James Bianco joins to discuss inflation, rising interest rates, and the concentrated tech rally, providing critical perspectives on managing investment risks in a volatile market. James Bianco, President and Macro Strategist of Bianco Research, joins James Connor to discuss the unprecedented challenges facing today’s markets. With inflation rates sticking and bond yields soaring, Bianco breaks down why investors need to brace for a volatile second half of the year. Are the market’s biggest tech giants driving an unsustainable rally?
James Bianco 0:00 The average market rates are somewhere between four and a half and low fives. So even if the Fed were to cut rates this week, and the market is assigning a zero probability of that happening, it's not going to change that interest expense is going to continue to rise for the next year or two. If the Fed cut rates to zero, and might slow it down, but then the fear there is if you cut rates to zero and stimulate the economy, you wind up having even more inflation and you could wind up creating havoc in the bond market as well. So that is going to continue to go higher. James Connor 0:32 Hi, and welcome to wealthion I'm James Connor. And today my guest is Jim Bianco of Bianco research. And Jim and his team provide a wide range of research across many different asset classes. And we're gonna get Jim's views on the markets as we hit into the second half of the year. Jim, thank you very much for joining us today. How are things in Chicago? James Bianco 0:59 Oh, things are great. It's summer in Chicago, one of the best places in the world to be? James Connor 1:04 Yes, I can't believe the last time we spoke was in January, so six months ago, and here we are. We're almost into the second half of the year. James Bianco 1:12 Yeah, January, one of the worst places in the world to be is Chicago. James Connor 1:17 Yeah, well, I'm in Toronto, and it's not much different. So the last time we spoke in January, the s&p was at 4600. And now it's at 5300. And Vidya has added about $2 trillion dollars in market cap and bitcoins gone from 40,000 to about 70,000. Give or take and the Blackhawks didn't make the playoffs? I'm sorry to say, but how do you think things are now? James Bianco 1:39 Yeah, I mean, other than the Blackhawks, which was not a surprise, the market did have a very strong first half of the year. But really what highlighted is what you mentioned about Nvidia and increasing its market cap by $2 trillion. And I might add, if you want to put that in perspective, Warren Buffett has been running Berkshire Hathaway for over 60 years, and Nvidia has created more value than Warren Buffett did in 60 years in four months. That's how extraordinary that morale rally is. Or if you want to put it in another way, the s&p is up about 12%, year to date, half half of that is Nvidia. And if you were to add in some of the other Magnificent Seven stocks, you know, the Amazons, the Microsoft's, the alphabet, the matters of the world, you know, a couple of others, you're worried about two thirds of the rally in the stock market is just a handful of stocks. It's been one of the most concentrated rallies ever, and I say one of the most concentrated rallies ever, because there's no accepted statistic for what is of concentrated rally, you can actually make the case it is the most concentrated rally that we've ever seen in financial history, that diversification has been the least effective that it's ever been. So that has been really quite an extraordinary run that we've seen in the market right now. You strip out those seven stocks, and you're down around a four or 5% gain in the stock market for the first half of the year. The other thing I think that's been very interesting about what's happened in the first half of the year has been the rise in bond yields. I know it's hard to remember, but we forgot that we started the year back in December and around 3.9%. On the 10 year note, we got as high as 475 in April. And right now is we're talking word around, you know 445 450. So there's been a big rise in yields, as well. And that is took a lot of people by surprise because back in January when we talked, everybody was bullish on bonds. And everybody thought that yields were going to fall and they wound up doing something different. James Connor 3:44 And so having said all that you were very bullish back in January, are you still bullish on the markets now that the s&p is up 12% year to date? James Bianco 3:53 You know, I'm a little less so because of those, those two reasons that I just brought up. First of all, because it's been a very concentrated rally. If you want to say are you bullish on the market, really, let's cut to the chase. So you're bullish on the video. You can own the s&p, but really what you're doing is you're making it you can own spy or vo o but really what you're doing is you're making a bet on Nvidia at this point. Are you really bullish on Nvidia? I am have mixed feeling about Nvidia. There's two things about that stock I'll just mention early on in any cycle. What you see is you see the hardware makers seem to do very well if you remember back to the PC cycle in the 80s it was IBM that was really roaring ahead. If you remember back to the early days of the internet in the late 90s It was Cisco that was roaring ahead. And now it's a video you know it's the picks and shovels plays we so often overused on Wall Street that no one knows what quite AI is going to do but the people that are making the chips for it are winding up being that I'll mention one quick word about a video and I'm not a I'm not a semi analyst. I'm not an NVIDIA analyst. Seven customers are half their revenue it, even though they're almost there a $3 trillion company, seven customers are half their revenue. If you look at the, you know, Tesla alone has bought over a billion dollars worth of Nvidia chips. This year, their chip runs between 28 and $40,000. And Tesla's bought nearly 40,000 of them. You know, AMD and Intel are sitting out there trying to innovate. And someday if if AMD and Intel come up and say to those seven people, Hey, we got the same thing, but it's only $10,000. And it's not 28 to $40,000, that dramatically and immediately changes, invidious business model. Now, their business models a lot like, you know, Boeing is, you know, where they basically have two customers or three customers, or defense contractor. But those customers are pretty stable. And those customers aren't really looking to jump ship on them. But in video, it might be a different story altogether. So I don't like I usually almost never go into stocks. And I went into that stock because it's half the rally. And that's what you need to understand. When you start owning stocks. I'm, I'm a little bit more sanguine on it. And the other reason I'm more sanguine on it is because of that rise of interest rates. What's been happening when you see the 10 year yield when it gets above 450. And it's a 445. As we're talking right now, that seems to be a major headwind for the stock market. And it really seems to really struggle. The 10% correction last fall was when yields went to 5%, above 450. The 6% correction in April, is when yields went to 475, above 450. Those are the two biggest corrections since the bottom of the market, September of 22. Even two weeks ago, when yields pushed for 70. Briefly, the stock market really struggled as well. Now why does the stock market struggle when rates go above 450? because interest rates aren't looked at as competition. That's really what they're not looked at as slowing the economy, or stimulating the economy. They're looked at as competition. Dr. Jeremy Siegel wrote a new update to his book stocks for the long run. In it, he said the long term prospects for the stock market just here buy some stocks any period, what should you reasonably expect without looking at the specifics of that period, about an 8% per year return? Okay, that sounds about right, but 8% a year. And that's historically what it's been. And that's what he thinks that will be in the future, when you start seeing the tenure yield, get about four and a half percent and three month bills or money market rates, staying above five, I think a lot of investors look around and go, you know, I could get half or two thirds of the stock market's expected long term return, with almost no risk in the case of a money market fund. Because it's $1 nav every day, or very little risk in case of a bond fund, especially compared to VOO or SPY. Good enough for me, I'll sign up for that. That's why I think the stock market struggles when it gets above four and a half, when the yields get above four and a half, because they're starting to look at it and going, people are just going to turn it our wealth managers and say put me in some of those bond funds, I'll take two thirds of the stock market's gains with 1/10 of the potential risk of the stock market. From a risk reward standpoint, that's a very good deal. So if yields continue to trade higher, at which I think they will, in the second half of the year, we can talk about that. But I think it will provide a formidable and I want to use this word carefully headwind for the stock market's not going to kill the stock market is just going to be a headwind. And it's just going to make it a little bit tougher to continue to move forward. And of course, again, everything is all about a video to you made an interesting point about Nvidia and the concentration of it because if you're an active portfolio manager or stock picker, and you don't have a weight in that name, or the other ones, you're significantly underperforming, the s&p and the NASDAQ, you're going to have some very unhappy clients, you know, and it's understandable because if you're a stock picker, or portfolio manager, and you've gotten your CFA and I don't mean this in any disparaging way, because I'd fall into the same trap, too. And you do what we understand is how you're supposed to value companies. You look at the valuation to this company and seven, seven people are there faster revenues, and those seven people are looking for a cheaper alternative desperately looking for a cheaper alternative. And then you conclude, yes, I need to be this needs to be far and away my biggest holding and I need to be pressing this bet as hard as I can know, very few few, very few active managers are going to say that, and that's why very few active managers have been outperforming in this rally. And that's the unfortunate reality about being an active manager. Now. The retort to that is yeah, that's what you buy index funds. Yeah, until until Nvidia turns and goes the other way. And then it's about acre dragging the index down, where the active manager will wind up doing much better. James Connor 9:59 I'm really gonna test your knowledge on Nvidia. Now you made mention of the fact that seven of their clients represent 50% of their revenues. Who would be the single largest client? And what percent of revenues would that client be? James Bianco 10:12 Well, we don't know for sure who the largest is because they've only disclosed those kind of numbers, but it's believed to be Microsoft. And then after that alphabet, Tesla, as I've mentioned, meta, those are the biggest play, those are perceived to be the biggest four, which is around 40 ish percent of their revenue. Remember, you've got to buy these chips that are 28 to $40,000, right, and you're trying to put together large language models that, you know, we could look at open AI and dropkick or other big players that are buying Nvidia chips as well. You and me aren't buying these chips, you know, regular comm Procter and Gamble isn't buying these chips, General Motors isn't buying these chips. It's these companies that are trying to make a big push into AI. And that's why AI is so concentrated in the big mega cap companies. Because to say that we need to have artificial intelligence, it is really expensive, you have to spend hundreds of millions of dollars just to get the equipment in place before you start training the models. And then you need specialized, you know, coders and specialized people in AI. And there's already stories now that you know, kids that are graduating from college with these degrees are in such great demand, they're getting half a million dollars before graduation day, just because they know how to do this stuff. So it is unbelievably expensive in order to do this, and this is why it's all concentrated in those top companies. So that said in Vidya doesn't tell us who is to break down. But Tesla has Tesla has told us that they've bought 35,000 of their chips. And if you do the math at about $30,000 35,000, that's a billion dollars, they have spent a billion dollars now how much of that is is X for crack their, you know, their, you know, AI a large language model and how much of it is for Tesla, and self driving is not clear, but they have bought a lot of it. James Connor 12:14 So let's talk about the economy. Now. We recently saw a revision of q1 GDP 1.3%, down from 1.6. And that's down from about 3%. Last year. And I want to get your views on the economy. And do you think it's slowing? And you think the next print we see is going to be 1%? or lower? James Bianco 12:32 So the answer to your let me give you the answer is yes, the economy is slowing. And the reason I think it is slowing is because prior to the first quarter, if you look at all of 24, you had several quarters of very strong growth up above two and a half percent for most of those quarters. If if not above three, now let me back up. Economists have a concept called potential growth. And what that is, is what should the US economy grow at if no one is stimulating it, or no one is trying to restrain it. Now, that's not an observable number. But they guessed that it's around two to two and a half percent. So we had several quarters of potential growth or more than potential growth. In the first quarter, it looks like we had below potential growth at 1.3%. Now, that's not unusual, you know, a couple of quarters above a couple of quarters below. Second quarter, the second quarter looked like in April, it started off weak. You were down around 1.6% on the Atlanta Fed GDP now. That is the Atlanta Fed does a GDP tracker that takes all the data that goes into the GDP report for the second quarter, and then says what is the run weight of the of GDP for this quarter. Now think of that, like the marathon, you know, you take your 10 mile time and then you project what you would run for the next 16 miles and there's your finishing time? Well, that assumes you're going to run at the same pace, you might speed up or you might slow down. And in the case of the economy, you might revise the first 10 miles as well. But that was running at around 1.6% through the end of April. And now that we're into June, it's up to 3.1. So it's looking like April, was a weak quarter weak month. But May the economy has been rebounding quite smartly headlined by the bigger than expected jobs, great creation to 272,000 jobs for the May payroll report, which was issued last week. So the economy is running a little bit slower after several quarters of faster, and it seems to be picking up. Now let me make one other quick comment. Because we usually when we talk about the economy, people talk about, oh, we're going to have a recession. And my answer is no, we're not going to have a recession for a very simple reason. There was an MIT economist named Rudy Dorn Bush. And he famously said, I think in the 70s, that economic expansions do not die of old age, they're murdered. Now, what does he mean by that? You'll hear and I've been I've been reading just this week, well, is the economy rolling over? The answer is, economies don't roll over. That's not how it works. In a capitalist economy, everybody that's listening to this podcast, is looking to put their money with good ideas, and looking to take their money away from bad ideas. So all things being equal, you should expect the economy to grow around its potential. So a couple of quarters, you know, we had several quarters above and 23 have a little bit of a period below, you know, in early 24, maybe starting to rebound into the summer, maybe. But that's to be expected. Well, what causes a recession, a murder, what's a murder, a COVID shutdown of the entire economy, a spike to $150 in crude oil in July of 2008, a housing market crash in job in 2007 911, a tech market bubble peak, you know, Arab oil embargo, Saddam or Iraq, which was headed by Saddam Hussein, invading Kuwait in 1990. These are the type of murders that cause a recession. So yes, the economy seems to be slowing after a period of stronger growth. But I don't think it's at risk of recession, because there isn't a murder out there. And the murder isn't. People stopped spending their money. The murder isn't that, you know, we stopped buying cars, or or something along or we stop hiring people. We do that in reaction to a pandemic shutdown, or an invasion of another country that spikes crude oil through the roof, or geopolitical crisis. These are the types of things that cause recessions. So yeah, we're in a period of a little bit below potential growth, after several quarters of above potential growth. And that's really all I see it as being right now. James Connor 17:03 Interesting comments, and so I want to get your thoughts on inflation now continues to be very sticky. And a lot of this has to do with the massive fiscal spending we're seeing by the federal government. And I want to discuss this too. But before we do that, I want to ask you about stagflation, and I'm reading a lot about this lately. Do you think Stagflation is a possibility here in the coming months? James Bianco 17:24 Oh, the dreaded S word stagflation? Yes. Let's Well, the the problem with Stagflation is what is the definition of it, right? Stagflation is supposed to mean that you get slower growth and higher inflation at the same time. Now, typically, growth is a driver of inflation when the economy's going along very strongly. That creates economic activity. People buy things, they push up prices, when the economy slows quite a bit or goes into recession, because it's murdered. People stopped buying things and prices fall. Stagflation is the economy slows, and yet, but prices continue to move higher. So to the direct or to the specific definition of stagflation, are we seeing it? I would argue, yes, we are seeing it because we're seeing the economy slow. And we're seeing inflation pickup. But when I say that people, you know, their heart skips, skips a beat, because they think stagflation means the late 1970s, it means the economy is crushed by near recessionary type of slowing of growth, and 100 year high and inflation. Well, that's an extreme form of stagflation. But that doesn't mean that that's the only definition of stagflation. So if you ask me clinically, yeah, we're seeing slowing growth. And we're seeing a little bit higher inflation, and that would qualify stagflation, but nothing at all, like what we saw in the late 1970s, and maybe into the early 1980s. That brings along the other question you brought about what about inflation? I've been of the opinion, that the inflationary cycle that we were used to have, you know, 2%, or lower inflation year in and year out, that ended in 2020, with the pandemic, that we're in a new cycle of higher inflation, persistent inflation 3% to 4%, inflation, not 2% inflation. And why are we in that persistent era? I think three things. I think, first of all, the D globalization trend is only accelerating and maybe it started, probably started after the financial crisis of 2009 got accelerated with the Trump tariffs of 2018. But one of the few things that the Biden administration has done that has been an extension of what the Trump administration has done has been to seem put up more barriers to globalization. So whether or not Trump or Biden wins, doesn't matter. Globalization hammering China, trying to protect American jobs is going to be the norm going forward, that is going to raise costs because more expensive to do things here than it is to do things other places. Now, you could argue it's coming to have a toll because it's created, it's gutted whole industries, because they've moved overseas, I understand that argument. De globalization is one reason you're going to see, you're going to see higher inflation. The The other thing I think you're going to see is just a complete mindset change. I know the Fed talks about inflation, meaning maintaining, it's being well anchored. And I will violently push back on that No, it's not, it is not well anchored, people have become accustomed to the idea that prices go up, and that they're used to prices going up. And that's why the President's approval rating is down. And that's why cutting through everything. If you ask in all the political polls, what is the number one issue that people are going to vote for in the United States in November? And the answer is inflation, it is overwhelmingly inflation, immigration being second on that list, as well. So that is going to definitely see a push back as well, too. And third, in this gets to stories that we're seeing this week, oil and energy is being used as a political weapon. And that is going to keep the price elevated, that we might have found a bottom on the price of oil in the mid 70s, not in the 40s or 30s, like we were used to prior to 2020. And you add all that up, and I think we are going to stay into a period of stickier inflation. And that doesn't even get to remote work and wage inflation. remote work is changing the nature of work. And that is creating, I think more wage inflation. So we are in an inflationary period, a sticky, persistent inflationary period. Now, why did I go through all that? Because if you ask most economists, they don't think that the cycle changed in 2020. They're all thinking that we're in the last mile to 2% inflation. And I don't think that that's been the case at all for four years. This was kind of the way it was in the early to mid 80s is latest 1985. The typical economic forecast was we were going to return to 14 or 15% inflation. Although it peaked in 1980. It took them five years to realize that that cycle changed as well, too. We're four years into this, maybe it another year, they'll start to realize that we're in a different, you know, inflationary cycle of higher inflation. And last thing about inflation, what I didn't say was eight to 10, Zimbabwe inflation, I didn't say that I said three to 4% inflation. Well, why is that important? Because it gets back to a comment they said earlier, four and a half percent in the 10 year note, you know, in the stock market starts to struggle, because it's competition before in a three to 4% inflation world, then the neutral funds rate, or the rate that the feds might think these neutral is no longer two and a half percent or two and three quarters percent, but it might be closer to four to five. And then four and a half 10 year note might be closer to fair value and get used to four and a half five ish interest rates, that that is kind of standard fare for what we're going to be moving forward. And that that that option of I could get over half of the stock market's gains with which much less stock market risk of those bigger interest rates are going to be with us for a long period of time. And we need to start to adjust expectations for that, largely because if we're going to have that persistent inflation at three to 4%, that that is going to keep it up there. God, I hope you're wrong about this persistent inflation because these prices are killing me. But another elbowing everybody. If I could just jump in real quick. There was a study put out by a bunch of Harvard economists and I don't want to butcher their names, but it came out last month it was featured by Justin lay heart and Wall Street Journal yesterday. And they pointed out that most people view a 1% rise of inflation as twice as injurious to the economy as a 1% rise in the unemployment rate. Meaning if you gave the average person an option of should the unemployment rate go up 1% Or should inflation go up 1%. They'll say the unemployment rate going up. 1% is far less injurious to the economy. And one of the things they talked about when you talked about these price rises is they said it puts constant stress on 100% of the population, because prices are squeezing 100% of the population. And that's why it is such a per it's corrosive effect on the economy. In other words, the public is almost saying look, 1.7 million people need to lose their jobs to go from 4% to 5% inflation 4% to 5% unemployment. 1.7 million people lose their jobs, but 300 million people are suffering under three to 4% inflation. If you could take the unemployment rate to 5% and bring the inflation debt rate down. Do it is what they seem to be arguing, do it. It's much, it's much less stressful on society. And I'm not suggesting that they're saying consign 1.7 million people to unemployment. It's we don't we forget how bad inflation is for an economy, how much it just wreaks havoc on an economy. And we're so cavalier about what's the Fed going to cut rates, how many times the Fed going to cut rates? Oh, yeah, we're in the last mile to 2%. Don't worry about it, it's all going to be no problem, the inflation rate is going to return back to where it was pre 2019. And all of that is to just paper over how much pain and suffering inflation does cause an economy. James Connor 25:42 Yeah, so true. The other element we got to touch on too is government spending. And the Biden administration is just spending billions and trillions of dollars as if they're a bunch of drunken sailors but the federal debt level now $35 trillion, it's growing by $1 trillion, every 100 days, which is a staggering number. Debt to GDP now is 125%. We haven't seen that a number like that in decades. The deficit now is $1.7 trillion, or 5.5% of GDP. And what are your thoughts on this, then? Does this concern you at all? And how does it get resolved? James Bianco 26:20 You know, I chuckled, when you said the the the federal government spending billions and trillions of dollars, and I was thinking to myself, I wish they were spending billions, that would be actually a big improvement, because they're spending $6 trillion a year. Now, to put that number in perspective, that's 22% of the US economy, that is a fifth of the US economy. Now we're apart, we are a Keynesian type of mentality when it comes to federal spending. What does that mean? When the economy turns down? When we go into recession, we expect the government to spend like crazy to stimulate the economy out of recession, okay, fine. But within the other half of that equation is when we get out of recession, we expect the government to back off, and not continue to spend as much in the recovery. That's we didn't do this cycle, we continued to spend this cycle, as if we're in recession, 22% of GDP is federal government spending, other than COVID, in the financial crisis, which you saw a little bit higher numbers, every other recession in the last 50 years, when we were in the worst of the recession, the government was never spending 22% of GDP. So that is one of the reasons another reason why I think we're not going to have a recession, you just can't have a recession, you know, defined as negative GDP, when the government is spending that kind of money, it will single handedly keep the economy moving forward, it will single handedly keep pressure on prices, and keep inflation to continue to be sticky or persistent in that three to 4% range. So I think that that is going to be a problem. And by the way, I don't think that gets solved at the ballot box. There isn't a Hamilton or Jefferson 2.0 that is sitting out there that he's going to come in and say, Look, this is unsustainable, which I think it is. And we have to rein this in which I think we need to there isn't, if Trump comes in, he's going to cut taxes. Look, I'm all for tax cuts. I'm not against him. But all that if he winds up being like Reagan, and he winds up cutting taxes, but he doesn't rein in spending, he just blows the deficit out wider just by cutting it cutting taxes. If Biden wins, it's just you know, all steam full steam ahead on even more spending. He'll threaten to raise taxes, but he won't do it. And then we'll just have a wider budget deficit. So what ends this, what ends this is what we saw, which is now being referred to as the Liz trust moment, in the fall of 2020 to two years ago, Liz trust was the Prime Minister of the UK, she put out the mini budget, cut taxes, increase spending, widen the deficit, Parliament, their Congress said fine, we'll vote for this no problem. But the guilt market, their bond market said nope, we can't do this. This is unsustainable. The 30 year gilt yields Rose 140 basis points or 1.4%. In one week, in September of 22, two years ago, the Bank of England has 300 years of data, it's never really risen that much in one week. It rose 45 basis points one day, it's never written that much in one day, and they've got 300 years of data. It created a financial crisis. It forced the government to stop with all of the spending. And it wound up causing Liz trust to resign is the Prime Minister of the UK after 47 days. And the only thing on her resume in those 47 days was the Queen died shall forever be a trivia question, who was the Prime Minister when the Queen died? And so that's how you wind up ending some thing like this is the financial market say you're done. And we're going to take interest rates up because I don't want to own your bonds because you're you're you're issuing too many. And then the government says, but but these are important programs. But But But what about spending for the poor, and rates go up and up and up, and then they break something liability driven investing was what they broke in the UK, and they create a financial crisis and they force spending to create rain in that is a dark scenario. I admit it is a dark scenario. But now that I said that, when when does that happen? Is it later this year? Or is it in 15 years? Or is it anywhere in between? I don't know. I don't know when it happens. I'm not going to I'm not going to opine and when I think it's going to happen. But it could be many, many years into the future. Or it could be many months into the future. But what I am trying to argue is, Do not think that there is people on the ballot that are going to say, look, we can't continue to raise debt at 108, at $100 trillion, every 100 days, we have to stop this, they'll say it, there'll be sincere about it. But we won't stop it. Because spending is power in Washington and no one wants to voluntarily give up their power. And if the bond market wants to stay at four and a half percent or 5%, or maybe even rally back to 4%. If I'm wrong about sticky rates, then the argument is seen the bond market is fine with us raising a trillion dollars every 100 days, keep doing it until the bond market says you're done. Stop it. Like I said, I don't know when that will be. But that's probably the only way that Liz trust moment that you're going to wind up seeing this end. But like I said, I wouldn't be surprised if it's not in the next couple of years. You know that it's several years away, doesn't have to be weeks or months away. It could be. But this is the type of danger. The fifth fifth the federal government is playing with, with all of this massive spending, I'd like to be wrong. And that I'd like to think that in November coming out of November, that we will have a new priority on spending. But I just don't see how we're going to have a new priority and spending and that we're going to voluntarily stop this before it gets out of hand. James Connor 32:14 Yeah, doing so would be political suicide, especially going into an election. But my other question to you is, do you think Liz trust actually has that 47 Day stint on her resume? Or does she just leave that off? James Bianco 32:26 No, she's got it on the resume. And the joke is, you know, not to get into geopolitical. But, you know, the National Front party did very well in France, and then McCrone called snap elections for the end of the month, and he's in trouble. He might be out, you know, in a matter of a couple of weeks. And the joke was he should call his trust and talk to her about you know, when when the pilot when when things turn against you, you can go quite, you could go in very, very fast and be out. And so yeah, she's, she's on a rehabilitation tour, and maybe be constantly other European leaders about how fast you can wind up being out of office if you do the wrong thing, like she did. James Connor 33:07 So we're going to talk about the interest expense associated with this, these debt levels, okay. And I believe in 2023, it was just over 800 billion in 2024, we're going to spend over a trillion dollars on interest. And that number is only going to increase and I read in one of your research notes that the average interest rate on the government debt is 3.2 3.23%. And that number is only going to increase when they go to refinance it, okay, it's going to be done and maybe 4%, maybe 5%. And so this burden of paying interest is just going to increase as time goes on. And I want to get your views now on interest rates, because the Fed is really backed into a corner, they want to cut rates. Right, especially, you know, given this honors interest expense that will be coming up here in the coming year. But what do you think the Feds going to do with interest rates? James Bianco 34:02 So the first part of your question, you're right, the average interest rate that the federal government is paying is about 3.23, called three and a quarter percent. But as I mentioned, you know, the average market rates are somewhere between four and a half and low fives. So even if the Fed were to cut rates this week, and the market is assigning a zero probability of that happening, it's not going to change that interest expense is going to continue to rise for the next year or two. If the Fed cut rates to zero, that might slow it down. But then the fear there is if you cut rates to zero and stimulate the economy, you wind up having even more inflation and you could wind up creating havoc in the bond market as well. So that is going to continue to go higher and it's going to continue to go higher. Now as far as the Fed goes, there is a big push by Federal Reserve officials to cut interest rates. They have said all year that they expect that they're going to cut interest rates this year. You're back in January we were pricing in six or seven rate cuts for the whole year. That hasn't come to pass. We haven't gotten anything, it looks like they're not going to cut rates at the June meeting, the July meeting is probably around 10% probability, they're going to cut rates at that meeting, I would put the odds at least that if not lower, because that's between the Republican in the Democratic convention. And if the Fed really wants to get political, go ahead and start a rate cut cycle between the Republican and Democrat psych convention, we'll stop talking about whether or not Donald Trump goes to jail, or whether or not Joe Biden has the cognitive ability to have a second term. And we'll start talking about Jay Powell. And that's the last thing Jay Powell wants to do is insert himself in the middle of those two debates. And that's what would happen if he winds up cutting rates in July. So I think July is off the table. So that gives you September, September, seven weeks before the election, same argument, do you want to overshadowed the election by making yourself the issue for cutting rates? So we're looking at earliest we're looking at at the end of the year, November, December that they could cut rates. But why haven't they done it yet, because all of the assumptions that the Fed has said about why we're going to cut rates is they expected inflation on its last mile to 2%, they expected the economy to slow. Now, we've seen some of that in the first part of the year. But we might be seeing a turnaround and speed up. And we're not seeing inflation, really cooperate. We're still 3.4% year over year CPI, where you're still at 2.8%, year over year course PCE, that's the Feds favorite measure of inflation, these numbers are way too high for the Fed to be considering cutting rates. So simply put, why is it the Fed cut rates yet, is because the data is not giving them the room they need, it is not there yet to give them the sufficient amount of either economic weakness or inflation, weakness, or both to cut rates. They're not there, the politics are getting in the way in the next couple of meetings. So maybe the economy slows down enough that they could potentially pull off a rate cut in November or December, I personally think it won't, I'll go back to my 22% number with the federal government, they are spending so much money that the economy isn't going to slow and inflation isn't going to slow. And it's not going to give them room to cut rates. And maybe that comes as a problem for the stock market. Remember, I said when you go above four and a half percent, it's a headwind for the stock market, because it's just, you know, a good deal from a competition standpoint for your investment dollar. But this is really where I think we're going to see is that if we see the economy even slow, if I'm wrong, and we see the economy slow, leaving off, maybe there's a murder, I mean, a murder would be some geopolitical event. And then you look, there's $120 crude oil, or some GL other geopolitical event that creates other kinds of stress points in the global economy that changes that equation. If that happens, happy to come on and talk about it. But it hasn't happened yet. But if we were to see, if we if we don't see that I just don't see how the economy with this level of government spending slows. And that just keeps interest rates up. And that keeps the Fed forever talking about their desire to cut rates, but not getting the actual excuse to do it. James Connor 38:23 Okay, so you said the Fed wants to cut but it can't because of the level of inflation. But we recently saw the ECB cut rates, and they said they did so even though inflation, inflation is not near their target rate. What are your thoughts on that? Why did they go ahead and cut rates? James Bianco 38:41 Well, good two things is that we have seen in the past, we have seen this decoupling between what the European Central Bank ECB does, and what the Federal Reserve does, you know, famously, John crush tree che, who was the head of the European Central Bank, back in 2010. raised rates, you know, he thought that the financial crisis was over, and that they had to worry about inflation, and he rose rates. Now, of course, we know that the Federal Reserve under Ben Bernanke held rates steady at zero from 2009 to 2015. During that period. So first point is, it's not unprecedented that you see a divergence between the European Central Bank and what the Federal Reserve does. Now that I said that why did they cut rates look at the growth rates in Europe, you could argue that they they they are in recession, right now that you've seen consecutive contracting GDP quarters in the UK, you've seen zero GDP numbers in Germany and for the whole of the European Union, their economy is far, far weaker than the US economy is. And so they're looking at, you know, in some of their countries, they've got much much higher, you know, unemployment rates approaching 9% in Spain. With some of the unemployment rates, so they're they're in a far different cycle than the US is. So I understand why they you know, cut rates and then you throw into, you know, that Rudy Dornbusch line that economies don't die of old age, they're murdered. The European economies might be getting murdered right now, through political upheaval. And what you've seen with, you know, the weekend before, we've seen elections in Germany and elections in France, where the right leaning anti immigration parties just trounced, the left leaning current parties in power, the Prime Minister of Belgium resigned on Sunday, you know, there is an epic swing towards the right in Europe. Now, I'm not arguing whether that's right or wrong. I mean, whether that's a good thing or a bad thing, that Europe is moving towards the right. But it is unexpected, and it will create uneven upheaval, just like if they had a big unexpected swing to the left, it would do the same thing as well. So they've got upheaval on top of a weak economy. So they're in a far different position than the US is. So I understand why they cut rates, we'll just have to see whether or not they wind up, you know, stoking inflation in on the European continent, because they're trying to stimulate their economies, as well. James Connor 41:24 Interesting comments, I hope we get the same sort of movement in Canada, as they're seeing in Europe right now. But that's another conversation for another time, we started James Bianco 41:32 seeing movement everywhere in the world, including the United States, including New Zealand, including Australia, that is this, this worldwide movement towards the right is is everywhere, except maybe the UK, where it looks like Rishi Sunak in the Tory party is going to rot probably give away to labor. But that's because the right has been in power in the UK where they weren't anywhere else in the world. James Connor 41:56 So we started this conversation talking about Nvidia. And the move that had seen it just in the last six months, it's gone from 1 trillion in market cap to 3 trillion now, which is just extraordinary. And I want to get your views on speculation and the level of speculation we're seeing now I think it's on par with what we saw in the late 1990s. And when I look at the hype surrounding AI, cryptocurrencies and FTS, you probably forget about those. But the metaverse and these mean stocks. I don't know if you watched growing kiddie last week, but I did. It's back here. He's back. But what are your thoughts on this level of speculation we're seeing now and does this concern you? James Bianco 42:35 It does concern me. But let me back up. This is not surprising in one respect. We are gambling culture. Look at what we do right now. You know, online gaming is exploding in popularity if the government will allow it to happen. Otherwise, everybody's doing it overseas through a VPN. We are seeing a massive explosion in you know, gambling on sporting events. The league's have embraced it, it has raised the value not only of their, of their franchises, whether you own a major league sports team, but also if you watch sports television in the United States, half the shows are about betting. You know, how do I how do I position my fantasy football league? Or who do I take this week in my fantasy baseball league? That's what all the TV shows are about. They're not about breaking down the games anymore? No, I went through that because we are a gambling culture. So why should we be surprised that that gambling is showing up in zero days to expiration options, over half of the options that are traded in United States expire today at four o'clock Eastern zero days to expiration? We trade daily options, half the volume is in that stuff? I mean, stocks are going ballistic as well cryptocurrencies, alt coins, otherwise known as shit coins are going are going ballistic. So I'm not surprised by the gambling that we're seeing in the United States. And yes, we should expect it to, you know, reverberate into, you know, the financial markets as well. That brings up you know, what, what's different now is there's a centralized marshaling force behind all this fancy words for saying social media. Sure, we had gambling culture in mid late 90s. But you didn't have the Reddit boards and you didn't have x, you know, to basically, you know, start narratives and get everybody to say, Yes, we all got to get into GameStop. or Yes, we all got to rush into Bitcoin, or something like that. We were all doing that independent of each other, not being able to communicate as a group. So that's what we're seeing in this economy. And quite frankly, the regulators are really struggling about it. You mentioned worrying kitty, Keith Gill, he put out you know, he came back two weeks ago, where he put out Got a meme, a picture where it was a guy with a game controller leaning forward. And in the gaming community that is the mean for this is about to get interesting. And and the Wall Street Journal was asking, you know, should the SEC be investigating him? And the answer was he put a picture on a on an Instagram, put a picture, excuse me, on his Instagram and on his ex account, it's all he did was he put a picture everybody interpreted it as being such, but welcome to 2024 where a lot of our regulatory rules look, you know, pre like prehistoric right now, for the type of world we're in. And maybe we don't want to be censoring people for putting pictures on the internet by saying that that is some form of security fraud. That is a dangerous slippery slope to be going down. So it's a whole Brave New World. So yeah, I'm not surprised by it. Yeah, I am worried about it. Because typically, you know, you know, the the word for it is dejan de Jen is short for degenerate gambling. The Wall Street Journal had a big story about how degenerate or deja degenerate gambling is really exploding in popularity. And I always remembered that, you know, when it comes to generate gambling, there's only two types of degenerate gamblers, those that have lost all of their money, and those that will lose all of their money. And if you're a degenerate gambler, and you haven't lost all your money, keep at it, and you will. And that's probably that's the problem with gambling like this. Now, you could argue, you know, societal impact and everything else. And it is concerning, but I don't know if you could really or nor do you really want the government to be heavy handed in breaking down all of this gambling, but right now, we are gambling culture, and it is showing up in not only sports, but in our culture, and it's showing up in our financial markets, and it's an unfortunate reality, and it isn't going to go away anytime soon. James Connor 47:03 Well, that was a fascinating discussion. Jim. I always enjoy speaking with you. And as we wrap up if someone would like to learn more about you and the various services that you and your firm offer, where can they go? James Bianco 47:15 So two services, we do offer a research service under Bianco research.com You could look a look us up there you can follow me on the socials at Bianco research on YouTube. We have an active YouTube page or at Bianco research on extra Twitter or follow me under Jim Bianco on LinkedIn. The other service we offer is we do manage an index which is actively managed fixed income index and there's an ETF W TB on it Wisdom Tree is our partner so Wisdom Tree Bianco Nancy WT bn. And you can find out more about that at Bianco advisors.com, which tracks our which tells you about how we do an actively managed Fixed Income Fund or index excuse me, and that there's a tracker fund that follows a think, you know, s&p manages the s&p 500 and zoo and spy track the s&p 500 were set up very similar. James Connor 48:09 Once again, Jim, thank you. James Bianco 48:11 Thank you. James Connor 48:12 Well, I hope you enjoyed that discussion with Jim Bianco and provide you with some insights on what to expect in the coming months. If you're trying to figure out how to prepare for your financial future consider having a discussion with a wealthy on endorsed financial advisor at wealthion.com After providing some basic information wealthy on will put you in touch with vetted advisor. There's no obligation whatsoever to work with any of these advisors to free service at Wealthion our first all of its viewers. Don't forget to subscribe to our channel, wealthion.com and also hit that notification button to be kept up to date on upcoming events. If you have any suggestions on who else you would like to see on our channel, please let me know in the comment section below. I would love to hear from you. Once again. Thank you
