Macro/markets researcher Jim Bianco returns to the program to explain why he sees AI stocks in a classic bubble at this point.
Where will stocks and bonds head from here? Jim offers his best forecast for the rest of 2023.
Jim Bianco 0:00
And I’m in year three of an expansion that is now got a hostile Federal Reserve, which I don’t think is going to stop. It’s got elevated inflation, and it still has a lot of restructuring to go through. I’m not so sure that, you know, paying up fully valued have slightly more than fully valued is what I want to do in this environment, anything to do with AI, whether it’s nividia, or some of the fang stocks. Those things are way out there right now in the bubble land.
Adam Taggart 0:34
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. Thanks for joining us for part two of our interview with macro and market research analyst Jim Bianco, if you haven’t yet watched part one of our discussion with Jim, in which he explains why he thinks the Fed could be more aggressive in its policy decisions here than the market is currently pricing in, head over to our channel at youtube.com/wealthion. And watch it there. First, it sets the context for the investment themes we discussed in this video. Alright, let’s get started watching part two of our interview with Jim Bianco. I just love to get a sense of where you think the markets are going to head from here. Let’s look at the rest of the year. Are you? Are you sanguine? Are you concerned? From your comments so far of how resilient the economy is my guess and the fact that you don’t see the markets is that overvalued, which may surprise some people when invidious trading at whatever multiple of sales? That’s right now, well, the video is invidious way out there. Yes, yeah. But it’s one of those eight stocks. I mean, there aren’t that many stocks propping the market up as you said, right. So right, right, right.
Jim Bianco 1:39
So to answer your question about where the market is, you know, the problem with saying that the market is above average valuation is it depends on where you think the market is going to go. Next, I’m fine owning an above average market, if I’m in year three of a nine year expansion, but am I in year three of nine year expansion, I’m in year three of an expansion that is now got a hostile Federal Reserve, which I don’t think is going to stop, it’s got elevated inflation, and it still has a lot of restructuring to go through. I’m not so sure that, you know, paying up fully valued of slightly more than fully valued is what I want to do in this environment. Now that I’ve said that, that doesn’t mean that the market is horribly oversold, and it’s going to go down. The other problem is you have to definitely break this market down into the two major camps, right? Anything to do with AI, whether it’s nividia, or some of the fang stocks, those things are way out there right now in the bubble. And, and I’ve been using it and just stick with that for a second, then I’m talking about everything else. I’ve been using the historical analogy of Amazon in 1999, December of 99. Jeff Bezos was Time Magazine’s Man of the Year, that’s when they were politically incorrect and was still mad at the year. And it was because we were going to have this revolution of online retailing, that was going to change everything. That was the tagline on the cover. When he four years later, that was right. That was totally right. We did have a giant revolution of online retailing. And but what about if you had owned Amazon stock 24 years later, you would have been very happy that you owned Amazon stock. But if you bought it in December of 99, you would have paid roughly $100 for it, which is what its price was pre split. In 99, by the fall of oh one, it was $6, you would have lost 94% of your money. By 2010. It was still at $100.11 years later, you still didn’t make any money. And then it went from $100 That was pre split to 3300 from 2010 to 2021. So I could see two things happening at once. When it comes to these these massive tech stocks. AI is going to fulfill the promises that everybody thinks it’s going to fulfill. And it’s going to be as revolutionary as the as the internet itself. I could understand that and go buy in a video, go buy all those stocks. And in 10 years, you’re still at a loss, you know that you know, because they’re they’re pricing in that expectation now, and then we have to wait to see it happens and that’s when the stocks wind up, wind up tumbling the rest of the market. The rest of the market, I still think is being held hostage by inflation, interest rates and the general level of the economy. It has been meandering sideways, and it will continue to meander sideways. The problem that the rest of the rest of the stock market has is if you do look at the long term studies by Ibbitson and the other groups, they would say that long term the stock market should return 9% Roughly 9% Well, if I was to believe the Fed, by the end of the summer, I could get five and a half in a table or money fund, I get over five. Now, in a money fund, without taking any risk risk, I get two thirds, two thirds of the stock market’s return with zero risk, this is a far, far different world than when the risk free alternative was zero. The risk free alternative is now two thirds of what you should long term expect from the stock market. So that is going to provide a lot of competition for the stock, cash is no longer trash. Cash is now a legitimate competing force. With the broader market, it’s well, because it’s going to give you let’s be a little more conservative, half to two thirds of what you would expect anyway, longer term, there’ll be good years, last year was a bad year, this year is a better year, you average it out, you’re still better off in cash over the last two years than you would have been in the stock market. But but this is going to be a real problem. So where do I see the market going? I see it other than those bubbles, stocks, it’s going to continue to struggle, it’s going to struggle, because it’s going to have the weight of higher interest rates more inflation, the stronger economy is just gonna feed back into interest rates and inflation. That’s why I want to say struggle not go down the bubble stocks. The problem with the bubble stocks is, yeah, they’re a bubble. Yeah, they could fall a lot. But I don’t know if they fall from this level down. Or if they go up another 100%. Before they start to fall. You don’t whenever you get into this detached from reality standpoint, we’re in a Vidya is trading at 40 times revenue. 40 times revenue is when a video is trading right now, which is a number that most people can’t understand. And the video tries to justify it by saying on their call, that they think that the ultimate market you know, whatever they use to tam total addressable market whenever you throw out the TAM term, and they say that you know that they could see them selling a trillion dollars worth of of their chips because of AI. Look, world GDP is $100 trillion. You’re telling me that 1% of all economic activity in the world is going to be buying to video chips. That’s, you know, by the way they sell for they sold 40 billion of chips last year. But now they’re trying to tell me that soon they’ll be at a trillion dollars of sales at chips. That is Yeah, I mean, sure in bianco research is going to is going to earn more than JPMorgan just because I said it. And then and I want I want valuations at my company to be, you know, appropriately reflecting that too. So yeah, I don’t know. But when you get into when you get a company, that’s 40 times revenue, which is a hard number to fathom, as far as the revenues, why couldn’t it go to 6040 is already so far out there. I don’t know why that 60 would be an impregnable barrier. But at some point, it will do like the Ark funds did and everything else, and it will have a vicious correction. I think I just don’t know where. But don’t confuse the correction with the promise of AI though. The other example I’ll give you two is in 1929, RCA Radio Corporation of America was pretty much doing what the video is doing now going into the 1929 peak, because radio was going to be this wonderful thing that everybody across the country was going to have. And it fulfilled that not only did they fulfill that promise, but then it went to the next step and made call black and white TV, and then we made color TV. RCA peaked in 1929. It wasn’t until the invention of color TV in the 1960s. It actually took out that level. But the promise that we would have nationwide radio nationwide television nationwide color television that did happen. It’s just It took you 40 years to make money on that stock investment. Xerox the same way in 1973. Xerox was going to receive was through photocopying was going to redefine the way that the Office works and they did. And Xerox the stock was such a major nifty 50 stock that it peaked in 1973 at a level that it was nearly 2000 before it took that level out again. And yet we did we define the office in a lot of ways that Xerox thought so keep in mind the hype of AI can be real and can be justified to stocks that can be completely different story.
Adam Taggart 9:19
All right. So you feel you see you’re you’re sitting echoes of the past here and the current AI enthusiasm that we’re seeing. Okay.
Jim Bianco 9:28
I also think that echoes of the past also is a lot of people have learned, you know, a lot of people were skeptical, didn’t believe the internet. You know the famous Paul Krugman line from 1998 it will be as important as the fax machine by 2005. I think a lot of people thought that and now that I think what’s going on with the AI hype is they’re not going to make that mistake again. We’re gonna buy these height stocks this time, is what they’re gonna do. Well, you’re gonna make money for a while but we’ll see how this whole how the entire cycle works out.
Adam Taggart 9:56
Right but then it could be dead money for a long time a lot longer than needed. Like, right? Yes, exactly. All right. So I’m just trying to wrap things up here and be respectful of your time, because we’ve already gotten over the hour here. It’s been a great discussion. As always, Jim, my prediction at the beginning is come true in spades. So let’s just talk about bonds for a moment, because you talked about Tina. Right? Right. And you think that the Fed may need to be more aggressive than is currently appreciated, right. So it wouldn’t surprise you if the Fed continued raising the federal funds rate from here aggressively, more aggressively than folks think. But looking at some of your recent work here, you have you’ve, you get some interesting contradictions. When you’ve got how the bond market in the stock markets have been kind of predicting Fed policy, they’ve been very different. And the stock market’s been wrong a lot more often, even though the markets kind of on fire right now, which is kind of funny. But there’s two reports you flag one is the commitment of traders that show their the net shortest they’ve been maybe ever, at least in the data set for the US Treasury. As ever, okay. And then you’ve got, on the other hand, the B of a global fund manager survey that shows that the most overweight bonds they’ve been in 14 years. So one of those is going to have to, to emerge as the right bet here. What’s your outlook for bonds right now?
Jim Bianco 11:28
So just real quick on that, what the other point I was trying to say is that I do think that from an investor standpoint, contrarian opinion, is a very good way to basically invest when everybody’s all on one side of the boat too bearish to bullish that the markets tend to go the other way, because you’ve kind of exhausted all of the buying or selling pressure when everybody gets on one side of the boat. And the reason I brought that up was, it’s easy to say it’s very, very difficult to measure, because you’ve got two measures here of the bond market, that are saying pretty much polar opposites of each other. Although the commitment of traders measures more short term players in the BFA fund manager surveys a little bit longer term, but they have polar opposite views of the market. So that has always been the problem with contrarian opinion is that I love the concept. It’s just is everybody bearish or bullish? And usually the the measure, the answer is yes, to both at the same time, because you can always find measures that contradict each other as far as the bond market goes, Yeah, I think that, you know, there was a moment there. After the banking crisis in March, I thought that maybe we saw the peak in interest rates, because I thought we really broke something that was going to change something big, but it doesn’t appear that that’s calm. So we’re kind of reverting back to the pre March trend that we’ve had in markets where they kind of continue to meet, I’m sorry, interest rates, where they continue to meander higher, and the yield curve gets more inverted, because short rates are going up faster, because the Fed is perceived to be more aggressive as we move forward. And because of that, I do think that we’re going to continue to see that competition for stocks to get even harder, because if rates go up, why should I take the risk in the stock market when I can get most of it without any risk? So I definitely see rates going up. Now, if we see signs that the economy is really broken, or we see or there’s an event that happens that changes things, or we see signs that maybe there’s something more going on than just a base effect in inflation from going to nine to three and it keeps going down. I think it’s a base effect. I think it bottoms at three and it starts drifting higher. But if I’m wrong on that, and it bottoms at three and then keeps going lower, then we could definitely see, I’d have to revise that outlook. But right now, I still think that interest rates are where everything begins. That’s the 2010s to 2020s. Everything began with zero. And that’s why you saw everybody pushed into this teenager, FOMO type of stuff, that there was no alternative. But now there is an alternative five and a half percent on no risk. That is an alternative in the marketplace right now. And we’ll see in by the way, that five and a half percent, other than eight stocks is very competitive with everything else.
Adam Taggart 14:23
Oh, absolutely. Yeah, yeah. The s&p, you know, 492 haven’t done anything this year, and you’ve equity risk. So you’d much rather be in the 5% table. Right?
Jim Bianco 14:35
Right. Right. And if you bought the index itself, you’re very exposed to those AI stocks. You know, and whatever happens with the stocks next look, they could go up or they can go down, but you’re basically making a bet on AI if you own spy to just use an example. So I think interest rates are gonna go up. I think the yield curve is going to continue to get more inverted and I continue to think it’s going to exert more pressure on the economy until we see either a the old line that something really breaks that causes the Fed to change policy, or we see signs that, you know, inflation is really as vanquished. As the New York Times says it was this morning, you know, in that we’re now doing post mortems on it when I’m not even sure it’s vanquished to begin with.
Adam Taggart 15:22
Okay, so I just want to ask this follow up, because we’ve been talking a lot about bonds over the past couple of little couple quarters now. And most investors, most retail investors don’t have a lot of experience with them. Right? So would you say that now is a good time to be buying into bonds, and maybe on $1, cost average basis, the reason being is you’re now getting good return, right? And even with the expectation that rates may be going up, what is your buying in, you’re obviously getting the higher buying and over time, you’re getting the higher rates. But there’s a play potential play here for bonds. And I don’t want to I don’t want to oversell the confidence that this is going to happen. But if something does break, and there’s a safety trade, or the Fed gets inflation under control, and decides, Okay, we’re done hiking, and eventually we’re going to start cutting again, or the Fed has to be forced to step into rescue with cutting, right, because something really bad happens. That eventually, if rates start coming down at some point in the future, not in the short term, because you expect them to go higher. But let’s say later this year, early next year, let’s say there’s a Fed pivot, you could see rates go down pretty substantially and get, you know, substantial appreciation in bonds if they’re longer dated here. So right now, we’ve had some capital managers that are that are that are beginning to go out on duration. I don’t think anyone’s going whole hog yet, at least the folks that we’re talking to, but but do you think that that is a good strategy to consider here? Or do you think rates are gonna go higher for longer so much that those folks that are waiting for that, that potential appreciation might be disappointed?
Jim Bianco 17:13
So a couple of things about the bond market last year, beginning of last year, you know, rates at the front end was zero in rates were at historic lows. So when you may remember, with bonds, the phrase we use as total return, you take the coupon that you get with the bond plus the price change it last year, you had no coupon or you had a very small coupon. And then when the Fed started raising rates and the prices fell, you didn’t have that coupon cushion, and you wound up losing nearly as much money in the bond market, as you want up losing in the stock market, not as much but closer, it was the worst year and a total return basis at the bond market has ever had. Well, the dynamics now are very different, there is a big coupon in the bond market a 5% yield, you get 5%. Now, if the Fed keeps raising rates, and the price declines, you’ve got that coupon to cushion you so that the losses that you would look at going forward might not be losses at all, they just might be small gains. But the the thing that bonds will offer you is safety, they won’t go down a lot anymore, because there’s a coupon. If there is a problem that causes the economy to go down or anything else, there is a rush to safety in bonds, and then their price rallies. And they provide you with a good hedge, which is the basis of the 6040 portfolio. The 6040 portfolio didn’t work as much last year because we started with no coupon. But now that we have a coupon, an interest rate, to cushion, any change in any fall in the price, that changes a lot of things as far as bonds go. And finally, I would say when you talk about bond managers, now that there’s a coupon, and there’s price, and there’s price volatility, there is opportunity for for fixed income managers to actually make money or actually earn their pay or earn their alpha, whichever phrase you want to use. Because two or three years ago, every rate was very was rock bottom, everything was dependent on the Fed, there was going to be one event that was going to cause all the prices to go down which happened last year. But it was really hard to say I want to as a fixed income manager, I want to invest in these sectors and not invest in those sectors and provide some outperformance because it never really happened. But now from this moment going forward, fixed income managers can separate themselves from other fixed income managers by investing in corporates or in high yield or in treasuries or the shape of the yield curve or their duration or structures like mortgages, or avoiding some of those if they think that they’re more problematic, and provide a much above average return than the index. It’s going to be a lot more opportunity to outperform the index now than it was a year ago. So yeah, bye Instant become an interesting place. Are they a place where you’re going to make a ton of money fast? No, you’re never going to do that unless you take a lot of risk. And that would be more in private equity and in stocks and in high yield. But are they a place where they can provide you a consistent return? That’s always positive, much better in good years? Less so and leaner years? Yes, because there’s a coupon now that you could maybe look almost always towards a positive return. Or if there is a loss in bonds, that would be a very small loss. But that would mean because there was a gigantic rise in interest rates, which probably hurt the stock market a little bit more. So the world of bonds, as I like to say, we’re returning to where I got into the bond market in the 80s, and 90s. And it’s more looking like what it was in the 80s and 90s, when there was actually a bond managers. You know, boom, Bill Gross became Bill Gross at that point, because he could separate himself from everybody else, because there’s so many opportunities, but from 2010 to 2020, what were the opportunities when you had no coupon? And everything was just trading on top of each other? Well, that’s changed now in a big way.
Adam Taggart 21:07
All right. Fascinating. All right. I’m gonna have to end it there. But it’d be fun to dig more deeply into this next time you come back on and we’ll be even further into the bond story by then. Jim has been great. Look for the very few folks who might not have been familiar with you before today’s interview, but it really enjoyed it. Where Can folks go to learn more about you and your work?
Jim Bianco 21:30
Well, three ways we offer work for the institutional investor at Bianco research.com, you can request a free trial, especially if you’re in that space if you’re not in that space. I tried to stay active on social media either Bianco research on Twitter or on my LinkedIn account on it Jim Bianco.
Adam Taggart 21:48
Jim, a great discussion. As always, always love it when you’re on the program. Thanks so much for giving us so much of your time today.
Jim Bianco 21:54
Sure, enjoyed it as well, too. Thank you for having me.
Adam Taggart 21:57
All right. Well now’s the time in the program where we bring in the lead partners from new harbor financial one of the endorsed financial advisory firms by Wealthion. To react to both what Jim said in this interview, as well as talk about what the markets have been up to in the past week, I’m joined as usual by lead partners from new harbor, John loader and Mike Preston. Hey, guys, Mike, why don’t we start with you? What are some of your key takeaways from this discussion with Jim?
Mike Preston 22:21
Hey, Adam, good to see you. Again. Really good interview with Jim enjoyed it a lot and jotted down a few notes that I’d like to just briefly mention here. In response to your first question, I think this the same first question you always ask what’s your what’s your take, or your outlook for the global economy and markets, Jim says it’s surprising to the upside, there are a number of things that are surprising to the upside. Most importantly, the stock markets, the stock markets have been on a tear, literally starting almost from the first of the year, the NASDAQ is up 37% or so 36%. The s&p is up close 10 to 10%. Interestingly, the Russell 2000, even though it’s had some strength in recent weeks, is relatively flat on the year it is up a few percent now because there was a move in the last few days or last week. But but but it’s really been a market of just a handful of stocks, like you both talked about during this interview. And we have seen that participation widened out a little bit, but it’s very unclear as to whether this is a brand new kickoff, a brand new bull market, as you see all over the news these days, because we’ve had a you know, a rise of 20% off the swing lower the previous bottom and October of 2022. We don’t think it’s a brand new bear market, a brand new bull market. We think there’s lots of reasons for concern, some of which I think we’ll probably talk about later in this video. But Jim says surprising to the upside. He’s absolutely right. In some regards. employment report came out recently very positive surprise to the upside. But Prep Prime predominantly, it’s the markets that are surprising to the upside. And the question is always why there’s been a lot of talk about liquidity. Liquidity has certainly been a big factor in recent years. The question is, Will liquidity be the only thing that matters the only game in town forever going forward? We think probably not in Jim’s gym list some pretty good metrics on how to measure the liquidity. He talks about the balance sheet. The Fed’s balance sheet is around 9 trillion or so it’s reduced a little bit, but hardly even noticeably reverse repos. And that the the TGA. The Treasury general account, the Treasury general account has recently been refilled or refilled to some extent, Jim talks about is probably done through the repo facility, which doesn’t necessarily take liquidity out of the market. That may be true, but all of these are details I’m not even sure everyone needs to worry about because there isn’t all Turn ative. Now that’s really the key. There is an alternative 5% save money, short term treasury bills are at 5%. And so there’s less incentive really, for that liquidity to find its way into the stock market. I know that we want to have a never ending reason, oftentimes for the stock market to perform well, generally people like that 401 K balances go up and politicians get reelected and that type of thing. But at the levels of valuations that we’re at which are exceeding or at levels that we’ve only seen a couple times in history, liquidity may not continue to be the only driver in market returns going forward. A couple other things that he said what Powell, the Fed Chair Powell pause in the most recent Fed meeting, he thinks it was more of a political decision, you know, that the Fed wanted to have an a unanimous vote. And to get the unanimous vote, they decided to pause and Jim thinks to probably have one or two more rate hikes, maybe 25, or 50 basis points more. That doesn’t really matter that much, though, we just went from zero in March of 2022, to, you know, to 5% interest rates, with Fed Funds rates to match or at least similar. So that was really the biggest move, or the largest move, or one of the largest moves in history, I think, actually the largest one in such a short period of time. And here we are 14 months later, still waiting for the ramifications of that historically, there’s 12 to 14 months before the waves start crashing to shore so to speak. They’re they’re likely going to start having ramifications soon. It’s puzzling that they haven’t. And he talks he talked a little bit about these the handful of stocks that have been driving this market and he says he’s not necessarily averse to holding on to overvalued stocks. And if you’re in the first early stages of a bull run, his opinion is that where to hold these types of stocks now with a hostile Federal Reserve and inflationary pressures is asking for trouble. We couldn’t agree more. We think we’re in a dramatically overvalued market. Maybe Jim doesn’t think maybe we think that is even more overvalued than Jim thinks. But I think we’re in agreement that the markets overvalued, and that holding on to darling stocks during that time is a dangerous thing. Lastly, Jim talks about bonds for a risk to safety trade. He mentioned that bonds are a good thing to hold in, particularly if we get a drop in the s&p 500. Money will flow into into safe assets and probably look to to nail down long term positive interest rates. He points out if you buy a bond, you’re getting paid a coupon 3% 4%. You know, if it’s a short term T bill, it’s a much higher coupon. But right now on long bonds, three or 4%. This is money that comes into the account that offers forgiveness. If you’re early and you’re underwater on your bonds. Don’t forget that the coupon payments, smooth things out over time. And lastly, we think that these assets will drastically increase and jump in value, particularly if we get a risk off event and the s&p drops precipitously which we think it’s likely to do. So I’ll take a pause there.
Adam Taggart 28:15
Okay. Those were great summaries there, Mike Johnson when it comes to you to let you you add on to that. And then then maybe we can talk briefly about today’s news with the latest statements by Fed Chair Jerome Powell, which sort of dovetails into some of Jim’s warnings that inflation may actually not be tamed here that it actually might start creeping up this summer. But what else would you add to what Mike said there?
John Llodra 28:39
Yeah, we always we always love seeing Jim and your guests, repeat guests that Adam, they always come with great perspective to kind of pick up on Mike’s acknowledgement. So we have have had a very narrow market this year. And we have seen a broadening of lead. It’s not a dramatic writing, but it is broadening nonetheless. But we’re already starting to see emblematic, kind of feverish, over overzealousness about a new boat bull market. In fact, I’d like to share a couple a couple of slides just kind of put things in context, you know, somewhere along the line, and hopefully you can see this. Somewhere along the line, someone decreed that a bull market is 20% up, right. Can you see this chart? Okay, I think you can.
Adam Taggart 29:26
Yeah, and yeah, it’s the kiss of death, the cover.
John Llodra 29:29
So it’s it’s fabled the history to look at magazine covers and the more bombastic or more shiny, and glitzy, they are usually the better the contrarian indicators, but this is a recent one. I think it’s June 12. About a week ago, barons, you know, kind of a glossy, shiny bull here saying this market has legs, all well and good. But, you know, let’s keep in the context here, what a bull market can look like, especially when we’re talking about overvalued Mark. So here’s here’s the tech bubble crash in around the year 2000 2000 into 2002. And you can see, this is for the s&p, NASDAQ was even worse decline than this, but all the way along what ultimately was an over 50% peak to trough decline. And in the s&p 500, there were very dramatic bull markets, you know, several of which crossed that 20% threshold and decrees a so called bull market. So oftentimes in a highly overvalued market, that is really a bear market that’s consolidating a lot of excess. These are what really should be called bull traps, and really bear bull market rallies. And we think that we’re likely in that and just kind of kind of emphasize the point. This is in the great financial crisis of Oh, 809. Same kind of thing we saw, you know, several very strong rallies, even though peak to trough and the s&p was over 60% decline from late oh, seven to two early, early. Oh, nine. I did also want to comment about this, this debate about liquidity. That’s been a common thread in a lot of your interviews lately, Adam, and it’s understandable because the last decade is all been about QE and money printing and flooding the the economy with massive amounts of base currency. Now, I think what’s unfortunately lost in a lot of this debate is that I Mike touched upon this. And so to Jim Bianco, you now have cash that has a rate of return over 5%. This is just another chart that I want to bring into this is Morgan Stanley’s, Mike Wilson put this out. And it’s just showing I don’t want to make too much splash about this chart. But because to your point in your interviews, Adam, there’s there’s so many different ways you can measure liquidity. And frankly, you can choose any chart to kind of make this make a case. And this one happens to show a divergence between the s&p 500 going higher, and a decline in stalling of global this global world money supply from the central bank’s. So that’s just that’s one that flies in the face of this simplistic suggestion that more liquidity means higher markets, and the range on
Adam Taggart 32:21
sorry, if I can just jump in there for a second. So what Jim, I think would say, and I’m now confusing my interviews from this week, it was Jim or it was spent, Henrik. But it was that? Because it is a sort of tricky, measurement, liquidity. Money supply is part of it, but not all of it. And basically, I think it was Jim was saying that, you know, you can go into things that are your capital can flow into things that are not defined by traditional measurements of say, money supply or liquidity. In other words, like bank reserves or things like that, or money market funds, right. So it’s not that, yes, the world money supply may be shrinking in a way that’s being measured here. But those balances of those other things I mentioned are going up dramatically. And they do impact. Total liquidity in a way that it can drive asset prices. And I’m not, not pointing out to say this chart is wrong. I’m saying it’s probably incomplete. And it’s tricky to measure this stuff. So I like I said, I keep asking people their preferred measurement of liquidity, because there’s so many different variants of it out there to your point, you can look at one and say, Oh, maybe it’s flatlining, you can look at another and say, Oh, it’s growing. Right? So it’s, it’s a challenge for us to be able to track this is what I’m saying.
John Llodra 33:50
That’s exactly the point. I want to emphasize. I’m not doing a great job at it. Because really, the point I really want to make is that the devils in the details of what that liquidity is, is it represents. So for much of the last decade, that liquidity represented oppressively low rates of return, right, so it incented all manner of folks to go out and chase anything with a yield junk bonds, stocks, anything, anything but 0% interest at the bank. The last year has changed that dramatically. And here’s a chart showing the earnings yield on the s&p which is a way to kind of make equivalent to the the yield on stocks as compared to Treasury bills the three month Treasury rate that is actually the earnings yield on the s&p Right now it’s below three month treasury bills. And it’s right around where US corporate bonds are the the point being is that this idea that massive amounts of liquidity he’s just itching to go into other things immediately ignores that. And here’s another look at the the excess earnings yield of the asset MPs compared to three month treasury bonds, you can see we’ve gone negative here. Last time we were there is was at the really pinnacle of the tech bubble. It can get worse, of course. But the say that simplistically that more liquidity means things going higher, really ignores that. This liquidity now has a pretty compelling rate of return. And Jim himself, and his his interview, pointed this out and said, If it’s in talks about the long term rate of return for stocks at 9%, if you can get two thirds of that, and essentially a risk free asset, why the heck would you be heavily invested in stocks right now?
Adam Taggart 35:38
Why Why would you take the equity risk? Right?
John Llodra 35:40
Absolutely. That’s that’s very much our view on the matter. So I want to, I think, and let’s, let’s take this thought experiment to an extreme, let’s imagine that money markets and T bills were earning 10%. You know, they’re five and a quarter, let’s say right now, semantic wording 10 10%, do we think she feels at 10% would still have this burning desire to go to the stock market. So it’s arguable where’s that threshold where the short term yield is compelling enough to to stamp out a speculative frenzy, we think we’re getting pretty darn close to that, especially as people have become awakened over the last several months, especially in this bank run or bank walk, whatever you want to call it, that there is an alternative to 0% cash at the bank. So really, really important point that I think we want to emphasize is is that there is an alternative and liquidity that’s that’s no longer trapped at 0% return is a whole lot different than than liquidity that’s earning pretty compelling rate of return.
Adam Taggart 36:39
So great points that I just want to point out, you know, you guys are probably pointing out where the puck is headed, right? In other words, as safe rates continue to rise here, right? Eventually, at some point, enough capital is going to a critical mass of capital will say, right, you know what, fine, forget these speculative assets that have maybe now been rebid up to really excessively high level evaluations. And I’m just gonna go park myself in bonds and get a nice safe fat return, right? Uh, probably, which is where the puck is headed. If these trends continue. I just want to contrast that with where we are right now, you know, we’ve had so much money over the past recent weeks, you know, just flood into the we’re now kind of calling the mega eight, right, the eight largest cap stocks in both the s&p and the NASDAQ. Now to the same eight companies. We have just bananas valuations we’ve talked about and video a lot, but we can we can talk to a lesser extent about, you know, a number of other companies in those that basket of aid, but also like, you know, much more speculative assets like Bitcoin has gone from 25,000. to today’s we’re talking it’s over 30,000 in just a matter of a couple of days. So there does seem to still be a lot of hot speculation in the market right now. Just curious, your thoughts on that?
John Llodra 38:05
Oh, no doubt about it. I think that magazine cover that we started the slideshow, says it all, no doubt about it. And we don’t have a good answer to that other than say, Man, are you investors wanting to be careful about your hard earned retirement savings? Or are you speculators? And do you want to go buy in a video at 40 times sales, where you got to return every dollar to shareholders for the next 40 years? To justify the current or revenue levels to justify the valuations. Sometimes, those kinds of things are best to be avoided. And, broadly speaking, we see rampant examples of that. But we have to give acknowledgement and we did last week, and we will do so again. There has been some broadening of the market and especially in some areas that aren’t so crazily overvalued or so sought after by speculators. We’ve noticed material improvements and things like industrials, old school industrials, biotech, even energy is starting to see some technical strength even though it’s still lagging on a relative strength basis, and we think a little premature. Point being is there are things underneath the surface that we are looking very closely and we will likely be making some tactical exposure increases offset with some hedges probably, to navigate. We think a bifurcation of the market that is a super overvalued, broad market, especially in new segments, but some areas that are starting to look like they’re gaining the footing and starting to perhaps get ready for a rotation.
Adam Taggart 39:39
Great and Mike, let’s talk about that for a second. So you know what John is talking about is is a ton of capital is flooded back into this market to date. It’s gotten into these high flyer AI stocks, AI driven stocks mostly. But now we’re beginning to see the rest of the market begin to come alive and there’s a lot of stocks that had kind of been left for dead half Your last year as punishment, that may now get a good ride as things, capital starts to maybe rotate a bit out of the White Hot AI stocks. Real quick though, before we talk about what you guys are looking at doing. I just got to express my, my consternation, my confusion that, you know, at the end of 2021, everybody still was convinced and they’d been trained that, you know, the Fed had everybody’s back and don’t worry about market valuations because stocks always go higher. But then reality punched him in the face last year, right? I mean, 2022 was a was a really rough year, right, no place to hide and stocks or bonds, a lot of people saw their portfolios go down by 20 30% or so. In this, What surprises me is the speed with which people have rushed back in to the speculative side of the market, right, I would have figured that I can understand money coming back in because maybe things got too oversold, you know, by the end of the year by the October timeframe. But the way in which capital has piled into these these hot, you know, AI stocks again, it’s almost like people just kind of learn nothing in terms of caution or being wary of excessively high valuations, because the valuation in those those top eight stocks, they are really stretched by any metric. So I’m just curious. Why do you think people have just returned so immediately, to loving speculate speculation, again, after a really recent, hard lesson.
Mike Preston 41:43
Because people love to feel good right now, you know, they don’t, they don’t want to, they don’t want to wait, they want the to have the positive reinforcement of what they perceive to be immediate gains. And oftentimes a momentum does continue for a little bit longer than you think. It is, I know of one money manager that I read about a pretty famous hedge fund investor that said, if I see a bubble, you know, the first thing I’m gonna go do is jump in and try to push it further. It because it can work, if you’ve got Lightning, fast trading, and you’ve got advanced systems, it actually makes sense from an immediate short term perspective. Because momentum tends to, in general go longer than you think. But it’s very dangerous. And if you don’t have good stops, or good exits, or at least iron steel discipline, you’re going to be in huge trouble. And most people don’t have that. Most people just pile into these things. And money managers included institutional money managers, pile into them without a really good exit plan. You know, when things reverse in the market reverses hard and it does, their what what has become a short term decision becomes a long term investment. And that’s where emotional discipline is really important. I think that’s what we help with more than maybe even more than a lot of other things. We help with emotional discipline. And, you know, act as a sounding board for people that are having this fear of missing out the neighbors or bragging that type of thing. So I started in this business in 1999, what a time to start in witnessed the, you know, the final blow off stage of that tech bubble. And it was all the same back then. And in my opinion, it’s even bigger. Now. It was very narrow back then, it was a handful of stocks. It was the Four Horsemen of technology, that type of thing. But you know, that market was devastating to a small group of technology stocks, we didn’t learn from that. And then we re inflated the bubble into the housing crisis. And we here at new harbor saw that coming a few years before it actually peaked. And that one went longer than we thought it could. And, you know, because of our defensive posturing and our ability to use options, we were able to ride that out pretty well. But then after the housing crash, and the Great Recession of 2008 to 2009. I, I gotta be honest, nobody could have imagined the amount of stimulus that would have been thrown at this market this system over the next 15 years. And so we’re in the everything bubble in this bubble is bigger than all of them. And so it’s really no surprise that human nature, being what it is, hasn’t changed. People like short term rewards, they like to feel good on a short term basis, they’d like to look good on a short term basis. And if things change, there’s always justification or at least there’s a lot of other people in the same boat as you that feel just as bad. So that’s why it’s really hard, particularly during historical bubbles. And this is, I think, the largest one any of us will ever see and have ever seen. It’s incredibly hard to do something different. You know, we try to do that we’re still heavy cash, although John mentioned, we’re looking at a tactical long trade with hedges. But but really I mean If this market goes further in a straight line higher to really make money in it, you’ve got to go all in. And given the given the set of circumstances in the data, we’re just not very likely to do that. In fact, we’re not going to do that the most we do is a smaller tactical trade in high relative strength sectors, because our very short term indicators have reversed up into the positive. So it’s just a wreck to just to recap, I don’t ever expect human nature to change ever, you know, potentially, or perhaps if we get a real wipe out, it could change for a generation or so there’s a lot of writings about the Great Depression, and people that swore off stocks for the rest of their lives. But it always comes back things go in cycles. And you know, lastly, I think we’re, we’re in the climax years of a fourth turning, you had Neil Howe on this program not too long ago. And he, by the way, is coming out with a new book, I believe, next month that I look forward to reading
Adam Taggart 46:01
and just let you know, I got an advanced copy of it from his publisher, sitting on my my nightstand for reading. He’ll be on the channel in in August. So we will have him back on this program for all your fourth turning fans to get the wave forward
Mike Preston 46:14
to that. For people that don’t know about the fourth turning, essentially, it’s it’s a generational theory. And the punch line is that we’re in a fourth turning the climactic phase, the time of greatest risk. And finally, we’re probably in the five to six years, the ultimate five to six years of this fourth turning so couple that with the most extreme valuations in history, the all in belief that the Fed can do no wrong, that liquidity is the only thing that matters that the Fed is the only thing that matters, the Barron’s cover that John just flashed up on the sheet earlier on the screen earlier. You know, there’s a lot of caution that’s warranted here. And I’m not surprised that people are piling into these darling stocks. And they might go a little bit further, who knows. But ultimately, even if the market advances a little bit from here, I think it will be a lot lower than here in the next year or so. And so we’re managing a coordinated.
Adam Taggart 47:07
Alright, thanks. Good. Good answer. And John, I’ll give you a chance to opine on that. Just in the sense that I get Mike’s Mike’s, you know, perspective that, hey, look, human nature is going to change not going to change until, you know, they really get burned badly enough to change that perception. But, you know, when I look at things like, we now have record call buying on the s&p, right, so, you know, we that’s exceeding the levels that we saw back in 2021, you know, early 2021, when meme stocks were raging, and people were getting checks in the mail, and the Fed was still keeping rates really low. I mean, we had just an environment that was much more conducive to speculation back then. And yet, the speculation is even higher at this point in time. And another thing that’s very different is the Fed, you know, the Fed, you know, finally became a disciplinarian. You know, raised rates super high fast is now doing Qt and whatnot. But even even on the day, we’re speaking, while the Fed did announce a skip last week, Powell came out today and told Congress, hey, we have quote, a long way to go until we get inflation, you know, anywhere near where we want it to be, you know, under under 2%. And so, you know, Powell is essentially saying, Hey, guys, I’m not going to come to the markets rescue anymore, right? You know, I’m not going to be that easy. accommodative guy. In fact, I’ve taken the cost of capital really high, and I’m going to probably take it higher from here, he said, basically, almost everybody on the Fed voting board is expecting to have to do you know, one to several more rate hikes this year. And I just want to underscore another thing that Jim said in this interview, that we just watched, which is, you know, he walked us through the math of the base effects, and said, Hey, that’s actually been bringing, you know, CPI down pretty aggressively in these recent months. But he said, if you if you look at their base effects, they actually should start driving inflation back up starting in July, for at least a couple of months. And so you, we can tell when the Fed starts seeing that it’s going to look really bad optically to the world that oh, my gosh, the Feds losing control of inflation here, which is highly likely going to influence the Fed to be even more aggressive going forward. So I just find it luck. We can always, you know, what do they say? Like, never underestimate, you know, I don’t know, mangling this but just the bad to say assumes that the general public, you know, can make something like that. But um, but it doesn’t take too many neurons to put those pieces together that I just mentioned, which it really surprises me that people are just still willing to be as speculative as they are right now. So anyways, I’ll let you react to that. And curious to hear your thoughts on what what Jim was saying about inflation possibly going up from here?
John Llodra 50:24
Yeah, I mean, the base effect, math is pretty, pretty simple. And it’s likely to see that and one of the big one of the things we humans are plagued with is we make assumptions about things that they’re just that assumptions that aren’t really granted. In fact, one of our favorite factfinding analysts is John Hussman, we recommend we reference him all the time because he does great, great work. One, one example of this. You know, we’ve talked a lot about your guests to have pretty pretty resigned, really talked about the likelihood for recessionary type things to take root later this year, we we are in that camp as well. The let the employment picture has been one of the most stubborn ly positive things. But that’s a intrinsically lagging indicator, that’s usually the last thing to kind of hit. But many people make the false assumption that recession means inflation drops, which is actually not what happens. John Hussman has done some great work, for example, to show that inflation oftentimes stays flat, or it maybe even rises a bit in the first year of a recession. So it’s entirely possible that we could have this situation where we have a Fed having to stay on policy to keep inflation in check, even while recessionary forces are starting to take hold. These are the kinds of things that are so ingrained, and it’s not surprising that after a decade of what amounted to be the biggest torture chamber psychological torture experiment, in monetary policy that people have a continuing, very speculative and very tortured set of psychology as relates to market. So it’s it, we have had a decade this is a decade of unprecedented monetary policies, it’d be naive to think that these kind of ingrained behaviors would be just sniffed out overnight.
Adam Taggart 52:19
Yeah, it’s true. It’s probably more Stockholm syndrome at this point. But yeah. So
John Llodra 52:25
yeah, and I think back to your, your original question, we kind of agree that there’s probably a decent chance that we can see sticky inflation because some some of these baseline numbers and, and the fact that, you know, recession doesn’t mean disinflation, and this and that these are these are things that are oftentimes rooted in perception rather than than reality. All right, well, look
Adam Taggart 52:48
in Carl’s comments, say to Congress, he said, quote, the economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring and inflation. So, you know, that’s basically him saying, Look, everybody get ready for pain, right? The pain that he was mentioning earlier, like to keep inflation under control, you know, I’m going to have to do stuff that’s going to slow the economy more meaning probably going to be a recession, you know, he said, hiring that’s, I think code for sort of, like, expect jobs to finally take a hit at some point in here. And inflation, inflation, you know, it’s made proof stickier than we think, and so we’re gonna have to be really tough to bring that sucker down. Right. So, you know, Powell has been, if anything, you know, he’s been very consistent over the past year. And, you know, as we’ve talked many times in this program, the market is pretty much always shrugged off what he said. And what’s interesting is the market has actually had to adjust its expectations over time. So in this game of chicken between the markets and the Fed, it’s the market that’s been having to blink. The interesting thing is, is it really hasn’t impacted the markets enthusiasm to to rise in the face of all this. But as we talked about with with Jim, you know, there’s two very different stories being told right now by the bond market and by the stock market, and one of them is going to have to prove right here, and historically, the bond market usually is the one that’s proven right, most really serious Wall Streeters, you know, respect the bond markets, predictive abilities way more than they do the stock markets. Who knows what’s going to happen from here, but I just want to underscore, you know, the point we’re all making here, which is the current enthusiasm in the stock market, you know, in less you can make a really good case that more and more net positive liquidity is just going to be shoved into this market. There just seem to be a lot of reasons to be wary. So this is not necessarily a time to go whole hog in particularly in the sectors of the market that have risen so far, so fast. I totally get that you guys, maybe making a short term oriented tactical play In some of the more defensive parts of the market that you think may now rise as some of the capital rotates out of the hot AI sector, I totally get the reasons for that trade. My guess is though, as you make it, you’re going to be putting in safeguards just in case, you tend to do that right before the general market corrects. And so you’re going to have some protections against that. So you guys nodding as I’m saying this. So Mike, as we as we wrap up here. You know, I guess I just sort of gave my little summary here, but But what what summary slash pardon? Counsel, would you give to folks that are, you know, watching the, the growing euphoria going on in the market and feeling that FOMO temptation, because there, you know, neighbor who’s just been blindly throwing money to the markets had a really good year so far.
Mike Preston 55:50
Adam, I believe, is just a relief rally, I honestly think the top of the market was likely January 4 of 2022. In the s&p, this has been a giant relief rally. And I’m not saying it can’t go higher than maybe even the highest can’t be exceeded. They certainly can. My belief is that this is a very long, drawn out a relief rally, that we had a bottom in October of 2022, the s&p down 20% or so maybe a little bit more, and that it’s been straight up since there and it’s retraced a good amount over 80% 78% is a Fibonacci number for the Fibonacci followers, we’ve actually gone past that. So it’s been a long drawn out affair. And so speculation is back, we’re chasing the the, you know, that’s the same old hot stocks, valuation is no concern. And volatility is in the basement, VIX is down at 13 or so which is a volatility measure threatens to go to 12. So, given everything else we’re talking about here, in admitting that we might do a short term tactical hedge trade, we’re very concerned that this is just a relief rally and not a return to normal, I know that we all want to believe it’s a return to normal, but I think it’s very unlikely to be that. And as such, we’re gonna have hedges we have hedges on what we’ve already got, we have a high level of cash, about 40 to 45%. For most people at present, that will drop if we if we do a short term tactical trade. And, you know, this, this market moves fast you recently had spent Henrik on we had a chance to look at his video as well. And his interview with you. And he mentioned that the options market is just the derivatives market is so complex. And there’s so much participation there that it causes very rapid movements in markets. So this melt up, so to speak, at least so far that we’ve seen has been probably exaggerated in speed, particularly amongst those few stocks that we talked about. But also downside moves, they can happen incredibly quickly, one or two, or maybe three days could erase all of the positive short term bullish signals we’ve seen so far. So it’s tough, we tend to be slow moving, sometimes we’re criticized for that. Sometimes we’re, we’re complimented for that. And so, you know, when we’re moving into the market, a lot of things have reversed up. In this type of market, oftentimes, that’s right before the reversal. So you have to be careful. So you know, be careful with FOMO or fear of missing out, don’t compare yourself to others try to have some patience. You know, watch videos like this, you know, read works from people like John Hussman, that that John mentioned earlier, that puts data out there that makes it less emotional for you. And so you won’t make mistakes. And we’re here to talk if anyone wants to talk. That’s what we’re here for.
Adam Taggart 58:52
All right, great. Well, well said, Mike, you know, I know I’m going to get some grief from people saying, Come on, guys. The markets are up this year, we had a terrible year, last year, and even when the markets are up, you guys find ways to be bearish. Like Can’t you just enjoy the ride and the people making money? Right. And I want to be the first to say I can’t wait to be able to be having discussions with you guys about companies that are attractive, pe levels, right? And talking about attractive cash flow multiples, you know, maybe in an environment where interest rates are starting to come down, right, and we can talk about, you know, capital flowing out of the safety of bonds into good value companies and whatnot. I can’t wait until we have a target rich environment to be able to encourage people to be more enthusiastic about the markets. Just for other reasons that we talked about here. You know, I don’t feel comfortable doing that. I can’t really tell that type of story except looking at liquidity flows. And just technical levels, right. Okay. We just punched through, you know, technical level x therefore, probabilistically we might go a little bit higher in the short term. Um, you know, those aren’t long term sustainable reasons to be taking, you know, long term long positions that most investors want to take. But just to be clear, I’m not trying to rain on people’s parades. I’m just trying to help people make eyes wide open assessments of where things are. Alright guys, well, another great week. Thanks so much for joining us here, folks, for all the reasons that Jim mentioned in this video, as well as the ones that John and I, John, Mike and I talked about here, continue to highly recommend that most people watching this, who want to preserve and grow their wealth going forward, should do so in partnership with a good financial professional financial advisor who can help create a personalized portfolio plan for them, and then execute it for them, while keeping them obviously very well informed along the way, if you have a good one who’s doing that for you, excellent, you should stick with him. They’re very rare. But if you don’t, or if you’d like a second opinion from when he does, maybe even John and Mike and their team, they’re at new harbor, then consider scheduling a free consultation with one of the financial advisors that Wealthion endorses to do that, just go to wealthion.com Fill out the short form there. You can set up one of these consultations, like I said that totally free, they don’t cost you anything. There’s no commitment to work with these guys. They just offer it as a free public service to help as many people as possible position prudently today for what might happen tomorrow. And if you enjoyed having Dave and Jim on this program, I’d like to see him come back on again in the future. Please do me a favor, cast your support for that by hitting the like button, then clicking on the red subscribe button below, as well as that little bell icon right next to it. I’m trying to let you have the last word as we we say goodbye to folks here.
John Llodra 1:01:45
Thank you again, Adam, for having us as always. And to the viewers, we are happy to talk answer questions. We are in a very tricky markets. There’s no doubt about it. The crosscurrents here are dramatic. And it just we think deserves a very open eyed look at things and not get seduced into believing that everything is just all peaches and cream. There’s there’s many, many crosscurrents here that deserve a real hard inspection. And we know it’s it was a tough week for you. And we we’ve talked about it. And you’ve shared some very touching moments that your mom’s passing, and we’re glad you’re back here and our hearts have been with you. It’s a very sensitive topic that we oftentimes talk to clients about as late stage care and the financial aspects of that, but a very, very tender time in your life. And we appreciate you being here,
Adam Taggart 1:02:42
despite all that. Oh, thanks. That’s very kind, John, very much. Appreciate that. And yeah, that’s something that we should talk about, at some point more on this program, just sort of planning for senior parents, you know, end of life needs in the transition. I certainly learned an awful lot that I didn’t know before going into this process symbol, which can help people and hopefully somebody would check in, you know, pitfalls I can, I can hopefully identify for people to avoid going forward. So big topic, but yes, Ian, thanks so much to everybody for all the kind words that folks have been sending in incredibly grateful for everybody’s support. In the the long and short of it is is a sad time as it is for the Taggart household. We’re very grateful for what a really wonderful passing my mom had. I’ll share the details at a later date. But it really went very gently for her. And that’s the best we could all hope for. So anyways, thanks so much for the kind words. All right, we’ll end it there. John and Mike, thanks so much for joining me this week. Look forward to see you guys in the program next week. Everyone else? Thanks so much for watching.
Mike Preston 1:03:52
Thank you, I don’t think you everybody. See you soon.
Adam Taggart 1:03:56
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Transcribed by https://otter.ai
Jim Bianco is President and Macro Strategist at Bianco Research, L.L.C. Since 1990 Jim’s commentaries have offered a unique perspective on the global economy and financial markets. Unencumbered by the biases of traditional Wall Street research, Jim has built a decades long reputation for objective, incisive commentary that challenges consensus thinking.