#1024 - Has the Fed Lost Its Way? with Jim Bianco | Rates, Inflation, & Bitcoin

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2:05as the fed lost its way welcome to real vision daily briefing it's friday april 26 2024 i'm ash bennington joined by my old friend jim bianco president of bianco research jim it's been far too long since we've gotten to do one of these yeah i'm excited about it thanks for having me on this Friday afternoon. Man, it's great to have you back. Listen, Jim, I've been hanging out in crypto land, keeping an eye on what's happening in traditional finance and capital markets in macro. Catch me up, bring me up to speed. Big picture, where are we at this moment right now? The thinking has been changing that we are going from any kind of idea about a soft landing and rate cuts, that those are gone, rate cuts are gone.

2:50maybe one in December if the data were to slow down and we're at higher for longer land. And the H word, the hike word, is starting to sneak into the conversation. Nothing to the point where you'd say that there is a hike. What was curious about today's action was the arguments, the narrative you were hearing was the inflation data was a little bit hotter than expected. That's PCE and core PCE and consumer spending and personal income and personal spending. A little hotter than expected. But it wasn't hot enough to bring up a hike. So therefore, it was bullish. And that's why I was like, wait a minute.

3:36Now we're going to the H word here. And so that might be the narrative as we go forward from here. is the data actually crossing that Rubicon that we actually might be talking about hikes? We're not there yet, but it's starting to creep into the conversation. Yeah. By the way, we should also mention disappointing GDP print coming out earlier this week. So you do see this potential risk, at least the chatter about stagflation. Yes. And the reason you're getting the chatter about stagflation is while the number was disappointing, It was largely driven by exports and inventories, which are very volatile, cyclical components.

4:14And the inflation part of the GDP report, which is the PCE deflator, was stronger than expected. So higher inflation, weaker data, or weaker real growth. And that was where the S word, we got all these single-letter words coming here, stagflation started to kind of creep into the discussion. Hey, talking of which, we've been mentioning this chatter. I want to point to some of our old friends here on the network, Tom Thornton, Kevin Muir, and Uri and Timmer. Let's just take a look at this clip to give a little bit of context, a little bit of setup for what some other folks are thinking and saying about the Fed.

4:51And the Fed's going to be in a bind. They want to cut. We know that. We know they want to cut rates. Unfortunately, they don't have the data that can justify cutting rates. and need and want are two different things. Like when I think about the risk going forward, if the economy rolls over and inflation comes in, actually, to me, that's not a bad outcome. What's more worrisome, what's more scary, what's more difficult to actually construct a portfolio for is what if inflation continues to surprise to the upside? What if the stock or the economy keeps being stronger than everyone expects? And then that ends up being a much more difficult situation.

5:29Your question hits the nail on the head because bond yields are the epicenter for the markets. And that's something that started to happen in 2022, of course, when we had the big rate reset, when the Fed went off to zero bound, inflation was a clear present danger, and the Fed raised 525 basis points, bond yields rose dramatically. And so to me, rising yields are the thing that are most likely to give the stock market a wobble here.

6:09Well, Jim, you just heard it. Some of the points we were just making right here. What are your thoughts?

6:17Markets are really starting to come around to this idea that the economy is stronger. There's going to be no rate hike. But I would caution that in the bond market, it, we're probably in the seventh or eighth inning of this move higher in yields. It started way back at 3.8 % in late December. And now we're at 4.7 % or roughly at 4.7%. If the Fed's not going to hike rates, and that's really not on the table, there's a limit to how high rates can go. And that's why I've long been arguing five to five and a half, 4.7, I'd be kind of, in fact, I do manage an index that we have an ETF on WTBN. And we are moving to neutral because we're getting close enough to that target.

7:05Not thinking we're going to go much beyond that five, five and a half percent range, unless, of course, the circumstances change and the door is open to rate hikes. And in an election year, there's a real high bar to get rate hikes. So I think while we could continue to see higher rates from here, there's not much more to go in the bond market. In the stock market, it's a different story. When do higher rates bother stocks? The answer seems to be April 11th when we hit 450. Stocks kind of really started to get headwind and they fall in about 5%. And if rates start going to five to five and a quarter, the 10-year yield, then I think you're going to continue to see stocks struggling with a headwind as we move forward.

7:50I know today there's been no headwind, but that is going to be a big problem. So stocks might not be in the seventh inning of their correction, but bonds could very well be. So yes, higher for longer. Yes, more inflation. Yes, no rate cuts. But bond market's been stiffing this out for a while, and it's most of the way towards pricing it in. As you mentioned, the 4.7%, this, of course, is on the 10-year yield. Talk a little bit about what's happening at the shorter end of the curve. Two-10s inverted right now. Two-year treasury yield was exactly 5 % earlier. Now 4.998 on my screen. Yeah, so you're really stuck at 5 % with the two-year yield for the same reason I just mentioned.

8:36If there's not going to be a rate hike, yeah, you could go above 5 % on the two-year yield. I think it hit 518 to 520 last October. So you've got some room you could probably move a little bit higher. But if you want to talk about 5.5 % or 6 % on the two-year note, I'd open the door for rate hikes. So there's very limited move there. But that can mean that the 10-year yield can still go to 5, 5.5%, which is a fancy way for me to say that the yield curve could go to zero. And so we could pretty much un-invert the curve or almost un-invert the curve in the next couple of weeks. So this two-year-long period of the yield curve being inverted could be coming to an end.

9:19But it will be coming to an end in a way that no one really expected because normally the yield curve will end its inversion, which is in bond market parlance a bull steepener. That is falling interest rates with short-term interest rates falling faster, falling below long rates to steepen the curve. This one will be a bear steepener where rates are rising, but long-term interest rates are rising faster to basically univert the curve. That's a rare instance when you see that. And that is worrisome because the only other times in history that you've seen any kind of a bear steepener, that S word, that stagflation word was associated with it.

9:58Remember, we're only talking about it going to zero here. We're not talking about it massively steepening. Maybe that comes later in 24 and 25 if we start talking about hikes. Again, I keep bringing that hike word up, but I want to emphasize there is no hike priced in, but we are starting to think that way. And that is a little bit of a shift. We're going to take a quick break and be right back with more of the day's top analysis on the Real Vision Daily Briefing. Today's Real Vision Daily Briefing is brought to you by Chintai, your partner in asset tokenization. Licensed and regulated by Singapore's monetary authority and powered by the innovative Chex token, Chintai offers a compliant, one-stop solution for bringing real-world assets on chain.

10:40Chintai enables the tokenization of virtually any asset, from carbon credits to corporate debt, private funds and real estate, enhancing liquidity and optimizing efficiency for all. The technology becomes largely invisible and seamless to the end user. I can take a selective store of value within a wider portfolio in a fairly liquid form, very efficiently, to anything, whether it's some high-value whiskey, whether it's a particular supercar that's a one of three limited edition, therefore, in this fungible trading of them in a liquid form is the true endgame here for tokenization. With billions of dollars in client deals facilitated, explore how you can take advantage of tokenization by visiting realvision.com slash chintai.

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12:28yeah it's a big shift from where we were uh earlier in the year uh and later last year when we saw this uh bacon of what it was what was it 325 basis point hikes yeah in fact at its most in early january we were at almost seven we were almost at seven hikes or seven cuts excuse me so So the market was, you know, like they said, the market was way over its skis in January, and now the market is at less than one. So we'll have to see when the Fed meets in June or maybe even next week. Next week is, by the way, next week is a monster week for the bond market because we start the week with the quarterly refunding announcement.

13:11Everybody remembers in November when Janet Yellen changed the mix and said, I'll issue more bills and I'll issue less notes. It sparked a gigantic rally. I think she played that card already. Everybody knows that. They're looking for it. So it's going to be hard to play that card a second time on Monday. Wednesday is the Fed meeting. Now, we don't expect anything out of the Fed meeting. But then 30 minutes later is the press conference. And maybe Paul drops some hints at the press conference. And Friday's the payroll report. $250 ,000 is expected. It's$303 ,000 the month before. So payrolls are expected to come down from the previous month.

13:50The last couple of months, payroll report's been beating again. It's been higher than expected. And that's why we've got no rate cuts talking about in this market because the economy's been so strong. So Monday, Wednesday, Friday are going to be big data points for the bond market next week. Jim, let's zoom the camera out a little bit. For folks who don't spend a lot of time focusing on the bond market, it may be easy to lose sight of just how big a swing this is. You mentioned, I guess, seven rate cuts being baked in, 175 basis points. Now we're talking about hikes. These are huge, huge swings in what was happening in the Fed Fund's future markets in a relatively short period of time.

14:28Talk a little bit about what caused that unprecedented move. Yeah, I think what caused the unprecedented move is very simple. Everybody got their forecast wrong. They started the beginning of the year until late last year with this idea that the economy was going to slow into a soft landing and it was going to slow maybe into a recession. You know, there was some recession talk. And then as January, February, March came, we started to realize how offsides that forecast was. There was no soft landing. There was no recession. There was strong growth. That's good, right? But with that strong growth came stickier inflation.

15:08We started the year talking about this concept of a last mile. That last mile was going to be inflation going from 3 % to 2%. It went from 9 % to 3%, and then the last mile was going to be inflation going from 3 % to 2%. Well, it looks like what we've done this year is we've taken inflation from 3 % at the beginning of the year to 3.5%, and it might actually go over 4 % before the end of the year. So that last mile is now looking like a half marathon. And this is why we've seen such a big shift in the bond market this year as rates have been moving higher and as these rate cuts have been coming out.

15:43The stock market has been a little bit slow to pick up on this. It's only been since 450, about a couple of weeks ago on the 10-year note. Why? Because in the stock land, the last time I was on with Maggie, I made fun of it, right? The stock guys would say, but Jay said he's going to cut rates. So you can save a lot of money by canceling your Bloomberg. You don't need to look at anything else. Jay said he's going to cut rates. So therefore, there will be rate cuts. And only the last couple of weeks have they started to realize, well, he may have said it, but it all of a sudden doesn't look like he's actually going to do it.

16:16And that's why, like I said, maybe the bond market's further on in this adjustment process with the stronger data in the seventh inning or something like that. But the stock market only started about three weeks ago, so it might only be in the third or fourth inning of this adjustment. You can't cancel your Bloomberg, man. Mayor Mike locks you in for 24 months. That's why he's the richest man in New York City. Yeah. Really? I could get 24 months? I think I'm on a lifetime deal. Then my estate's going to be paying for this thing after I'm long and gone. By the way, Jim, I should say I should take a victory lap on this because you were early to this call.

16:50I believe you were the first person I heard the phrase no landing. Yeah, no landing. Remember, that's just to stick with the Merriplane metaphor of hard landing and soft landing. And no landing just means that if the economy's potential, and potential is what economists think the economy will do if it's not being stimulated or strained, and most of them think it's about 2%, 2.5%, I've argued no landing is. It just keeps going at least 2%, 2.5%. And largely for the last seven quarters, that's what it did. Now, it dipped down a little bit below that in the first quarter. But we'll have to see because, like I said earlier, that was a lot of inventory and exports.

17:33And that stuff can swing big in the next quarter and just push it right back up. And prior to that, we had six quarters in a row of at least 2.5%. So that's what the no landing is. And that's what I always thought. I just thought that the economy was not showing any signs of slowing. And now that is largely a consensus view. Let's talk a little bit about inflation. I was talking about this with Tom Thornton yesterday. While we were talking, I jumped on the FedFRED database and baselined inflation from April of 2020 to the last month, which is March of 2024, 121 % is where it came back, meaning 21 % or 21.9, so 22 % increase in prices.

18:17This idea that we've come down from 9 % to 3%, this last mile idea. Let's talk about how pernicious this is. I had an uncle who used to like to jump out of airplanes. He was really into skydiving. And the joke in the skydiving community is it's not the first 10 ,000-foot freefall. It's the last six inches that kill you. Are we in that sort of period there where this sustained inflation just sticks around and just devastates? It's just so pernicious. You know, we already might be there because you're right that the inflation rate since 2020, since the recovery began, is up something along the lines of about 21%.

18:55But wages are up around, depending on how you measure it, 16 to 18%. So wages have not kept pace with inflation. So, you know, what you can buy, you're losing ground on. Now, let me throw out one other statistic at you. The BLS does do an inflation report based on income levels. And if you're in the lower income levels, meaning that something like 75 % of your paycheck goes to housing, transportation, and food, and in that case, food is grocery store, your inflation rates may be 1 % higher than in the upper income levels, where less than 50 % of your paycheck goes to housing, transportation, food.

19:41And in that case, food is largely restaurants. So those people have been really falling behind. Now, in the last few months, they've been maybe getting some relief that wages have been growing a little bit faster than inflation. But that is not offsetting the first three and a half years, which is why there's a lot of anger in the polling data and everything else. When you ask people, what is the most important issue? What are the two most important issues in the economy? Other than you will get some people talking about immigration, which you could argue is somewhat economic, it's inflation in the economy.

20:22And it's largely meaning about inflation and about the growth of their paycheck. So yeah, it's a real problem. And that's why I think the Fed was correct in 22 and 23 to say, look, we got to get this inflation rate down. and if I have to, if I, me, Jay Powell, has to raise rates 75 basis points every meeting, and I have to crush the stock market, you as an owner of stocks or assets, you know, just do your patriotic duty and lose money with dignity, because then you'll stop spending, and then we'll bring down inflation. Well, that was 22-23, but late 23 and into 24, it's almost like Jay said, okay, enough of that.

21:02We need to, you know, give some relief to the upper half. We need to kind of get a 28 % six-month rally going in the stock market, which we did from October through March. And the problem is that that might be reigniting some more inflation fears. So yeah, the inflation problem is still with us. And it is going in the wrong direction. As I said, it started at three year-over-year CPI. It's probably at three and a half now. And credibly can make the case we're going to see a forehandle before the end of the year. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

21:44Yeah, losing money with dignity is one of the toughest things to do. Right. By the way, I mean, just to point out the obvious here, when you talk about how wage growth has not kept pace with inflation, those wage numbers that you state, they're not evenly distributed, So if you're in a job and you're not moving positions, very rare to have your employer come to you, tap you on the shoulder and say, hey, listen, I've been looking at CPI. You're not really doing great here. I want to hike you like 20 % on your pay. No, you won't get any of that at all. You're right. In fact, in the Atlanta Fed wage numbers, they do break it down between what they call job switchers and job stayers.

22:25and if you want to get it if you want to get a raise you got it you got to get into a different job job switchers also includes promotions so you know you've either got to get a promotion or you got to go to another company if you want to get a real wage hike you don't get it just by sitting still and hoping that you know you're going to get some kind of cost of living adjustment And again, too, the Atlanta Fed breaks this data down by income levels, too. And there's a wide disparity among income levels, too, depending on how much money you make, whether or not you're going to get a way it's not uniform across the board.

23:03Right. And of course, people at the lower end of that distribution have a much higher marginal propensity to consume versus save, which means they're paying an even greater percentage of their income on things like consumer staples. and it just on and on for the pain that this has been causing. Jim, we've got some great questions coming in. First one from Justin Smart. Maybe a more poignant question. Does the Fed have any good options left? Well, I guess the answer is, what do you mean by good options? The Fed can hold. The Fed can raise rates if they think that the data is coming in strong. If they, you know, the reason I say that is if they do the right thing to bring down inflation, but it brings down the stock market, is that a good outcome?

23:55If they do the wrong thing on inflation, which I think they've been doing for the last four or five months, but the stock market's up 28%, was that a good outcome? So it's a difficult question to answer without answering what is it you're defining as a good or bad outcome. But now that I've said all that about the semantics of the word, let me throw out that there is a dynamic in this economy that we have not had to deal with in previous cycles, and that is the fiscal response. Currently, the federal deficit is 6 % of GDP. What that means, in English, what that means is that the government spends about$6 trillion, six to six and a quarter trillion dollars a year.

24:41That's about 22, 23 % of GDP. That is a huge number. Usually, when you see the government spend that much, we're in recession, and they're doing old-fashioned Kinsey and pump priming to just throw money at everything to try and get the economy to move. Now we're in the fourth year of recovery, and they're still doing that. As a result, we've got this 6 % GDP deficit. So we've got this giant deficit that's happening. When you look at a deficit of that size, as I'd like to say about the no landing scenario you were asking about earlier, I just would say to all the soft landers and all the no landers, 6 % deficit to GDP.

25:19You could cancel a soft landing with that number. You just will not get a soft landing when the government spends that kind of number. Now, what you will get is positive GDP, maybe at trend or potential or higher, but you could also very well get inflation too. So the Fed is, if you want to ask the question, do they have no good options? Yeah, if the federal government is going to act like we're in the eighth month of a recession and they're in full panic, throwing money at everybody to end it, that's the level of spending that we have right now. But we're not in the eighth month of a recession trying to get everybody employed.

26:00We're in the fourth year of an expansion and we've had unemployment under 4 % for two years. So if they keep spending at that level, we are going to continue to have an inflation problem and we will also have positive GDP. Yeah, that's no longer Keynesian pump priming, right? I mean, that's not the thesis behind it, which is you spend, you put your foot on the gas pedal when you need to accelerate, when you need to run loose. That's not the case here. No, this is put the pedal to the floor and just put a brick on it and just leave it there forever. That seems to be the point that we're doing now.