We're going again.
Ever since the early two thousands, starting with the dot Com crash and nine to eleven and then on to the Great Financial Crisis, we have been in an ultra low rate environment. Sure, rates have been steadily falling since nineteen eighty two, but starting in the twenty tens they were practically zero, and in Japan and Europe they were negative. That era is over, regime change occurd, and now rates are much higher than they've been since the nineteen nineties.
Investors should consider the possibility that rates remain high and for much longer than they've been. The era of zero interest rates and quantitative easing is dead. I'm Barry Retults and on today edition of At the Money, we're going to discuss how these changes are likely to affect your portfolios and what you should do about it. To help us unpack all of this and what it means for your money, let's bring in Jim Bianco, chief strategist at
Bianco Research. His firm has been providing objective and unconventional commentary to professional portfolio managers since nineteen nineties and remains amongst the top rated firms amongst institutional traders. So let's start with the prior cycle, rates were very low for a very long time.
Tell us why coming out of the financial crisis in two thousand and eight, DEFED was worried that the psyche of investors was to stay away from risk cury assets like home prices or equities. Remember, the stock market fell almost fifty percent in two thousand and eight. Home prices had their biggest crash according to the case Shiller measure, and so they wanted to try and reinforce that these
assets were safe to own by doing that. One way to do that was they took safe assets like bonds, treasury bonds and their yield and tried to make them very unattractive by lowering their interest rates all the way down the zero. And they used a fancy term for it. They called it the portfolio balance channel, which meant that you were like, I have this internal clock in my head. I need to make so much every year. These bond yields will never get me there. So what do I
have to do to make my yield? I have to start thinking about taking on a little bit more risk, putting money in corporate bonds, putting money in equities, maybe putting money more back into real estate again. So the idea behind it was to try and push people into risk your assets.
And we sore in the two thousands. It certainly was a contributing factor to the financial crisis. When they took yields as low as they did, did they sent bond managers looking for higher and riskier yield And it obviously raises a question in the twenty tens, why were they on emergency footing long after the emergency ended? How much of this is just a function of the FED tends to be conservative and move slowly. Is this just the nature of a large, ponderous conservative institution.
Oh yeah, I definitely think it is, and you're right. I mean, the first example of emergency policy was after nine to eleven when they cut rates down to the unfathomable level back then of around one percent, and they kept it there all the way to two thousand and four. And the joke was in two thousand and three to two thousand and four was an emergency rate when there
was no clear emergency. And by keeping that money cheap, they encouraged speculative movements in markets, and the big one that we all aware of was housing prices took off like crazy, because everybody borrowed at low variable rates and produced a big But you're right that the FED is
very very slow in starting to think. And part of the problem I think with the FED is there's a group think at the FAD that there's a consensus view of the world and everybody is to purport to that view, and they don't allow heterodox opinions.
I have a vivid recollection following eight oh nine of you and I having a conversation. At the time, we were both constructive, hell I could say bullish, and but for very different reasons. I was looking at Hey, market's cut in half, tend to do really well over the
next decade, down fifty seven percent. I'm a buyer. You were the first analyst of everybody on Wall Street who turned around and said zero interest rate policy and quantitative easing is going to leave no alternative and all of this cash is going to flow into the equity markets. I recall exactly where we were where we had that conversation. When you talk about change, is that the sort of substantial change in government policy that impacts markets. Tell us a little bit about that.
Yeah, I think it's even more fit basic than that. It impacts psychology. One of the reasons that the FED wanted to put rates at zero and push all that money in the risk markets was the psyche coming out of two thousand and eight was people were afraid. They were afraid that their nest egg, their net worth, their wealth was at risk, and that they could work their
whole life save some money and it just disappears. And so the fear was that they were just going to all pilot into tergery bills and they were never going to move into risk assets. And without that, you know, investment in the economy, we weren't going to get the economy forward. So they cut rates to zero to force
that money in. But what did people do in twenty ten, twenty eleven, and twenty twelve when they saw, wait a minute, my house prices recovering, my stock portfolio is recovering, my net worth is starting to go back up, they felt better. Oh good, my nest egg is still there, it's still safe, it's not going to fall apart. They didn't do anything other than they felt better. They felt a comfort level because that was happening. Twenty twenty comes we have a
big downturn. In twenty twenty, we have MASSI fiscal stimulus, we have mass of spending the Cares Act that you point out, And so because we're spending more money, we're seeing higher levels of growth, We're seeing higher levels of inflation. Again, like I said, three or four percent, not a ten Zimbabwe and to higher levels of growth and higher levels of spending means that the appropriate interest rate in this environment is higher. It's probably in a four or five
percent range. If nominal growth is running a five or six percent, you should have five or six percent interest rates.
Active managers have not distinguished themselves in an era of rising indexing. At what point is there enough inefficiency and price discovery that active managers can begin their keep.
Oh, I think that we might be seeing it, you know, evolved now with the whole you know, And I'll answer the question in two ways. In the whole area of like artificial intelligence and everything else, we're starting to see somewhat of you know. The fancy Wall Street term is a dispersion of returns that certain stocks are returning much different than other stocks. Look no further than what some of the AI related stocks are doing. And if you want to look on the other side, a big cap
stocks that are really struggling. To look at the banks, they're really kind of, you know, retrenching in the other direction because the banks are struggling with overvalued office real estate and it's really starting to hurt them. Where AI is the promise of some kind of you know, Internet two point zero boom that's coming with technology, and people could start looking at managers to try and differentiate about that.
This is not the twenty nine ten to twenty twenty period where basically all you needed was and I'll use the Vanguard example Voo, which is their S and P five hundred fund, sixty percent in that, and then B and D which is there, which is their Bloomberg aggregate bond fund forty that there, I just need two instruments, sixty in stocks, forty in bonds. Thank you. Let's see how the decade plays out. I don't think that the
next decade is going to be quite like that. So far as as far as active managers, I did want to make this distinction and throw in a cheap commercial here because I do manage an ETF and explain that in the equity space, it is well established that active managers have a hard time beating the index, and there's several reasons for it. I'll give you one basic broad reason. Your biggest weightings you're in videos, your Microsoft's of the
world are your all stars. And if you're not all in on your all stars, it is very, very hard to beat the indus. And so that's the challenge that an active manager in equities has. In fixed income, the index runs it around the fiftieth percentile. There's a lot. Now. One of the big reasons is your biggest waitings in fixed income in bonds are your over levered companies and your countries that have borrowed too much money, and so they're your problem children, and you could recognize them as
your problem children, and you avoid them. And that's why so many active managers in fixed income can beat the index. To put a sports metaphor on it, equities is like playing golf. In golf, you play the course, but fixed income is like playing tennis. In tennis, you play the opponent. No one asks. In I shouldn't say no one asks. You're more likely in fixed income to be asked a question, not can you beat the Bloomberg Aggregate Index, but can you beat Jeff Gunlock? Can you beat Pimco. Can you
beat Metropolitan West. That's the question. You'll be fixed income inequities. They ask question is can you beat the s and P five hundred? Can you beat the course?
So let's put some number. Let let's put a little flesh on the on the active bones. You know, you look at the active equity side and historically, once you take into fees, taxes, costs, you know, after ten years,
active doesn't there's very very few winners. But on the fixed income side, it seems like there are many many more winners in the active bond management if nothing else, As you mentioned, you screen out the highest risk players, the bad companies, the over leveraged countries, and just dropping the bottom pick a number, twenty thirty percent of the worst participants, your way ahead of the index. Is that a fair way to describe it?
Yes, And that's exactly right, because you know, it's a very different type of game in fixed income where it is you know, just avoiding the land mines is really all you have to do, and you wind up doing better. And remember by avoiding the land mines. The other thing that's different about fixed income now relative the last fifteen years, there's a yield as they said, there's a yield to observe. So if you can avoid those land mines and continue.
You could start the year by saying, on a fixed income portfolio, a broad based bond portfolio, it's going to return four point eight percent. That's if every price is unchanged. That's what the yield's going to be. Now, I've got to try and avoid those land mines that keep taking me down from four point eight percent, and you know, trying to you know, protect that yield and hold as much at that yield as I can.
So to wrap up, from the dot com crash to the COVID nineteen pandemic that's twenty to twenty twenty, Monetary policy was the chief driving force in markets. But since the twenty twenty Cares Act, the pandemic, which led to an infrastructure legislation, to the Semiconductor Bill, to the Inflation Reduction Act, the shift has been to fiscal not monetary stimulus. This tends to mean higher GDP, higher inflation, higher yields, and perhaps lower market returns from the equity portion of
your portfolio. Investors should take this into account when they think about alternatives to riskier stocks. I'm Barry Ridholts, And this is Bloomberg's At the Money