Jim Bianco on the Market Crisis and the Fed

I always find his analysis and commentary elucidating. He is one of the rare people that makes you think about things that you have not thought about before. With no further ado. My conversation with Jim Bianco VI is Masters in Business with Barry rid Holts on Bloomberg Radio. My special guest this week is Jim Bianco. He is president and macro strategist at Unco Research, where he covers such broad areas as monetary policy, the intersection of markets and politics,

fund flows, and market positioning. Jim was a market strategist in both the equity and the fixed income research group at UBS Securities. UH. He was equity technical analyst at First Boston and Scherson Lehman Brothers. He is both a CMT and a member of the Market Technicians Association. James Bianco, Welcome back to Masters in Business on Bloomberg Radio. Thanks for having me, very really appreciate it. So I've been looking forward to having a conversation with you about the

present circumstances for a while. For people who may not be familiar with you, um, not only do you have a background as a technician, but you were also a fixed income analyst for a long time. And I find that bond analysts look at equities very different than stock guys do. Is that is that a fair assessment? It's more than a fair assessment. I think we're wired a little bit different than stock guys. Vind guys are always worried about the return of their money, where stock guys

are the return on their money. So you start off by thinking about things very differently than you would from an equity investors standpoint. And and let me just give you some props about your analysis post financial crisis. I think you were the first person I recall reading who were describing quantitative easements and zero interest rate policy as there is no option. It's going to send stocks appreciably higher.

For those of you who are pushing back on the FED action, just lay back and put your money to work and let the FED make it go higher. Is that a Is that a fair assessment? Yeah? Early on, I did definitely think that, Like you know, in the two thousand and ten to two thousand and fifteen era, I was definitely on that ball. Um. To be honest, I've been a little bit surprised at twelve years later

it seems to work as well as it did. Uh, you know early on that the market hasn't adjusted at all to the idea that, um, there's there's this fet put and it will always work as veriently as it did the first time. Every single time has tried that, there's been no um, you know, to use the word of the day, there's been no immunity to it in the market. That the FED is not as effective as it used to be. Now they have to do larger doses, but it does seem to still work, and that's been

very surprising. Hey, every junkie requires a bigger and bigger dose if they want the same high. Isn't that a fair analogy? Oh? Yeah. In fact, that was the uh. That was the analogy that I was using early on, was that you know, the markets are a junkie and the FED is a pusher, and that seems to have worked in it um as it works like I said to this day. So here's where the metaphor maybe goes

off the rails a little bit. Every time I see a consensus of people discussing the FED put and why markets can never go down, it usually means we're getting pretty close to markets going way down. Think back to the end of all we heard is Hey, the Greenspan put means that that you could be more aggressive and take more risks, and that was fantastic right up till

that drop in the tech sector. Yeah, that's right, and I do think that that we might be getting very close to that period one more time that the FED the FED put might have run into some trouble here. Ultimately, at the end of the day, I think there is one other thing that people need to remember about markets

that there is a fair value. There is um uh, you know, a level that you would look at to say that this is where the market should trade if the FED is successful in keeping the market relatively near those levels. I think that then the ft point is successful. And that's largely been the case over the last ten or twelve years, that as the market has gone up and as the FED is pushed um, they were fairly

close to what you would consider fair value. But today now the real question is what is the true value of the market. Where should a trade if the FED wasn't in the market right now? And the big debate is how much of a long term effect is this shelter in place pandemic gonna have on the economy. Do you believe that this is a supply issue? What I mean by that is all we really need to do is have the governors just allow all these businesses to unlock their doors and open them up, and we will

return to something very very close to normal. That's all we need. Or do you believe that there will be some longer lasting demand issue. In other words, these businesses unlocked their doors and open up. But now we need to get people to be convinced to resume two thousand nineteen again that they're going to voluntarily stay away, voluntarily change their habits, voluntarily take a more conservative approach if you believe the latter that they are going to voluntarily

take a more conservative approach, and I'm in that camp. Uh. Then I think the markets might be a little bit ahead of themselves if you believe the former. No, they just just let these businesses open up and everybody will return. Memories are short. Uh, then I think that these markets are probably appropriately valued. So to me, that's kind of the crux of the question is how much of this is being held back by just the rules, or how much of it is being held back by people's attitudes

that have now changed. Quite interesting. I have so many different places to go with you, the technical sides, some of the other more interesting aspects, but I have to stay with this supply versus demand from a framework perspective. Last week was the beginning of May. A number of states have begun to reopen, either partially or or more aggressively, and at the same time, on Sunday we saw the highest level of new infections that we've seen, um since

this whole thing started. You seem to be raising the possibility that we're gonna look back a month or two from now and suddenly when there's another surge of infections, it's gonna frighten consumers into staying home. Is that sort of the scenario you're thinking about. Yeah, I would even say it's even one step before that. It's not that you know, a wave of infections is going to is going to frighten consumers. It's the fear of a wave that might be enough to get them to change their behavior.

Let me let me put this in the context for you. Um, the worst recession in the post World War two period was the last one two thousand seven to two thousand nine. At its worst point, real GDP, real economic activity was four percent down from its high. Or we retained nine of the activity that we had at the high at the low. But yet a four percent drop off was enough to produce a fifty retracement in the stock market

at ten percent unemployment rate. Um, you know the social unrest that led to Brexit and Trump and the political polarization that we had, and a lot of and bailout schoolore effect. I think you might wrote a book about the bail I recall I recall a few jotting down a few notes about the bailout spect and all all of that was from a four percent correction in real GDP.

By the way, the worst app or was the Great Depression when we were corrected seventy so another at its worst point in ninety three, we still had seventy five percent of the economic activity that we had in nine. So the reason I bring that up is when people say, okay, we're going back. The doors are open. Hey, look at this. Three people walked into a store. It's all okay, Look, we got to get back of where we were in

two thousand nineteen. Otherwise, if we make it back to and that's the cover of this week's Economist to Economy, and they've picked up on the same thing I was talking about. A n recovery is a disaster. It's it's something twice as bad. It's what two thousand seven was, and it's something that is approaching a mini depression. Now I'm not trying to be a Cassandra here, but what I'm arguing is we need to get almost all the

way back, if not all the way back. Remember the way we used to do analysis before the virus, like three months ago. We used to just talk about the change of the change of the change, and if something was it was was on the third derivative moving a little bit that that was somehow significant for markets. But now we're talking about just basically the change, not the first derivative, not the third derivative. So this is the

challenge that we have in the economy right now. It's not a question of unlocked the doors and activity will return. That will happen, and the warmer weather of summer will help activity return. Let's leave the virus soft for a second. It's do we get back to where we were last year. If we do, markets are okay if we make it back.

To think about it in these terms, if you went through and added up every governments, state and local government said you just got a ten percent loss of revenue, every business loss of revenue, that will be devastating for them. So this is the challenge that we have. How far back are we going to go? Huh? So before we wrap up this segment, I have to ask a question not about how far we will get to in Q three a Q four. But let's stay with the second quarter. You know we got data on Q one. Really it

was only one month. It was March that had such an impact. But my back of the envelope calculations, you know, you have thirty million people unemployed out of a hundred and fifty five million in the in the entire pool. That's over. And then you look at GDP for one month. If that continues for the full quarter, are we running it six capacity? And we down thirty g d P for Q two, which we are now you know barely uh a month and change too. Yeah, it looks like

that that's going to be the case. And these will be the worst economic numbers ever recorded for a quarter, for a quarter, worse than the worst point the Great Depression, worse than anything we saw during the Civil War. Um. Now, the the good news is that that should not be a sustained level that that was all from the shelter in place. Obviously, when we reopened, there is going to be some uptick, a big uptick in activity. Uh as we return to something that approximates normal, which is what

we're talking about. What is that going to be on the other side. But yes, we are going to see some of the worst numbers that we've ever seen. And I would also add to you the thing that I've been watching that I think is gonna be really important is going to be that unemployment number. And and if I was to speak in statistical terms, um, we're all now familiar with initial claims. That is, when somebody shows up at the unemployment office to ask for unemployment insurance.

There's another number that they put out called continuing claims that means that you're still on unemployment insurance week two, week three, week four. That number would lacks a couple of weeks, but it is now approaching twenty million. It should probably approach to thirty million in the coming weeks. They'll be It'll come up a little bit short of the total of initial claims because a bunch of these companies are getting their paycheck Protection Plan loans and they're

rehiring their workers. But that's only a few million out of thirty million that that's happening with. I think the real question then becomes, Okay, these twenty odd million people, how fast they get off of unemployment? Because if we're going to leave them on unemployment for months or quarters on end, I think that that's going to be an enormous stress point for our economy. Uh And so the faster we can get them off, the faster we can

return to normal. Now now that I've said that, we haven't even we're not even done adding them to the to the to the unemployment roles right now, let alone talking about getting them off. So if there's one focus on that worst numbers ever, I think it's going to be that unemployment measure. My special guest this week is Jim Bianco. He is president and macro strategist at Bianco Research,

where he covers all manners of markets and strategies. Jim, you and I have been fishing pals for I don't know about a decade, maybe even longer, going up to the Shadow Federal Reserve better known as Camp Kotak up in Maine. It's May, and I'm thinking about August, and I'm having a hard time imagining getting on a plane and flying from LaGuardia up to Banguora Main. Any chance that we're going to have the sort of um opening that will allow that sort of behavior. What what your

plans for for August this year? I would very much like to go to um Bangor and go to Camp Kotak this year. Again. It's always been one of the highlights of my summer. Uh, not the least, which is to watch a bunch of economists try and fish and beda hook. And that's always worth the price of admission right there as well. Um, but I'm like you, I

don't know, uh, if that's going to be doable. Um. Sure, I mean technically there are planes that are flying right now, and technically you and I could get on a plane. But I'll have to see what my comfort level is to get on a plane in August, just like you, And then we'll have to see how many people actually want to make it up there as well too. And this is gonna be a story that we just said. I just said is gonna be repeated in a lot of industries and for a lot of people across the

economy for the next several months. And it really impacts more than anybody else, people that have large gatherings. You know, one of the things I've always been saying to people because I'm in Chicago, Um, I'll know the day that we've hit a recovery is when there's people in Wrigley Field watching a baseball game. Now, will that be this year, will that be next year, five years? Never? When will that event happen? When that event happens, then I'll know

we're all the way back. But right now, you know, that's an open ended question, is to when it's gonna happen. Maybe I usually should say if well, I assume we're gonna end up with some form of treatment eventually and some vaccine. The news this week from Fiser and their partners in Germany is that they're very much on a fast track for a possible vaccine. If if we have a vaccine before the years over, do things things go

back to normal? Can we rise zoom our previously scheduled lives or has this left a mark that's going to change us permanently. Um, let's say we get a vaccine. I'll answer the question by by posing the metric. Let's say we get a vaccine. Let's snap our fingers and say we've we've got to max and it happens. Um, I go back to the previous segment. We got twenty million unemployed people on continuing claims? How fast do we

get that down to three or four million? It was one before this started, but let's just try and get it from twenty down to three or four. You know, if that thing can go down, that measure can go down in a few months as everybody gets massively hired back. Uh, then everything's cool and we've gone back to normal. But if companies have gone out of business, or even with a vaccine, people said, yeah, we dodged a bullet, but I got to rethink the way that I do things.

And then that number stays elevated for a long period of time, then we've you know, if you would, the behavior has already been changed, the damage has already been done, and uh, it's just not a vaccine that can fix it.

I don't know what the answer to that is, but I do fear that the longer we go the more without a vaccine, the longer we go with this fear of health, the more people are going to be willing to change their behavior, and that even a vaccine may not bring that back all the way, and it will be a while before we see it come back, Like you know, in markets parlance, a whole cycle that we'd have to run through before we'd have to see it return,

you know. I think of it in terms of almost a science fiction book, where there are some people who have had the virus and theoretically have the anybodies and may or may not be immune, and then there are people who live with people or themselves, or people who are either older or immuno compromised or have comorbidity ease that put them in a higher risk category. Uh. And then there are people that you know, let's call it

twenty to fifty otherwise healthy who haven't had it. We may end up with different groups of people with different risk factors, and the way things come back online is going to be very dependent upon which group you find yourself in, exactly. And I think that that's what I mean by that. You know that even with a vaccine, and assuming that one comes up, uh, that you might you might have already seen the behaviors, especially among different groups, um,

change and change a lot. And that again, I'll go back to what I said before. You had of the activity of the high at the worst point in the Great Recession, and that produced all that stress. And so it would only take a little change at the margin to get you, you know, five percent off the high, three percent off the high, and that's all we're talking about. And that produces what we would ultimately know as a recession or recessionary type conditions. So we'll have to see

where everybody is now. The last thing I mentioned, you know, is about surveys, you know, and I'm always been very skeptical of surveys too, because every time a gallant organization or somebody like that does a survey of people, are you concerned, eighty percent of the country says yes. Are you taking precautions of the country says yes. Uh. To me, that seems like that's the politically correct thing to say.

I mean, no one said say no, I don't care about this, and I'm running around and asking people to breathe on me on the subway, um and so. But the question really becomes this, when things open up, do you still have that attitude? Um? And that remains to be seen at this point. I think most won't have that attitude. They'll go try and go back to some level of reality or normalness. But enough might that it

could actually restrain economic activity a little more than we think. Yeah, the problem with those surveys are it's always a function of how they phrase the question. Change a word here, change an emphasis there, you get a completely uh different answer. You know. A new term just real quick on surveys is the shy bias. Um. Even the shy bias might be working here, And that is how do you answer a question when a human being asked you versus clicking on a on a radio, button on a on a

web page. So when a human being ash you, you, you know, how how concerned are you about the virus? You're not. You're more willing to tell a human being a poster, yes I'm very concerned, as opposed to answering a question and anonymously saying not very concerned at all. So there could be a shy bias in there too. And we did see something very similar to that in some of the political polling in when supposedly people didn't want to say they were a Trump supporter, uh, and

yet they were. That was their plans for voting, and there was a reasonable argument to be made that the polls might have been undercounting um now president Trump strength, I'm curious if this is a similar phenomena. It is, it is, and we also saw it in Brexit too.

Was the same thing that um Brexit was really where the word shy bias came from, because it has that uh, British tone to it, is that people did not want to tell human polsters that they were in favor of Brexit, but in the online polls it actually pulled a lot better because when you didn't have to tell a human being, you were more likely to say, yes, I'm in favor of of Brexit as well too, so that I fear that there's something like that happening again, because it's it's

almost sounds irresponsible for me to say I'm not concerned about the iris. And so therefore when a human ask you, you your natural responses yes, but in reality maybe you're not. And so we'll have to find out where people are once things open, and how we how this all shakes out. If you remember that video clip that one viral of young college dude on spring break on the beaches in Florida who basically saying exactly what you're um articulating, Hey, man,

I don't really care about the virus. I'm young, I'm healthy as spring break. I'm here for a party. Man, that poor guy get xcorciated. That is a perfect example of not having the Shaw bias. Yeah, exactly, you know, and you could you could say, look, that's his opinion, and he's welcome to his opinion and it's not illegal. Um, you may want to argue a little bit on their margins about the morality, and maybe his grandparents wouldn't like

to hear that or see him soon. But boy did we jump down his throat, and that that's what I mean by that we've really pushed this behavior on everybody, that that you need to change because this is a big deal, and that you know, taking this full circle, why I fear that even a vaccine, while it will get a lot of people to relax and try and return back to normal, if it has changed enough people's attitudes that even vaccinated, I still think that I want

to maintain this more conservative attitude, go out less, spend less money, and the like that that could wind up pushing the economy enough off of its peak that it keeps it very, very sluggish. As we move forward from here, Let's stick with the topic of sentiment, because there's a question that keeps coming up, and you're really the perfect person to address it to. I keep reading how many people can seem to wrap their heads around a market that's rallying so strongly in the face of what looks

like continual bad news. How would you explain the market's recovery to folks who are saying, I don't get it. The death count is up to seventy and higher, it's more than a million infected. How on earth can the market? What was April the one of the top twenty best months for the SMP fire. Ever, how is this possible? You know, I think what people need to do is remember what happened before. There's two things. First of all, there's the obvious answer, and that markets look forward, and

the death count and payrolls are backward looking. You know, we're we're bracing ourselves for in early May to get the April payroll report. It's the April report, it's last month's report, and we know that it's going to show, if Wall Streets right, more than twenty million people have lost their jobs, far and away the worst report ever seen in The markets are looking forward, But let's also

remember what they did in March. They went from an all time high in late February to down in a little more than five weeks, far and away the biggest all time high to down thirty plus percent correction. It's the fastest ever recorded. That was one of the worst collapses by that measure ever seen. So was the market overdone in late March? Man? Probably? Was the market maybe overdone um now as it recovers or wherever it's teak winds up being if it's at this level here or

slightly higher probably as well too. But the market always has that irregular kind of move where it kind of goes too far one way, too far, the other way, too far back the other way one more time, and you need to look at the larger trend. And right now, the bigger question is what is the larger trend. You know, it's still fift off of its all time high that was set three months ago. That would suggest the larger trend is still still lower um at this point, and

it's percent off of its March low. That would suggest that the larger trend might be back up. So I still think we're very much influx with the markets. But um, you know, don't get that nuanced with the market. I hear a lot of people get mad about the market

as well too. And what I mean by that is they'll run these statistics like for every death, market cap has increased five hundred thousand, or for every job you know, the market has increased fifty dollars times the number of thirty million jobs lost, or or some number like that, And that's completely the wrong way to look at it. Um it it's it doesn't think of it in those terms. It's where are we going next? Is where it is? And right now I'd say the larger trend is it's

still very mixed. You know, the market is still not telling you it's all okay or it's all real bad. It's still trying to figure it out. Right now, you are the perfect person to have this conversation with about the policy response from both the federal government and the Federal Reserve. Let's let's start with the FED. How does monetary policy look? And what do you think of what Jerome pal has done so far? Um, He's set all kind of records to FED has set all kind of

records in the most extreme policies that we've ever seen. UM. You know, it's about that they threw the kitchen sink at the market. They've thrown all the kitchen sinks at the market as well too. And it's probably if UM I talked about watching financial television, UM and talking and watching professional money managers, it's probably reason number one why

they think the market is up. Co invest with the FED seems to be kind of a working uh thesis that you hear repeatedly from a lot of people that the market is going to go higher. But if the question really becomes this, is he doing the right thing? But I think Warrenant Buffett this past weekend summed it up perfectly. Um that the FED actions has helped markets, and in their view, they look at the fixed income markets to corporate bond market is opened, it's a lot

a lot of companies to get financing. It's allowed a lot of companies to stay in business, it's allowed a lot of people to see their losses get reduced, and that the FET is looking at that as being a positive. And what Buffett said is it is now. But the very big risk is is that as we move forward, that distortion in markets that they're creating and they think it's a distortion for the good, could wind up being

a real problem down the road. And he said I think the word he used was an extreme problem down the road. But then he also said doing nothing and just allowing you know, this UH market to sort itself out with any support, could have meant that that extreme outcome happened now as opposed to later on. So his suggestion was, which is why I'm bringing it up because I'm in that same camp, is that while the FED

has made things better now. It's still a very open question as if they've made things better for good and if there are problems a year or two now because of distorted markets or malinvestment meaning bad investment because the Fed old everybody, Hey, it's all okay, go ahead and paw your money into the market. And then some investments go bad because we realized that we were buying them at the wrong price or at too high a value.

And then you would say a year for two from now, Yeah, they've really created problems for the economy that very well may be true. If they had done nothing, those problems would have been occurring now. So I think what he's suggesting is what they might be doing is just shifting the timelines as opposed to repairing the economy to the extent that they think they are. I would I would phrase it slightly differently. This is a hair of the

dog that bit you. You wake up with a hangover, You do a quick shot, the hangar goes away, at least temporarily. We're still dealing with the hangover from O E O nine and uh lo, and behold, hair the dog is going to kick the can down the road a little bit to mixed metaphors. Is that what I'm hearing you say to some degree here, Yes, I think so. I think that they they have been able to, you know,

to use that last metaphor kick the can down the road. Right, Um uh, since we're since this is the metaphor segment, there's no atheist in a foxhold, there's no capitalists in a crisis, we had to do something. If we didn't do something, that worst decline that we ever saw down thirty four percent in five weeks might have gotten even further worse in bad English there, but in that it would have created more and more problems. But by kicking the can down the road, it gives us some time

to figure out what we're gonna do. Now. What I'm arguing here is that maybe at the end of the day, we're still going to have those problems, but we're just going to stretch them out over a longer period of time, as opposed to having those problems right now and in In In other words, what I'm arguing is, I don't think that the fat can really taken economy that's sick and make it better. Uh. They can't create business, they can't create revenue. If people don't want to go to the stores.

If people don't want to buy, they can create liquidity to make the markets behave more in line with what you hope for for a shorter period of time. But that's all they can do, and you can hope that in that period of time that gives us time to find a vaccine, to change your behavior, to figure out what we're gonna do next, and hopefully mitigate those problems.

And that's really the big question. So I'm not so sure what what they've done short term has been good because it's made what looked like a catastrophe at least stop for now. But I'm not so sure that they've prevented it forever. That remains to be seen. So they can't keep the jumbo jet in the air, but they could foam the runways, right, all right, So you're listening with a fun with metaphors on Bloomberg Radio. So so let me put one of my favorite powers to work

I hereby appoint you chairman of the Federal Reserve. What would you do under these circumstances? But you mean I can't take the Gratio marks line that any organization that would have me I would immediately withdraw from that would be well if I if I was, if I was the head of the Federal Reserve, I think I wouldn't be doing the things that are vastly different than what they're doing now. But I would be asking a question,

you know, kind of behind the scenes. President Trump says every time he talks about this, we have to get the economy back to where it was. Okay, I would ask, as the Federal Reserve chairman, can we go back to two thousand nineteen, even with the vaccine? Can we get everybody to say, okay, that's over with. Let's all let so I'll remember what two thousand and nineteen was like and let's go right back to that, or what I

think might be the case. Can we help transition from a pre virus um mentality and economy to a post virus mentality and economy and that post virus economy is going to be something different? And what's that? Why? Why

is that important? Because our job then here is not to make everybody try and maintain where they were, but help them manage to where we're supposed to be going, which means I'm going to give you some support for a while, then not forever, and while I'm giving you that support, you need to sit down and figure out your business or figure out your finances, or figure out your career and say, Okay, it's going to be different in twenty one. It's going to be different in twenty two.

How and what do I do to get there? As opposed to Oh, when are we going to get back two? That's the big difference I think we need to be talking about is what is economy look like? And my fear is too many people still feel like, oh, it'll be two thousand nine all over again, and it will be you know, not but a hundred percent or in the case of Trump, hundred and five of what it was in two thousand and nineteen. And maybe it is.

I mean, you know, this is unprecedented. Nobody knows, but I'm going to bet that it's going to be different. And trying to preserve a status quo that's unrealistic is where I think the problems could come. Jim, let's talk a little bit about what we were discussing earlier with the Federal Reserve and some of the new things that they're doing. I don't ever recall them buying ets that seems to be pretty new, and then buying debt of some pretty junkie companies that seems to be pretty new. Also,

what do you think of what's going on? Yeah, they're not only buying the e t F, but bear in mind only e t F that are tied to corporate bonds, so no spiders, which is the sp F. UM. They're buying corporate bonds, are buying commercial paper, they're buying asset back securities, they're buying municipal bonds, UM. You know, uh, They're they're buying paycheck protection loan UM loans and trying to package them into securities as well too. This is part of the effort to try and support markets from

falling much more than they can. This is them stepping in buying and trying to put a floor on markets to try and calm everything down to hopefully get us to the other side. Now, there is one thing that I worry most about with all of these programs UM. Technically the fens not allowed to do this. So how did they get away with this? UM? As I pointed out, they're actually not doing it. The Treasury is doing it.

They've put together all of these special purpose vehicles or these funds and then the treasury, the taxpayer put some money into these funds, the FED offer, the FED finances it, and they go out they buy these securities. In other words, now monetary policy, and Jerome Paul says this every time he speaks about it, monetary policy needs the permission of

the Treasury Department to do this stuff. So the FED is given away a lot of its independence to the administration, not just this administration, but whoever is the administration after twenty whether it's the same or different, because this program will most certainly continue well past the election um as well too, and that, I worry could cause two problems. One, it seems to be like a nationalization of markets, because it is the government that is ultimately buying corporate bonds

and e T F and municipal securities. The federal government in this case and to the FED, is going to need the permission of the Treasury Department to change these programs anyway they can, and so far that's not been a problem. But later on, you know, especially in an election year, if the FEDE says, hey, we want to maybe back off of this program or not do this, the administration could say I got an election to win you're gonna keep buying this stuff and keep going because

now I now have a say in your policy. So this is gonna be really an experiment that we haven't seen now. Last thing about the people say, didn't do this in a weight and the answer is yes, but not to disdagree. But we also didn't really understand it in a wad, and we had a different administration that was willing to say to Ben Burnanky, then you tell us what to do and will agree with it. Twelve years later, we've had twelve you study this, we understand it.

We have a very different attitude about the Federal Reserve than we did in two thousand and eight. So I'm going to ask you two questions about that, and one is practical and one is theoretical. Answer them however you like. The practical question is what happens if the FED decides they don't want to keep buying this and and the government says, yes, you are, and the FED says, okay, good luck, We're We're done. So that's the practical side

of it. The theoretical side of it is, have we just de facto created a giant experiment in modern monetary theory? Is isn't this MMT rit large to take the second one first? Yes, I refer to it as MMT version one point. Oh is what this seems to be right now? Um, And the better it goes, the more I think we're

going to continue to see more of it. Uh. To stick with that question, UM, real quick, the amount of stimulus or the amount of support maybe that use that phrase that we're giving the economy, Uh, is between what the Federal Reserve has done and expanding their balance sheet with with the government is going to borrow, and they announced this week they're going to borrow three trillion dollars just in the current quarter, which is the number most

bond people are having a hard time understanding. It's so such a big number right now, it's the equivalent of four years of income tax receipts. When all is said and done, If the federal government in the Federal Reserve can either borrow or print four years of tax returns and not have a problem not produce inflation. I've jokingly said,

can we get rid of the I R s? Can they just print up our factors every year and just send them to the Treasury at that point, because if you can do this without having any problems, then why do we even pay taxes in the first place. And isn't that been one of the arguments that mm tears have been saying is that MMT believes that the you don't adjust monetary policy with interest rates, you adjusted with taxes, is that when there's no inflation, you print the money

and tax rates go down a lot. When there's inflation and you want to remove the money from the system, you raise taxes as well too. So yes, I do think this could be version one of mm T. Now

to your practical question. If the FETE says, hey, we want to back off, and the Treasury says no, and the FETE says, good luck trying to do it without us financing it, they run a real political problem because then they put the treasury the taxpayer at risk of loss, and then they would have to Joan Paula, whoever decided that policy, would have to stand there and say, you know, you agreed with the Treasury to buy hundreds of billions of dollars worth of corporate bonds or municipal securities or

et F and the government and the and the Treasury wanted you to do more, and you said no, and you backed off, and now the taxpayer is sitting on an unrealized loss DROLL and that's your fault. You're causing the taxpayer to take tremendous losses. Why are you doing that to the taxpayer? That is a issue that they never want to be involved with. They don't ever want to go there, so and we I don't think we'd ever know it. I think that they'll always come to

some form of an agreement. And let me emphasize, there will be no disagreement right now, you know, because we're in the process of trying to support a crisis economy. The disagreement comes later down the road, whether it's several years down the road or several months, whenever we decide that it is now getting better enough that the set

can stop start reversing out of these programs. The administration, in theory has a veto over that, and I'm just opening the question that maybe they will exercise it when that time comes. But no one wants to exit these programs right now, right now, probably being in a minimum the year, so that's not going to be an issue right away. Hey, we we had ultra low rates for a decade and the administration screams when pal wanted to thike rates, wanted to normalize rates up from one and

a half percent to a more normal level. I got to imagine that, no matter what the circumstances, no president is going to want to see this get normalized. Or am I now too cynical in the era of a White House Federal Reserve jaw boning contest. No, I don't think you're too cynical. I mean, if you look at the history of the Federal Reserve and the relationship that the Federal Reserve has with the White House. Um, the big difference between Trump and previous president says Trump does

it out in the open on Twitter and that. But we've known from books and biographies going all the way

back to Harry Truman. UM, Harry Truman inviting the entire think about this entire inviting the entire f O m c UH to the White House for lunch and telling them that if they did not cut rates, that they were doing the bidding of Joseph Stalin to Lyndon Johnson, UM, you know, throwing the Federal Reserve chairman against the wall, literally physically assaulting him and saying, boys are dying in Vietnam and Bill Martin, who was the Federal Reserve chairman

at the time, can't cut interest rates to Ronald Reagan, commanding Paul Vulker. Paul Looker wrote that in his autobiography to Cut Rates in which was an election year, to George H. W. Bush, blaming Ellen Greenspan for losing the action. So this has going out for seventy years that presidents have been at odds with the Federal Reserve. The difference with Trump is he just does it in the open, real time. The rest of them did it behind closed doors.

And now that we have given the administration a veto, it doesn't matter if it's Trump or Biden or whoever. They're gonna think twice when it comes back when the FETE comes to them and says it's time to leave, it's time to us to reverse these policies, and they'll maybe push back. That's a very open question. So I don't think you're being too cynical. Huh. Quite quite interesting. So I recall back in two thousand and ten, two thousand and eleven, remember the open letter to Ben bernanke

Hui and Zurp are going to cause hyper inflation? What are you doing. You're going to destroy the dollar. We're gonna have crazy inflation. And of course none of that came to pass. The dollars was record ties. For the next eight years, we saw no inflation at all. If anything, deflation is this similar to that in that it's an unprecedented set of circumstances, and the natural reaction from inflation hawks is oh no, the Fed's action is going to

send inflation much higher. Uh. This this is clearly different, if for no other reason than gold has spiked dual Compare and contrast between when it comes to inflation. Yeah, you know the letter. I remember the letter to UH. To be honest with you, I thought that that letter at the time it was written, was a reasonable fear that we had that we looked at what the FED

was doing. If you believe the metric too much money chasing too few goods, that the FED was creating money, you could argue that it didn't have the velocity that it needed to turn over that it needed in order

to create inflation. But it was a reasonable fear. And I would actually argue to you that out of that experience that they did, that episode without inflation was the catalyst for modern monetary theory to come along and saying, hey, look what we just did in two thousands, nine, ten, and eleven with all that money printing and then reversed it out and we never had inflation. Um, maybe we can start rethinking how we could run monetary theory as well.

Today it's just orders in orders of magnitude larger. And today the other thing that's going on that's a little bit more different, at least on its surface, is a lot of these programs are trying to be pushed down to non Wall Street main street. We even call them the main street programs. We have p p p T PPT Personal Protection Plan loans. We're giving companies direct loans. He has they're trying to support markets, but we're trying

to of those companies loans. Now. The fear here is that that lending will lead to a higher turnover of that money. Problem in two thousand and ten was the FED printing up a lot of money, pushed it into financial markets to support financial markets, but it never made it to the real economy people. That money never filtered into your pocket, or my pocket, or or a neighbor's pocket, where we want up buying a new car, or or buying a house, or spending more on vacations or something

along those lines. This time around, we are trying to get it into your mind, in our neighbor's pockets for that express purpose of go spend it on a vacation, Go buy a new car with that money as well too. So I think that the risk that it does create inflation is a real one and is a concern. And

it goes back to what I said before. If they can do a trillion dollars worth of borrowing and printing and it doesn't produce inflation, why do keep raising two trillion two and a half trillion dollars a year in taxes? Why don't they just print up two trillion dollars a year and just send it to the Treasury and say everybody's tax rate is now zero um at that point. So, I think there's gonna be leng lasting consequences to this.

Either it produces some kind of a problem in the form of inflation, or it doesn't, and not only like we just talked about a second, either the administration or somebody else says, well, then if it didn't produce a problem, why do we stop? Why don't we just keep printing, printing more of this money, just keep going and going, And why don't we Everybody gets free college education, everybody gets free healthcare, everybody gets uh um, a much much

lower tax rate. And you know, because we've shown that we can print this money without there being that consequence. So one way or the other, I think we're gonna have an issue to deal with. This quite interesting, uh the pushback against it, and I'm surprised to learn that you were a Bernie bro This is this is news

to me. Um. The pushback against the inflation argument is, hey, this isn't money that's going to people to buy houses or cars or vacations or if you remember, the home equity mortgage with rural money was being used to buy big screen TVs and and do home renovations. These are people who have been forced to shelter in place. Many of them have lost their paycheck. This is going to rent. We've seen thirty of rent payments not being made. This

is going to food and medicine. This is really basic survival. How does that cause inflation, especially if at best were an economy and we can't get all the way back up to so I think I I think, um, I needed to give a little bit of a of a definition when I talked about inflation. Um, there is there will be no inflation in and there probably will be no inflation in the first half of twenty one, and there is a risk of deflation exactly the way that you said. But there will be this much I think

we can agree on. There will be a restart to the economy. We are not going to shelter in place for all of eternity. There is going to either be a vaccine or we're just going to get sick of this and say that we have to kind of go back to some semblance of normal. And there will be some kind of a rebound in the economy. Whether it goes to hundred remains to be seen, but there will be a rebound. And it's on the other side of

that rebound. Does all this stimulus money, which is becomes mere survival money, then some people go back to work. Maybe you know, won't cool about how many don't, but a fair number of people will, uh, and there will be more economic activity plus all this other money as well too. That's where the fear that the inflation comes back and it set and a half of one twenty two in that respect, not necessarily in two thousand and twenty.

In fact, not in two thousand and twenty. I wouldn't say necessarily, wouldn't put that qualifier on it, because I think with the with the economic contraction that we're having, you're not going to see it now. But the question is what about on the other side. And to me, you know, that's where I think the message of the bond mark that has been the tenure yield hit a low of March on March nine thirty basis points. Today

as we talk, it's around sixty sixty six basis points. Now, he's a very little numbers, but it hasn't gone anywhere for two months, if you know, it's been trending sideways in the face of all of this terrible economic news and tremendous amount of Federal Reserve purchases of of traditional QUEUEI type of treasury securities as well too. They have purchased nearly and this is a hard number to understand, they have purchased nearly two trillion dollars worth of bonds.

This is mortgages and treasuries and agencies. And I'm not talking about corporates and e T s. That's a difference program in two trillion dollars of those bonds in the last seven weeks, and yet interest rates are not falling and falling through the floor we have seen in corporate bond funds, and we have seen from foreign central banks

massive liquidations of treasury securities. I think the message to market might be telling us is the bullmarket and bonds is over, and that we are now looking at not only not looking at negative interest rates, which a lot of people are wondering in the US we won't get that, but we're looking at the fear of what comes on the other side, and that fear is crushing supply and inflation, which is why I think that's a bond market has been struggling as much as it has for the last

few months, that that's the signal it's trying to send us. In the wake of all that fed buying, it still cannot rally any more, and that is very concerning. So doesn't a lot of that have to do with the fact that when you're at the zero bounds, when when rates are this low at a certain point, I know it's a cliche, but you're you're pushing on a string,

there's there's no impact, there's no stiffness. Um, there's a technical term to that that I'm during a blank on but you're not seeing resonance from the FED buying in prices. Is that misstating it? Tell me what's wrong with that thesis? The thesis is the thesis is right, but it's it's it's it's a measure about the real economy. Is that lower interest rate? And this gets to the negative interest

rate argument too, is that lower interest rates? Um, if you're not going to buy a house at a two mortgage, Uh, why does a one percent mortgage make it more attractive for you to buy a house? And the answer it doesn't because the reason you're not willing to buy a house at a two percent mortgage doesn't have to do with interest rates. It maybe has to do with either you've lost your job, or your fear you've lost your job, or you fear that your company is going to run

into trouble or something along those lines. That's why you wouldn't do it. That's the pushing on the string argument, which is which is the big pushback about negative rates. Well, if if two percent interest rates won't get me to buy a house, and one percent interest rates won't commuter buy a house. Why would zero get me to buy a house? Um? At this point, my problem is not that I need another hundred dollars or a hundred fifty dollars a month off the rent page or off the

mortgage payment to get me into that house. I need concern about or I need, um um, to be less concerned about the economy or my employment situation to buy the house. So that's the pushing on a string argument. And I think that that's ultimately what the bond market has been saying is that the problem here is not that rates are too high, um the you know, and that that the fix isn't what nerion of cars collode.

And the former vice or former president of the Minneapolis FET has been saying that we must go to negative interest rates in the US like they have in Europe and in Japan. The problem, I think is with a fear of the state of the economy. That's what's holding us back. And what the bond market says is, I lower rates isn't going to help you anymore. It's no point going lower, and at some point when we get a rebound, all this support money could produce inflation, could

produce inflation. Now I want to emphasize that word could, because we're only sixty five basis points in the tenure note. Uh. But like I said, the fetes bought to trillion dollars to trillion with the T and that is not pushing interest rates down. That's a hard number for most bond people to understand two trillion, and let alone non bond people are understand that much. Mind cannot get the BOMO rally to continue um at this point. And so I think that what the market is fearing is that there's

going to be problems on the other side. So yeah, that's how the pushing on the string thing fits into it. And I think it's a it's a right argument. I want to get away from the FED, but I can't help it because there's still one or two things I have to ask about. The arguments against the purchases and in favor of inflation seem very similar to what we heard made two the central bank in Japan. If you do this, you will cause inflation. If you do this,

you will cause problems. So question one, can we avoid inflation in a similar manner to Japan? And Question two. Does that damn us to the same sort of problems that Japan and has been suffering ever since its market peaked in Yes to the first question, we can't avoid the inflation, and is that the the support money just winds up not getting You know, what you need to have inflation is two things. You need to have too much money. And then the other argument, I'm using the

classic monetary line, chasing too few goods. It needs to chase something that's velocity, so you knew. You know, it's one thing for me to send you a check, but then I need you to spend it as well too. As you know, if it just sits in your bank account going good, I've got a little bit more money just in case things go bad. I'm not going to do anything but let it sit there. It's not going to produce inflation. But if you go out and you spend it, then that will helpfully get the inflation moving.

And that's always been the problem in Japan, the high savings rate, the conservative attitude that most of the Upan he's have about spending money because they've been afraid about their economy. Can we damn ourselves in the other way as well? Too? Yes. One of the things that we've learned about negative interest rates, in very very low interest

rates is it's very damaging to the financial system. Because I like to joke, um uh, if I was around, if you were around in the Middle Ages or in the Renaissance, and it's the fifteenth century of uh uh, and we're in Venice when we developed fractional banking. Um. It wasn't developed as an event, but it evolved over time during that period. And you said, look, here's what we do. We take in, We take in a unit of account like a dollar, and we put in eighty

cents of it in the reserve account. We lend out the other twenty cents to make some money or make some return on that money. If you or I would have raised our hands in the fifteenth century said hey, this is a good theory of how bank you should work. But what happens when interest rates go negative and you lend out the money and then you have to also pay the the interest payment on it too, They would have asked us to leave the room. It doesn't work

that way. But you would make the loan. What's that you wouldn't make the loan if you if that case right, well, welcome to you know, with with negative interest rates. So negative interest rates is very damaging to the financial system. It is crippled the financial system. I think in Europe it is crippled the financial system. In Japan, the Japanese stock Japanese Bank Stock index is at a forty year low, and the only reason it's at a forty year low

is because they started the index forty years ago. All right, so let's jump to our favorite questions are speed round and what are you watching these days? What are you streaming on Netflix or Amazon Prime or podcasting? What are you what's keeping you entertained? Um? I am streaming a lot more than I have in the past because I'm a big sports fan and there are no sports to be a big fan of except the Last Dance on ESPN. Yes,

that's been fantastic. UM. I tend to like political thrillers, and um there's one that I've been watching that's on Netflix, which is an Israeli show called Fauda, which is the Arab word for chaos. Uh. Interestingly, it's a political thriller about terrorism, Palestinian terrorism in Israel, and supposedly it is one of the most popular shows in the Arab world. So it's an Israeli show about Palestinians attacking Israel, and it was meant for Israeli's to watch, but yet the

Arabs love it just as much as they do. It's dubbed show, so you know a lot of it is in Arabic with subtitles. But it's a really good show. Uh. That's been one that I've liked. I've also been a big fan of Better Call Saul and Homeland, um, and a lot of those shows. The Last Dance I've been j eating that up as well too. Amazing. By the way, Fouda is something you can't watch right before bedtime because it's so thrilling you just won't get to sleep for hours.

It's that it's that exciting. Um. What about books? Are you reading anything, you're finding anything you're catching your fancy these days? Yeah, I've been trying to catch up a little bit more on some of my economic reading lately. Um as well, So I've been reading, um, you know The Economist Hour by Apple Bomb, which I've show could be a very good book. Uh as well, I've been reading, uh, the Jim Grant's book about Walter Baggett, uh, learning a

lot about you know. UH. He was the founder of the Economist magazine in the nineteenth century and was a big thinker as far as what is the role of a central bank. He was the one who coined the term that they are the lender of last resort, uh and what that means as well to uh. And then

my kids. I've got four kids, so I've you know, I've I'd like to say that because of my kids are all grown for but for the last twenty years, what they've done to me is they've reintroduced me to peanut butter and jelly sandwiches, and I'm still a fan of those and reading children's books. So I've recently, within the last year or so, I reread the Harry Potter series, which I think is just tremendous. Isle of the Blue Dolphins is another book that I've read. These are children's

children's literature, which well done. Children's literature is just fantastic as well too. So you know, I eat my peanut butter and jelly sandwiches and I read these books and I think about that I'm doing a seventh grade homework assignment all over again. Hey, the hobbit was a children's book, and I know people who read that and the rest

of The Lord of the Rings every year. Um. So our final question, what do you know about the world of investing today that you wish you knew back in when you first launched Bianco research that you need to question every assumption and be open to the idea that things that are not supposed to happen can happen. Negative interest rates, negative crude oil prices, the Federal reserved buying

corporate bonds. There was time not too long ago, just to use those recent examples where if you were to say that these things were going to happen, people would have looked at you and said, you know, you're off your met because it's not the way that the world works.

And you need to be open to these ideas. Now, that doesn't mean that you need to run around with a tinfoil hat on looking for all of these things to happen, but that you, as an investor or, as somebody who watches markets, to be open to the idea that things that you never thought were possible could wind up becoming possible, especially in a period of stress. Quite fascinating. We have been speaking with him. Bianco He is the

founder and chief strategist at Bianco Research. If you enjoy this conversation, well just look up an incher down an inch on Apple iTunes or Google podcast, Spotify, wherever finding podcasts are sold, and you could see any of the previous three hundred plus conversations we've had over the past six years. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net.

Give us a review on Apple iTunes. You can check out my weekly column on Bloomberg dot com slash Opinion, sign up for our daily reads at Rid Holtz dot com, or follow me on Twitter at rid Halts. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Charlie Bohmer is my audio engineer. Michael Batnick is my head of research. Michael Boyle is my producer, slash booker. A Tikoval Bron

is our project manager. I'm Barry Ridhults. You've been listening to Masters in Business on Bloomberg Radio