Jim Bianco: Inflation is Dead - Long Live Inflation! How YOU Can Profit NOW

The problem is, how do you know when everybody's bearish or when everybody's bullish? That's really hard to figure out.

What's going on the political front and the military front outside of the U S and maybe a little bit about his Bianco total return index, which I find very interesting. Welcome Jim. Thank you for coming today. How are you doing?

And in 1998, I spun myself off within Arbor Research and Trading into Bianco Research. 26 years old right now. We provide macro and fixed income research for Institutional investors, mainly throughout the world right now through our either directly through Bianco Research or through Arbor Research and Trading, our affiliated partner and earlier or late last year. Now I should say we started Bianco Advisors, which is an advisory company that provides the Bianco Total Return Index.

And that is an index where it is our estimate as to changing factors as to overweighting and underweighting various sectors to outperform, say, the Bloomberg aggregate or the J. P. Morgan broad investment grade. And a couple of, about a month ago now WisdomTree brought up a ETF on it, WTBN for WisdomTreeBianco N for Nancy, WTBN. And it trades on that as well. Pretty busy.

We've got two businesses going here and we've got a research business, which we'll spend most of the time talking about, and we've got an advisory business in a tracker ETF following our index as well.

I think that 2020 was one of the biggest economic events And that was the shutdown restart, or as I like to call it, the reboot of the economy, the global economy. When it was rebooted, it didn't come back quite the same way as it was going into it in 2019. And as I like to always, warn, different is not dystopian, different is not worse, it's different. The biggest thing we know about difference is remote work. If you go to YouTube.

The television show 60 minutes last night did a very good episode, probably three years too late because they should have done it three years ago about the nature of offices and the nature of cities are going to have to be rethunk because of remote work. That is probably the most obvious exit. And then you can throw into that an acceleration of deglobalization using energy as a weapon, and the like, and you've got a different cycle. What is that cycle? I think the.

Bull market and bonds that started in 1981 ended in 2020. I think we're in a multi year bear market and bonds now within a multi year bear market and bonds, you can have a two or three year rally within that. But I think if you were to ask me in 10 years, 15 years, I think rates will be much higher than they are today. But like I said, there could be a peak in a rally and a peak in a rally.

And I think what's changed is the inflation cycles changed that the low sub 2 percent inflation world has now given way to a more friction world higher inflation, saying the 3 to 4 percent range has given way to a world of more transactional nature of jobs, which will lead to faster nominal growth, which will lead to higher interest rates. So within that I've been advocating the idea that interest rates have turned. They're going much higher.

That made me look like a genius till around November 1st. And then they proceeded to rally 120 basis point. And then I doesn't look so smart anymore, but I stuck with this bearish call and I am still sticking with it. And I think that interest rates are going to go higher. I think within that, we could flesh this out if you want. I think that inflation, everybody on wall street talks about inflation. is going to the last mile to 2%.

If you want to use the sports metaphor there, I think we've already hit the finish line on the last mile, somewhere in the high twos to around 3%. And that inflation might be, starting to bottom here ish and start back up. I've got various reasons to think that goods inflation might be moving higher. I think that housing inflation might be bottoming as well. And I think that services inflation is going to stay stickier than people think, and that's going to help to bring up interest rates.

Like I said, I start big picture. I think the cycle turned in 2020. I think that there's a lot of economic things that are changed since 2020, and then I try to focus it down from there. But really what I think is driving all of this right now is inflation. Prior to 2020, what drove everything was real growth. You could ignore inflation. Let's focus on whether the economy is speeding up or slowing down. Let's focus on employment. Post 2020, it's all about prices.

And what is to a lesser extent important is about real growth. And I think Wall Street's had a very difficult time making that adjustment because they still want to focus on let's talk about the economy, let's talk about real growth, and then we'll get to inflation. And I think the way you should be discussing it post 2020 is inflation, and then real growth.

And we always liken it to most of people's careers has been about balancing on a barrel, a two dimensional kind of balancing act, whether it's growth, low growth, and whether you need to inject money in order to increase the economic growth or take it away in order to decrease it. All of a sudden, when you inject a real inflation thrust, Then you're trying to balance on the top of a ball, right?

It's a three dimensional game that nobody has any real experience except for veterans like you and historians that have gone back to the 40s to the 70s to, to the 20s to really understand what inflation is. So I think there's a, there's not a lot of demand from the analysts for, to get insight into what's going on with inflation. But I do think it's going to be the dominant factor going forward. We like to say that it's not going to be a period of inflation.

It's going to be a period of inflation volatility. These ups and downs, right?

And if I was to summarize it for everybody, why, what do you think moves inflation? Is it money? Is it velocity of money? Is it rational expectations? Is it some other theory? Is it monetary theory? Go ahead and backtest it. Your correlation to inflation is going to come up to zero in all of these. And his point was inflation is extraordinarily difficult to understand. That's not a problem.

If the Fed would just start with that, but no, the Fed likes to say, we've got these levers and these dials that we could turn and push and you want it to the 3rd the 4th quarter, we gotcha. We could put it right there wherever we want. Bernanke's favorite line that we could get rid of inflation in 15 minutes. We could just raise interest rates. It, it doesn't work that way. It's a lot more complicated. It's complicated. Then everybody thinks and because it's a lot more complicated.

That's the other impatient here on Wall Street. I think inflation is a problem. Okay, fine. Where's the model? And I want to know out to the 4th decimal place where it's going to be at the end of the year. Oh, you can't do that. Okay, then forget the inflation thing. Let's go back to talking about payrolls because we've been talking about payrolls for 30 years and we think we understand that. That makes sense.

They'll lose faith in the Fed's ability to manage things, and it may lead to a a change or an accelerating sort of inflation. Expectations cycle, which, I think that really is the only weapon that the fed really has to bring to the table to fight inflation, which is rhetoric, right? Just how are they going to jawbone? Inflation expectations lower and follow a playbook that is simple enough that everybody can understand.

And even though there's no historical calibration between the playbook and reality, there's a theoretical. And just the theoretical connection alone can do some of the heavy lifting.

It's not the Treasury Secretary. Here's your man. He's got all the answers and he's going to make it go away. And of course, Jay has taken that mantle on and he immediately started by raising rates, 75 basis points and a meeting right after that, in order to start to tackle that inflation. In that the Fed does use this theory about inflation expectations being well anchored. If you believe inflation is not a problem. It's not a problem. If you believe it's a problem, it is a problem.

I get the theory and the theory is probably right. The problem with the theory is that it's hard to measure it. I liken it to sentiment in the stock market. When everybody's bearish, the market peaks when everybody's, when everybody's bearish to market bottoms, when everybody's bullish, the market peaks. It's a great idea and it works. The problem is, how do you know when everybody's bearish or when everybody's bullish? That's really hard to figure out. What is the sentiment?

What is the expectations about inflation? The Fed has used things like the Michigan survey or the tips break evens and they said, it's well anchored, it's under control, but then you go look at the political surveys. And the President's approval rating is in the tank. And when you ask people why it's in the tank, they're very pessimistic about the economy because prices have risen for the last three years.

And what they see is a 20 percent or 25 percent rise in the last three or four years where the Fed is saying no, the year over year expectation for inflation is mid twos. So therefore we've got the problem solved. Again, the theory of inflation expectations is right on. But we could spend the rest of our life trying to figure out how to properly measure it. And I don't think they're measuring it properly.

I think that those expectations are a little bit more, to use their term, unanchored than they think, because everybody anchored themselves off the last big event in their life, 2020 shutdown. And they know now that it cost them 120 to buy something that cost them 100. In the middle of 2020, and that's what's driving the mentality, not that the inflation rate was 9 percent year over year in June of 22, and it's 3. 4 percent if you use CPI, at the end of 2023. They don't think of it that way.

It costs you 120 to buy the same thing. So now I thought inflation was licked. Why is everything costing me 124 this year? But this inflation just means that you're, the cost of purchasing things is coming in at a lower rate. It doesn't give you back what you've already lost in terms of purchasing power, especially if you have no ability to increase your own income.

And so it, that kind of anchoring to expectations works in Latin America when you actually create a little bit of deflation so that people can feel. Good again, that's not going to happen here. And so it just it's a complicated thing to deal with in the environment. And I find funny that you said that the president pointed at Powell and said, you're going to fix inflation. Do you then point at Yellen and say, you're going to create, you're going to cause inflation once again in November?

Like what was he saying to the treasury about all of this?

Okay. Tell me you don't understand what inflation is without telling me you don't understand what inflation is. Yeah. And but again, you set those expectations. Oh, so the inflation rates down so prices should be falling and they're not falling. So something's wrong, so yeah, I get that it's a complicated thing. It sounds easy on the surface because you see this on social media all the time. You talk about inflation. Oh, just look at money supply.

That, that's it done, takes four seconds to figure out what inflation is, but when you start to really dig into it, it's far more complicated than that.

mosaic of different ways to interpret this term inflation. Why do you think that is?

As far as inflation goes, I think part of the problem is that what economists are trying to do is Not just try to tell you what's been happening lately. Oh, because that could be subject to food prices are up or down or gasoline prices are up or down because they're volatile. They're important. They also have a big psyche on everybody, especially gasoline prices, but they want to try and look at what is the underlying trend of inflation.

That's why the Cleveland Fed invented the median CPI, and you've got, the multivariate model by the Dallas Fed that tries to look at what is the undertone or the tone or trend of inflation beyond what we see as far as the last print goes. And then when you start thinking about it in those terms, and you start asking people, what is the definition of inflation? You start getting a lot of different answers.

Cause one of the pushbacks I get is I talk about that the economy hits constraints and then those constraints get met by higher prices. And then I hear people tell me but that's not inflation. That's constraints being hit by higher prices. And I'm like, yeah, but the public knows they go to the store and it costs more money. And they're not thinking, Oh, there's a shipping problem out of Asia. So this is not really inflation. This is something different. No, to them, it's all inflation.

And, or you could say that core inflation is doing X, but gasoline prices are up or down. They think that inflation is up or down because of what gasoline prices are doing. So that's where it gets to be really complicated because we can't really settle on. What is the underlying trend or what is the underlying cause? Going back to Dan Torillo, right? There's no underlying theory.

If there was an accepted theory of how inflation interacts with the economy, and that's it, write it in the textbooks. We don't even have to entertain other ideas. Then we could then get to an accepted definition. But since we can't have an accepted theory, we have several theories about inflation. We have several ways to measure it and several ways to argue about it.

They're punishing Bill Ackman has said something similar to that. He thinks that the Fed is going to have to start cutting rates in March because interest rates are punishing and that gets a big reception on Wall Street because there's an old adage on Wall Street that the Fed keeps raising rates until something breaks. And over the last two years, we've had a 25 percent decline in the stock market. We've had at a total return basis.

One of the worst sell offs we've seen in the bond market, because we went from 1 percent to 5 percent on interest rates and the math shows you that if you held like the 30 year bond through that. You lost almost half your money. We're down about 50 percent at the lows as well. And we had a banking crisis about a year ago in March of last year with a bunch of banks headlined by Silicon Valley Bank failing. So surely something broke, right?

Those are three things that Yes, but they didn't necessarily break the economy. So I push back on this idea that we've raised rates to the level that we've broken something economy wide. Sure, some banks had some problems. Sure, the stock market had some indigestion in 22 over it, recovered in 23. We haven't broken anything.

So I start with the idea that when you look at the housing market, It's holding up a lot better than people think it would have if you would have asked anybody in the abstract a year and a half ago, what happens if mortgage rates go to eight percent? The answer would have been a hell of a lot worse than what we've actually seen. And so it's actually held up okay.

Now part of that might be because the average mortgage rate Even though the current mortgage rate in the U. S. is 7 percent down from 8 two months ago, the average mortgage in the United States is still three and three quarters because so many people still own the same mortgage that they had from three and four and five years ago. So I don't think that we've seen that pain really come into the housing market.

And if you look at some of the real time measures like Zillow, Redfin, these are the online sites that do some algorithms. There's really some evidence that home prices are bottoming and that there's some evidence to that rents are starting to move higher. Now home sales are down a lot, but the way that I interpret that is most people are not stressed. I have a home. I call a broker. I list my house. I want X for my house.

My broker tells me yes, but mortgage rates are up and the average monthly payment for your house is higher. Fine. I still want my X. I don't want to lower my price. So if nobody shows up to look at it, I'm fine with that. But I'm not selling it for less than what I want. So home prices are starting to hold up. And so I think what you're seeing in the data is some signs that you might be seeing more of a bottom in home prices. Then you are seeing further declines.

Now, add to that, that the 30% of the inflation report is owner's equivalent rent. That's the way that they impute rental inflation in the CPI index. Now, everybody's on this idea that has to come down a lot and they look at the year over year numbers. But again. Just like we were talking about with the public's attitude about inflation, look at the cumulative numbers. Most of the real time measures of home prices and rentals since 2020 are up 30 or 40 percent.

The Owner's equivalent rent is up around 23 to 25%. It has not risen as much as the real time measures of the housing market. I think it has to rise more to converge with that gap. So that doesn't mean that rental inflation or OER has to go up. I just think it's going to be sticky. It's gonna be slow to going down and it did rise in the last couple of, or outperform by going up five tenths of a percent in the last couple of CPI reports and Wall Street's pointing at that going, oh, that's wrong.

It's got to come down. It's got to come down. I keep saying, no, it has under counted the amount of housing inflation we've had to date. And it's going to go up. Another one that I've been looking at is services. Services are largely service inflation. That is about 60 percent of what we spend is in services. That's largely driven by paychecks. And there's been an attitude change in the public, remote work, as I mentioned before, about paychecks. Jobs are more transactional.

If you look at the JOLTS report, job opening labor turnover report. If you're old enough, like I am, you remember the old newspaper wanted reports, no newspaper ads for jobs. They used to measure that, but we don't use those anymore. So they invented Help Wanted Index or whatever. The Help Wanted, that's what I was thinking of. Yes. The Help Wanted Index, that, that went away with the dinosaurs. So the Joltz Report replaced it.

And if you look at the, also what they added in their report is the number of people that turn over their jobs. It's really high. Now, Wall Street likes to talk about the number of jobs that have turned over has come down from the previous month. But if you look at where we are, like something like 2 percent or 2. 5 percent of jobs a month turnover, that's higher than anything we saw pre pandemic. Sure, it's lower than it was a year ago or 18 months ago, But it's still much higher.

And if you look at, we've invented words like quiet quitting, and labor hoarding, and we've seen big wage gains. We've seen the biggest amount of strike activity in at least 20 years, headlined by the UAW and the Hollywood strike. Those are the two most headline strikes that everybody's familiar with. Workers feel comfortable. I have a job. I get a paycheck. I will spend money. What if I lose my job? Eh, I'll find another job. We'll go to the Caymans for a weekend vacation.

And then when I get back, I'll find another job. I am not concerned about my job status. That's what you're seeing, I think, in the labor market. I think Wall Street's got this backwards, that they keep focused on this idea of how much pandemic savings is left.

I think it's really comfort about the labor market that's got people spending because that's one of the big surprises of 2023 was the consumer spending just kept going and they kept trying to force it into all this excess pandemic savings, which there that is true. And that's there. But I think it's about jobs. And then finally. Goods. Goods, inflation is around zero. It has really decelerated in the last couple of years.

But what did we find from 2020 that really drove goods inflation was shortages and shortages relative to demand. Could we be seeing that again? I think that we're really underestimating what's happening in the Red Sea now. I'm not talking about Israel Gaza, I'm talking about In the Red Sea with what the Houthis are doing. Oh, they're a ragtag bunch that are firing off homemade rockets into the Gulf of, into the Gulf of Aden or into the Red Sea around the Bab el Mandeb.

That's the 16 miles of water between Djibouti. And Yemen where they're attacking all the shipping. From the Houthi standpoint, it's been enormously successful because hundreds of billions of dollars of shipping goods has been diverted around Africa on the Cape of Good Hope. That adds 10 days or so, one way, 20 days round trip back to Asia. We were, we work in a just in time world. I need my stuff scheduled to show up on time. What they're doing by shutting down the Red Seas.

Commercial shipping is they're putting all of the just in time behind schedule. Volvo and Tesla have already announced that they're going to idle their plants at the end of this month, because they're looking at their inventory schedules. And they're saying the parts we need at the end of January and early February are not going to arrive on time. And we're not going to be able to finish making cars because we're going to be missing parts. So we're just going to idle.

And the longer this goes on and the longer we have to send ships around Africa and add time and add friction and more cost, the more that we're going to see that we're going to have a problem in a just in time inventory world. And we're also finding out that the world is relatively inelastic. Shipping, shipping rates. We all look at these container prices and that's become a new parlor game on Wall Street that container rates are going up. What does that mean?

70 percent of shipping is on a contract. I have a big container ship. It's contracted for the year. It goes back and forth between Asia and Europe. It may be six times a year because it takes, so many, it's an 8, 000 mile trip if you go through the Suez canal, and then it has to go back. But now that you're sending my ship around Africa, it might only be able to do four or five trips a year.

That extra one or two trips it's missing, I will contract out excess in excess shipping in the spot market. Those prices are up 80 percent in two weeks. So what the shippers are telling you is people want their stuff now, whether they're Tesla or Volvo or consumers, and they will pay extra to get it now. So pay up, get those ships online, fill them with containers and start sending them around Africa in order to get them where they were.

So if there's going to be a general slowdown and a stalling of goods. Because of what's happening in the Red Sea, the first thing people are going to say is what's available and how much is it going to cost me to get it, and I will pay that to get it. That's what we saw in 2021 and into 2022. Goods prices, when CPI was up 9%, CPI goods was up nearly 16 percent year over year. So I think all of these are suggesting for listening.

That the inflation rate, like I said, the last mile might be here right now, and that I'm not saying we're going to get anywhere near 9 percent because it's not nearly as bad as that, but we can stay in a 3 to 4 percent world is what we can wind up staying in. And yes, that's a big problem for a Wall Street that thinks inflation's licked, we're going to 2%, the Fed's going to cut rates six or seven times this year. Not if we stay in a 3 4 percent inflation world.

That, that, that reality won't happen.

But of course, that raises rates everywhere, as you mentioned, because just there's just less capacity to do less trips. The The interesting thing is that what needs to happen for that to calm down is not a less rockets being thrown at these ships. It has to calm down completely because you just can't get your shipment insured. It's the insurers that simply will not Ensure your, or if they will ensure it, the costs are so astronomical that you're better off going around.

So it has to end completely for it to go back to normal.

It stops at Rotterdam or Felixstowe, which is the largest port in the UK, and then it gets put on another ship and it's sent to New York or it's sent to, Savannah or Charleston. And the reason that is because another technical thing is the Panama Canal, which would be another way that they could send it. The water levels on the lake and the Panama Canal are so low that it's running at around two thirds capacity and there's a big backlog to get through the Panama Canal.

So they've been actually sending stuff through Europe. So the shortage of stuff will show up. On the East coast of the United States. Now, maybe we can mitigate that by increasing shipments to the West coast and putting them on rails. But again, in a just in time inventory, I'm sitting here in Detroit and I am making a car and on February 17th, I need these 20 parts to show up so I can finish this car, you're telling me I'll get those parts. It's just some time after February 17th.

What am I going to do with this half built car? Is, is what's going to happen at that point. That's the problem. And I remind everybody that in 2020, in September of 2020, this is five months after the recession ended, car production in the United States was 200, 000 units. A month all car production and truck production in the United States. By the fourth quarter of 2021, it had fallen to 84, 000 units a month.

That was not because demand was down because demand was increasing during that period because we were already past the lockdowns and we were restarting the economy. It was just in time inventories couldn't finish making the cars. Chips, Silicon chips out of Asia and everything was a big problem. And that's why by 2021 90% of people were buying cars over sticker price. Yeah, they're in elastic. I want a car, I want a deal, except when there is no deal and I need a car. What?

What do I have to write down on this check in order to get this car? And that's what people wound up doing and that's what could wind up happening this time is sure, everything you've ordered you will get, but you need it at the time you expected. Otherwise it creates all kinds of problems that produces goods inflation because of the inelasticity. I want what is available and what do I have to pay to get it? And prices go up.

You take away one teller, and it's not just that it slows down by one third, it slows down by 80 percent because the line keeps getting bigger and bigger. And, we saw that play out. That's a big reason why we did get to that 9 percent inflation, right? It's not just that, Oh, it slows down for awhile. And then once it's it stops slowing down, everything catches up. It doesn't catch up. It takes a very long time to get back to that equilibrium again. And in the meantime.

Everybody's got to live with too much money chasing too few goods, which leads to inflation. And I totally still, one of the things we haven't really covered. Is the demand side, there's a lot going on the fiscal side that I think also may contribute substantially to a higher than expected growth rate and a higher expected rate of in demand coupled with potential supply constraints. You're back to the same cocktail we were looking at in 2022.

The great example I like to use is a mortgage. When I'm in, when I'm 30 years old. And I'm freshly married and going to start a family. I need a house then. Now I can afford the house when I'm 60, after I've served, saved for 30 years. It's too late then for me to buy the house. So I pull that consumption forward to right now by borrowing the money in the form of a mortgage and paying it off slowly over time. And so what deficit spending is that we have all of this spending in the economy.

That is going on by the government and that is creating demand and it's creating, economic activity. On top of everything else that's been going on and that demand makes prices a little bit more inelastic. People want to buy it. They want to pay up for it. They want to get it right now. What would slow the economy a lot would be if we were to stop the government spending as much as that we've seen. But the problem with that is, is then if you were to slow the economy, we would risk recession.

If you keep the government spending going, we could be risking The idea of inflation right now, and I think really what is it comes back to when it comes to demand, it comes back to an attitude change, right? Because people would say prior to 2020. You didn't have maybe the massive government deficits that we had then, but you had massive wealth creation through financial markets. Why didn't that wealth creation through financial markets create inflation?

I think it was the legacy of the financial crisis of 2008. When I looked at my brokerage statement, keep the example simple, when I looked at my brokerage statement at the end of the month or the end of the quarter and I saw that My portfolio went up in value and I went on Zillow and I saw that my home price went up in value. I said, okay, good. I've got extra savings. I feel comfortable. I feel a little bit more secure. But that's all. I just wanted to feel more secure about it. I'm happy.

I have extra savings. That's why I didn't see inflation. Today, and we saw this in 2021, when I get extra money, either the government mails it to me, or meme stocks boom, or Bitcoin booms, or the government spends it, and I see that I have extra wealth in my pocket. checking account or my brokerage account. I book a trip to the Caymans. I spend it. I buy a new car or something like that. That attitude changed. We saw that in 2021.

When we saw that the government was mailing people money, they didn't put it in the bank and say, good, the rainy day fund is there. We could exhale and relax. We know we spent it. We spent it. We paid over sticker for cars. We invented the word YOLO. You only live once. Let's go for it. And we speculated in the markets with it. So that's been the big attitude change coming out of 2020 with the attitude change. Coming out of 2009 was a lot more conservative.

I want to make sure that my savings is higher. Now the attitude changes. I want to live a little bit more and maybe it's a PTSD from what happened in 2020, but I'm willing to spend and that will fuel demand. And that will fuel. More inflation and ultimately higher interest rates.

Now, three rate hikes, that's 25 basis points. So three would be, they'll raise rates 75 to a hundred basis points in 2022. Three or four rate hikes. Jamie Dimon came out and said, I could see them doing six. Six? Man, what's this guy smoking that he thinks they're going to do? Six rate hikes. They wound up doing 21. Is what they wind up doing in 2022. Deutsche Bank has pointed out, they got a piece they put out about a month ago, that we're all talking about the Fed pivoting to cutting rates.

This is the seventh time in the last two years that the market is now priced in a Fed pivot. The first six times it never happened. Maybe the seventh time is a charge. My point is, yes, the rubber meets the road. There is a mispricing, but that's always the way it is on Wall Street. So the first part is that's not unusual that you get the market pricing in a reality. That may not come to pass the

And if prices go down, you are cushioned by the yield, and that needs to be managed. So the bond market will struggle, but not nearly like it did in 21 or 22. Because what happened then was you had massive rises in rates of hundreds of basis points with no yield to cushion you. Now you'd probably see I've been, vocal about the idea that we can go to five and a half percent in 2024.

We hit five percent in late October, so that's 50 basis points above the old peak, but that's only about 150 basis points away from here, not 400 like we did from 21 to 23, and there's a yield. Stocks. Stocks, on the other hand, is an interesting game because what I'm arguing is, the economy stays a little bit stronger than people think. Demand stays up. That means earnings comes back. That at the face of it sounds like that should be okay for stocks. Stocks should be doing well in that.

You're talking about earnings. You're talking about growth. You're talking about opportunity. Yes, all of the above. But what have we learned about stocks in the last two years? They trade on their competition. Their competition is interest rates. When interest rates go up, the alternative. is to just park it in a money market fund. And when interest rates go down, stocks look relatively more attractive.

Dr. Jeremy Siegel, who wrote the book Stocks for the Long Run, put out a new edition of it this year. And I'll summarize it real quick. The long term potential of the stock market from here forward is 8 percent a year. So like he said, if you do the Buffett thing buy SPY. Don't even value it for five years. Expect that it'll give you about an 8 percent return. Okay. That sounds about right. 2019, if you were going to get an 8 percent return, your alternative was to keep it simple.

A money market fund is zero. That's why we coined the term TINA. There is no alternative. You can't sit a money market fund at zero. You got to put your money in something that's gonna give you a return like the stock market and flows one into the stock market. In January 2024. The money market fund is yielding five, maybe 5. 3, depending on the money market fund you're in, it's giving you roughly two thirds of the gain you would get in a stock market without any market risk money market funds.

Don't have any market risk. There are any of these always 1. There is an alternative. It's interest rates. So if you were to look at the way the market traded last year, you could give the market hundreds of good earnings reports, decent economic reports, and antidotes that everything's okay, or you can give it falling interest rates. And the market said to you, you can keep your earnings reports and good economic reports and antidotes. I want falling interest rates.

That's why the market, the stock market struggled all the way through the end of October. The S& P was only up 7 percent at the end of October finished up 26 percent for the year. And if you took out the magnificent seven stocks, it was still down on the year. At the end of October, as was mid cap, as was small cap stocks, everything, but seven stocks was down in the year at the end of October and in the 10 year yield was at 5%.

Then at the end of the year, the 10 year yield went to 380 and all those stocks took off 15 to 20 percent in the next two months. So you can spend your time looking at earnings reports and figuring out what the economy is going to do and talking to management and understanding what they are going to do. Or you can just pine for lower interest rates and it's lower interest rates that's going to drive it.

But if I'm right and interest rates are going to go up, then the competition stays with stocks. I'm not suggesting like some terrible bear market, suggesting more of what we saw in 23. Looks good, looks okay, but why is the stock market going anywhere? Because a trillion and a half dollars went into money market funds. And it's getting most of what you should expect out of the stock market. I know people are trying to say cash is trash again, cause stocks were up 26 percent last year.

Are they going to go up 26 percent every year? Then, yeah, then I'll be in the stock market, but they're not going to go up 26 percent every year. All last year was an offset to 22. The, actually the two year gain in the stock market is zero right now. And so I think really the problem with, if you want to go back to cash is trash.

You have to get the Fed to pretty much halve the funds rate to take those money market funds down to two and a half The only way they're going to do that is if we have a recession and then you're back to earning bad earnings reports. So if we see higher interest rates, I think that's going to be a powerful headwind for the equity market. And I'm using that word carefully, headwind, not a disaster.

Between bonds and bills given their issuance over the last couple of years. Do you think she's going to try and make up some lost ground, bring that back into balance, or is she happy to sustain a new paradigm of that mix? Do you think?

Now I wasn't surprised by the rally. I was surprised by the extent of the rally. I don't know what way further than I thought it, it should have or needed to go. Now that we come into 20, where we are now moving forward, there's a 2 trillion deficit, and that has to be financed. And that has the bonds have to, treasury, let me say this, treasury securities have to be issued to finance that 2 trillion deficit.

Now the treasury can, continue, she could continue to try and issue short term bonds, but she's putting the taxpayer at an enormous disadvantage. That's the highest point of the yield curve. That is the most interest expense that they'd have to pay is to, but is to be buying into those short term bonds right now. I, the history of the treasury is they can be counted on to do the wrong thing at the wrong time from 2010 to 2020.

When interest rates were at 200 year lows, I used to joke that if I was the treasury secretary, the yield curve would be 30 year, 50 year, a hundred year in perpetual bonds, and I should just be jamming them down everybody's throat, and then I turn to you in 2024 when the funds rates at 5 percent and go. Aren't you glad you got another 98 years of one and a half percent. And only Argentina did it, right?

And but you can be counted on to do the treasury can be counted on to do the wrong thing at the wrong time. But I ultimately think that as we go throughout 2024, with this deficit that we have, that the number of notes and bonds are going to have to be increased. She cannot just continue to just jam. Treasury bills down everybody's throat because she puts the treasury at an enormous invest in an enormous reinvestment risk.

If the inflation rate does stay sticky, if the funds rate doesn't come down, this is going to cost many billions of dollars of extra interest expense by issuing at the highest point in the yield curve. I think better off. They're better off shifting out. And smoothing things out. But, that's what I think. She thinks something different. We'll find out in two weeks what they are.

There's clearly a,

The bankers and the hedge funds will tell you what's in their best interest. I've argued throughout 2010 to 2020 was enormously critical of that. Committee, because I said, who on that committee is arguing for 100 year bonds when interest rates were under 2%, we should have been issuing them as much as humanly possible, but nobody was on that committee arguing for 100 year bonds. The bankers didn't want them. Because they're long duration. It's a new market.

They have to take them on their inventory. They have to be subject to taking losses. They didn't want them, but there should have been somebody saying, I don't care what JP Morgan wants or what Goldman Sachs wants, I'm here to tell you what the taxpayer wants, and if you want to remain a primary dealer, you're going to do this, we had it the other way around, so you're right. They're never advised as to what's in the best interest of the taxpayer.

They're only advised as to what is in the best interest of Wall Street. I don't blame Wall Street. That's what they should do. They should tell you what's in their best interest. The treasury should have other voices on that committee.

Because

They're fully aware of the problems with this committee, and they are fully aware that there is another side to the equation, and they do present that to the treasury secretary. So it's not that she never ever hears that side of the argument in theory. She should, or he should, if we have a different treasury secretary, it's in theory, what is it that they want to do?

Now, the problem is, if you go back the last seven years, we've had Janet Yellen as the Treasury Secretary for three years in a rising rate environment that wants to mitigate the impact of interest rates on the economy for her boss, the president. And before her, we had a hedge fund manager and Steve Mnuchin for four years as the Treasury Secretary.

And there, there's always been a very sympathetic ear to what Wall Street wants on that, at the treasury secretary level for many years now, maybe the next treasury secretary that could change. I doubted I doubted that it will because if Trump becomes president, Trump. So Trump is an overlevered real estate guy. He thinks that zero on interest rates is too high. He thought the greatest invention known since the, since fire was negative interest rates as an overlevered real estate guy.

What a great idea are negative interest rates. And why didn't we have them here in the United States for commercial real estate in Manhattan is really what he was basically thinking about.

So they're going to cut rates at every single meeting. In an election year, have they done that before? Yes, they've done that in 2020. They did that in 2008, but usually they cut rates in an election year because there's a crisis that forces them to do it. They usually don't voluntarily say, let's cut rates every single meeting in an election year. This year they are, and you just have to wonder, why is it that they're wanting to be so zealous in cutting rates in an election year?

Could Jay Powell remember when he was the Fed Chairman under Trump and all the mean tweets that he got? He doesn't want him coming back? I'll just throw that idea out as one possible reason as to why they want to be uber accommodated for the economy. The problem with that argument, though, is you could cut rates, and you could help Biden. But if you wind up having inflation It could backfire. It could backfire in a big way.

They vacillated in order for political reasons and those that didn't do it correctly the first or second time had much longer inflation regimes and had much lower growth. Hopefully somebody there is doing, is thinking about it that way for this coming year. Otherwise,

What are you looking for from markets to signal a shift in sentiment?

And in no landing, to keep with the airplane metaphor, It's just the economy keeps growing a trend or higher, which is about two and a half percent or more, which is what it's done over the last year. And I like to joke, Wall Street loves to forecast a soft landing since it has no definition. I will give you the definition in a year and tell you why I was right. It's the way that they, it's the way, it's the way that they like to work that one.

But what would signal to us that we are going to go into a hard landing and into a recession? A lot of people have noted that, the yield curve is 8 for 8. in predicting recessions. Except maybe this time it's been inverted now for well over a year and there's no real indication that we might be having a recession. I've argued, as others have argued actually it hasn't been the yield curve inversion that signaled a recession. It was the un inversion that signaled the recession.

The thing about the past was the time between the inversion and the un inversion was a couple of months. So whichever you could pick either one, and it looked like it was a good leading indicator. But like in the seventies, when the yield curve inversion and un inversion could have been up to two years in difference, we were inverted for two years. You gotta designate that maybe it is the un inversion. That signals the end of the recession.

And to be clear, I'm talking about the three month treasury bill to the 10 year note, that's where all the and that one is still, still very inverted, nearly a hundred minus a hundred basis points. So what typically happens is. The yield curve un inverts last the last time it did that was 2020 with the Fed cutting rates. So short rates, which are higher than long rates, fall more, fall below long rates. That un inverts the curve. But what is causing that to happen is the Fed is aggressive.

In cutting rates. So I'm going to use a technical term here for you. The Fed is shitting its pants that the economy is falling apart and they're cutting rates aggressively to try and stop it. So it would be the un inversion of the curve that would signal to us something's going on. And again, it's the three month tenure curve that I'd be looking at. Not necessarily, I know the two thirties curve un inverted.

The week before we're talking, but that's far different from the three month tenure curve right now. That would be the signal to me that something's going bad on the South side of the equation. On the North side of the equation, what if the economy is staying much stronger than people think? I think the curve gets more inverted because.

What happens then is we get the bear flattener, the bear more, more inverted, if you want to think bear meaning higher interest rates that the 10 year yield starts marching again towards 5%, maybe even more, because it's starting to worry that there is an inflation problem at that point again, if the, as I like to say, If the Fed is not going to be vigilant about fighting inflation, then I don't want to own your bonds.

So if the market believes there's an inflation problem and the market believes that the Fed is not sufficiently on the case, then it's going to sell off the long end of the curve. And the long end of the curve is going to go up and up in yield. So that's the leading indicators that I look at. My bias, of course, is that the economy stays stronger. The deficits stay large. That's more spending. Demand pushes prices up.

Move on through the idea that, you've got a bottom in potentially housing prices, maybe in wages and possibly in goods and that you get that sticky inflation and that those interest rates go up, but don't be afraid of the bond market now because there's a yield in the bond market. And that yield can be managed to still get a positive return. This is not 21 or 2020.

When you're talking about higher rates with no yield, and you were talking about hundreds and hundreds of basis points, where rates were going to go up. We're talking about a hundred to 150 with a 4. 7 percent coupon. So that's a very different world for the bond market. But yet I do think that those are the leading indicators that I would be looking at is to what the yield curve winds up doing.

And I think now what's happening with the change in the economy is ultimately, I believe that we're going back to a stock picking world and that it isn't so much is the stock market going to go up or down? It's do you have the right themes and the right stocks? Last year, you needed to own seven stocks. That's really all you needed to do. And maybe just avoid, and maybe just avoid some REITs and you would have, you'd be getting paid like Bill Ackman.

If you wind up doing those two things, it's easier said than done. I understand that, but I also don't think that this is going to be the world of. Just buy SPY or sell SPY. People come back to me and say you don't know what you're talking about. SPY is up 26% last year. I should have owned SPY. Yeah, okay, you should have, but then don't come crying to me. If in another year, maybe this year, maybe next year or the year after that, the magnificent seven are down Aton.

And that you could have done the Dave Portnoy thing where you picked the letters out of a Scrabble bag and you would outperform the S& P because everything, all those other 493 stocks were up and these big seven stocks are just dragging the whole index down. So you could see the inverse of that coming. So I do think it's going to be more of a stock picking world. Ultimately, I think what you're going to see.

If I was to just go into the financial business a little bit more is you're starting to see a lot more active fixed income ETFs show up. BlackRock's got some, Vanguard's bringing some, PIMCO even rolled out one as well too. Heck, I am to some extent with my index.

Within that, there is going to be themes that if you capture the right theme, that you will do fine. I used to, and I'm saying, everybody says that, but I used to not say that until about two years ago. But now I think that is the type of world we're in. You said, with the restructuring of the economy, with remote work, with the restructuring of the office, with the re imagining of cities, because If you don't have to physically be located in an office. You could live anywhere you want.

Look at this interview. You're in a foreign country compared to me that we're doing this interview. As well, it changes a lot of things that may not be captured by just buy the index or sell the index. And that a manager that understands those trends can really have a leg up. Whereas from about 2000 to 2020, It was really difficult to beat the index.

I think from going forward, and I'm talking about from here over the next several years, I think you're going to see the percentage of active managers that beat on the stock market side is going to go up. Now, currently it's about 5 to 10 percent on a long term basis can beat. I think that number is going to go up. By the way, In fixed income land, and it's always been the case, and I think it's always going to be the case. The index itself falls around the 50th percentile among active managers.

If you didn't study it, if you didn't study it, you would have thought the index should be somewhere around the middle. It isn't fixed income. It isn't necessarily in equities, but I think it's going to be moving more towards that in equities. Cause if you go back and look in the seventies and eighties among active managers, then the index was closer to the middle.

It was still like in the 66th percentile of the 60th percentile, meaning the majority of managers underperformed the index, but it wasn't in a 95th percentile, like we've seen recently. I think it's going to shift back. So stock picking is going to become a big deal, I think, as we go forward.

And then you've got other commodities like sauce and grains, oil seeds. They're going to go with the weather cycle and a lot of other different things as well too that may not be just driven by the inflation cycle. But I think the industrial commodities and energy. Probably be the two better ones that will be driven more by the inflation cycle within industrials. I you know also include lumber in there, too as well

And the reason I mentioned that is that if you're going to follow me, make sure it's the one with the blue check mark, but 375, 000 followers, not somebody with 14 followers and I'm also available at LinkedIn at my name, Jim Bianco. And also we have a YouTube page at Bianco Research. Amazing. Love it.