In this interview with Wealthion’s Maggie Lake, Jim Bianco, President and Macro Strategist at Bianco Research, brings his incredible insights into what is happening in these volatile times is just what the investor needs. From what the bond market is really telling us, to why he thinks the Fed WON’T be coming to the rescue in the face of a potential recession.
His 4/5/6 theory and why he thinks investing is now so much harder, everyone needs a wealth manager to help them navigate the markets going forward. What the dollar’s decline really means, the massive shift away from US assets and what he thinks investors should be looking to buy (hint: one is gold) and what they should be wary of (hint: one is AI). Plus, why the transactional nature of the country’s current tariff policy, may not be a bad thing.
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Jim Bianco 0:00
The market is putting a 20% chance that the Fed is going to cut rates at its meeting on May 7. 20% meaning 80% chance they won’t cut rates. What more does the Fed need to see? Everybody’s calling for a recession. We had a 20% correction in stocks. We’ve got, you know, markets that are dysfunctional, and yet they’re not going to cut rates at their next meeting. Oh, but they’re going to wait till the June meeting. I didn’t know. That’s the way the work, the way that the Fed worked, right? The shit hit the fan. But don’t worry, you’ll get a rate cut 90 days. It’s usually the shit hits the fan. You’ll get a rate cut 90 minutes. Is the way the Fed is supposed to work. So that doesn’t seem to seem to sit well with me is that, no, they’re not going to cut rates in 90 days. If everything’s going bad, they’re not going to cut rates period.
Maggie Lake 0:53
Hi everyone. Welcome to wealthion. I’m Maggie Lake, and today I am joined by Jim Bianco, president and macro strategist at Bianco research, Hi, Jim. It’s great to have you on.
Jim Bianco 1:03
Great to be with you. Maggie, have some interesting things to talk about. Yeah,
Maggie Lake 1:07
we have, we have a lot to talk about. And I think investors are really just trying to digest what happened. We’ve had so many dramatic moves in so many different markets at the same time. Huge sell off in us, stocks, us, dollar, oil, big spike higher in bond yields and gold. It just seems like everything’s moving. So as you, as you think about this, first of all, what are you most focused on? What’s, what’s the what’s happening that we should really kind of keep our laser focus on
Jim Bianco 1:37
the bond market. I think, I think the bond market is the center of the universe right now, right now, not always, but now, I think that what you’re seeing in markets is the bond market moves, and everything is reacting to it. Yields the day we’re recording, yields are down, so the stock market is up, and vice versa. Why is this happening, or what is happening in the bond market. And you’ll hear a lot of people talk about positioning, basis trades, lever traders, China selling, you know, Japanese banks in trouble. And some or all that might be true. And I think some of all of that is is true. But I always like to say that positioning never, ever creates a trend in markets. Something else creates a trend in markets. But positioning can exaggerate the move, and I think that that’s what it’s done. Last week, the bond market had, let’s take the 30 year bond it was up 46 basis points. That’s its biggest one week rise since 1987 so you have to go back 38 years to see a move like that. So what happened last week? I think that over the last two weeks, the Federal Reserve has made it very clear they’re worried about tariff driven inflation. We’re going to get tariffs of some degree, even though Trump has backed off of some of them, he hasn’t backed off all of them. We’re going to get tariffs. That means we’re going to get higher prices. That means that the measure of CPI is going to go up. And the Fed has said, Look, we’re going to see higher inflation prices, and everybody’s talking about that, we’re going to have a recession. We’re not going to cut rates. We’re going to have to hold the line, because inflation, tariff driven, inflation looks problematic. That upset everything, because the perception is the minute the economy wobbles or has any kind of problems, don’t worry. The Federal cut. If they have to, they’ll cut to zero. If they have to, they’ll print money. They’ll do whatever it takes to try and stimulate a weakening economy. Now what they’re saying is, good luck. We’re not going to move. And I think that’s what started to move higher in rates, and that shock that the world view has been changed, created, scrambled to get out. And then with all these leverage traders and basis traders and Chinese selling and Japanese banks having issues, overdid the move. Now the last thing I’ll say is, does that mean that Friday, April 11, at 458 on the 10 year yield, was the high of the move? I don’t know if that was the high of the move. You can’t, you can’t predict it within one or two days. We’ll only find out in the due course of time, but I wouldn’t be surprised if it wasn’t, and that we can continue to see yields moving higher. So I would start with something that’s more traditional as to what’s going on here, and a shock, right? That everybody understands that if, if, if we all started saying the R word, the Fed would step in and start cutting rates left and right, forward and center, and talk about printing money, and they’re not doing anything of the sort right now. And I think that that’s really the thing that’s really slipped up everybody. So
Maggie Lake 4:52
there’s a lot, there’s a lot to ask as a follow up to that. So if we are in a situation, it sounds like you’re saying that fed. Put that sort of come to the rescue that everyone had really gotten used to and and has been in place for more than a decade now, is gone. If that’s the case, are we heading into a recession? Is that happening into a recession? Yes,
Jim Bianco 5:15
it’s possible. I’m at 5050, in a recession right now. Let me, let’s talk about what a recession is. We’re a capitalist economy. I know. Insert joke here about when I say we’re a capitalist economy, but we are, and that means that a capitalist economy always kind of remakes itself. So the natural state for our economy is to grow 90% of the years since World War Two, we grow sometimes we grow slow, sometimes we grow fast. What’s a recession? A recession is what the economists from the 1970s Rudy Dorn Bush, quoted a famous line, right, economic expansions do not die of old age. They’re murdered. Some event happens scares the hell out of everybody. We stopped doing economic activity in the economy contracts. The last one was COVID. The world shut down. That’s what caused the contraction in the economy. So the big question is, is all this tariff hysteria going to get people to say, do what they say, I don’t know what to do. I don’t know if I should hire. I don’t know if I should be importing or exporting, so I’m going to do nothing. I’m going to stop economic activity. If the answer to that question is yes, then we’re going to have a recession. And I’ll put it at 5050, why isn’t it much higher than that? I’ll just remind everybody, two years ago, we had Silicon Valley Bank fail, we had Signature Bank fail, we had Republic bank fail, we had Credit Suisse fail, all within days of each other. Collectively, it was one of the biggest run of failures of banks that we’ve ever seen, 2008 and then you gotta go back to the Great Depression. Two years ago, we were saying exactly the same thing, we’re gonna have a financial crisis because all these bank failures, and banks are gonna loan and people are gonna change their habits. They’re gonna be scared about the stock market, it corrected more than 10% and we never had a recession. So just because everybody’s saying that they’re going to do this, and that doesn’t mean they will stop doing economic activity, but there’s a real high probability that they can. That’s why I put the odds at 5050, and how long will a recession last until they can kind of get some semblance of an all clear, and they can go back to their economic activity, just like the last one was, once we reopened the recession then and but that’s what we have to understand. What a recession is. It’s an unusual event. Economies don’t die of old age. They just don’t roll over because there’s a certain number of years, and that’s it. We have to start contracting. It’s a war, it’s an oil embargo, it’s a pandemic. It might now be, you know, unsettlement about tariffs and the like. Those are the types of things that cause recessions. Yeah,
Maggie Lake 7:54
the Silicon Valley Bank is an interesting example, because as much as we all felt it, I wonder how much the consumers, it didn’t, it didn’t seem to hit them in the same way they didn’t if they weren’t exposed or didn’t have their money there, it seemed like a financial event. Whereas tariffs, you can’t go get a car if you can’t go get a TV, although they’re electronics for the moment, you know, if you, if you are, if you are seeing prices rise, that feels like a little bit more of a stomach punch to consumers. That’s
Jim Bianco 8:23
right, and that’s really what we’re going to be waiting on, right? Is that in the next couple of months, the question really becomes, are we going to see dramatically higher prices because of tariffs? If the answer is yes, we could very well have a recession, and then the Fed will say, because of higher prices, we’re not going to cut rates. Give you one interesting statistic, 71% of the sellers on Amazon source their products from China. And so you should expect all things being equal. Even though we’re not at 145% tariffs, which was the peak that we threatened, we’re still up, you know, like, I think, like in the 80 or 70% point of all in tariffs, when you add all of the different variations in we should see dramatically higher prices on Amazon within weeks. You know, they’ve still got inventory that they can work off that they’ve got with the lower prices. But unless there is a quick resolution to this, there should be much higher prices there anything, you know, 10% of what’s on the shelves at Walmart comes from comes from China as well too. We should be seeing dramatically higher prices at Walmart within weeks. And if that does happen, you’re going to get two things. You’re going to get a dramatically higher CPI number, and you’re going to get people to behave, change their behavior, stop economic activity and possibly have a recession. Now, if on the other side of the equation, we don’t see higher prices, and that’s all. Is possible that somebody eats it, either the supplier or the importer, either Walmart eats the price, or China somewhat eats the price. Or I’ve even read a story now that we’re actually collecting no tariffs, because the customs, the agency, doesn’t know what to do, because we change it every five minutes, they don’t know what they’re supposed to be collecting, so they’re not collecting any but I suspect that won’t last more than a few more days. But if we, for some reason, don’t see higher prices in weeks, then we might not have a recession at that point. So that’s the great unknown when it comes to what the economy is going to do.
Maggie Lake 10:37
Yeah, and this is where it’s going to get interesting, hearing from executives and looking at corporate balance sheets, if you’re big, maybe becomes a market share issue, not a price issue, which is going to be really, really interesting, but we won’t know that yet. So let me ask you about these inflation expectations. We’ve seen a dramatic fall in the price of energy, as I mentioned, right? Oil is down sharply. Does that not at some point help offset in terms of inflation. Oh, campaign more here, but wow, the gas just got a lot cheaper, which we know as Americans really respond to that quickly. Why is that correct having as much of an impact? Or is that just a lag, a timing issue? Yeah,
Jim Bianco 11:14
I think it’s a lag and it’s a timing issue. Actually, you know what you’re referring to is the price of crude oil has done a lot, but the price, the national average, triple A the auto Association puts out a national average for the price of gasoline, and it hasn’t fallen but two cents, you know, in in the last couple of weeks. Now that might be coming in, you know, the next 10 days, to two to three weeks, we might be seeing gasoline prices coming down quite a bit. But to the to this moment, they really haven’t now gasoline, you know, CPI. One of the things that people have to also remember about CPI, which kind of useful, is they do do extensive work and trying to figure out what our basket is, what we we as a country, spend our money on. And they got CPI gasoline is waiting at 3% so 3% of the average budget. Now, some people pay more, some people pay less, but the average budget is three is what we pay on gasoline. So yes, falling gasoline prices will help, but it’s only 3% of the budget. Now, when it comes to things like clothing and food and other things, you know, hardware we need and everything else, the stuff we buy in Amazon, that’s actually a bigger part of our budget than gasoline. And we’re talking not about those prices going up one or two or 3% right? We’re talking about an 80% tariff on Chinese. I mean, these are hard to unfathom numbers that we’re talking about a near doubling of prices. When we’re talking about 3% of our budget is on gasoline, and maybe, if all things are equal, we’ll have about an 8% drop in gasoline prices. So does it offset? Yes? Will it completely offset? Well, if we are going to get the type of price increases that we are expecting, the answer is, No, it won’t completely offset it, and we’ll see much higher prices as we go forward. And I will emphasize CPI prices is what we’re going to see. I’m involved in a little spat with Jared dillian on Twitter about what is the definition of deflation. And we you know his definition of deflation. It might be correct, but you can but I’m talking about that inflation means higher CPI prices. Yeah, I
Maggie Lake 13:26
just talked to Jared. It’s always good to have some robust macro conversations about inflation. Everybody fights about it, including the Fed. So what about people there? I’ve heard people say, Listen, this tariff policy, it’s chaotic, it’s confusing, but I think, I think overall, it’s deflationary. What are they seeing that makes them think it’s deflationary? Or where do you disagree with them?
Jim Bianco 13:47
They think that the what will happen when you see the price rise is that no one will pay, no one will buy that stuff. Right when the prices of that 71% of stuff, let’s just go with the extreme. 71% of the stuff on Amazon is going to be 80% more expensive in three or four weeks. None of that stuff will get sold, right? They’ll have sales of zero at that point, and that that will collapse economic activity so much that there will be no demand for any of that stuff, and the prices will have to come down, that’s kind of like an Old Testament kind of disaster, is what we’re talking about at that point. I think that’s what they mean. And so I agree with that concept, right? That as those prices go up, you’re not going to you’re not going to buy as many things, or you’re going to defer, you know stuff, you know, especially if it’s a discretionary item to make one up. You know, if you were in the market for a tennis racket, and they go up 80% the next month, I ain’t gonna buy a tennis racket, because my life doesn’t depend on me having a new tennis racket right now, you know, I’ll wait until this thing blows over. That is true. I but the question is. How much of that is going to happen. First of all, we have to see how much prices actually go up. And then we have to see how much people react to those prices as well cars, if cars go up in price, what’s going to happen with us when, when cars go up in price? A lot remember that during the pandemic lockdown, when we were coming out of recession, and everybody thought we were still in recession, cars were trading. You know, new cars were being sold for enormous premiums over sticker prices. The prices these cars went up. And instead of people saying, well, I ain’t gonna buy this car if I have to pay 20% over sticker, they ran to the store before it was 25% over sticker. So we don’t know what the reaction is going to be in the public when they see these higher prices. Are they going to say, Man, I better buy that tennis racket now because it’s going to be even more expensive next month. Or are they going to say, I’m just not going to play tennis anymore? That’s what we’re going to have to figure out harder when
Maggie Lake 15:57
you need a car, which most people do, although I will be opting for a bicycle this summer as my drive. You’re going up a price too during COVID. We know that I better buy one. Now. This is, this is the scary thing about this is why we’re spending some time talking about inflation. Because this is what the bond market. So get to get back to the bond market, which is the center, center of the universe. So you are, you don’t think 458, the 10 year, which is what things are benchmarked off of. You don’t necessarily think we’ve seen the high for that. Where do you think it could go? Like, what is your what are the scenarios that you’re looking at here? Right?
Jim Bianco 16:34
Exactly. So yeah, we hit four and five eighths or so thereabouts on the 10 year. Yield. Now just emphasize, once again, it’s this unusual situation with all this talk about inflation that has got the Fed saying we’re not going to cut if we have a recession, unless we see signs that the recession is going to negate all of that in tariff driven inflation. And that’s like, Whoa. That’s not how it works. So where do rates go from here? I think the Fed’s done cutting rates.
Maggie Lake 17:09
The market, a bunch of rate cuts, right?
Jim Bianco 17:11
The market, the market is that’s another good point, too, right? Right before we came out, I looked the market is putting a 20% chance that the Fed is going to cut rates at its meeting on May 7. 20% meaning 80% chance they won’t cut rates. What more does the Fed need to see? Everybody’s calling for a recession. We had a 20% correction in stocks. We’ve got, you know, markets that are dysfunctional, and yet they’re not going to cut rates at their next meeting. Oh, but they’re going to wait till the June meeting. I didn’t know that’s the way the work, the way that the Fed worked, right? The shit hit the fan. But don’t worry, you’ll get a rate cut 90 days. It’s usually the shit hits the fan. You’ll get a rate cut 90 minutes. Is the way the Fed is supposed to work. So that doesn’t seem to seem to sit well with me is that, no, they’re not going to cut rates in 90 days. If everything’s going bad, they’re not going to cut rates period, and that’s because of this inflation thing. So if the funds rate holds at four, I think that the two year note, just to, like, get back into where I’m going to go with this the two year note historically, you know, if you look at the two year note, yield to the funds rate, it’s about 40 to 50 basis points. So if that means half a percent, so that means, if the funds rates at four, then that means that the two year note should be around 440, to four and a half. It’s a little bit below that right now. And historically, the 10 year note trades about one full percentage point above the two year note, that’s 540 Well, we’re 454 40 right now on the 10 year note. So we’ve got a little ways to go. I think that fair value is going to be somewhere above 5% on it. And I would emphasize that word fair value when I say we’re going to go about 5% everybody gulps, oh, what’s it going to do to mortgages? What’s it going to do to the economy? What’s it going to do what’s it going to do to borrowing rates? And the answer is, if it’s fair value, it’s going to be fine. Yeah, I’m old enough to remember the 80s and 90s. Those were the rates that we had. You know, my parents had a 15% mortgage at one point in homes traded and the economy continued to move forward, because that was the appropriate interest rate for that environment, and that’s why I say fair value. The appropriate interest rate for this environment, I think, is going to be a 5% yield, and we’re just not ready to accept that, because we’re still anchored to that zero interest rate we had throughout the 2010s and we have to kind of realize that that era ended, and now we’re in a different era. So even if we get a 5% rate, that doesn’t mean that it’s going to be bad. It’s just that this is the world we live in. So
Maggie Lake 19:51
one would think at least mentally, there’s an adjustment period. Right? People feel trapped in their homes if they have a low mortgage, because it seems a mortgage above seven. Seems outrageous if you had a mortgage at three I mean, you’re very reluctant to move. So if there’s a transition period that seems like it’s going to be a little rocky if we, if we step away from that, what kind of position are corporate balance sheets and consumer balance sheets? Can they withstand an environment where we are more often at 5% and it’s unusual to go below that. Now that that’s where Fauci fair value is. Can we, can we withstand that kind of interest rate? Are we prepared for that?
Jim Bianco 20:29
Yeah, I think we are. And in the reason is, and there’ll be a little bit of an of a mix, because if you look at the consumer balance sheet, the consumer is largely a net beneficiary of higher interest rates. What do I mean by that? We own more. So we have $7 trillion in money market funds. We’ve got trillions of dollars we own in bond secure and bond funds and annuities and everything else. So when interest rates go up, our interest income is going to go up. Now, for those that are borrowing, when we talk about, you know, 7% mortgage becoming an 8% mortgage, you know, for those that are taking out car loans and stuff like that, that’s gonna be a net negative. But as an economy as a whole, I think it’s a net benefit. Now, the problem is, the people that are getting the interest income tend to be the wealthier. They have investments, and they’re, you know, and they own annuities and bonds, and have money and money market funds, and those yields will stay up and throw off them interest income, those that tend to borrow tend to be less wealthy. If they were wealthy, they wouldn’t need to borrow, and so they’re going to be hurt. So it will have a disproportionate impact on the economy that so called K shaped economy, you know, the lower half of income will be hurt a little bit worse than the upper half of income. And it’s the same thing with corporations, too. If you look at corporate balance sheets, they also, I think, are kind of a wash to his positive benefit for all of the levered companies that need to borrow to keep going, that are going to be troubled by higher interest rates. You’ve got a Microsoft, or you’ve got, you know, actually the better example is Berkshire Hathaway, Warren Buffett is like the sixth largest owner of treasury bills in the world. He owns more than some foreign central banks. Do you know it’s like $300 billion worth of them? So if you tell Warren Buffett that he’s going to continue to get a 4% interest rate, he’s gonna get like 12 to $14 billion a year just sitting on a pile of treasury bills. So that’s also got to be factored into the equation too. But again, Berkshire’s not going out of business. Microsoft, which is in somewhat of a similar is not going out of business. But some of these levered companies that need lower interest rates might very well go out of business with higher interest rates. So it’s not uniformly, but at the top line for the economy, higher interest rates should not be a negative for
Maggie Lake 22:59
it. That’s so interesting because it’s sort of not how we’ve been thinking about it lately, but it benefits the big benefits the wealthy and some of these lover companies, by the way, are startups too, right? Small and medium sized companies tend to borrow. Sounds like that’s not great for the Russell, but is this bad for stocks? Because now, if you have an option and cash is attractive, it competes for the stock market, right? So why would people put their money necessarily in stocks, if you are able to park your money in a bond in a way that you haven’t as a saver?
Jim Bianco 23:30
So this gets to something I’ve been arguing now for several months, that I think that over the next decade, we’re going to be in what I call the 456, markets. 4% was be what cash returns like I said, the Fed’s not going to cut rates. They’re going to hold them in around four and that’s what money markets will churn out for the next several years. You’ll have better years and worse years. 5% is what the average coupon is on the bond market, not just treasuries, but when you add in mortgages, and you add in corporates, agency securities, the average investment grade yield is around 495, call 5% I think that over the next several years, bonds will return you five. You’ll have good years and you’ll have worse years, but they’ll average five. So four or five and six, where I come up with sixes, if you look at some of the stuff that Bob Shiller’s done of Yale University, with this cape ratio, cyclically adjusted, pe won the Nobel Prize in 2011 for this actually, excuse me, 2013 for this work, and that the Shiller PE is at 37 that is a very high PE number. Remember, we had a 22% gain in 23 a 24% or 25% gain, excuse me. And 24 that was powered by the mag seven, and the market was really rich at the beginning of the year. And his work says at a 37 PE you should see this, the bar the stock market just bottom line, it returned you about 1% more than what the bond. Market’s going to return you. So that’s where the six comes in. Now those numbers don’t sound very good, right? Because we, like I said, we had 25% last year in the stock market, 22% in 23 now we’re talking about six going forward. So at the top line, I think that these markets are going to give you mid single digit returns. It’s not terrible, because it’s not. It’s not it’s going to be above the inflation rate. I think the inflation rate is going to be, I’m the camp is going to be elevated, and it’s going to be three, and money markets will return your four, bonds five and stock six. But here’s the big but I think that we’re going to transition away from by the index. The index goes up, and we’re going to start thinking about themes, stocks, sectors. You know, whether or not I want to be in growth or value, big cap, small cap, Europe versus us, emerging versus developed. How about financials versus energy versus health care versus consumer? Cyclicals? That’s where you could get a lot of your money if there’s an environment that this might be closer to somewhat, is the 70s. During the 70s, the s, p, I think, returned 4% that was it. And in the 70s, inflation was six so you actually lost to inflation. But during the 70s, if you caught the energy trend, right, if you caught the gold trend, right, if you caught the consumer trend, right, the banking trend, right. There were two, 300% gains that could be made up and down. We’ve so gotten away from that, right, that everybody just buys spy or smells by spy, Spy being the S P Index Fund, S p5, 100 index fund. And now everybody wants to know, when is the S P going to go up? And the answer is, maybe it doesn’t. And maybe there’s going to be themes within that or outside of that, that you could be playing. And the big problem with that is nobody’s had to do that for a long time. It’s all been just buying broad indexes and watching, you know, the tide lifted, lift the boat. And now it’s going to be a little bit more selective, and that’s a different skill set altogether, and it’s going to be difficult for people to start to transition to it. I think the easiest way to do it is, how do you do it? Is there are professional managers that do that kind of stuff, right? And I think that a professional manager would probably be the best way to go if you were thinking, that’s the way that you want to be making money, even in the
Maggie Lake 27:29
way that 401, system is structured, you get the wheel, right? And it’s like, maybe you have a choice to pick some individual type funds, but a lot of times it’s just percentage wise, right? Do you want? How much equity do you want, balanced growth, aggressive growth or not? You know, there’s not a lot of leeway in some of these. It just wasn’t set up that way. So this is a completely different way that people are going to have to approach this.
Jim Bianco 27:55
Yeah, that’s exactly right. And you’re already starting to see the beginnings of that on Wall Street, the ETF what one of the fastest, you know, when you take the Bitcoin and the crypto ETF side of the equation, would suck up all the oxygen. What’s the next biggest theme within ETFs that we’ve seen, and that’s active, managed ETFs, you know, both fixed income and equity, so that, you know a in you know the wheel, if you will, will have as an act you know an active equity manager, an active fixed income manager as a choice in order to do that. And in full disclosure, I do have an actively managed fixed income ETF through Wisdom Tree. Wtbn is its ticker symbol. So that is and when we rolled that out in 23 it was somewhat unique. And now even Vanguard is starting to not only actively fixed, but active equities. And they haven’t made it yet to your 401, K sheet of options, but they’re coming. So whenever I have this conversation with Mike Green about, you know, we’re going to go to active managers, he goes, Well, the ETF is here to stay. The ETF is going to be and I was like, Yeah, you’re right, and the active managers are going to be another ETF symbol is what they’re going to become. That’s the way that we invest and that’s the going to be the fix with it as well.
Maggie Lake 29:17
So let me ask you about this higher rate environment. And it’s, it’s, it’s good to have an option and a line of thought that this isn’t going to kill the system, because that’s what you were hearing, right? It’s going to blow up. The Treasury markets blowing up. But one of the things that concerns people about that, I think, is this idea that, okay, the US economy maybe can handle consumers and businesses, the big ones can handle and maybe even benefit from higher rates. The US government can’t. We can’t roll over our debt when we have higher rates like this, so they’re unsustainable. They’re going to have to go lower one way or the other. What are your thoughts about that? And I know it’s a big topic that you can spend a whole hour talking about that, and people have different views on it. But is that something? That might sort of throw a wrench in that idea that we can, we can tolerate higher rates.
Jim Bianco 30:06
Yeah, so that’s the fiscal dominance argument that you’re giving them, right? That the Fed can’t raise rates. We have to cut rates because we’ve got so much interest. But the problem is, it doesn’t work that way. You know, we can’t, we can’t set the interest rate which is convenient to us. We get the interest rate which is appropriate for the environment that we live in right now. And I think to answer the question without having another hour discussion, I’ll say it this way, what is Trump doing with tariffs and with all of this talk about Europe’s got to pay for security and a sovereign wealth fund and everything else, and there is a method to the madness. And of course, maybe the execution is not being done properly. In that is, we are at an unsustainable period right now that we’ve borrowed too much. We’ve got too much debt. It can’t continue. Radical policy is what is needed, and he’s offering that radical policy. And the retard I’ve always given is okay, you could disagree with his radical policy. He’s got it all wrong. Then give me another radical policy, in other words to do, because if the answer is, just forget it. Like Larry Summers in the day we’re recording is got an op ed in the New York Times, and he’s like, just forget it. Let’s just go back to last year with $7 trillion budgets, $2 trillion deficits. Let’s lift the debt ceiling and go to $40 trillion of debt. I actually think the bond market would sell off even harder, because we’d have to have Treasury Note Auctions every other day because we’d be issuing so much bonds for that we can’t go back to that. So ultimately, you’re right. We’ve got this problem, and this is what we’re trying to address. One of the things that we’re worried about is what the economic historian Neil Ferguson has pointed out we pay more in interest costs than debt service. And he’s pointed out that, and he went through for the last 200 years, that every empire us is an empire that has run into that problem, that they pay more in debt service than defense, they stop being an empire. And so we have to correct this situation that we just can’t keep buying goods from foreign countries, sending them money, letting that money get recycled back into treasuries forever. We have to break that cycle, and that’s what they’re attempting to do. Now, are they doing it correctly, this haphazard way? Maybe the answer is, no, they’re not. But the idea of what we’re trying to do is trying to, you know, reduce our reliance on a huge trade deficit with a huge capital surplus that comes back to the US that we fund it more domestically, getting Europe to pay more for defense, to defend themselves, so we don’t have to, you know, maybe realizing more assets in terms of a sovereign wealth fund. This has also been known as the MAR a Lago accord. So I’m what I’m arguing is, yeah, we do need to keep that in mind, and that’s part of what is the bigger hole here that they’re attempting to do. And ultimately, in government and in business, there’s always two things right there’s, do you have the right idea? And I think they do, are you executing the proper solution? That’s the open question right now. Yeah,
Maggie Lake 33:28
that doesn’t seem like there’s too much accord anywhere. But you know, who knows what will happen? So, you know, you were talking about Europe. And we’ll, we’ll finish on that in the dollar. And then I want to get kind of a speed round of just how we should we? We should be thinking about this as we close this idea that Europe’s going to start spending. I mean, just the initial way this has been executed has them opening up their deficit spending more, making plans to up defense spending in a way they haven’t in many, many years. You know, post World War Two, some people look at that and say, okay, valuations are low, they will be spending. Our valuations are high. We will be getting our fiscal house in order, one way or the other, whether we like it or not. That’s negative for us. Stocks everywhere else in the world looks like a buy right now. Are we seeing a profound shift away from us assets? Do we need to worry about what that will do to the US stock market?
Jim Bianco 34:24
The answer is yes, we are seeing a profound shift. I mean, if you look at the surveys of global fund managers and the like, they are moving their money to Europe and other cheap markets to degrees that we haven’t seen in at least a decade, if not longer or so. And yeah, if the argument was that we were being supported by this ever increasing inflow of money from foreign sources into the US now we’re going to have to compete. And we’re and it isn’t just so much that we’re going to have to compete with Donald Trump. Can’t be trusted. You know, you don’t want to put your money in the United States. I’m sure there’s some of that, but really it’s more along the lines of what you said. We are very expensive, and we have to rein in our government spending. They are very cheap. You know, their PES are down at 10 or 12. Our peas are over 2037 on the cape. It’s a little different measure. But, you know, they’re half of our valuation, and their governments are about to start deficit spending, where we’re about to go the other way. That alone is going to get people pushed in the other direction. By the way, that’s going to be a lot of government spending in Europe, and that’s going to be inflationary, because government spending is always inefficient. It creates inflation as well too. So I think that that’s really going to be one of the things you’re going to have to think about as an investor, is maybe we should be looking overseas. Maybe we should be thinking more international. Or when you get that 401 K list, maybe there’s an international fund on it. But yeah, I think that these are some of the types of things that are going to go on. We refer to this as the end of American exceptionalism, which, by the way, just I gotta say it, I take great offense at that term, because that was a, you know, that was a term that was coined 200 years ago about the American experiment being different and American experiment being unique in terms of freedom and democracy. I know a lot of my European friends take offense at that term. Thinking that we’re superior, that firm term never meant that we were superior. So I always think of when they say the end of American exceptionalism as being kind of a shot that the entire American system is going to go away. No, it doesn’t mean that. You know, Alexis de Tocqueville actually coined the phrase in his book in the 1830s so that is a step, but to that point, I think people mean American exceptionalism, meaning that we are no longer going to be the dominant financial markets for returns. That if that’s what you mean by it, then I’ll yeah,
Maggie Lake 36:58
with it, it is. And I I like your clarification, because I think that there’s a lot of other sort of meaning that’s thrown into there, or bias. So
Jim Bianco 37:06
yeah, it’s a partisan shot
Maggie Lake 37:09
what it is. But also, you know, it’s important, because I think people might, might rail at it and then not want to do something because they don’t like the way it hears. So clarifying, it helps keep it neutral. And you know, you gotta, you gotta think about things differently when you’re when it comes to your money. So I just want to ask you about the dollar, because we’ve seen a dramatic, dramatic drop in that and so we’re thinking about, what does this mean? You’ve got to think internationally, and maybe we’re in a different environment the dollar. Is this a sort of devaluation or a decline in the dollar that’s necessary and healthy, or is Is this something we should be concerned about, and signaling some loss of confidence? What? What will that mean for us, a little bit
Jim Bianco 37:49
of both? So let me, let me go with what Scott Besson says about the dollar. He says that the dollar is the preeminent monetary currency in the world, and it will remain its status as the reserve currency. Okay, fine. I agree with you. I agree with you. It will remain its status as the reserve currency. For all the argument that you hear people say the dollar is going to lose its reserve currency status. To what to what I mean, there’s $5 trillion dev dollars. That 5 trillion with a T that trade every day, world trade is done in dollars. You know, we get used to this in the United States, right? What’s the price of crude oil? It’s priced in dollars. What’s the price of gold? It’s priced in dollars. Ask a European, what’s the price of gold? They’ll tell you what it is in dollars, and then they have to convert their currency. They have an extra friction step in there to buy gold or to buy oil, we don’t. So what currency can do that with if the US loses its reserve currency? The Euro can’t. The Yen can’t. The Yuan isn’t even a convertible currency. Cryptocurrency can’t do that. Gold can’t do that. So we are the reserve currency by default. But as Besant would say the value could go down, and that’s okay, and that’s what’s happening with it now. Now what’s driving that could be very interesting right now, especially with what we’ve been talking about. The Euro has really been the surging. The Euro has been surging. The dollar’s been declining against the euro the most. Now, part of that might be that flow we were just talking about, right? Get into cheap stocks, that’s Europe. Get out of expensive stocks, that’s the US. But also what’s been happening is interest rates in the US have been going up, and European bond interest rates have been falling at the same time, which suggests get out of treasuries and get into European bonds. Now, who’s doing that? Quick, a quick tangent for one second in 2014 Russia invaded Crimea, and we wanted to punish Russia because they had $170 billion of treasuries held in the foreign custody account at the New York Fed. New York Fed does that. Every country, they had 170 billion. We were gonna say, We’re gonna freeze those 100 and 70 billion. The next week, those 100 and 70 billion were transferred out of that foreign custody account, and a week later, they came back into that account as an increase in China’s account. In other words, the Russians made a deal with China to hold their treasuries because we weren’t going to sanction China. Now, why did I go through that? Because Russia and China learned we got to be careful, because the US can sanction us. So the last 10 years or so, China has made legal entities in in Belgium and in Luxembourg to hold about 700 ish billion dollars of their $1.4 trillion of Treasury securities. The other 700 is hold directly in China. So when you start seeing massive selling of US Treasuries, massive buying of sovereign bonds in Europe come in, the Euro surging in, the dollar falling, and you ask, who’s the big seller of treasuries out of Europe, buying European bonds? The answer is, it could be the Chinese, and that’s how they’re doing it is that they’ve got these entities in Europe which we can’t sanction. We, you know, they fall under Belgium law. They fall under Luxembourg law. We can’t we the United States can sanction them or put restrictions on those accounts, and we’d have to ask the Belgians to do it, or the luxembourgs to do it, but they won’t do it because they’re mad at us over over tariffs anyway. So that’s where we might be seeing what’s been happening a little bit in those markets. It’s been rather interesting, and it makes more sense to me than saying that it’s European fund managers that are selling treasuries and buying sovereign. Oh, yeah, there’s probably some of that going on, but I don’t think enough to see these dramatic moves in the dollar. So that’s what I think is going to keep pushing the dollar lower. So I’m not concerned about the dollar losing its reserve status. That would be a problem for the US, because, like I said to what is it going to lose its reserve status tool, because anything else the Saudis tried this last year or two years ago, they said, We’re only, yeah, we’re gonna, we’re gonna ditch the dollar, and you gotta buy oil in Saudi dinars. That lasted, like, a week. And the reason it lasted a week was there isn’t enough Saudi dinars in the world to come, you know, for everybody to buy up, to use to pay for oil, and it just ground the market to a halt. And they just stopped it with after a week, there’s only one currency you could do this in, and that is the dollar, and it’s but, you know, unfortunately, the world has to deal with it, and that’s allows us to abuse it, because we’ve got kind of an anomaly, although
Maggie Lake 42:37
all of this maybe is a little warning that nothing has to be forever. If you keep abuse, it won’t
Jim Bianco 42:42
be. So it absolutely, it absolutely won’t be. There will be another reserve currency, probably in our lifetime, many years away from now, but there. But we’ll see it coming. We’ll see something that compete with the dollar. Maybe it’s a crypto, but, you know, they still got a long ways to go.
Maggie Lake 42:59
Yeah, yeah. There’s a lot of interesting work being done on that. So is, is the dollar? So reserve currency still is a cheaper dollar. As a lower dollar, do we have to worry about it being inflationary? Is it good for us? Does it make some things more competitive? What does it do to our portfolio? Or do we not really have to pay attention? No,
Jim Bianco 43:18
I think we have to pay attention to it. A lower dollar means, you know, you know, a lower dollar means that the currency that you’re trading into goes up. So that means strengthening currency. So you always want to be in a currency that’s appreciating in value. So that means international investments will do better. A lower dollar, all things being equal, should be disinflationary, you know, in normal times, but if we’re going to have 80% tariffs, if the the dot, you’re not going to offset that with a 2% decline in the dollar, or 3% decline in the dollar, if we had an 80% decline in the dollar to offset those tariffs, we would collapse our financial system. So that’s not going to happen. So we’re still going to have, we’re still going to have that inflation. So it does kind of push you into that idea that maybe you want to have more of an international flavor with your portfolio as we move forward from here because of those relative valuations and everything else that’s been going on.
Maggie Lake 44:14
So if we, if we put this all together, which I think has been a sort of fantastic overview of all of the different moving parts, and boy, they’re moving. Is there. If we talk about anything, people should think about increasing or buying. People are, I think, really cautioning people maybe buy the dip for us, assets that just knee jerk by the dip mentality should be over. What should people be looking at on a shopping list, if they’re thinking about the future, should it be international? Should it be some sort of, you know, bonds, outside of treasuries? How can people find return in this kind of new environment that we’re in? So I
Jim Bianco 44:54
would argue first of all that we need to temper our expectations. You know, as a macro guy, you. Everybody always turns to me and says, Okay, it’s a new year. There’s going to be some multi, multi trillion dollar giant asset class that goes up 20% which one is it? And trade? What’s the trade, right? Yeah, what’s the trade? And there’s largely been one. You know, last year was SAP, i How about there isn’t one? And that, no, the market’s not necessarily going to be a disaster. Maybe we’ll still come back from this a little bit, but, you know, it’ll be kind of milk toasty is where it will be in. And as long as it’s above the inflation rate, which it will be, you’ll be okay. I mean, yeah, we all want it. We all want to have 20% gains, but we always don’t get what we want. I think the Rolling Stones wrote a song about that once and and so we need to start to think in those terms. Now, bonds, in cash will be a competitive alternative, right? Cash, as I said, will give you two thirds of what the stock market will give you with a $1 nav with no risk, bonds will give you a little bit more with a little bit less risk. You know, stocks, I would argue, like I said, Don’t think, like, when’s the s, p going to go up? But think about rotations. Europe is a place that you could definitely think about rotating to Financials might, might be something. And then, you know, under the same idea as Europe, right, talk about a sector that’s just gotten that this shit kicked out of it for 25 years and has ridiculously low valuations, is been financials and especially the banks. I mean, I’ve been one who’s hated on the banks as much as everybody else, but then when I look at some of these bank charts and go, Man, they’re trading at the same levels they were trading at 20 years ago. You know, in the world has advanced in 20 years, and their stock prices haven’t that. You know, that’s usually when you start to see some kind of value. So there might be something there, you know, there might be something coming in energy, because they’ve gotten so beat up. Gold has obviously got the momentum going with it as well. Too late,
Maggie Lake 47:02
huh? Too late to chase gold if you know, I don’t think
Jim Bianco 47:04
it’s too late to chase gold at this point, especially if you look at some of the miners and some of the junior miners, which have not kept up with the price of gold. But the bigger issues, I wanted to say was, we haven’t had to think about this stuff, right? We’ve always talked about s, p, up, s, p, down, your risk on, risk off. And that worked for a long time. But I think in this environment, we’ve moved beyond that to something that akin to, you know, was what we had in the 80s and 90s. You know, Peter Lynch can come out of retirement now, you know, because we need them back, and we need that kind of thinking. Dust
Maggie Lake 47:36
it off. Dust it off. We need a What about is there anything people should be thinking about lightening up on especially if we are maybe, you know, we’ve seen such volatility, but you know, there might be tradable dips in rallies. Now, is there if, if people are looking and see they have a high concentration in something, what would make you nervous anything
Jim Bianco 47:56
that’s got extreme valuation, you know? And that would probably go right to AI mag seven. And the reason is, when you started in in the year, you would look at the AI, and you’d look at the mag seven stocks, and you’d say, Man, these got extreme valuations. And then everybody said, AI is going to, you know, eat the world, and we’re going to redo the world, and everybody’s going to have to pay for this stuff. What was embedded in that assumption was and the world wasn’t going to have any issues. Well, now the world does have issues, and so I don’t want to be owning very rich stocks. And one quick word about AI. My favorite example the biggest stock of the 1920s was RCA radio, Corporation of America took off on this new burgeoning technology called Radio. Everybody was going to have one in their house. The stock peaked in 1929 I forgot the price level it peaked at, but it held. It did not take out that level again until the 1960s 40 years later, not only did everybody get a radio in their house, subsequently everybody got a black and white TV in their house, and half the country already had color TVs in their house by the time RCA made a new high in its price. Do not confuse that AI could be a transformative technology. That could be the change the way we do life, do work, do business, do schooling and everything else, and that’s already in those sky high prices. And so while that happens, the price doesn’t go up. You want another more recent example, 2000 we had the tech peak, and we talked about the great things the internet was going to do. It did throughout the 2000s and into the 2010s and it wasn’t until 2013 that the NASDAQ eventually took out its 2000 peak. So you what you wound up saying, everything that we hoped for, for the Internet, happened for 13 years, and you didn’t make any money. And so that’s what you have to be careful of with these AI stocks, especially if we’re in a period of transition, if we’re in a period of less government, if we’re in a period of a Mar a Lago accord, which could cause a. Session or something like that, AI could re can meet its promise. Doesn’t mean that the stock prices have to keep going up that and it’s all about the valuation. Is why I’m worried about those stocks.
Maggie Lake 50:12
Yeah, that’s a really, really good point. Jim and again, something we haven’t seen in a while. Last question, what’s the what’s the biggest risk? What are you most worried about at this juncture,
Jim Bianco 50:22
that this whole shift, you know, towards terrorists and rebalancing or realigning the world order. While I said, I agree that something has to be done, we can’t just go back to this status quo. As I said before, if you don’t like this radical policy, give me another radical policy. We get it wrong. We get it wrong in some way, not that we get the idea that we have to do this wrong. We get the we get the prescription of how we’re trying to do it wrong, and we wind up creating a mess out of everything. And that’s what I think you’re seeing in markets, and that’s what the big worry is, is that maybe we need to do this, but are we doing it in the right way? And the unfortunate answer is, nobody does what the right way supposed to be. And we’re kind of all feeling around in the dark, trying to hope that we get this right. The one solace I would give us about Trump is he’s a very transactional guy, you know? I’ll try something. If it doesn’t work, I’ll pretend like I never did it, and I’ll try something else, as much as that might be chaotic and it is, maybe that’s kind of what we need a little bit here when we’re trying something new, is we don’t want to be too dogmatic about here’s how we got to try this new, untested thing when we don’t know how it’s going to work.
Maggie Lake 51:37
Yeah, that’s a really, that’s a really interesting thought. A great, a great place to lead the conversation. Jim, appreciate your your insight and all the knowledge that you’re sharing, especially right now, we all need to set our level up. So thank you so much.
Jim Bianco 51:50
Thank you. Enjoyed the conversation. You
