In this episode, we have the pleasure of hosting James A. Bianco, Founder of Bianco Research Advisors. Bianco shares his insights on a wide range of topics, from his macroeconomic framework to the impact of inflation on the global economy. This conversation also delves into the implications of the current political and military climate outside the U.S. and the workings of the Bianco Total Return Index.

Topics Discussed

• A brief introduction to James A. Bianco's career trajectory and the establishment of Bianco Research Advisors

• Understanding Bianco's macroeconomic framework, including his approach to analyzing the macro space and the key indicators he focuses on

• An in-depth discussion on inflation, its current state, and its potential

implications on the global economy

• Exploring the role of the Federal Reserve in managing inflation expectations and the potential risks associated with their strategies

• A look at the current political and military landscape outside the U.S., and its potential impact on the global economy

• Discussion on the potential impact of shipping disruptions in the Red Sea on the global supply chain and inflation

• Insights into the bond market, including the potential impact of higher

interest rates on the equity market

• An exploration of the Treasury Borrowing Advisory Committee's role in advising the Treasury on bond and note issuance

• A discussion on the potential signals for a hard economic landing or recession, and what could indicate a stronger economy than anticipated

• An introduction to the Bianco Total Return Index and a discussion on the future of actively managed ETFs in the equity market

This episode is a must-listen for anyone interested in macroeconomics, inflation, and the global economy. Bianco's insights provide a comprehensive understanding of the current economic landscape and offer valuable strategies for navigating potential future scenarios.

This is “ReSolve Riffs” – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick, and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

If you believe inflation is not a problem.

2

It's not a problem.

3

If you believe it's a

problem, it is a problem.

4

I get the theory and the

theory is probably right.

5

The problem with the theory is

that it's hard to measure it.

6

I liken it to sentiment

in the stock market.

7

When everybody's bearish, the market

peaks when everybody's, when everybody's

8

bearish to market bottoms, when

everybody's bullish, the market peaks.

9

It's a great idea and it works.

10

The problem is, how do you

know when everybody's bearish

11

or when everybody's bullish?

12

That's really hard to figure out.

13

Hello and welcome to the Resolve Rifts

Investment Podcast, where the science of

14

investing meets real world application.

15

Join Adam Butler, Mike Philbrick, Rodrigo

Gordillo, and Richard Latterman of Resolve

16

Asset Management as they bring their

extensive investment experience to bear

17

on deep dives into the current market

trends, optimal portfolio construction,

18

and risk management techniques helping

animate the world of quantitative

19

investing with a global macro perspective.

20

This podcast is a must listen for

professional capital allocators seeking

21

to navigate the complexities of global

markets with skill and confidence.

22

Welcome to the journey.

23

Adam Butler, Mike Philbrick, and

Rodrigo Gordillo are principals of

24

Resolve Asset Management Global.

25

All opinions expressed by

the principals are their own.

26

And do not express the opinion

of resolve asset management.

27

This podcast is for informational purposes

only, and should not be relied upon

28

as a basis for investment decisions.

29

For more information, visit investresolve.

30

com.

31

Rodrigo Gordillo: All right.

32

Hello everyone.

33

Once again, to another

episode of resolve riffs.

34

And today we have a

very special guest, Mr.

35

Jim Bianco.

36

This is the first time that he's on our

podcast even though we've been Thinking

37

about you for a long time here at Resolve.

38

For those of you who don't know Jim,

he runs Bianco Research Advisors.

39

You can find him at Biancoresearch.

40

com.

41

And we're going to be talking

about everything macro where

42

the markets are, inflation.

43

What's going on the political front

and the military front outside

44

of the U S and maybe a little bit

about his Bianco total return index,

45

which I find very interesting.

46

Welcome Jim.

47

Thank you for coming today.

48

How are you doing?

49

James Bianco: I'm doing fine.

50

Thanks for having me.

51

Looking forward to the conversation.

52

Adam Butler: We might even

touch on a little Bitcoin too.

53

I know Jim's got some

thoughts there as well.

54

James Bianco: Yeah, I've heard of Bitcoin.

55

Yeah, we can talk about it.

56

Yeah, that's right.

57

Rodrigo Gordillo: And Jim, maybe because

our listeners might be new to you, maybe

58

just a quick five minute intro your past

and what you've done in your career,

59

and then we can get into the magic.

60

James Bianco: Yeah, so I came

61

I worked at Lehman Brothers when it was

Lehman Brothers, and Shearson Lehman, it

62

changed its name to, and I worked at First

Boston before it became Credit Suisse.

63

I was there for the 1987 crash

that, you know, so now you

64

can back into how old I am.

65

from there, I moved back to my

hometown of Chicago and started

66

working for a brokerage firm

called Arbor Research and Trading.

67

And in 1998, I spun myself

off within Arbor Research and

68

Trading into Bianco Research.

69

26 years old right now.

70

We provide macro and fixed income

research for Institutional investors,

71

mainly throughout the world right now

through our either directly through

72

Bianco Research or through Arbor

Research and Trading, our affiliated

73

partner and earlier or late last year.

74

Now I should say we started

Bianco Advisors, which is an

75

advisory company that provides

the Bianco Total Return Index.

76

And that is an index where it is our

estimate as to changing factors as

77

to overweighting and underweighting

various sectors to outperform, say,

78

the Bloomberg aggregate or the J.

79

P.

80

Morgan broad investment grade.

81

And a couple of, about a month ago now

WisdomTree brought up a ETF on it, WTBN

82

for WisdomTreeBianco N for Nancy, WTBN.

83

And it trades on that as well.

84

Pretty busy.

85

We've got two businesses going here and

we've got a research business, which we'll

86

spend most of the time talking about,

and we've got an advisory business in a

87

tracker ETF following our index as well.

88

Rodrigo Gordillo: Amazing.

89

Amazing.

90

Lots going on.

91

I want to touch upon that, that

how you run that later on in

92

the podcast, but let's first

start with the, with your macro

93

framework just broadly speaking,

everybody, every macro player that

94

I know has a wide, different lens

by which to look at the macro space.

95

Before we get into your views, how

is it that your macro lens works?

96

What are you, how do you

look at the macro space?

97

And what are the major indicators

that you like to look into?

98

James Bianco: I like to start

off very broad and then I like

99

to narrow it down from there.

100

On the very broad aspect of

the markets in the place.

101

I like to look at what are the

economic trends and what could come

102

about to change the economic trends.

103

And then from there, I try to,

focus it down more narrow and best

104

way to explain it is maybe to tell

you broadly where I'm at right now.

105

I think that 2020 was one of the biggest

economic events And that was the shutdown

106

restart, or as I like to call it, the

reboot of the economy, the global economy.

107

When it was rebooted, it didn't

come back quite the same way as

108

it was going into it in 2019.

109

And as I like to always, warn,

different is not dystopian, different

110

is not worse, it's different.

111

The biggest thing we know about

difference is remote work.

112

If you go to YouTube.

113

The television show 60 minutes last

night did a very good episode, probably

114

three years too late because they

should have done it three years ago

115

about the nature of offices and the

nature of cities are going to have

116

to be rethunk because of remote work.

117

That is probably the most obvious exit.

118

And then you can throw into that an

acceleration of deglobalization using

119

energy as a weapon, and the like,

and you've got a different cycle.

120

What is that cycle?

121

I think the.

122

Bull market and bonds that

123

I think we're in a multi year bear

market and bonds now within a multi year

124

bear market and bonds, you can have a

two or three year rally within that.

125

But I think if you were to ask me in

10 years, 15 years, I think rates will

126

be much higher than they are today.

127

But like I said, there could be a

peak in a rally and a peak in a rally.

128

And I think what's changed is the

inflation cycles changed that the low

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sub 2 percent inflation world has now

given way to a more friction world higher

130

inflation, saying the 3 to 4 percent

range has given way to a world of more

131

transactional nature of jobs, which will

lead to faster nominal growth, which

132

will lead to higher interest rates.

133

So within that I've been advocating the

idea that interest rates have turned.

134

They're going much higher.

135

That made me look like a genius

till around November 1st.

136

And then they proceeded

to rally 120 basis point.

137

And then I doesn't look so smart

anymore, but I stuck with this bearish

138

call and I am still sticking with it.

139

And I think that interest

rates are going to go higher.

140

I think within that, we could

flesh this out if you want.

141

I think that inflation, everybody on

wall street talks about inflation.

142

is going to the last mile to 2%.

143

If you want to use the sports metaphor

there, I think we've already hit

144

the finish line on the last mile,

somewhere in the high twos to around 3%.

145

And that inflation might be, starting

to bottom here ish and start back up.

146

I've got various reasons to think that

goods inflation might be moving higher.

147

I think that housing inflation

might be bottoming as well.

148

And I think that services inflation

is going to stay stickier than

149

people think, and that's going to

help to bring up interest rates.

150

Like I said, I start big picture.

151

I think the cycle turned in 2020.

152

I think that there's a lot of economic

153

then I try to focus it down from there.

154

But really what I think is driving

all of this right now is inflation.

155

Prior to 2020, what drove

everything was real growth.

156

You could ignore inflation.

157

Let's focus on whether the economy

is speeding up or slowing down.

158

Let's focus on employment.

159

Post 2020, it's all about prices.

160

And what is to a lesser extent

important is about real growth.

161

And I think Wall Street's had a

very difficult time making that

162

adjustment because they still want

to focus on let's talk about the

163

economy, let's talk about real growth,

and then we'll get to inflation.

164

And I think the way you should

165

inflation, and then real growth.

166

Rodrigo Gordillo: It's just one of

those things that who's asking, right?

167

And it's the allocators that have

had their own personal experience

168

to be in a period of 40 years where

inflation really has been less and

169

less of a problem up until 2020.

170

And we always liken it to most of

people's careers has been about

171

balancing on a barrel, a two dimensional

kind of balancing act, whether it's

172

growth, low growth, and whether you

need to inject money in order to

173

increase the economic growth or take

it away in order to decrease it.

174

All of a sudden, when you inject a real

inflation thrust, Then you're trying

175

to balance on the top of a ball, right?

176

It's a three dimensional game that

nobody has any real experience

177

except for veterans like you and

historians that have gone back to

178

the 40s to the 70s to, to the 20s to

really understand what inflation is.

179

So I think there's a, there's

not a lot of demand from the

180

analysts for, to get insight into

what's going on with inflation.

181

But I do think it's going to be

the dominant factor going forward.

182

We like to say that it's not

going to be a period of inflation.

183

It's going to be a period

of inflation volatility.

184

These ups and downs, right?

185

James Bianco: Yeah.

186

And Dan Tirillo was a Fed

187

And I like to say that the best Fed

officials to listen to the ones that

188

recently leave, because then they

tell you what they really think.

189

They're just not reading the talking

points that they were handed.

190

And so after he left in 2017.

191

He went to the Brookings Institute

in October of 17 and gave a speech.

192

And a paper, and it was basically

the Fed has no theory on inflation.

193

And if I was to summarize it

for everybody, why, what do

194

you think moves inflation?

195

Is it money?

196

Is it velocity of money?

197

Is it rational expectations?

198

Is it some other theory?

199

Is it monetary theory?

200

Go ahead and backtest it.

201

Your correlation to inflation is going

to come up to zero in all of these.

202

And his point was inflation is

extraordinarily difficult to understand.

203

That's not a problem.

204

If the Fed would just start with that,

but no, the Fed likes to say, we've

205

got these levers and these dials that

we could turn and push and you want it

206

to the 3rd the 4th quarter, we gotcha.

207

We could put it right

there wherever we want.

208

Bernanke's favorite line that we could

get rid of inflation in 15 minutes.

209

We could just raise interest rates.

210

It, it doesn't work that way.

211

It's a lot more complicated.

212

It's complicated.

213

Then everybody thinks and because

it's a lot more complicated.

214

That's the other impatient

here on Wall Street.

215

I think inflation is a problem.

216

Okay, fine.

217

Where's the model?

218

And I want to know out to the 4th

decimal place where it's going

219

to be at the end of the year.

220

Oh, you can't do that.

221

Okay, then forget the inflation thing.

222

Let's go back to talking about

payrolls because we've been talking

223

about payrolls for 30 years and

we think we understand that.

224

That makes sense.

225

Adam Butler: I think the Fed

always has a major challenge, which

226

is to a meaningful extent, they

also need to anchor expectations.

227

The Fed comes out and says, we

have no model for inflation.

228

We have a variety of dials.

229

We don't know which way

to turn them to manage.

230

Inflation shocks in one direction

or the other, then there's a

231

much greater potential that the

economy becomes unanchored, right?

232

Because, every company is going to

interpret their own inflation picture.

233

They'll lose faith in the Fed's

ability to manage things, and

234

it may lead to a a change or an

accelerating sort of inflation.

235

Expectations cycle, which, I think that

really is the only weapon that the fed

236

really has to bring to the table to fight

inflation, which is rhetoric, right?

237

Just how are they going to jawbone?

238

Inflation expectations lower and

follow a playbook that is simple

239

enough that everybody can understand.

240

And even though there's no historical

calibration between the playbook

241

and reality, there's a theoretical.

242

And just the theoretical connection

alone can do some of the heavy lifting.

243

James Bianco: Yeah, I agree.

244

There's two things about that

245

So about 18 months ago, 19 months

ago Jay Powell was in the White House

246

with Janet Yellen and president Biden.

247

And that's when the

inflation rate was nearly 9%.

248

It was like 8.

249

7 percent and president Biden.

250

Literally in the Oval Office with the

cameras rolling, pointed at Jay Paul.

251

And I'm summarizing, he said,

America, this is the guy who's

252

going to make inflation go away.

253

It's not me, the President.

254

It's not the Treasury Secretary.

255

Here's your man.

256

He's got all the answers and

he's going to make it go away.

257

And of course, Jay has taken that

mantle on and he immediately started

258

by raising rates, 75 basis points and

a meeting right after that, in order

259

to start to tackle that inflation.

260

In that the Fed does use

this theory about inflation

261

expectations being well anchored.

262

If you believe inflation is not a problem.

263

It's not a problem.

264

If you believe it's a

problem, it is a problem.

265

I get the theory and the

theory is probably right.

266

The problem with the theory is

that it's hard to measure it.

267

I liken it to sentiment

in the stock market.

268

When everybody's bearish, the market

peaks when everybody's, when everybody's

269

bearish to market bottoms, when

everybody's bullish, the market peaks.

270

It's a great idea and it works.

271

The problem is, how do you

know when everybody's bearish

272

or when everybody's bullish?

273

That's really hard to figure out.

274

What is the sentiment?

275

What is the expectations about inflation?

276

The Fed has used things like the

Michigan survey or the tips break evens

277

and they said, it's well anchored,

it's under control, but then you

278

go look at the political surveys.

279

And the President's approval

rating is in the tank.

280

And when you ask people why it's in

the tank, they're very pessimistic

281

about the economy because prices

have risen for the last three years.

282

And what they see is a 20 percent

or 25 percent rise in the last

283

three or four years where the Fed

is saying no, the year over year

284

expectation for inflation is mid twos.

285

So therefore we've got the problem solved.

286

Again, the theory of inflation

expectations is right on.

287

But we could spend the rest of

our life trying to figure out

288

how to properly measure it.

289

And I don't think they're

measuring it properly.

290

I think that those expectations are

a little bit more, to use their term,

291

unanchored than they think, because

everybody anchored themselves off the last

292

big event in their life, 2020 shutdown.

293

And they know now that it cost them 120

to buy something that cost them 100.

294

In the middle of 2020, and that's

what's driving the mentality, not that

295

the inflation rate was 9 percent year

over year in June of 22, and it's 3.

296

4 percent if you use

297

They don't think of it that way.

298

Rodrigo Gordillo: No, and look,

as a Latin American, inflation

299

expectations indeed are what works.

300

It is what ultimately breaks the back

of hyperinflation when somebody new

301

comes in and creates a new currency and

says, we're not gonna do it this time.

302

And that tends to cause in that type of

scenario, it tends to cause deflation.

303

Not disinflation, but deflation.

304

I think a lot of the issues here is

people in their minds think, okay, my a

305

hundred dollars now only buys 80, right?

306

So in other words.

307

It costs you 120 to buy the same thing.

308

So now I thought inflation was licked.

309

Why is everything

costing me 124 this year?

310

But this inflation just means that

you're, the cost of purchasing

311

things is coming in at a lower rate.

312

It doesn't give you back what you've

already lost in terms of purchasing

313

power, especially if you have no

ability to increase your own income.

314

And so it, that kind of anchoring to

expectations works in Latin America

315

when you actually create a little bit

of deflation so that people can feel.

316

Good again, that's not

going to happen here.

317

And so it just it's a complicated

thing to deal with in the environment.

318

And I find funny that you said that

the president pointed at Powell and

319

said, you're going to fix inflation.

320

Do you then point at Yellen and say,

you're going to create, you're going to

321

cause inflation once again in November?

322

Like what was he saying to the

treasury about all of this?

323

James Bianco: That's the

big, that's the big question.

324

I was going to say, you're right

about understanding inflation.

325

No less than the president's staff.

326

And I'm going to say president staff,

cause let's just assume that every

327

tweet that comes out of the white

house, Jim, it's not him and he doesn't

328

even know what they're coming out.

329

We're saying that inflation is

down and they would criticize

330

companies for not lowering prices.

331

Okay.

332

Tell me you don't understand what

inflation is without telling me you

333

don't understand what inflation is.

334

Yeah.

335

And but again, you set those expectations.

336

Oh, so the inflation rates down so prices

should be falling and they're not falling.

337

So something's wrong, so yeah, I

get that it's a complicated thing.

338

It sounds easy on the surface because you

see this on social media all the time.

339

You talk about inflation.

340

Oh, just look at money supply.

341

That, that's it done, takes four seconds

to figure out what inflation is, but

342

when you start to really dig into it,

it's far more complicated than that.

343

Rodrigo Gordillo: Velocity

of money and all that.

344

Adam Butler: It's yeah.

345

You sadly in all of these

economic terms are subject to

346

this syntactic ambiguity, right?

347

Every per every, even every

economist that you talk to, you

348

say inflation, they hear something.

349

At least slightly different than what

you meant when you said that word, right?

350

So it's not even, you can't measure it.

351

You can't, we don't even have

a common definition for it.

352

I think we can all there's a

lot more convergence around a

353

definition of growth, right?

354

For some reason, there's this massive.

355

mosaic of different ways to

interpret this term inflation.

356

Why do you think that is?

357

James Bianco: I think it's

cause it's a, first of all, the

358

corollary of that is deflation.

359

And that, if you think inflation

is hard to define, trying to find

360

deflation, because I like to joke,

if you ask five economists, what

361

is the definition of deflation?

362

You'll get seven answers.

363

Because some people think it's

a fall in financial assets.

364

Others think it's just a, a negative CPI.

365

That's deflation.

366

As far as inflation goes, I think part

of the problem is that what economists

367

are trying to do is Not just try to

tell you what's been happening lately.

368

Oh, because that could be subject to food

prices are up or down or gasoline prices

369

are up or down because they're volatile.

370

They're important.

371

They also have a big psyche on

everybody, especially gasoline prices,

372

but they want to try and look at what

is the underlying trend of inflation.

373

That's why the Cleveland Fed invented

the median CPI, and you've got, the

374

multivariate model by the Dallas Fed that

tries to look at what is the undertone

375

or the tone or trend of inflation beyond

what we see as far as the last print goes.

376

And then when you start thinking

about it in those terms, and

377

you start asking people, what

is the definition of inflation?

378

You start getting a lot

of different answers.

379

Cause one of the pushbacks I get

is I talk about that the economy

380

hits constraints and then those

constraints get met by higher prices.

381

And then I hear people tell

me but that's not inflation.

382

That's constraints being

hit by higher prices.

383

And I'm like, yeah, but the

public knows they go to the

384

store and it costs more money.

385

And they're not thinking, Oh, there's

a shipping problem out of Asia.

386

So this is not really inflation.

387

This is something different.

388

No, to them, it's all inflation.

389

And, or you could say that

core inflation is doing X, but

390

gasoline prices are up or down.

391

They think that inflation is up or down

because of what gasoline prices are doing.

392

So that's where it gets to

be really complicated because

393

we can't really settle on.

394

What is the underlying trend or

what is the underlying cause?

395

Going back to Dan Torillo, right?

396

There's no underlying theory.

397

If there was an accepted theory of how

inflation interacts with the economy,

398

and that's it, write it in the textbooks.

399

We don't even have to

entertain other ideas.

400

Then we could then get to

an accepted definition.

401

But since we can't have an

accepted theory, we have several

402

theories about inflation.

403

We have several ways to measure it

and several ways to argue about it.

404

Adam Butler: It's the, the answer

is it's complicated, right?

405

It's like trying to measure, am I healthy?

406

Or, in defining intelligence,

407

James Bianco: I've used the analogy of

weather, is, is the weather good or bad?

408

We were talking off camera.

409

I'm in Chicago.

410

It's six below zero.

411

It's January.

412

It's the middle of January.

413

That's not unusual.

414

You guys are in the Caymans.

415

It's, 80 degrees.

416

That's not unusual.

417

Is my weather unusual?

418

It would be for the Caymans,

but it's not necessarily

419

unusual for Chicago in January.

420

So it's all a relative scale

is really what boils down to.

421

Rodrigo Gordillo: So I guess the

question then is from your perspective,

422

you're coming up with certain

beliefs with regard to inflation

423

that were plateaued, maybe going up.

424

How do you measure inflation?

425

How have you gotten to that conclusion

and what can we expect going forward?

426

James Bianco: Yeah the first

conclusion I start with, I'll start

427

with housing inflation, because

that's the big one, the most interest

428

sensitive sector that there is.

429

And the assumption that everybody

makes is that we've got these

430

punishingly high interest rates

that are really hurting the economy.

431

You've heard Jonathan Gray, he's the CEO

of Blackstone say this when he reported

432

disappointing numbers in October,

he said interest rates are too high.

433

They're punishing Bill Ackman has

said something similar to that.

434

He thinks that the Fed is going to

have to start cutting rates in March

435

because interest rates are punishing

and that gets a big reception on Wall

436

Street because there's an old adage

on Wall Street that the Fed keeps

437

raising rates until something breaks.

438

And over the last two years, we've had a

25 percent decline in the stock market.

439

We've had at a total return basis.

440

One of the worst sell offs we've seen in

the bond market, because we went from 1

441

percent to 5 percent on interest rates

and the math shows you that if you held

442

like the 30 year bond through that.

443

You lost almost half your money.

444

We're down about 50 percent

at the lows as well.

445

And we had a banking crisis about

a year ago in March of last year

446

with a bunch of banks headlined

by Silicon Valley Bank failing.

447

So surely something broke, right?

448

Those are three things that Yes, but they

didn't necessarily break the economy.

449

So I push back on this idea that

we've raised rates to the level that

450

we've broken something economy wide.

451

Sure, some banks had some problems.

452

Sure, the stock market

had some indigestion in 22

453

over it, recovered in 23.

454

We haven't broken anything.

455

So I start with the idea that when

you look at the housing market, It's

456

holding up a lot better than people

think it would have if you would

457

have asked anybody in the abstract a

year and a half ago, what happens if

458

mortgage rates go to eight percent?

459

The answer would have been a hell of a

lot worse than what we've actually seen.

460

And so it's actually held up okay.

461

Now part of that might be because

the average mortgage rate Even though

462

the current mortgage rate in the U.

463

S.

464

is 7 percent down from 8 two months

ago, the average mortgage in the

465

United States is still three and three

quarters because so many people still

466

own the same mortgage that they had

from three and four and five years ago.

467

So I don't think that we've seen that

pain really come into the housing market.

468

And if you look at some of the real time

measures like Zillow, Redfin, these are

469

the online sites that do some algorithms.

470

There's really some evidence that

home prices are bottoming and

471

that there's some evidence to that

rents are starting to move higher.

472

Now home sales are down a lot,

but the way that I interpret that

473

is most people are not stressed.

474

I have a home.

475

I call a broker.

476

I list my house.

477

I want X for my house.

478

My broker tells me yes, but mortgage

rates are up and the average monthly

479

payment for your house is higher.

480

Fine.

481

I still want my X.

482

I don't want to lower my price.

483

So if nobody shows up to look

at it, I'm fine with that.

484

But I'm not selling it

for less than what I want.

485

So home prices are starting to hold up.

486

And so I think what you're seeing in

the data is some signs that you might be

487

seeing more of a bottom in home prices.

488

Then you are seeing further declines.

489

Now, add to that, that the

30% of the inflation report

490

is owner's equivalent rent.

491

That's the way that they impute

rental inflation in the CPI index.

492

Now, everybody's on this idea that

has to come down a lot and they

493

look at the year over year numbers.

494

But again.

495

Just like we were talking about with

the public's attitude about inflation,

496

look at the cumulative numbers.

497

Most of the real time measures

of home prices and rentals since

498

2020 are up 30 or 40 percent.

499

The Owner's equivalent rent

is up around 23 to 25%.

500

It has not risen as much as the real

time measures of the housing market.

501

I think it has to rise more

to converge with that gap.

502

So that doesn't mean that rental

inflation or OER has to go up.

503

I just think it's going to be sticky.

504

It's gonna be slow to going down and

it did rise in the last couple of, or

505

outperform by going up five tenths of

a percent in the last couple of CPI

506

reports and Wall Street's pointing

at that going, oh, that's wrong.

507

It's got to come down.

508

It's got to come down.

509

I keep saying, no, it has under

counted the amount of housing

510

inflation we've had to date.

511

And it's going to go up.

512

Another one that I've been

looking at is services.

513

Services are largely service inflation.

514

That is about 60 percent of

what we spend is in services.

515

That's largely driven by paychecks.

516

And there's been an attitude change

in the public, remote work, as I

517

mentioned before, about paychecks.

518

Jobs are more transactional.

519

If you look at the JOLTS report,

job opening labor turnover report.

520

If you're old enough, like I am, you

remember the old newspaper wanted

521

reports, no newspaper ads for jobs.

522

They used to measure that, but

we don't use those anymore.

523

So they invented Help

Wanted Index or whatever.

524

The Help Wanted, that's

what I was thinking of.

525

Yes.

526

The Help Wanted Index, that, that

went away with the dinosaurs.

527

So the Joltz Report replaced it.

528

And if you look at the, also what they

added in their report is the number

529

of people that turn over their jobs.

530

It's really high.

531

Now, Wall Street likes to talk about

the number of jobs that have turned over

532

has come down from the previous month.

533

But if you look at where we are,

like something like 2 percent or 2.

534

5 percent of jobs a month turnover, that's

higher than anything we saw pre pandemic.

535

Sure, it's lower than it was a year ago or

18 months ago, But it's still much higher.

536

And if you look at, we've invented

words like quiet quitting, and labor

537

hoarding, and we've seen big wage gains.

538

We've seen the biggest amount of strike

activity in at least 20 years, headlined

539

by the UAW and the Hollywood strike.

540

Those are the two most headline

strikes that everybody's familiar with.

541

Workers feel comfortable.

542

I have a job.

543

I get a paycheck.

544

I will spend money.

545

What if I lose my job?

546

Eh, I'll find another job.

547

We'll go to the Caymans

for a weekend vacation.

548

And then when I get back,

I'll find another job.

549

I am not concerned about my job status.

550

That's what you're seeing, I

think, in the labor market.

551

I think Wall Street's got this backwards,

that they keep focused on this idea

552

of how much pandemic savings is left.

553

I think it's really comfort about the

labor market that's got people spending

554

because that's one of the big surprises

555

kept going and they kept trying to

force it into all this excess pandemic

556

savings, which there that is true.

557

And that's there.

558

But I think it's about jobs.

559

And then finally.

560

Goods.

561

Goods, inflation is around zero.

562

It has really decelerated

in the last couple of years.

563

But what did we find from 2020 that

really drove goods inflation was shortages

564

and shortages relative to demand.

565

Could we be seeing that again?

566

I think that we're really underestimating

what's happening in the Red Sea now.

567

I'm not talking about Israel Gaza,

I'm talking about In the Red Sea

568

with what the Houthis are doing.

569

Oh, they're a ragtag bunch that are

firing off homemade rockets into the

570

Gulf of, into the Gulf of Aden or into

the Red Sea around the Bab el Mandeb.

571

That's the 16 miles of

water between Djibouti.

572

And Yemen where they're

attacking all the shipping.

573

From the Houthi standpoint, it's

been enormously successful because

574

hundreds of billions of dollars of

shipping goods has been diverted

575

around Africa on the Cape of Good Hope.

576

That adds 10 days or so, one way,

20 days round trip back to Asia.

577

We were, we work in a just in time world.

578

I need my stuff scheduled

to show up on time.

579

What they're doing by

shutting down the Red Seas.

580

Commercial shipping is they're putting

all of the just in time behind schedule.

581

Volvo and Tesla have already announced

that they're going to idle their plants

582

at the end of this month, because they're

looking at their inventory schedules.

583

And they're saying the parts we need at

the end of January and early February

584

are not going to arrive on time.

585

And we're not going to be able

to finish making cars because

586

we're going to be missing parts.

587

So we're just going to idle.

588

And the longer this goes on and the

longer we have to send ships around

589

Africa and add time and add friction and

more cost, the more that we're going to

590

see that we're going to have a problem

in a just in time inventory world.

591

And we're also finding out that

the world is relatively inelastic.

592

Shipping, shipping rates.

593

We all look at these container prices and

that's become a new parlor game on Wall

594

Street that container rates are going up.

595

What does that mean?

596

70 percent of shipping is on a contract.

597

I have a big container ship.

598

It's contracted for the year.

599

It goes back and forth

between Asia and Europe.

600

It may be six times a year because

it takes, so many, it's an 8, 000

601

mile trip if you go through the Suez

canal, and then it has to go back.

602

But now that you're sending my ship

around Africa, it might only be able

603

to do four or five trips a year.

604

That extra one or two trips it's

missing, I will contract out excess

605

in excess shipping in the spot market.

606

Those prices are up 80

percent in two weeks.

607

So what the shippers are telling you

is people want their stuff now, whether

608

they're Tesla or Volvo or consumers,

and they will pay extra to get it now.

609

So pay up, get those ships online,

fill them with containers and

610

start sending them around Africa in

order to get them where they were.

611

So if there's going to be a general

slowdown and a stalling of goods.

612

Because of what's happening in the

Red Sea, the first thing people are

613

going to say is what's available and

how much is it going to cost me to

614

get it, and I will pay that to get it.

615

That's what we saw in 2021 and into 2022.

616

Goods prices, when CPI was up

9%, CPI goods was up nearly

617

16 percent year over year.

618

So I think all of these are

suggesting for listening.

619

That the inflation rate, like I said,

the last mile might be here right now,

620

and that I'm not saying we're going

to get anywhere near 9 percent because

621

it's not nearly as bad as that, but

we can stay in a 3 to 4 percent world

622

is what we can wind up staying in.

623

And yes, that's a big problem for a Wall

Street that thinks inflation's licked,

624

we're going to 2%, the Fed's going to

cut rates six or seven times this year.

625

Not if we stay in a 3 4

percent inflation world.

626

That, that, that reality won't happen.

627

Rodrigo Gordillo: Yeah, it looks the

inelasticity of it is very interesting

628

because like you said, you have a tight

job market, you continue to have demand,

629

housing is sticky, as you mentioned,

but also, the there's a discussion

630

to be made of whether inflation is

going to be much worse for Europe.

631

United States, just because most of the

shipping that's being disrupted is in

632

the European is for European delivery.

633

But of course, that raises rates

everywhere, as you mentioned,

634

because just there's just less

capacity to do less trips.

635

The The interesting thing is that

what needs to happen for that to

636

calm down is not a less rockets

being thrown at these ships.

637

It has to calm down completely because

you just can't get your shipment insured.

638

It's the insurers that simply will not

Ensure your, or if they will ensure

639

it, the costs are so astronomical

that you're better off going around.

640

So it has to end completely

for it to go back to normal.

641

James Bianco: Yeah.

642

So a couple of things about that.

643

There's big ports in the Eastern

half of the United States.

644

Savannah, Charleston.

645

Norfolk, New York, New Jersey,

just to name a couple of them.

646

About 30 to 40 percent of the goods that

come to those ports come through Europe.

647

So the Asian manufacturers put

it on a boat through the Suez.

648

It stops at Rotterdam or Felixstowe,

which is the largest port in the UK,

649

and then it gets put on another ship

and it's sent to New York or it's

650

sent to, Savannah or Charleston.

651

And the reason that is because

another technical thing is the

652

Panama Canal, which would be

another way that they could send it.

653

The water levels on the lake and

the Panama Canal are so low that

654

it's running at around two thirds

capacity and there's a big backlog

655

to get through the Panama Canal.

656

So they've been actually

sending stuff through Europe.

657

So the shortage of stuff will show up.

658

On the East coast of the United States.

659

Now, maybe we can mitigate that by

increasing shipments to the West

660

coast and putting them on rails.

661

But again, in a just in time inventory,

I'm sitting here in Detroit and

662

I am making a car and on February

17th, I need these 20 parts to show

663

up so I can finish this car, you're

telling me I'll get those parts.

664

It's just some time after February 17th.

665

What am I going to do

with this half built car?

666

Is, is what's going to

happen at that point.

667

That's the problem.

668

And I remind everybody that in 2020, in

669

after the recession ended, car production

in the United States was 200, 000 units.

670

A month all car production and truck

production in the United States.

671

By the fourth quarter of 2021, it

had fallen to 84, 000 units a month.

672

That was not because demand was

down because demand was increasing

673

during that period because we were

already past the lockdowns and

674

we were restarting the economy.

675

It was just in time inventories

couldn't finish making the cars.

676

Chips, Silicon chips out of Asia

and everything was a big problem.

677

And that's why by 2021 90% of people

were buying cars over sticker price.

678

Yeah, they're in elastic.

679

I want a car, I want a deal, except

when there is no deal and I need a car.

680

What?

681

What do I have to write down on

this check in order to get this car?

682

And that's what people wound up

doing and that's what could wind up

683

happening this time is sure, everything

you've ordered you will get, but you

684

need it at the time you expected.

685

Otherwise it creates all kinds

of problems that produces goods

686

inflation because of the inelasticity.

687

I want what is available and

what do I have to pay to get it?

688

And prices go up.

689

Adam Butler: Reinforcing this de

globalization theme that was talked

690

about a lot in 2022 re emerged with

this, with the Ukraine conflict.

691

Every time there's conflict and some,

the supply of some major good is

692

threatened to be disrupted in Ukraine

situation, obviously it was commodities

693

and in the Houthi situation, it's now

694

James Bianco: shipping

goods, industrial goods,

695

Adam Butler: Then there's this major

potential for an uptick in inflation.

696

The interesting thing about.

697

Logistics, and like you say, the sort

of just in time world, is that it's

698

subject to queuing theory, right?

699

Where, you've got this idea where, and

there's great models on this, where

700

you've got a lineup for the bank, and

there's a certain number of tellers.

701

You take away one teller, and it's not

just that it slows down by one third,

702

it slows down by 80 percent because the

line keeps getting bigger and bigger.

703

And, we saw that play out.

704

That's a big reason why we did get

to that 9 percent inflation, right?

705

It's not just that, Oh,

it slows down for awhile.

706

And then once it's it stops slowing

down, everything catches up.

707

It doesn't catch up.

708

It takes a very long time to get

back to that equilibrium again.

709

And in the meantime.

710

Everybody's got to live with

too much money chasing too few

711

goods, which leads to inflation.

712

And I totally still, one of the

things we haven't really covered.

713

Is the demand side, there's a lot going

on the fiscal side that I think also

714

may contribute substantially to a higher

than expected growth rate and a higher

715

expected rate of in demand coupled

with potential supply constraints.

716

You're back to the same cocktail

717

James Bianco: No.

718

Yeah, no, you're right on the demand

side, what you've got happening right now.

719

is you've got enormous, you've got

an enormous 2 trillion, 6 percent

720

of GDP deficit in the United States.

721

I saw a statistic and I believe it to be

correct that whenever the deficit has been

722

this big, we've never had a recession.

723

And the reason is that what deficit

spending is, first of all, let me back up.

724

What borrowing to spend is pulling

forward future consumption to the current.

725

The great example I like

to use is a mortgage.

726

When I'm in, when I'm 30 years old.

727

And I'm freshly married and

going to start a family.

728

I need a house then.

729

Now I can afford the house when I'm 60,

after I've served, saved for 30 years.

730

It's too late then for

me to buy the house.

731

So I pull that consumption forward

to right now by borrowing the

732

money in the form of a mortgage

and paying it off slowly over time.

733

And so what deficit spending is that we

have all of this spending in the economy.

734

That is going on by the government

and that is creating demand and

735

it's creating, economic activity.

736

On top of everything else that's

been going on and that demand makes

737

prices a little bit more inelastic.

738

People want to buy it.

739

They want to pay up for it.

740

They want to get it right now.

741

What would slow the economy a lot would

be if we were to stop the government

742

spending as much as that we've seen.

743

But the problem with that is,

is then if you were to slow the

744

economy, we would risk recession.

745

If you keep the government spending going,

we could be risking The idea of inflation

746

right now, and I think really what is it

comes back to when it comes to demand, it

747

comes back to an attitude change, right?

748

Because people would say prior to 2020.

749

You didn't have maybe the massive

government deficits that we had

750

then, but you had massive wealth

creation through financial markets.

751

Why didn't that wealth creation through

financial markets create inflation?

752

I think it was the legacy of

753

When I looked at my brokerage statement,

keep the example simple, when I looked

754

at my brokerage statement at the end

of the month or the end of the quarter

755

and I saw that My portfolio went up in

value and I went on Zillow and I saw

756

that my home price went up in value.

757

I said, okay, good.

758

I've got extra savings.

759

I feel comfortable.

760

I feel a little bit more secure.

761

But that's all.

762

I just wanted to feel

more secure about it.

763

I'm happy.

764

I have extra savings.

765

That's why I didn't see inflation.

766

Today, and we saw this in 2021, when I get

extra money, either the government mails

767

it to me, or meme stocks boom, or Bitcoin

booms, or the government spends it, and I

768

see that I have extra wealth in my pocket.

769

checking account or my brokerage account.

770

I book a trip to the Caymans.

771

I spend it.

772

I buy a new car or something like that.

773

That attitude changed.

774

We saw that in 2021.

775

When we saw that the government

was mailing people money, they

776

didn't put it in the bank and say,

good, the rainy day fund is there.

777

We could exhale and relax.

778

We know we spent it.

779

We spent it.

780

We paid over sticker for cars.

781

We invented the word YOLO.

782

You only live once.

783

Let's go for it.

784

And we speculated in the markets with it.

785

So that's been the big attitude

786

with the attitude change.

787

Coming out of 2009 was

a lot more conservative.

788

I want to make sure that

my savings is higher.

789

Now the attitude changes.

790

I want to live a little bit more

and maybe it's a PTSD from what

791

happened in 2020, but I'm willing

to spend and that will fuel demand.

792

And that will fuel.

793

More inflation and ultimately

higher interest rates.

794

Rodrigo Gordillo: So let's talk about

the rubber meeting the road here.

795

So clearly there, if this is all

correct, there's a mispricing between

796

where inflation is and where it's

going and the belief that there's

797

going to be a bunch of rate cuts

going to happen next year, right?

798

It's not, yeah,

799

James Bianco: let me just say but

the first part of your question.

800

A mispricing between what

the market expects and what

801

actually happens is not unusual.

802

That's almost kind of standard fare

that we see this happen all the

803

time that the market prices in a

reality, if you go back two years ago.

804

I can remember.

805

The, when everybody, I'm talking

about February of 22, when everybody's

806

jaw hit the floor, because Wall

Street was saying that the Fed would

807

raise rates three, maybe four times.

808

Now, three rate hikes,

that's 25 basis points.

809

So three would be, they'll raise rates

810

Three or four rate hikes.

811

Jamie Dimon came out and said,

I could see them doing six.

812

Six?

813

Man, what's this guy smoking that

he thinks they're going to do?

814

Six rate hikes.

815

They wound up doing 21.

816

Is what they wind up doing in 2022.

817

Deutsche Bank has pointed out, they

got a piece they put out about a month

818

ago, that we're all talking about

the Fed pivoting to cutting rates.

819

This is the seventh time in the

last two years that the market

820

is now priced in a Fed pivot.

821

The first six times it never happened.

822

Maybe the seventh time is a charge.

823

My point is, yes, the

rubber meets the road.

824

There is a mispricing, but that's

always the way it is on Wall Street.

825

So the first part is that's

not unusual that you get the

826

market pricing in a reality.

827

That may not come to pass the

828

Rodrigo Gordillo: second part of the

impact then so you totally agree.

829

What's the impact to?

830

Assets bonds equities given your

framework in the next three to six months

831

James Bianco: If i'm right in that

interest rates go up of course, there's

832

two things to keep in mind about bonds

is As we sit here now in January of

833

2024, there's a yield again, or as my

friend, Jim Grant, he runs the newsletter,

834

Grant's Interest Rate Observer, says,

it's nice to have an interest rate to

835

observe again because we've got a 4.

836

7 percent yield on the investment grade

index, as opposed to something under 1.

837

So there is a yield again.

838

And if prices go down, you

are cushioned by the yield,

839

and that needs to be managed.

840

So the bond market will struggle, but

not nearly like it did in 21 or 22.

841

Because what happened then was you had

massive rises in rates of hundreds of

842

basis points with no yield to cushion you.

843

Now you'd probably see I've been,

vocal about the idea that we can go

844

to five and a half percent in 2024.

845

We hit five percent in late October,

so that's 50 basis points above the old

846

peak, but that's only about 150 basis

points away from here, not 400 like we

847

did from 21 to 23, and there's a yield.

848

Stocks.

849

Stocks, on the other hand, is an

interesting game because what I'm

850

arguing is, the economy stays a

little bit stronger than people think.

851

Demand stays up.

852

That means earnings comes back.

853

That at the face of it sounds like

that should be okay for stocks.

854

Stocks should be doing well in that.

855

You're talking about earnings.

856

You're talking about growth.

857

You're talking about opportunity.

858

Yes, all of the above.

859

But what have we learned about

stocks in the last two years?

860

They trade on their competition.

861

Their competition is interest rates.

862

When interest rates go

up, the alternative.

863

is to just park it in a money market fund.

864

And when interest rates go down,

stocks look relatively more attractive.

865

Dr.

866

Jeremy Siegel, who wrote the book

Stocks for the Long Run, put out

867

a new edition of it this year.

868

And I'll summarize it real quick.

869

The long term potential of

the stock market from here

870

forward is 8 percent a year.

871

So like he said, if you do

the Buffett thing buy SPY.

872

Don't even value it for five years.

873

Expect that it'll give you

about an 8 percent return.

874

Okay.

875

That sounds about right.

876

2019, if you were going to

get an 8 percent return, your

877

alternative was to keep it simple.

878

A money market fund is zero.

879

That's why we coined the term TINA.

880

There is no alternative.

881

You can't sit a money market fund at zero.

882

You got to put your money in

something that's gonna give you a

883

return like the stock market and

flows one into the stock market.

884

In January 2024.

885

The money market fund is

yielding five, maybe 5.

886

3, depending on the money market

fund you're in, it's giving you

887

roughly two thirds of the gain you

would get in a stock market without

888

any market risk money market funds.

889

Don't have any market risk.

890

There are any of these always 1.

891

There is an alternative.

892

It's interest rates.

893

So if you were to look at the way the

market traded last year, you could give

894

the market hundreds of good earnings

reports, decent economic reports, and

895

antidotes that everything's okay, or

you can give it falling interest rates.

896

And the market said to you, you can

keep your earnings reports and good

897

economic reports and antidotes.

898

I want falling interest rates.

899

That's why the market, the

stock market struggled all the

900

way through the end of October.

901

The S& P was only up 7 percent

at the end of October finished

902

up 26 percent for the year.

903

And if you took out the magnificent seven

stocks, it was still down on the year.

904

At the end of October, as was

mid cap, as was small cap stocks,

905

everything, but seven stocks was down

in the year at the end of October

906

and in the 10 year yield was at 5%.

907

Then at the end of the year, the

10 year yield went to 380 and all

908

those stocks took off 15 to 20

percent in the next two months.

909

So you can spend your time looking

at earnings reports and figuring

910

out what the economy is going to

do and talking to management and

911

understanding what they are going to do.

912

Or you can just pine for lower

interest rates and it's lower interest

913

rates that's going to drive it.

914

But if I'm right and interest

rates are going to go up, then the

915

competition stays with stocks.

916

I'm not suggesting like some

terrible bear market, suggesting

917

more of what we saw in 23.

918

Looks good, looks okay, but why is

the stock market going anywhere?

919

Because a trillion and a half

dollars went into money market funds.

920

And it's getting most of what you

should expect out of the stock market.

921

I know people are trying to say

cash is trash again, cause stocks

922

were up 26 percent last year.

923

Are they going to go up

26 percent every year?

924

Then, yeah, then I'll be in the

stock market, but they're not going

925

to go up 26 percent every year.

926

All last year was an offset to 22.

927

The, actually the two year gain in

the stock market is zero right now.

928

And so I think really the problem with,

if you want to go back to cash is trash.

929

You have to get the Fed to pretty much

halve the funds rate to take those money

930

market funds down to two and a half The

only way they're going to do that is

931

if we have a recession and then you're

back to earning bad earnings reports.

932

So if we see higher interest rates,

I think that's going to be a powerful

933

headwind for the equity market.

934

And I'm using that word carefully,

headwind, not a disaster.

935

Rodrigo Gordillo: Yeah, look, you

still have an inverted yield curve.

936

So it's bad for equities.

937

It's also bad for bonds.

938

And at some point we're probably

having a very yield curve because

939

people are waiting for the Fed to

reduce rates and if it does happen.

940

Adam Butler: Let's also not forget about

Janet Yellen's role and what's going on.

941

She.

942

To what extent are you paying attention to

the supply dynamics out of the treasury?

943

She obviously came out and surprised

everybody with much fewer or

944

much, much lower coupon issuance

than the market expected in Q4.

945

And to what extent do you think

that played a role in bolstering

946

equities and how do you expect her

to react given that, already we're

947

way out of our historical balance.

948

Between bonds and bills given their

issuance over the last couple of years.

949

Do you think she's going to try and

make up some lost ground, bring that

950

back into balance, or is she happy to

sustain a new paradigm of that mix?

951

Do you think?

952

James Bianco: Yeah, no, you're right.

953

The quarterly refunding

announcement on November 1st.

954

Next one will be February on February 1st.

955

So in a couple of weeks really turned

the whole bond market around because what

956

the market was worried about was she was

going to issue a lot more bonds and notes,

957

more supply on the back end of the curve.

958

And what she wound up doing was she

wound up issuing less supply, but

959

more treasury bills on the front end

of the curve, and it sparked a rally.

960

Now I wasn't surprised by the rally.

961

I was surprised by the

extent of the rally.

962

I don't know what way

further than I thought it, it

963

should have or needed to go.

964

Now that we come into 20, where we are

now moving forward, there's a 2 trillion

965

deficit, and that has to be financed.

966

And that has the bonds have to,

treasury, let me say this, treasury

967

securities have to be issued to

finance that 2 trillion deficit.

968

Now the treasury can, continue, she

could continue to try and issue short

969

term bonds, but she's putting the

taxpayer at an enormous disadvantage.

970

That's the highest point

of the yield curve.

971

That is the most interest expense

that they'd have to pay is to,

972

but is to be buying into those

short term bonds right now.

973

I, the history of the treasury is they

can be counted on to do the wrong thing

974

at the wrong time from 2010 to 2020.

975

When interest rates were at 200 year

lows, I used to joke that if I was the

976

treasury secretary, the yield curve

would be 30 year, 50 year, a hundred

977

year in perpetual bonds, and I should

just be jamming them down everybody's

978

throat, and then I turn to you in 2024

when the funds rates at 5 percent and go.

979

Aren't you glad you got another 98

years of one and a half percent.

980

And only Argentina did it, right?

981

And but you can be counted on to do

the treasury can be counted on to do

982

the wrong thing at the wrong time.

983

But I ultimately think that as we go

984

we have, that the number of notes and

bonds are going to have to be increased.

985

She cannot just continue to just jam.

986

Treasury bills down everybody's

throat because she puts the

987

treasury at an enormous invest

in an enormous reinvestment risk.

988

If the inflation rate does stay sticky,

if the funds rate doesn't come down, this

989

is going to cost many billions of dollars

of extra interest expense by issuing at

990

the highest point in the yield curve.

991

I think better off.

992

They're better off shifting out.

993

And smoothing things out.

994

But, that's what I think.

995

She thinks something different.

996

We'll find out in two weeks what they are.

997

Adam Butler: I agree.

998

Everything, that all makes a ton of sense.

999

The reality is, as we both know that,

the treasuries is responding to what the

00:51:07,241 --> 00:51:09,541

primary dealers are saying is in demand.

00:51:09,561 --> 00:51:11,591

They're doing it, sending out a survey.

00:51:11,771 --> 00:51:14,601

The primary dealers are saying, yeah,

we want more bills than coupons.

00:51:15,101 --> 00:51:19,371

And so the treasurer responds it's

not surprising that if the treasurer

00:51:19,601 --> 00:51:22,601

is going to do the bidding of the

primary dealers, that they're always

00:51:22,601 --> 00:51:26,361

going to be offside on what would

be best for the taxpayers, right?

00:51:26,471 --> 00:51:27,451

There's clearly a,

00:51:27,621 --> 00:51:28,231

Rodrigo Gordillo: That's interesting.

00:51:28,731 --> 00:51:30,111

James Bianco: I'll go

you one step further.

00:51:30,111 --> 00:51:34,191

There is this thing called the treasury

borrowing auction committee advisory

00:51:34,191 --> 00:51:40,776

committee, the TBAC, and this is a bunch

of wall Street hedge funds and bankers

00:51:41,066 --> 00:51:45,956

that get together with the treasury once

a quarter to advise them on the most

00:51:45,956 --> 00:51:48,906

efficient way to, issue bonds and notes.

00:51:49,216 --> 00:51:50,846

It's all bankers and hedge funds.

00:51:51,221 --> 00:51:55,341

That are on that committee, as I've

often argued, who is the representative

00:51:55,351 --> 00:51:58,131

for the taxpayer on that committee?

00:51:58,541 --> 00:52:01,781

The bankers and the hedge funds will

tell you what's in their best interest.

00:52:02,121 --> 00:52:05,811

was enormously critical of that.

00:52:06,131 --> 00:52:10,371

Committee, because I said, who on that

committee is arguing for 100 year bonds

00:52:10,551 --> 00:52:14,911

when interest rates were under 2%, we

should have been issuing them as much as

00:52:14,921 --> 00:52:18,991

humanly possible, but nobody was on that

committee arguing for 100 year bonds.

00:52:19,311 --> 00:52:20,751

The bankers didn't want them.

00:52:21,081 --> 00:52:22,611

Because they're long duration.

00:52:22,611 --> 00:52:23,621

It's a new market.

00:52:23,621 --> 00:52:25,201

They have to take them on their inventory.

00:52:25,401 --> 00:52:27,351

They have to be subject to taking losses.

00:52:27,391 --> 00:52:30,341

They didn't want them, but there should

have been somebody saying, I don't

00:52:30,341 --> 00:52:33,901

care what JP Morgan wants or what

Goldman Sachs wants, I'm here to tell

00:52:33,901 --> 00:52:36,961

you what the taxpayer wants, and if

you want to remain a primary dealer,

00:52:36,961 --> 00:52:40,381

you're going to do this, we had it

the other way around, so you're right.

00:52:40,881 --> 00:52:44,241

They're never advised as to what's

in the best interest of the taxpayer.

00:52:44,281 --> 00:52:47,161

They're only advised as to what is

in the best interest of Wall Street.

00:52:47,361 --> 00:52:48,591

I don't blame Wall Street.

00:52:48,861 --> 00:52:49,871

That's what they should do.

00:52:49,901 --> 00:52:51,461

They should tell you what's

in their best interest.

00:52:51,961 --> 00:52:54,751

The treasury should have other

voices on that committee.

00:52:55,111 --> 00:52:58,021

Rodrigo Gordillo: What's funny is that

I've always the way that committee has

00:52:58,021 --> 00:53:01,741

been described to me is a committee

of academics and technocrats that

00:53:01,751 --> 00:53:05,251

weigh things very critically in

order to provide their guidance.

00:53:05,751 --> 00:53:09,631

This is the first time I've heard that

it's filled with the Wall Street interests

00:53:09,631 --> 00:53:11,451

that obviously don't align with the tax.

00:53:11,481 --> 00:53:14,321

James Bianco: Oh, until last year,

Beth Hammack, who is the treasurer

00:53:14,321 --> 00:53:17,341

of Goldman Sachs, was the head

of the committee, for many years.

00:53:17,351 --> 00:53:20,021

You had a Goldman Sachs managing

director running the committee.

00:53:20,441 --> 00:53:24,671

And it's got PIMCO and it's got a

couple of hedge funds, JP Morgan, Bank

00:53:24,681 --> 00:53:28,301

of America, all the usual suspects

are on that committee as well.

00:53:28,301 --> 00:53:32,831

But you're right they're backed up

in research by the academics over

00:53:32,831 --> 00:53:36,781

at the Treasury Department that

work in domestic finance that help

00:53:36,781 --> 00:53:38,741

them with making their decisions.

00:53:38,801 --> 00:53:38,901

Because

00:53:38,901 --> 00:53:41,501

Rodrigo Gordillo: up until this very

second, I had no idea and I didn't

00:53:41,501 --> 00:53:45,011

look into it too much, but I had no

idea why Yellen would do such a thing.

00:53:45,151 --> 00:53:46,391

Now it makes a lot more sense.

00:53:46,701 --> 00:53:48,011

So I guess.

00:53:48,436 --> 00:53:53,826

Is there any way that one can get a line

on what that committee is leaning towards?

00:53:53,826 --> 00:53:57,826

Or is it one of those things that

once a quarter it's, dark period,

00:53:57,906 --> 00:54:00,546

send it to Yellen and then she

makes a decision based on that.

00:54:00,556 --> 00:54:02,506

What do we know about that

committee and how they're

00:54:02,506 --> 00:54:03,576

thinking that we could replicate?

00:54:04,076 --> 00:54:07,476

James Bianco: We could read the minutes of

the committee and you could surmise what

00:54:07,476 --> 00:54:09,046

is in the best interest of wall street.

00:54:09,046 --> 00:54:12,656

I will say this in fairness

to the treasury department.

00:54:13,156 --> 00:54:18,226

Under the treasury secretary, there are

some staffers that work in the treasury

00:54:18,226 --> 00:54:24,616

department, and what I argued that

no one is representing the taxpayer

00:54:24,696 --> 00:54:27,896

gets a very sympathetic ear by a

lot of the staffers at the treasury.

00:54:28,176 --> 00:54:31,926

They're fully aware of the problems

with this committee, and they are

00:54:31,926 --> 00:54:36,076

fully aware that there is another

side to the equation, and they do

00:54:36,106 --> 00:54:38,861

present that to the treasury secretary.

00:54:39,321 --> 00:54:43,821

So it's not that she never ever hears

that side of the argument in theory.

00:54:43,871 --> 00:54:48,201

She should, or he should, if we have a

different treasury secretary, it's in

00:54:48,201 --> 00:54:51,051

theory, what is it that they want to do?

00:54:51,551 --> 00:54:55,591

Now, the problem is, if you go back the

last seven years, we've had Janet Yellen

00:54:55,591 --> 00:54:59,911

as the Treasury Secretary for three years

in a rising rate environment that wants to

00:54:59,921 --> 00:55:05,231

mitigate the impact of interest rates on

the economy for her boss, the president.

00:55:05,701 --> 00:55:09,111

And before her, we had a hedge fund

manager and Steve Mnuchin for four

00:55:09,111 --> 00:55:11,191

years as the Treasury Secretary.

00:55:11,461 --> 00:55:16,581

And there, there's always been a very

sympathetic ear to what Wall Street

00:55:16,581 --> 00:55:21,701

wants on that, at the treasury secretary

level for many years now, maybe the next

00:55:21,701 --> 00:55:23,511

treasury secretary that could change.

00:55:23,791 --> 00:55:27,331

I doubted I doubted that it will because

if Trump becomes president, Trump.

00:55:27,361 --> 00:55:29,571

So Trump is an overlevered

real estate guy.

00:55:29,581 --> 00:55:32,321

He thinks that zero on

interest rates is too high.

00:55:32,591 --> 00:55:36,171

He thought the greatest invention

known since the, since fire was

00:55:36,171 --> 00:55:38,871

negative interest rates as an

overlevered real estate guy.

00:55:38,981 --> 00:55:41,211

What a great idea are

negative interest rates.

00:55:41,391 --> 00:55:44,581

And why didn't we have them here

in the United States for commercial

00:55:44,581 --> 00:55:47,921

real estate in Manhattan is really

what he was basically thinking about.

00:55:48,241 --> 00:55:51,011

Rodrigo Gordillo: It's just, how much

of this is politically motivated?

00:55:51,021 --> 00:55:51,791

We're coming into an election.

00:55:51,801 --> 00:55:52,411

James Bianco: A lot of it.

00:55:52,891 --> 00:55:53,721

A lot of it is.

00:55:53,721 --> 00:55:55,211

Absolutely a lot of it is.

00:55:55,711 --> 00:55:58,581

Yes, just like the Fed, Wall Street.

00:55:58,631 --> 00:56:04,701

I've made the argument too that

Wall Street is Basically looking

00:56:04,701 --> 00:56:07,691

like they're not going to move

interest rates on January 31st.

00:56:07,781 --> 00:56:09,421

That's the next FOMC meeting.

00:56:09,921 --> 00:56:10,901

There's eight meetings a year.

00:56:10,901 --> 00:56:13,111

That means there's seven

meetings left this year.

00:56:13,421 --> 00:56:16,001

How many rate hikes or rate

cuts, excuse me does, do the

00:56:16,001 --> 00:56:17,181

markets have priced in seven?

00:56:17,191 --> 00:56:18,211

How many more meetings are there?

00:56:18,261 --> 00:56:18,671

Seven.

00:56:18,981 --> 00:56:21,301

So they're going to cut rates

at every single meeting.

00:56:21,801 --> 00:56:24,271

In an election year, have

they done that before?

00:56:24,271 --> 00:56:26,521

00:56:26,621 --> 00:56:30,121

usually they cut rates in an

00:56:30,121 --> 00:56:33,821

election year because there's a

crisis that forces them to do it.

00:56:34,241 --> 00:56:37,661

They usually don't voluntarily

say, let's cut rates every single

00:56:37,661 --> 00:56:38,731

meeting in an election year.

00:56:39,181 --> 00:56:42,841

This year they are, and you just

have to wonder, why is it that

00:56:42,841 --> 00:56:46,431

they're wanting to be so zealous in

cutting rates in an election year?

00:56:46,931 --> 00:56:51,401

Could Jay Powell remember when he

was the Fed Chairman under Trump

00:56:51,401 --> 00:56:52,851

and all the mean tweets that he got?

00:56:52,871 --> 00:56:54,001

He doesn't want him coming back?

00:56:54,091 --> 00:56:58,531

I'll just throw that idea out as one

possible reason as to why they want to

00:56:58,531 --> 00:57:00,481

be uber accommodated for the economy.

00:57:00,601 --> 00:57:03,911

The problem with that argument,

though, is you could cut rates,

00:57:04,161 --> 00:57:05,241

and you could help Biden.

00:57:05,741 --> 00:57:08,441

But if you wind up having

inflation It could backfire.

00:57:08,911 --> 00:57:10,621

It could backfire in a big way.

00:57:10,721 --> 00:57:13,331

Rodrigo Gordillo: Like you need

to have, you need to manufacture

00:57:13,331 --> 00:57:15,381

that, that destruction demand.

00:57:15,881 --> 00:57:16,611

That's the next step.

00:57:16,611 --> 00:57:18,021

That needs to happen one way or another.

00:57:18,521 --> 00:57:19,671

And if you inflate

00:57:19,681 --> 00:57:21,271

James Bianco: You don't want to do

that in an election year, though.

00:57:21,281 --> 00:57:23,331

Rodrigo Gordillo: If you stimulate

the economy you're done, right?

00:57:23,501 --> 00:57:25,581

Getting that genie back in the

model would be much, much harder.

00:57:25,591 --> 00:57:30,811

I think there was an IMF paper that went

00:57:30,821 --> 00:57:33,501

types of inflation regimes that they

were, what different governments did,

00:57:33,501 --> 00:57:39,321

and the clear winners were the ones that

actually hit inflation hard and their

00:57:39,351 --> 00:57:43,521

growth trajectory from point to point

was much higher if you got the job done.

00:57:43,911 --> 00:57:46,361

But most governments didn't

get the job done, right?

00:57:46,491 --> 00:57:51,321

They vacillated in order for political

reasons and those that didn't do

00:57:51,321 --> 00:57:55,221

it correctly the first or second

time had much longer inflation

00:57:55,221 --> 00:57:58,031

regimes and had much lower growth.

00:57:58,111 --> 00:58:00,641

Hopefully somebody there is

doing, is thinking about it

00:58:00,641 --> 00:58:02,261

that way for this coming year.

00:58:02,401 --> 00:58:02,981

Otherwise,

00:58:03,481 --> 00:58:09,221

Adam Butler: I think Jay Powell, McChesney

Martin is going to deliver for Biden

00:58:09,221 --> 00:58:14,971

and team this year, and he's going to

look like he delivered a smooth landing.

00:58:15,471 --> 00:58:18,871

the error of that pivot.

00:58:19,011 --> 00:58:23,641

But to, to Jim's point, we may

see inflation begin to pick

00:58:23,641 --> 00:58:28,481

up in advance of that, which

would confound that trajectory.

00:58:28,541 --> 00:58:32,241

So it really is a really

interesting macro environment.

00:58:32,331 --> 00:58:37,931

Clearly equities and bonds

are still indicating.

00:58:38,231 --> 00:58:42,231

A very substantial amount of confidence

and optin optimism in a soft landing.

00:58:42,501 --> 00:58:46,771

What are you looking for from markets

to signal a shift in sentiment?

00:58:47,271 --> 00:58:48,731

James Bianco: There's a couple

of ways you can look at the

00:58:48,731 --> 00:58:49,981

markets to shift sentiment.

00:58:50,021 --> 00:58:52,891

Let's talk about on the downside,

if things were to go South.

00:58:53,101 --> 00:58:56,901

on the economy and maybe get

something worse than a soft landing

00:58:57,251 --> 00:58:59,411

into a hard landing or recession.

00:58:59,661 --> 00:59:01,351

By the way, real quick

about a soft landing.

00:59:01,571 --> 00:59:06,221

I always joke too, soft landing

does not have a definition.

00:59:06,671 --> 00:59:08,111

Is it below trend growth?

00:59:08,111 --> 00:59:09,221

Is it a mild recession?

00:59:09,221 --> 00:59:10,631

Is it somewhere in between?

00:59:10,901 --> 00:59:12,361

Hard landing is a recession.

00:59:12,361 --> 00:59:14,251

That's a, that's a harder definition.

00:59:14,251 --> 00:59:17,791

And in no landing, to keep with

the airplane metaphor, It's just

00:59:17,791 --> 00:59:20,951

the economy keeps growing a trend

or higher, which is about two and

00:59:20,951 --> 00:59:23,841

a half percent or more, which is

what it's done over the last year.

00:59:24,341 --> 00:59:27,821

And I like to joke, Wall Street

loves to forecast a soft landing

00:59:28,221 --> 00:59:29,781

since it has no definition.

00:59:29,801 --> 00:59:32,611

I will give you the definition in a

year and tell you why I was right.

00:59:33,111 --> 00:59:35,821

It's the way that they, it's the way, it's

the way that they like to work that one.

00:59:36,311 --> 00:59:40,671

But what would signal to us that

we are going to go into a hard

00:59:40,671 --> 00:59:42,581

landing and into a recession?

00:59:43,081 --> 00:59:46,001

A lot of people have noted that,

the yield curve is 8 for 8.

00:59:46,501 --> 00:59:48,091

in predicting recessions.

00:59:48,591 --> 00:59:53,701

Except maybe this time it's been

inverted now for well over a year

00:59:54,031 --> 00:59:57,491

and there's no real indication that

we might be having a recession.

00:59:57,991 --> 01:00:02,361

I've argued, as others have argued

actually it hasn't been the yield curve

01:00:02,361 --> 01:00:05,081

inversion that signaled a recession.

01:00:05,461 --> 01:00:07,911

It was the un inversion

that signaled the recession.

01:00:08,311 --> 01:00:12,431

The thing about the past was the

time between the inversion and the

01:00:12,431 --> 01:00:14,221

un inversion was a couple of months.

01:00:14,591 --> 01:00:17,831

So whichever you could pick

either one, and it looked like

01:00:17,831 --> 01:00:19,201

it was a good leading indicator.

01:00:19,701 --> 01:00:24,191

But like in the seventies, when the yield

curve inversion and un inversion could

01:00:24,191 --> 01:00:27,591

have been up to two years in difference,

we were inverted for two years.