Wait, Inflation Is Going To Start RISING Again This Summer? | Jim Bianco

Jim Bianco 0:00
This is the bottom in inflation it the declines over now. And we’re going to start to see it start trending higher from here. And I was smart because that’s like the perfect time to start saying that the move is over is when everybody’s decided that the move will continue into perpetuity. Right, which is, which is what everybody’s thinking. But I do think that inflation is bottom. So to the inflation Reduction Act and the big deficit spending and stuff like that, we could see inflation continue to be a problem. I think that Jay Powell and company are going to look around and they’re going to start saying, you know, we might have to go beyond two more rate hikes. Before this cycle is over, we might have to continue to raise rates, even more than that.

Adam Taggart 0:49
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. No one can doubt the bulls are in control of the financial markets right now. But will it stay that way long enough for investors to make good returns from here? It’s unclear. There are a lot of ways the future can play out from here as there are cross currents galore in both the macro and market data. To discuss and make sense of it all. We’re fortunate to welcome Jim Bianco of macro research firm Bianco research back to the program. Jim, thanks so much for joining us today.

Jim Bianco 1:21
Thanks for having me.

Adam Taggart 1:22
Guy, Jim. It’s always a pleasure. Look, we always have great discussions. I sense we’re gonna have another great one here. Lots of questions for you based upon your recent work. But real quick, before we dive into the details, what’s your current assessment of the global economy and financial markets?

Jim Bianco 1:39
They seem to be surprising to the upside, I’d like to joke that the problem, at least for now, has been that there is no problem with the economy, you know, job creation continues. positive growth continues. The markets are responding properly, the risk markets, at least corporate bonds and stocks are responding positively, more or less, there’s a bit of a concentration around AI. And the concern might be that there would be inflation later this year, because things aren’t slowing fast enough. But so far 500 basis points of rate hikes. And everything else that we’ve seen the turmoil that we’ve seen between the Ukraine war and everything else, has not really manifested itself into major problems. Now, maybe the word I should stick after that is yet but so far, you know, we’ve made it all the way through halfway through 2023 Without a bigger problem. Are you surprised by that? To some degree I am, I thought that with the massive rate hikes that we’ve seen 500 basis points, you’d see a little bit more slowing in the general economy than we’ve seen that higher cost of capital, they’re supposed to retard business activity, at least that’s the theory hasn’t really come across. What that suggests to me is that the if the economy is on solid footing, even after 500 basis points of rate hikes, that maybe were not restrictive, and that that would give the Fed more room to continue to raise rates.

Adam Taggart 3:13
Okay, so I’ve had several discussions on his channel recently, one just yesterday with spent Henrick. Really focused on liquidity. And several folks saying at the end of the day, it’s really just net liquidity that drives everything here. And could we be sort of riding the sugar high of positive liquidity right now? And that, that there could be a reckoning a hangover, you know, once once that surge ends? Or do you feel that the economy is being driven by something that’s more fundamentally, you know, something we should be optimistic about?

Jim Bianco 3:56
No, I definitely think that there’s a lot to the idea that it has been liquidity. If you look at just the post pandemic era, right? 2021 markets boomed. What did we do? We stuffed everybody full of liquidity. We sent out STEMI checks. 22. What happened? Well, Fed started raising rates and started doing que te, and we saw that liquidity started to pull back in the markets really struggled in 2023. We’ve seen at least a stabilization of liquidity, if not an addition of liquidity. So there’s a lot of that. Also, if you were to step back and say, well, markets are up, are they cheap? And the answer is no, they’re not really cheap. I wouldn’t call them ridiculously overvalued. I’d call them slightly overvalued. But, you know, if you were to look at the measures or the metrics that seem to correlate best with the ups and downs and risk markets, you know, stocks, it would definitely be liquidity and I think liquidity is a major concern. Now, the biggest concern we have with liquidity sticking on that subject for The second is, ironically, let me make sure we understand this. When money goes to the government either through the reverse repo facility with the Fed, or to the general account for the Treasury, that’s money that’s outside the financial system. It’s it’s still money. And it still counts, but it doesn’t count as part of the banking system. It doesn’t count for everything that goes into the mechanics of the financial system. So when we push a lot of money to the Feds reverse repo facility, or to refill the TGA, what we’re doing is we’re pulling money out of the financial system, we’re reducing liquidity. Now, the reason I bring that up is what were we doing until a couple of weeks ago was, we were running down to TGA account, because we were held against the debt ceiling, we were taking money out of the government’s account, pushing it back into the real economy, we were adding liquidity. So when the markets were rallying during the debt ceiling crisis, we were adding liquidity. While we’ve continued to rally since then, even though we’re supposed to be refilling the TGA account. By early indications what’s happening is money is coming out of the reverse repo facility, and being used to buy all of these new bonds now, are treasury bills that are being issued. Now, keep in mind reverse repo facilities. Also out of the financial system, it’s money held at the Fed. So if you’re going to transfer from one account outside the financial system to another account outside the financial system, you’re not draining liquidity by taking money from bank accounts to buy treasury bills, that may still happen in the coming weeks. But it hasn’t yet. And so I’m not surprised to see markets responding positively. I am surprised by the degree that they’re responding to it. I didn’t think it was that big or positive, but we’ll see how it plays out.

Adam Taggart 6:51
Okay. So you’re basically saying that, largely the reason why the refilling of the Treasury general account has been sort of a nothing burger, the financial asset prices is because we’re basically just kind of doing a swap in these two pools that are already outside of the financial system. Right? They’ll change in the future. But But yeah, so far. Yes. So on the topic of so far, you know, at some point, the TGA will be refilled? Who knows what they might need to do in the interim, or whatnot. But I guess what, what’s your outlook for net liquidity? If it’s so important? What’s your outlook for net liquidity going forward? And if you can, what, what metrics do you look at to measure liquidity, I find that there’s no sort of universally accepted metric. And I kind of feel like if there were man that should be at the top of every financial media in a newspaper and website, because it seems to maybe be the prime factor in where the markets go.

Jim Bianco 7:49
Right. And I think that the metrics that everybody uses are, the big three that everybody uses is the Fed’s balance sheet, and then netted against or subtract out, you know, reverse repo in the TGA, some variation of those three things that you look at whether money is going into the financial system, or coming out of the financial system has a pretty good fit with measures of the risk market, like if you overlaid it with the s&p 500. Now, yeah, that should be at the top of the list, but I would caution everybody, that’s not the Rosetta Stone for where the markets gonna go next, it only tells it’s usually coincident, where the market is now. And then you got to kind of predict where liquidity is gonna go, which can be as hard as predicting where the stock market is gonna go. But it helps to understand what’s been going on with markets. So most of the year, we’ve been adding liquidity, because we’ve been running down because we hit the debt ceiling, the government has been exhausting its extraordinary measures, and it’s in its general account, what does that mean? That means they’re paying benefits, they’re paying workers, they’re taking money outside the financial system, and they’re putting it into their bank accounts. And so they’re shoving money back into the bank into the banking system. Now, like I said, now that they’re trying to refill it, they seem to be swapping it from the R RP to reverse repo facility. So there’s no like net drag. But like I said, so far, maybe starting next week or the week after all of a sudden, the RFP stops going down. And then people start buying all these treasury bills, by buying them through their bank accounts, which means that they’re taking money out of the bank, and they’re putting it with the government. Now, eventually, that money returns back to the financial system, because they still have to pay workers, they still have to pay benefits, they have to pay the bills of the government, but it’s initially it’s a big drain first, and then it’s a slow push back. Later. So the liquidity it is, it is interesting that it does a good job of explaining coincidentally are currently where the market is, but you’d have to predict where liquidity is gonna go next. And that’s like I said that you might as well just predict where the s&p He’s gonna go next because it’s ultimately what you’re trying to do. But it out, it definitely helps to put color on why markets are doing what they’re doing, maybe not so much as to what the next move is going to be.

Adam Taggart 10:09
Okay, so of course, my next question to you is going to be where do you think liquidity is going to go next? And just for some context around that, you know, there was a lot of discussion about where liquidity was going to go, you know, over the past six months that people have said, hey, look, you know, we bet is continuing to hike interest rates, which should be contractionary to economic growth. It’s pursuing Qt, that’s draining liquidity. We’ve got the banks that are tightening lending standards in the wake of the banking system woes that’s draining liquidity, we have the refill of the TGA. I mean, there’s just sort of this parade of like, oh, my gosh, we’re gonna see this massive contraction in liquidity. And we really haven’t, at least not yet. So I’m curious what you see going forward is more likely more, more net increase? Or Are there reasons to believe that things could reverse?

Jim Bianco 11:03
Oh, I think that you’re right, that the the needs of the government to refill the TGA, the continuing reduction of the Fed’s balance sheet, is going to continue to demand a lot of money from the financial system. I don’t think that the RP is going to have I know a lot of people. I mean, some people actually think that that $2 trillion in ERP might go all the way back to zero. I mean, I understand that argument, and could very well be the case, I just don’t think it will. And so therefore, I think that ultimately, when we start moving forward from here, we’re probably going to see some reductions in liquidity. Now, I might add, I kind of danced around this, that liquidity is showing up there that reductions of liquidity and stuff is showing up in some other places. Because if you do break out the stock market, you’ve you know, this, it’s been the most concentrated rally that we’ve probably ever seen. Where eight stocks, I mean, the stock market, people who say, the stock market’s up, well, you know, what 12%, or something like that year to date, the last time I looked it, eight stocks accounted for all of it. In fact, half of it is is basically to stocks and the video in an app is a good five or 6% of the rally in the entire s&p is to stocks. If you look at the other 490 stocks, they’ve been treading water somewhat now they’ve started to pick up a little bit this month, I wouldn’t call it a breakout, but they started to pick up. So that’s more where I think the liquidity is, is having its impact. So you’ve got a lot of FOMO going on in AI stocks. But from here forward, to answer your question about Quiddity. I suspect that the reductions in the RP are not going to be enough to say people just can’t take $1 out of the RP and they’re going to use it to buy a dollars worth of treasury bills. So therefore, there’ll be no effect on liquidity. That has been the case for about two weeks now. I don’t think it will be the case going forward. That’s my guess. And if it is where will the liquidity show up? It won’t show up in the Googles. And then it won’t show up in the fang stocks and videos and the Microsoft’s and the Tesla’s it will show up in everything else kind of meandering around as those stocks continue on the tear that they’ve been on, you know, for most of the year.

Adam Taggart 13:30
Okay. Okay. That’s great. One thing I forgot to mention, too, on the plus side of liquidity is one we’re running pretty substantial deficits this year. Right. So trillion dollar deficits again, and we have the inflation Reduction Act, and they’re really pumping some serious money into the economy, the manufacturing side of the economy now, or the construction side of the economy now for infrastructure spending. So I haven’t really done the math. I mean, there’s a lot of variables in play here. But there’s an argument that that could keep things net positive for a good long while. What do you think? Yeah, I

Jim Bianco 14:13
mean, that was, you know, you right? That large that was 2020. Right? That was the thing that really, in 2020, you know, surprised everybody when the markets rebounded so massively, I guess we initially we didn’t appreciate that, you know, if the government’s gonna bail everybody out money, and then they’re going to point at putting their money in a Robin Hood account, and they’re going to start speculating with it. Yeah, markets are going to rebound and that’s exactly what happened. But to the extent you’re right, that as long as there is this massive deficit spending that we’ve seen, and, and I was gonna say the cares equity inflation Reduction Act is going to continue to push infrastructure spending that will be somewhat stimulative. I think, though, that ultimately all of that will be more of a problem. Foreign inflation in the second half of the year, then it will be a problem, you know, for liquidity in markets. And let me throw out the argument about inflation. I have been one that has been I noticed that the consensus on inflation is now that it’s been vanquished, and now that it’s going down forever, what does it what does it mean? The day we’re recording the New York Times podcast, the dailies got a whole podcast on inflation is gone. Now, what does it mean that inflation is gone? And I’ve been making the argument, no, this is the bottom in inflation it the declines over now. And we’re going to start to see it start trending higher from here. And I always smoke because that’s like the perfect time to start saying that the move is over is when everybody’s decided that the move will continue into perpetuity. Right. Which is, which is what everybody’s thinking. But I do think that inflation is bottom. So to the inflation Reduction Act, and the big deficit spending and stuff like that, we could see inflation continue to be a problem. And given the strong economy, the strong economy, not recession, you know, I’m not sitting here arguing that the economy is great. The resilient economy that resilient is a great word. Yes, resilient economy, 300,000 jobs. I think that Jay Powell and company are going to look around, and they’re going to start saying, you know, we might have to go beyond two more rate hikes before this cycle is over, we might have to continue to raise rates, even more than that, because they’re not seeing any signs that what they’ve done so far, has definitely pulled pulled in inflation. Let me let me, I’ve teased it. So let me throw it out a little bit why I think inflation is bottomed. We like to look at inflation on a year over year basis. So the economists call this the base effect. What did inflation do a year ago? Well, a year ago, price of oil was $120. And in June of last year, the in one month, June 2022 inflation rate was 1.2%, one of the highest monthly numbers ever. So when we get the June number next month, we will drop 1.2%, we will add in point four point 3.5. Or wherever we are for this month’s inflation. And of year over year inflation rate from four will go down to three. Then what happens in July? Well, July of last year, the inflation rate was zero was zero. Well, if we put point four, point 3.5, your number will go up. And then it was a point two, we could jump over that one, it will go up, there’s a couple of point ones in there as well too, in like October and November. So all of a sudden, you could see the inflation rate bottom and start back up. Now, I’m not saying it’s gonna go to 9%. But you could definitely see go back, you know, solidly into the four handles, maybe the high fours in the Federal Reserve will look at this and say that this is unacceptable, and that their job is not complete. And they will continue to raise rates. And we won’t find that a four, four and a half percent inflation rate is anything near being acceptable. And I know a lot of people have argued, well, the Fed will change its target, either explicitly or implicitly. Jay Powell could not be more clear, he is not stopping till he gets to 2%. And we’re not at 2%. We’re not going to be at 2% anytime soon. So that’s wishful thinking to think somehow that they’re going to stay for 4% Close enough. Horses hand-grenades In fed targets on inflation close enough, well, mission accomplished, you’re not going to do that. They’re going to continue to stay tight until they see 2.0. And we’re not going to see that anytime soon in this space effect means that we’re going to bottom now and probably start to see inflation meander higher.

Adam Taggart 18:55
All right, great explanation of the base fact I totally agree with you that comparisons get a lot harder. After June,

Jim Bianco 19:02
like the way we win real quick thing, you know, that base effect argument was really interesting, because a year ago, everybody was making the base effect argument we’re peaking. We’re gonna peak at 9% because of the base effect, and they were right. That was June of last year that we peaked at 9%. And I’m saying June of this year, for this same reason. We’re going to bottom for the base effect. And yet no one everybody’s memory hold the base effect argument. They don’t want to talk about it anymore.

Adam Taggart 19:30
I know it’s so funny. And I’m going to bring up a few other sort of memory hole issues too in a second here. But I agree with you too, that Powell has been incredibly consistent, saying look, you know, get ready for paint like I’m going to do whatever it takes pain, everything right to get right through jobs under the bus I have to to get inflation back down under 2%. And I think he’s really referring more toward to core inflation. When he says that then then headline, and core hasn’t really We’d gone anywhere. I mean for quarters, it’s been incredibly sticky. So

Jim Bianco 20:06
incredibly sticky around 5% is where core has been, you know, it’s printing point fours and point fives every month and you annualized that out. And that’s like a four and a half to 5% range is where it’s been. Now, a lot of people have argued that the core rates should come down some because owners equivalent rent this imputed way that the government measures inflation should start to roll over because the we all know that rents are starting to come down and have been weakening for about a year and the government’s numbers should start to capture that. And that’s true, it should come down some, but not nearly as much as everybody makes it out to be because the government’s measure of of rents also includes the existing rents. So when they do their survey, what do 90% of renters say it’s happened to their rent, it’s unchanged. I still have my lease from six months ago. And it’s still the same price. Whereas the Zillow and Redfin numbers that we all like to look at they only measure the incremental rents have new rentals that are down, but 90% of people are not in the market for new rental, they’re still paying the same price. So yes, it will come down, but it won’t come down as much. And the other argument I’ll throw out to a lot of people like to talk about when it comes to inflation, well, I am to is collapsing them to his negative for the first time since the 1930s. That means that we should have a big decline of inflation, yes, nine to three is what we’ve what we’ve seen with inflation coincident with the big M two. But keep in mind what it means for negative m two, m two measures a certain segment of money that is liquid and readily accessible. That’s m two, what we’ve been doing is we’ve been moving money to accounts that is maybe as by definition not readily accessible. If you bought a ETF that buys a T bill and institutional money market fund. If you put money in a in a cash account in an IRA, because you’re getting five and a half percent, these are accounts that are not part of them to the reverse repo facility is not part of m two. So when we see them to decline, does that mean money has been destroyed? Does that mean that money has gone away? No, it means it’s moved to an account that the government has decided has defined as not readily accessible. Maybe you or me might think that it is readily accessible, I moved my money to my brokerage account. And I bought the the ETF that invests in three months T bills, because it’s yielding 5.2%. I think of that as being indistinguishable from a money market fund. Well, though, that ETF is now part of m two, that money market fund is part of m two, but you don’t think there’s much of a difference between the two of them, but the government does. So keep in mind that when it comes down to it’s just that money has been moving to categories that’s not readily accessible. It’s not that money has been disappearing. And yes, it does work, we’ve gone from nine to three. But I know people think we’re going to have to go from nine to minus 10. or something, I don’t think we need to see the inflation rate collapse that much because the money supply is falling. It’s a very tricky thing, the money supply, they haven’t updated their definitions of what is readily accessible. And I might argue that some of the categories that they don’t have that are readily accessible, where money has been flowing into reverse repo might actually be readily accessible. And if you were to add those back to m two, it’s not, it’s still declining, just not as much as it appears to be right now.

Adam Taggart 23:54
Got it. Got it. And that just seems to be a consistent story here, which is like we’re all using data that isn’t really quite as perfect and reliable as maybe perhaps we’re treating it right for a lot of the reasons you’re talking about here.

Jim Bianco 24:08
I would I would refine that a little bit and say we’re using definitions that aren’t perfectly reliable. Because the whole idea about financial markets and business in general is we’re supposed to evolve, we’re supposed to get better at doing things. And the definition of readily accessible should evolve to, but we’re still using the same definition that we were using in the 70s. But the financial markets and financial products available to people are not the same as they were in the 1970s. But the definition of them too is and so there is where the rub beats.

Adam Taggart 24:41
All right. Well said All right. Well, look on this theme. I I agree with you, which is that I think that if inflation does start to go back up, you know, Powell is not going to just shrug and say Oh, well, you know, he’s gonna say Alright, look, you know, this is my legacy. See, I gotta do whatever it takes to get this down. Now he has paused or is skipping before you know it, but he’s guiding us that hey, look, folks, you know, I’m not giving up the fight here, I very well may jump right back in with with rate hikes depending on the data. And, you know, for for quarters now, I think I’ve actually been advising what he’s just announced, which is, hey, you know, pause in wait and see for a little bit. And the reason for that was the lag effect, right, where we’ve had these 500 basis points and over how long it takes to see them manifest in the economy. But let’s take kind of a midpoint more or less a year ish, right. So we’re just beginning to see the first couple quarter point rate hikes reflected right now. How big of a factor do you think the lag effect is going to be? Because right now, the markets are treating them like they are not going to do anything?

Jim Bianco 25:53
Right. Right. So a couple of things. Let me go to the first part of your question. I think the reason that he paused is more political than economic, the Fed. And I’ve been very critical about the fed on this, the Fed likes this idea that they need to have these unanimous votes, that somehow that means that gives monetary policy more impetus that they all agree. And the reason that they paused was it is apparent, because there was a number of speeches by a number of Fed officials, they were going to get the sense if they were going to raise rates again at this meeting. And, and if they didn’t raise me at this meeting, they were gonna get this sense in the other direction, because they had people that said, on the Fed board, I don’t want to raise rates anymore. I want to raise rates anymore. So I think it was a deal, we’re going to skip this meeting, and we’re gonna raise later, is because he wants to get the unanimous vote. Now what I’ve been critical about is, I think that this is bad for the Fed to have to make sure that they get a 12 Oh vote or an 11, one vote at the most, the Bank of England, the Bank of Japan, they’re perfectly fine. With seven, five votes, the Supreme Court is perfectly fine with five, four votes. It is a big, complicated topic. People are allowed to have differing opinions. But now at the Fed, they only agree with groupthink. And this is why you get yourself into trouble over and over again. Because you want you demand a certain type of group thing out of the Fed. So the point I’m trying to bring up is, I think it was a political decision that the Fed didn’t raise rates, I don’t think it was necessarily an economic decision. Long and variable lags on monetary policy is true. And that is a valid argument to say, look, we got to stop it, we got to see what what we’ve done so far, what kind of impact it’s having. I might turn that around and say 810 months ago, you raised rates by 200 basis points, six, eight months ago, you raised rates by 300 basis points, you know, three, six months ago, you raised rates by 400 basis points. And currently you’ve raised him by 500. Where’s the 200 300 400 Lag effects showing up in the economy? And it’s really been very difficult to see even those really showing up now. I wouldn’t say they’re, they’re not existent, I’d say the concentration in the market might be one aspect of it. The problems with the banking system might be another aspect that we’ve seen showing up because of these of these of these rate hikes, but nevertheless, written as a whole, if the Fed is going to skip and say, well, well, let’s wait and see. What are they going to see by July or September, then it’s going to really change the well what are they going to know in September that they don’t know now? And the answer is not a whole lot. Unless you tell me that something dramatic is about to happen. The data is gonna look very similar. I think in September that it does, then it looks now it might be a little weaker, might be a little stronger, but they’re gonna be dramatically weaker. Unless you tell me that we have this life altering event that happens somewhere in the next 30 or 60 days. But short of that they’re not gonna have any more news. So I don’t know what it is that they think they’re going to see you. So that’s why I’m left with the pause looks like it was more of a political decision to continue to have these unanimous votes than it was, you know, any kind of an economic decision. And lastly, on this, this political decision. Look, when you’re a Fed governor, you are appointed by the President and you are approved by the Senate and your boss is the American people, you are there to represent them. But somehow fed governors have fallen into this trap that their bosses Jay Powell, and they’re there to make sure that they helped to support their boss. There’s no other place where when we have commissioners, or justices or governors, that we expect them to support the head of the organization. We expect them to represent the American People, and if that means flying against what the head of the Commission, or the or the group says, then that’s what you do, but not at the Federal Reserve. And that is a problem. I think the Fed thinks it’s a strength and not. I think it’s actually a weakness of the organization.

Adam Taggart 30:18
All right. So let me ask on top of that, the Fed is supposed to be an independent entity. Right. And yet right, the chair Jay Powell was appointed by the President. Right. And we have a election year next year. Right. There’s been a lot of, you know, criticism about, I’d say, the Jay Powell tenure at at the Fed, that it’s been influenced by pressure from the administration. What do you think is more likely going forward from here, especially if inflation starts going back up again, is Powell going to say, you know, damn, everything else? This is my job, I gotta make it happen, or is he going to say my boss really wants to get reelected, and I’ve got to do stuff to help them get reelected, so I can keep my seat.

Jim Bianco 31:07
So you know, what’s really funny about this is that everybody says that an election year the Fed will alter policy. And you’ll point to 2015. In December of 2015, the Fed raised rates often zero to 25 basis points. 2016 was an election year one was the second rate hike, it was after the election, they waited a year for the second rate hike, ah, sees the Feds very political because they they raised rates, and then they sat on the second rate hike for a year until they after the election was done. And you know, I think they’re guilty as charged when it comes to being political. However, if you look at 2008, you look at 2020. It’s, it seems to be that, or 1980, would be another example of this as well, too, that the Fed would like to be political and sit out the election year. But then extraordinary things happen in election years, the pandemic, the financial crisis, you know, 20% inflation in 1980, that forces them to be ultra aggressive. So also at the same time, if you looked at what does the Fed typically do in an election year, they sit it out. But what have been the years where the Fed has been the most aggressive? they’ve ever been election years? Because they’ve been forced to do it because of 2008 2020. So I think they would like to sit out 2024 I just don’t know if he can. So to your question, you know, my job is to bring in inflation. Yeah, if it behaves, I’ll sit out the year. But if it starts creeping towards 5%, in 2024, he’s not going to sit out the year, he’s going to have to raise rates in an election year. And that’s going to be a real problem for them. A real problem for the current administration. GREENSPAN famously had to do this in 92, George Sr. Bush, you know, hated Greenspan. He wrote it in his memoirs and stuff like that, for he caught he’d said, it cost him the election. But again, it was the circumstances of 92 coming off of the Gulf War, they’re forced Greenspan’s hand on that as well. So, yeah, I’d like to, they would like to sit it up. But it’s a funny kind of thing. Every four years when we get to election cycle, other than 2016 was the only one that wasn’t the case. Circumstances kind of forced the Feds hand to have to be aggressive in an election year.

Adam Taggart 33:26
Okay. And that’s, you know, we can make an argument that if inflation doesn’t go down, the Feds gonna have to get tighter and even more aggressive. on the conservative side. Let’s flip this around for a second. So I did pull a quote from you from the news headlines tell me if this is true or not. But the Fed is had this massive rate hike regime, right, so now the cost of capital is way higher than it was a year ago. And that’s coming off a decade or more where the economy has really habituated to zip or near zip, you know, cost to capital. There’s a lot of people, myself included, who have thought that this would this would cause a shock, probably fatal to at least some cohort of the American economy, right? This is 20% zombie companies and stuff we talked about and whatnot. Your quote is the economy can handle 5% rates, maybe even 6%. Do you think the economy is resilient enough to do that on a sustained level? Or am I just pulling this was this quote just taken out of context and you want to give a little more color to it?

Jim Bianco 34:35
No, I think you can. I think that it for now. It is showing every sign that it can handle five we have 5% rates right now, and it can handle 6% rates for now. It seems to be showing it now. What I’ve always basing that on was 339,000 jobs, 14 straight months and what that’s what we created in May was 339,000 jobs. That was above consensus for the four tene straight month in a row, which was a record. That’s important, because whenever you see a group of economists constantly missing in the same direction, they’re missing their their model is off. Right. And their model was off that there is some underlying strength in the labor market that we don’t understand just yet. The the other metrics of the economy, whether you’re looking at industrial production, or GDP or the like, seem to be, you know, handling these higher costs of capital. So yes, when the Fed looks at the higher cost of capital, saying that the economy is not under stress, and the inflation rate might be bottoming? Yeah, then the conclusion is, we’re not at we’re not restrictive. So bit embedded in your question was five percents restrictive. And I’m saying maybe it’s not, there is a level that we have to get to rates where it is restrictive. And a lot of that has to do with the level of inflation, and we might not be there, and that we might have to go higher. Now. If later on this summer, we start to see serious weakness in the economy, or serious weakness and inflation. And by the way, when I say serious weakness, inflation, I mean, something other than the price of crude oil goes to $40, or something that could happen. And that could drag down the statistic of GDP. But if you need more than that, it’s to show that inflation is actually starting to come down. If we don’t see that, then yeah, I do think that the the watchword is, is that interest rates are going to have to stay higher. I thought just to complete this thought that coming off of the banking crisis in March, that that would be something up, you know, the old adage that the Fed raises rates until something breaks, we just broke something. Yep. Yeah, we kind of broke something. And then there wasn’t a whole lot. There’s been follow through to it, in that we have this what I refer to as a bank walk, that everybody’s acting rationally, why are you leaving your money in a chase account, getting one basis point when you could spend three minutes on your phone and move it to a money market funding get 5%? You know, if you have $250,000 in the bank, that’s the FDIC minimum, you’re gonna pick up 13 grand in interest income over the next year, by the way is the FDIC maximum? But yes, yeah, not maximum. I’m sorry, you’re right maximum. Yes, you can pick up 13 grand by spending five minutes in your fund. Why would you do that? And so yeah, we have a bank walk, but it hasn’t metastasized into a bank run, that is creating more failures. So we sort of broke something, but the economy can handle that breakage. Right now. So yeah, it looks like rates will continue higher until we see real signs that inflation is really broken and broken hard. And I don’t think we have that yet.

Adam Taggart 37:47
Okay. And that’s kind of where he’s going with this question where we could we just made it earlier, we made an argument that the Fed might have to tighten next year, because inflation continues to go up. But if the Fed is still searching for the restrictive level, and it keeps hiking, literally until something breaks under these higher cost cap, and by the way, you and I can come up with a long laundry list of pins that are floating out there, right, that could bring us down, right, one of which is a lot of these zombie companies. You know, they raised capital going into this, so they’re okay, for now. But then when they have to reraise, you know, that’s when things get real tough. But if if if the economy really starts struggling under these these higher rates, well, the Fed may actually have to be accommodative next year. Right? I mean, it could get to a point where it does force a pivot, right? And so we kind of could go either way, next year or so to what I’m saying?

Jim Bianco 38:36
Yes, yes. You know, you definitely could, and as far as breakage You’re right. There, the old adage, just to stick with that for a second, you know, the Fed raises rates to something breaks, what’s the definition of break? How about a 25%? decline in the stock market in 2022? How about the worst total return year ever? In in bonds in 2022? How about the problems that we’ve had with liability driven investing in the UK? Or the banking crisis that we’ve seen to date? Or add all of those together? Is that the breakage? Apparently not? At various points, you, you would have thought that what it was,

Adam Taggart 39:14
yeah. And let me just pull on that question. Because I’d love your thoughts to it, which is, you could say that that was the breakage, but it really would have had to have been the market pricing in what it thought was going to happen, right? Because Because there hadn’t been a lot of economic damage yet, right. Coming out of 2021. We were still partying, right. And of course, we had dumped a crap ton of liquidity, you know, that went straight into the financial markets. And so one could just argue it, make the argument that was just taking the froth off from the previous year, year and a half. I’m curious, do you have an opinion one way or the other?

Jim Bianco 39:50
Yeah, I think we’re there was definitely that, that we were at least taking the froth off and whether or not look as far as the definition of break. Let’s let’s Talk about what we’re talking about here. We’re bringing inflation down to 2%. Why is that important? It is somewhat of a made up number. It is no, it isn’t someone

Adam Taggart 40:10
it is a made up. It isn’t. It isn’t arbitrary target.

Jim Bianco 40:13
But it is important in the following respect. If you look at Jay Powell, at every press conference, and the one that he held, you know, from when we were recording two weeks earlier, he has some boilerplate language he uses in the beginning, we’re here to serve the American people. If we have inflation, it doesn’t work for the whole economy, we understand the hardship that it puts on families. And he says stuff like that, and everybody looks past it. Because he says the same thing at every every press conference, it’s not new. That’s why they look past it. But let’s remember now that according to a lot of studies, 57% This is a bankrate.com study that came out in January 57% of the American public can come up with $1,000 of savings in an emergency of people under the age of 35 43% of them, in a recent survey in the last couple of weeks said that they live paycheck to paycheck, these people don’t have savings, they don’t own homes, they don’t have spy, or anything like that, to see that it’s gone up 14% this year to offset higher costs. We also know that over the last 26 months, the longest streak, since they’ve been keeping records on it, the inflation rate has been higher than the average claw increase in average hourly earnings. In other words, raises are less than the inflation rate.

Adam Taggart 41:34
Right. Real wages have continued going down despite all the inflation. Yeah,

Jim Bianco 41:37
right. So that means that people that don’t have savings that live paycheck to paycheck, buy less things every month, every year, because their dollar doesn’t get them as much as it did a year ago. Paul is correct. To point to that, and say, that’s what we got to do, we have to get the inflation rate underneath wage growth, or at least equal to wage growth. Because more than half the public doesn’t own assets. They don’t own a home. They don’t own stocks, that he is correct that they have to do that. They cannot just say 4% It’s good enough, I’m sorry that you have no savings live paycheck to paycheck, you get a three and a half percent raise your job, you’re just going to have to deal with with doing with less every year that’s

Adam Taggart 42:18
that’ll eventually end in social revolt. Yep. Right.

Jim Bianco 42:21
Exactly. I was gonna say that is untenable. Whether he’s got the right prescription to do it. We could argue, you know, raising rates into oblivion to pound the economy, is that the right way? Right. That’s a different argument. But his intention, and his goal is clear. That’s why he doesn’t back off on the 2% target, that he has to get that inflation rate down. And so, you know, whenever I hear people that say, Oh, you just change it to three, and it’s fine. Oh, yeah. Because you want a bunch of assets, and you want your asset prices to go up. But that doesn’t serve the broader mass of the of the economy. And that’s where his focus has been. And that’s why I think that this inflation rate is such an important thing. And we cannot, you know, discount it or try to wish it away or anything like that.

Adam Taggart 43:09
All right. So I was gonna go here a bit later, but let’s dig into it right now. So, you know, I share a lot of concerns about the bottom 90%. Right, you know, top 10% or 90% of all the financial assets. Right. So it’s been a great year, this year, right? The bottom 90% have had a terrible year, right? Because all the inflation of last year is still there. Yes, we are in disinflation now. But that means prices are still going up, right. wages aren’t keeping up, as you just said. So they’re really getting crushed between the cost of living the lower purchasing power of their wages, and they’re not participating at all, in the RE inflation of financial assets. Meanwhile, you know, home prices are the most unaffordable they’ve ever been in history for new buyers, right? Even used car prices are going back up. And that’s because people are not able to afford as much in a new car. And so they’re crowding into the used car market now used car prices are going bananas. And at the same time, we’ve seen the resurgence in consumer dependence upon revolving credit and the interest rates that that revolving credit is charging now are now at record high, too, right? So that just the blows are coming from every angle from these folks. And now, you know, we have some of the last remaining forbearance programs ending right, so student loans are gonna go back into repayment. Biden’s plan to do debt forgiveness probably gonna get shot down. So, it’s an election year, next year, obviously, you know, I’m sure the current administration would love to have a better story to sell to these people. But even though we talk about like this resilient economy and whatnot, it doesn’t seem to be working for a lot of these folks. And again, you and I can make arguments whether they prove to be true or not in the future. of how the lag effect, the higher cost of capital, and all these other things could potentially grind the economy lower to the point where the employment market starts to crack. And yes, that’s been surprisingly resilient, I think. But there was a lot of debate on how true these numbers really are. No doubt, it’s still pretty good out there on a relative basis. But, you know, you look at initial claims and continuing claims they clearly bottomed at the end of last summer, and the trajectory is not looking great. Now, they’re still at levels where no one’s breaking a sweat quite yet. But if this trajectory continues, maybe they do. So I’m just I’d love to get your thoughts on kind of like, you know, do you have a more optimistic view of how the economy may work out for that bottom? 90%? Or do you share the same concerns that I do?

Jim Bianco 45:52
Well, I share the concerns. I mean, ultimately, we have to get the inflation rate back down like it was pre pandemic, because even though the bottom 90% had the same, some of the same issues pre pandemic, what they were able to see was their wage gains were equal to or a little bit more than the inflation rate, at least they were able to buy the same amount of stuff every month, you know, real wage gains were zero or slightly positive. And if we could get back to that, then I think that that would relieve a lot of their concerns right now the but the only positive they’ve got going for them right now is price gasoline is down, because the price of crude oil is down. But OPEC is trying really hard to reverse that right now, as led by the Saudis. They don’t they’re not happy with that price level that didn’t you know, in the mid 60s, and they want to see the price of gasoline up.

Adam Taggart 46:44
Yeah. And just sorry to interject, but you were just in California. And you know, that like, yeah, the price has come down a little bit. But it’s different across the country. But like here in California, we’re still paying close to $5 a gallon, you know, yes.

Jim Bianco 46:57
Yes. And unfortunately, I am, too in Chicago, because we’re in one of the few places where they add sales tax to gasoline prices. Most people exempt sales tax on gasoline prices as well. But yeah, we pay we pay quite a bit. But let me come back to what’s happening with the inflation rate. My bigger picture with the inflation rate was we’re in a post pandemic economy. That’s a fancy word. What does that mean? That means a lot of things about the economy have changed, that we did something extraordinary, we shut down the global economy restarted it. And when we restarted it, it’s not the same as 2019. I’ve used many times, even talking to you on these podcasts, work from home has been a major catalyst for changing people’s lifestyles and everything else. You were home, I was home two days a week before the pandemic, Saturday and Sunday. Now, if we’re like the typical person who are home Saturday and Sunday, plus, probably Monday to Friday, and you go into the office three days a week, you’re now home twice as much as you were pre pandemic, your lifestyle change you whether you’ve realized it or not, you know, you’re doing more stuff yourself, or you’re changed the way that you, you, you live your life not negatively differently, and the economy needs to restructure because the world is changing that restructuring, what we’re finding is the economy is a little more brittle than we thought. And that’s giving us embedded costs, which is more inflation, we need to restructure the economy. Now eventually, we will do that, it will take years. And we will eventually get the inflation rate under control. But until then, it is going to continue to be a real burden, especially for people on the lower end. Let me give you one other example of what what’s happening to people on the lower end. So those people the bottom 90%, especially the bottom 50%. If they work, they probably work at a job where they have to go to a job, they don’t get the option of remote work. You know, they work fast food or they work some other type of of job where you have to be you have to be on site. Yeah, right. You can’t do it. You can’t do it via zoom. Down the street from you, San Francisco, is now showing that the BART system is losing astronomical sums of money because it’s only got about 40% usage than it did pre pandemic. And they’re trying to figure out what they’re going to do with the BART system. Because they cannot continue to operate it in the manner that it is because of the way that it’s because no one rides it.

Adam Taggart 49:25
No one drives it. Yeah, they’re shutting down the arteries of it because to your point, ridership just isn’t there to afford it right.

Jim Bianco 49:33
And we in the follow on on that. If you’re in the bottom 50% And you have to go to work and they’re now shutting down your subway line. Yeah, way to go to work. You have further added burdens on those people. They kick it in a car and drive to work, they can’t get on, find another job and work on Zoom. And now they can’t get there because you’re going to change the schedule or shut down certain lines on and this is going to come by the way This is gonna come really to a head for the rest of the country in the next year, because the Cares Act has been supporting public mass transit until the end of 24. And then that runs out. And if you have any kind of divided Congress, there’s not going to be any kind of a recap of public mass transit support, like there was after the pandemic. So a lot of these things are coming. This is the problem about restructuring the economy. That’s why I brought this up now, because we need to understand we’re in a post pandemic economy, we need to rethink public mass transit, we need to rethink the way that things are people’s lifestyles have changed. And we need to start to understand that to restructure the economy. And last offering it 19. You know, the closest example people used to this is after World War Two, the big difference, and I think I’ve even said this last time I was on the podcast with you, in 1946 1947, everybody in the economy knew we weren’t going to need to make p 50. ones in Sherman tanks anymore. So I knew my job on the assembly line making a Sherman tank was done. And I actually was happy that it was done. Right, I knew it was over. The problem with 2023 is there’s a fair number of executives and people of power think big banks in Manhattan, because they’re forcing their employees back to the office five days a week, they’ve led the charge on that, that are trying to say nothing has changed. You just wait, everybody’s gonna go back to the office, everything’s gonna go back to the way it was in 2019. It’s not. And the sooner we start to realize it’s not the sooner we can get about, we have to change the economy. Now. Change does not mean dystopian, it does not mean it’s worse. It’s just that you know, supply chains. And some other things need to be restructured, but what we’re finding about supply chains is they’re very brittle. And it’s very hard to change them. But we need to start to change it because this event that we had the post pandemic economy, the shutdown, and the restart, is keeping elevated, elevated inflation. Once we’ve restructured and gotten back into balance, I think the inflation rate goes away, you know, goes back to 2%, or something like that, or very low level for a long, extended period of time. But that’s not happening this year, next year, maybe the year after I was gonna say it sounds like you’re expecting that to be measured in years. Yes, yes. And I think the first thing we need to do is like a 12 step program, right 70% of the solution is admitting you have a problem is is as soon as we get everybody from Dave Salomon and Goldman Sachs to Jamie Dimon at JPMorgan to stop screaming that nothing has changed everybody back in the office five days a week, which at Goldman Sachs means six days a week. You know, as soon as we start going back to that, we’ll return to 2019. And everything will be like it was as soon as they stopped saying that, then we’re 70% of the way towards the solution. But they’re pushing on that more than anybody else. And so we’ve still got a ways to go. So this is sort of like 1946 47, except there’s a fair number of people saying no, we still need to make Sherman tanks and p 50. Ones, even though it’s not clear that we need them anymore,

Adam Taggart 53:00
right? Well in from an American standpoint, to it’s very different in the sense that we don’t have a bunch of now highly trained workforce reshoring to America from being deployed overseas, and the rest of the world needing all of our services, it’s a rebuild. So there are a lot of differences I get, I get what you mean. And they also get the dichotomy that you know, it was pay, you’re glad that was over and you can redirect yourself to something different. Now you’ve gotten a taste of something different. And you don’t want to go back to the way it was before. So it’s, it’s very opposite. But I would imagine, I don’t want to put words in your mouth here. But I would imagine that you would say that, hey, look, yes, it’s going to be messy for the next couple of years as we figure this out. But there’s an opportunity here to be better, right? Where some sort of hybrid solution where the people that need to be on site or on site, but the people who don’t need to be on site can be more efficient by working from home with all these new technologies. We take friction out of the system that then hopefully unlocks some value, some cost savings, all that type of stuff. You’re nodding as I’m saying this,

Jim Bianco 54:02
yes, no, I completely agree because restructuring the economy can be better. And it can be great for investors, because there’s a there’s always great opportunities for investors. It could be a could be a win for everybody. I like to use the example of when they first brought up, you know, the TSA lines in this in the airport. One of the reasons that they they brought up the TSA lines, they said all but it’s unfair because not everybody gets access to the TSA. No, but if you put me in the TSA line and put you in the TSA line, that gets us out of the regular line, so that people that are in the regular line, they go through faster too, because we’re not we’re not getting in their way. If you pick me and you and some others and say we’re going to work from home, that’s less people either on the subway or on the highway. So those that have to go to work every day. They could get there faster and improve their standard of living. So the point I’m trying to bring up is when we get about trying to restructure the economy, it can be a win for everybody. Even if you don’t get that work from home job or anything else, you still get, you know, some kind of an incremental increase in it. But we have to get above that. We don’t have to, you know, let’s stop deciding that the economy is doing great, because it takes me an hour and a half to commute to work. That is not a good metric to use, for the reason for saying that the economy is doing good. And somehow, that seems to be the metric that everybody wants right now. So yeah, I do think we definitely need to start to think about that this is a different post pandemic economy. It’s not worse, you’re right, we got a taste of what it was like with work from home, the extra time I get with the family, the extra, you know, things that I can do, working from home sometimes can be more productive, because you’re less distracted. Yes, collaboration is a problem with work from home. It’s not so it’s not perfect. But that’s not enough to blow out the whole thing, we just have to figure out a new way to collaborate remotely with everybody develop relationships with vendors, co workers in or supervisors remotely, we have to figure this out. So we still got some issues to work through. But definitely, I think most people are viewing this as a positive, which is why they don’t want to go back. Which is why there’s been no real urgency for people to get back on the park system in New York, which is our park system, excuse me in San Francisco, or the MTA in New York, which is why they you know, they’ve been having such problems with public mass transit.

Adam Taggart 56:30
Great, real quick, I thought your analogy was really good about TSA. Just want to clarify for folks, you were talking about the TSA PreCheck line? That’s correct. So to make sure people get the so for every person

Jim Bianco 56:40
that’s in the doesn’t get precheck and says Why do I have to take my shoes off and everything? Well, get me in you out of that line, so that you can get through that process faster. Is is is basically that’s what I mean by it’s not as good to be a

Adam Taggart 56:55
everyone would rather be going through pre check. But even if you’re not, you’re getting your experiences getting improved a little bit because there’s less congestion. Yeah, exactly. Exactly. Yep. Okay. Look, there’s no time to really dive into this. But it’s, I just have to say it, because we’re on the topic. I mean, there are some really interesting knock on effects of this whole change of culture and workforce and whatnot. And I think one of the shoes we’re still waiting to see drop is what’s going to happen in the commercial real estate space, particularly in the office space world, right. And because that’s getting decimated by this, no huge surprise. But also that may be another painful injury to smaller banks, right, which are holding a disproportionate percentage of the commercial real estate bank. And so there’s many other knock on effects we could think of you and I could probably talk for another hour and just that alone, so I hate to just touch it and move on. I’m gonna move on to the last big question of this discussion. Because you are a market researcher. 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? 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?

Jim Bianco 58:30
Well, the video is invidious way out there. Yes, yeah. But

Adam Taggart 58:33
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 58:38
So to answer your question about where the market is.

Adam Taggart 58:44
Our interview with Jim will continue over in part two, which will be released on this channel tomorrow, as soon as we’re finished editing it. To be notified when it comes out. Subscribe to this channel if you haven’t already by clicking on the subscribe button below, as well as the little bell icon right next to it. And be sure to hit the like button to while you’re down there. And finally, if the challenges Jim is detailed in this interview, have you feeling a little nervous about the prospects for your wealth? Then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth, keeping in mind the trends, risks and opportunities Jim’s mentioned here. Just go to wealthion.com and we’ll help set one up for you. Okay, I’ll see you next over in part two of our interview with Jim Bianco.

Transcribed by https://otter.ai