets with Lisa A. Bramoeds and Paul's Wheeney on Bloomberg Radio. While we are awaiting a press conference from President Trump sometime

later today. One of the many topics likely to be addressed will be the rising tensions between the US and China. Whenever we want to get smart on China, we welcome our guest, Leland Miller. Leland is the CEO of China Basebook International. So, Leland, I hate to put you on the spot. What do you think we could possibly hear from President Trump today as it relates to the current

state of US Chinese relations. Well, look, the issue of the day is Hong Kong, and I think it's important to understand the landscape has changed dramatically over the past several weeks. So, first, Beijing pushed through Article twenty three uh sedition laws in Hong Kong. It's a process, but they've announced it's happening. It's coming out of the National

People's Congress. The State Department, the U S State Department has responded by the certifying Hong Kong as an autonomous entity uh SO, saying there's no difference between Hong Kong and China based on its review. What this is essentially done is is set the two sides up to see how much is this going to escalate and President Trump has as president today, he's going to UH layout the fact that that the situation has changed. The United States is prepared to to escalate in some dramatic ways if

it's these Hong Kong changed dramatically on the ground. But I think right now you're at a point in which each side is looking at each other and saying, we're going to see how bad this gets, and we're going to react based on some of the realities on the ground rather than rather than the initial step of of the laws going into effect. What are some of the USS options in getting tough with China right now? Well, look, you can you have nuclear options that the the White

House is is not ready to go to. But I think the more realistic ones are requirement and leads a requirement changes. UH. There's a lot of worries about extradition, UM and and and ways of the Chinese will take advantage of the new laws to basically disappear people that needs to the extraditions and major topic. UH. Sanctions are going to be on the table, particularly financial sanctions. And then of course tariffs are looming in the background. You know,

the President loves tariffs. This doesn't mean they're ready to actually uh commit to to hiking tariffs and and to revoking special status. Uh they don't appear to be there yet, but it means that the president has to lay out the landscape, here's what we've got on the table, and then sort of bait their Beijing to to behave within then the construct of the new system leland with any sense of why China is taking this harder more, uh sterner stands towards Hong Kong right now? Is there anything

unique in the in the timing here. Yeah, you know, it's there's a there's a tendency to look at everything through the US China leads, and and it's not that they're even't a US China angle here, but this is basically, uh, a reaction to Hong Kong's domestic political schedule. You have, you have legislative Council elections in September, and if those proceed,

pro Beijing forces are going to get demolished. So Beijing had an option of either postponing or suspending or getting rid of those elections, or else moving in the summer window to push forward Article twenty three, which will essentially make it illegal to do anything promoting secessions. Addition, treason gives them wide uh, you know, a wide variety of options to be able to ensure that people they don't like don't rise to power in Hong Kong. So this

is their window. They're moving on it. It just happens to be the very critical time in the US China relationship as well. So everything is a reaction everything else. You said it earlier, and you said this number of times that you think that the Phase one trade deal is going to get torpedoed later this year. We were speaking with a number of people from the Trump administration. That doesn't seem to be on the table right now. There seems to be a cautiousness about going that route.

What do you think would make that change? Well, I think the reality on the ground is the Chinese can't live up to the terms of the deal. And you can say that some of its COVID or a lot of its COVID. Uh, you could say part of it was an unrealistic deal. But going into the fall, we're entering the most toxic period in US China relations since

its Tenement Square is back in. I think things are gonna get really, really tough and As a result, it's gonna be very difficult for the President to stick by a deal, particularly with the Chinese, particularly when they're not adhering to most of it. They're hitting some targets, they may even exceed a few targets on the agricultural side, but in order to back the deal, the President is going to have a lot of pressure on him to to to to condemn the Chinese and will walk away

from it. And I think that sooner rather than later. That actually gets to it's interesting Leland, I think real quickly. My question, I guess is just one. Is there really anything that we can do to prevent Hong Kong from really becoming a significantly a part of China and really lose It's it's an independence in internationalism. Uh No, we have no way of stopping what's happening, but we can

affect how it looks. So one of the reasons why I wouldn't expect to see the full range of options laid out today, or at least uh pushed out today, is that the United States has an ability to affect how aggressively the Chinese act in Hong Kong, even if when Article twenty three is a reality on the ground. If people are disappearing left and right, particularly you know, next week is a tenement UH anniversary. UH. That will

be extremely incendiary. If this law applies retroactively, it would be it would encompass all the people who can participate in democracy protests for the last couple of years. It would be extremely incendiary. Really worry people on the ground in Hong Kong, even more so than than than in this case. Now. So the United States, by keeping active, by keeping aggressive, but keeping its options open, can affect

the way this plays out on the ground. It can't reverse it, but can affect how it looks, you know, six months or a year from now. Leland Miller, thank you so much for being with us. As always, your insights are incredibly valuable. Leland Miller, chief executive Officer of China beige Book International. This is Bloomberg Markets with Lisa

Ramowitz and Paul Sweeney on Bloomberg Radio. The market has been buffeted recently by a series of economic data that show a brutal reality, as well as the incredible policy response that has fueled optimism in markets, and now increasingly a focus on growing tensions between the US and China.

There is no one better to speak about all of these things in the intersection of them, the Nathan Sheets, chief economist and head of macroeconomic research at PIGEM Fixed Income with more than eight hundred billion dollars under management, who has worked at the FED working on some of these emergency programs during the last financial crisis, as well as in the Treasury Department, working internationally with a front eye view in the possible issues that may arise there. Nathan,

thank you so much for being with us. We have talked so much about the policy response. I want to shift gears in terms of the US's response to China and from a financial perspective, how worried market watchers should be about the escalating tensions right now between the U S and China. The US China relationship is clearly a first order risk for the economy and for the markets.

I think we saw last year with the trade war, and I think that this escalation and the tensions between the United States and China UH that we're seeing in recent weeks here also holds some very significant rest we need to worry about. UH. Now, my expectation is the President Trump is going to try to keep this mainly in the field of rhetoric between now and the election, but the possibility that he missteps, the possibility that Congress forces his hand, or the possibility that the Chinese react

more vigorously than what the administration is expecting. I think all of those possibilities um wold meaningful risks, and I think our our our concrete uh, you know, risks that we need to be thinking hard about as we as we consider the markets over the next six months. All right, so we've got that to worry about it. But we also have the reopening, if you will, Nathan of America. It's kind of on a state by state basis, region

by region basis. What is your expectation for how this reopening goes and what it might mean for economic economic activity and a potential rebound later in the year. So I am persuaded that the geographical diversity and heterogeneity that you described that different regions are opening up at different paces is likely to be a feature of the US

economy that is somewhat supportive of recovery. And to emphasize that, I think right now much of the industrial northeast of the country is still pretty well locked down, but there are broad swaths of the south, the Midwest, and the western part of the country where the economy is moving back toward normal at a pretty pretty rapid rate. So when I put all of this together, it gives me maybe a little bit more confidence than I had a few weeks ago that the US economy is going to

be able to achieve a gradual U shaped recovery. I don't expect the level of GDP to be back to where it was at the end of two thousand nineteen until a well ended but I think a gradual recovery growth in the second half of the year is is a pretty reasonable baseline, and I think it's the one that's being priced in UH in UH in the markets at this stage. The hallmark of this downturn is the unemployment rate, which has been so ching and may reach with some expect to this month and figures that come

out next Friday, a week from today. I'm struggling to understand the skills gap that emerges and how we closed at the idea that a lot of these jobs will not come back in the same form and that people will have to get rehired in new roles that require new skills. How long do you think that takes and what could speed it up? In in my view, the three big questions that characterize this UH this recovery, and I think frame the risks around them or first, UH,

what happens with the virus? Second, what happens in terms of psychology of of consumers? And the third one is is exactly this issue that you're highlighting through this period to what extent has the underlying structure of the economy been damaged? How many workers are there that are not going to be able to go back to their jobs and their skills are diminishing. How many firms that were previous to sleep productive will now be bankrupt and as

a result of that, unable to produce. I think it is very much The answer is very much an open issue. But I think what we can say is the faster we're able to get back, the better the virus proceeds, that the less damage will see over the medium to long run UH in the economy. I think the other point that's important here is I think that the stimulus that the Fed and in Congress have put in place will also help buffer the downside and help drive a

stronger recovery than might occur otherwise. So I guess I would say I'm cautiously optimistic that we won't see long live damage, but we're still in a place where there's a lot of uncertainty surrounding those assessments. Nathan, you mentioned fiscal stimulus. We've gotten a couple of rounds so far. I guess the the next one eventually might be something along the lines at the House pass the three trillion

dollar stimulus bill. How important is another round the fiscal stimulus, particularly one that focuses on states and local municipalities as many governors have called for. So I I do expect that we will see another fiscal stimulus bill. I think that he needs to replenish the p p P program for the small businesses, to extend the unemployment benefits, and as you say, to do something for the standard local governments.

I think that that is UH will be compelling and Congress will see that as something that is is unavoidable. That said, I don't think we're going to see a three trillion dollar package. My guess is there would be more in the one to one and a half trillion dollar range UH, and I would expect that Congress would approve that probably late June or into the first half of July. Nathan twenty seconds. I'm just wondering. Right now we're seeing a FED balance sheet at seven point one

trillion dollars. Where do you think it gets by the end of the year. Well, I think it's going to be probably close to ten trillion, a little bit below that. But you know what we're seeing now is market stabilization, Quewie. I think come the middle of the year we're going to see monetary policy of it with the focus on the dual mandate, and that the FAT is going to be buying so close to ten trillion by the end of the year, and uh, you know who knows in

coming years. Nathan, Thanks so much for joining us. We always appreciate your insights. Nathan Sheet's chief economists ahead of macro economic research at JIM Fixed Income, based in Newark, New Jersey. Thanks for listening to the Bloomberg pan L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at p T. Sweeney. I'm Lisa abram Woy. It's I'm on Twitter at Lisa A. Bramwoit's one before the podcast.

You can always catch us worldwide on'm Bloomberg radioh