#1041 - What's the New 60/40 Portfolio? With Jim Bianco

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1:00What's the new 60-40 portfolio? Leo. Hi, everyone. Welcome to the Real Vision Daily Briefing. I'm Maggie Lake. With me today is Jim Bianco, president of Bianco Research. Hey there, Jim. Hey, Maggie. Good to see you again. Yeah, same here. So we were just talking really briefly. There's a lot going on. Stocks traded in a pretty tight range today because everyone's really waiting for NVIDIA to come out tomorrow with earnings. We had a chorus of Fed officials talking. ETH jumped 20 % in two days on hopes of an ETF and some potential moves and regulations. So there's a lot going on. Let's start on the stock front.

1:36How are you feeling about the moves we've seen in the stock markets? I mean, I understand the moves in the stock market that, you know, as long as what we've seen in the last year is as long as the 10-year yield stays under 4.5%, then the stock market seems to do okay. When it gets above 4.5%, like it did September of October of last year, it corrected 10%. Like it did in April last month, it corrected 6%. So whenever we get above 4.5%, it seems like that's a big headwind for the stock market. We're 441 right now. So we're still under that number. Not by much, but we're still under it. So I think that the stock market will continue to advance.

2:20You know, this NVIDIA earnings, it's like this is becoming as big as any data point out there. They report earnings after the close on Wednesday, and there seems like there's like equal amounts fear and FOMO, right? Nobody wants to miss out, but everybody's worried that this AI freight train is going to come skidding to a halt or that valuations will suddenly start to matter again. How are you thinking about that? Well, first of all, let me just point out that you're right. Right. NVIDIA's earnings for the last year are probably just under CPI in payrolls. That's how important they are. There is no other company's earnings that approach this.

2:59And I don't think I've ever seen a company's earnings report ever get to this level, to the point where people like my mother are asking me to explain how stocks move after they close. I thought they were closed. I love that. That's always a good barometer, isn't it? Right, right. And she's got a good point, too. We say that so matter of factly, well, the market's moving after the hours. But yes, life for the stock market begins at 4 Eastern tomorrow with the NVIDIA numbers. And I think you got it exactly right. The last couple of quarters, when NVIDIA really came to the forefront, is they just don't beat.

3:36They beat every estimate on the street. They beat the highest estimate on the street. And that's why this stock has so electrified the stock market. And so there's a lot of people wondering, will it continue to not only perform as expected, but beat, or God forbid, it comes in below expectations. How does that really change the entire narrative around one of the driving things in the stock market right now, which is AI? We'll find out in about 23 hours and 58 minutes, I guess, at this point. Yeah, I guess that's what it comes down to, right? It's not just the company. It's a sort of bellwether for the entire AI trend.

4:18Does that seem fair, though? I mean, it's the chip part of it, but there's been a lot of enthusiasm all around, and it's kind of not clear who the winners and losers are yet. that no it it is fair that you know that the ai train and the ai narrative is an important driving narrative and for whatever reason we have glommed on to this company and you know i get i get old timers like myself arguing this and i've been arguing i've never seen a company's earnings take this center stage like this company's does not intel in the day not microsoft in the day not IBM way back in the day, not Apple, not Google, none of these other companies' earnings have so captured the market like this one has.

5:07And probably again tomorrow, it will. And to your larger point, yes. How do you know we're in the early ages of AI? Because the bellwether is not a content producer of AI, but it is the chip maker. It's the picks and shovels play, the old overused term that we love on Wall Street. And we're not quite to the point where, you know, this is kind of where Cisco was in the late 90s when it came to the internet. No one knew what the internet was going to be. So buy the company that's building the routers for the internet. But then eventually we learned that, no, we should be focused on the Yahoo's and the Googles.

5:44And, you know, eventually the, you know, the social media companies, the Met, as I was thinking, trying to think of as well in my head, because these are the actual content makers. Now, we'll eventually get to that with AI, but we're not there right now. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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7:12Yeah, which is, I think, so frustrating to people. So does it feel like, why does it seem like stocks are going to continue to be able to rally? I mean, we're at these record levels. What do you think is supporting that? Is it simply a function of that sort of lack of volatility or relative performance of rates as long as they stay low? Is that the main thing that's sort of opening up that runway for stocks? And is it that they sit here or can they continue to suck money in and run a lot higher from here? Well, let's talk about what's happening with the stock market. And let me pivot that to that 60-40 that you teased at the top.

7:49Well, that was your question and your research. Yes. So no, I think the 60-40 portfolio is changing to something a little bit different. Now, what everybody's looking for, what the 60-40 portfolio was until a couple of years ago was 60 % equities, 40 % bonds, because they were uncorrelated. And that usually you had the terms risk on, risk off, right? You bought 60 % stocks, you participate in the upside, 40 % bonds, because when things got ugly, bonds would rally and they would give you a cushion whenever stocks fell. That stopped about two or three years ago. It just flat out isn't working right now.

8:30Everybody's looking for that alternative asset that has a zero correlation to the stock market. And let me tease you, there isn't one right now. They're all largely correlated to each other by different degrees, by different beta. Some are more volatile than others. even if you stick in gold and even if you stick in cryptocurrencies, they all seem to roughly go up and down together by different degrees. So I think what's been happening is the 60-40 portfolio is morphing into stop looking for an uncorrelated asset. Oh, by the way, why are they all correlated to each other? Because the overriding thing that is driving this correlation, which is what it did in the 70s and 80s too, is inflation.

9:17When you have inflation, all assets seem to correlate. When you don't have inflation, then you get that uncorrelated nature to all of these assets. So what is happening now, people are looking at the 5 % yield in the bond market, 5.3 % in the money market fund. And let me throw in one other thing. Dr. Jeremy Siegel wrote a new update to his book, Stocks for the Long Run. And he said, what is the long-term prospects for the stock market? What should you expect if you own a broad basket of stocks? 8%. So you get five in the stock market. That's most of what the stock market would offer you. Bloomberg had a story about this exact point yesterday.

9:57I think what you're seeing is people are moving more and more money into bonds, like more like 50 % into bonds, maybe 55 % into bonds, because that's at base. 50, 55 % in bonds, 5%. What am I doing my other 45 % or 50 %? Let me be blunt. I'm not wasting my time with IWM, which is the Russell 2000. I'm not maybe even wasting my time with VOO or SPY, which is the S &P 500. I am going to buy Max 7 stocks. I am going to buy AI themes. I am going to play leverage, maybe in triple Qs. I am going to play Bitcoin. I am going to play what Eric Balkunis at Bloomberg calls hot sauce, so that everybody's racing into the hot stuff is what they're doing with the rest of their portfolio.

10:43So a big base of give me five on my base and the rest of it is going to be very racy stuff, which is why we're seeing that concentration in the market. Look, the S &P is up 10 % this year or thereabouts. A third of that is NVIDIA. Another reason why tomorrow's earnings numbers are going to, it matters. In fact, if you take the top four stocks, NVIDIA, Microsoft, Meta, and Amazon, you've got almost half the gain in the stock market out of four stocks. It's extraordinary to think about that. So, Jim, go ahead. Yeah, I was just going to say, that's why you're seeing this intense concentration in the market and this intense concentration in risky things, like the success that the Bitcoin ETF has had with all of its flows.

11:33Like I said, gone are the days. Now, I know a lot of people, because of their match at work, You know, we've got VOO or SPY down and they're just plowing money into the S &P 500. But beyond that, people are like, give me a big base of income and then give me something that's going to go on the other side, whether it is a crypto or it's a Max 7 stock or some theme along those lines. So what's so interesting about that, though, is that I could see why people are doing that because they're thinking I'm going to be like almost like a barbell strategy, right? I'm going to be safe and park my money in bonds and then I'm going to go for it.

12:08and really go risky on the other side. But to your point before, they're all correlated. So are they as protected or hedged or diversified as they think they are? Is that strategy flawed because of the way markets are moving right now? No, everything's correlated. And that's the thing. Let's back up. Everything is correlated. If you're going to try and find an uncorrelated asset, You're either stretching the definition of what an asset is. Oh, I'm going to buy some kind of currency hedge CTA thing. That's not an asset class. That's a theme that might be currently uncorrelated, and we'll see if it remains that way.

12:50So no, you're right. If you're looking for that hedge, it doesn't exist. Understand that that 60-40 portfolio from about 2000 to 2020 with that uncorrelated in bonds, that was an extraordinary period. That is usually not the case when it comes to bonds. I understand we kind of created the whole wealth management industry based on that idea. We created risk parity trades. We created the concept of risk on and risk off, all on this idea that stocks and bonds prices are uncorrelated, but they're not anymore. So I think what people are trying to say is, I'm going to take some risk here in getting higher beta stocks or maybe some leverage, but my base is going to be a constant cashflow of around 5%.

13:39That's about all you can do in this environment. And that's pretty much what you had to do if you went back to the 70s or 80s or even into the 90s, early 90s, that that was the way you had to think about a diversified portfolio then. So this whole idea that I want what I had in 2019, that doesn't exist anymore. We have to start thinking about it in different ways. So you mentioned this is happening against the backdrop of inflation. So Boris has a question. Last week's inflation data were widely interpreted as the signal that the future path of interest rates is downwards. What does your opinion still speak against this scenario?

14:18Yeah, mine does. Let me start with the first half of the question. I think you could tell a lot by sentiment by looking at the way that we look at this data. When you look at the way that the narrative always comes out with CPI, for example, we always want to focus on the things that are surging. Auto insurance. And we want to say they don't count. Well, wait a minute. What happened to airline tickets and used cars that used to be surging that are down? Oh, well, they count now because they're going in the direction we want. We desperately want inflation to peak and we want it to go down. And every time we analyze this data, we look at it this way.

15:00When was the last time anybody said inflation is going up? I don't see it. We're always talking about OER is going to peak and inflation is rolling over and we're back on our way to 2%. and the Fed's on pause and the Fed's going to cut. So that's what I think we saw in the CPI report last month was version 17 of that. And the first 16 versions didn't really work, but maybe the 17th version will work. Now that I've said that, where am I on interest rates? I have argued that we were going to go to five to five and a half in the 10-year. We got to 475. When we got to 475 last month. I moved to neutral.

15:39Now, the reason I moved to neutral is simple. It was most of the moves over. That's the only reason I really did it. I still think we need a move to 475, to 5, to 5.5, 25 basis points above the high set three weeks ago. And I still think we're probably going to get it, but it's a low conviction call because most of the move is over. Now, why do I think we still need that move because we never really set up that capitulation in the bond market that we saw, say, in late October of last year, where everybody hated the bond market and everybody was just, we're done with bonds for the rest of our life.

16:17They're a useless asset class, an uninvestable asset class. That was almost what you were hearing last October when we were at 5%. What do we get now? We had a story today in Bloomberg that big money managers are getting long duration. Everybody's positioned for the fall in rates because inflation is going to come down. Yeah, we've been saying that constantly for three years. And I guess if we just say forever, one day it'll eventually, I think, work its way out. And to be fair, it did kind of work out a little bit last year with the big fall in rates as well. But I still think we're going to need one more push up in yields.

16:50And that's going to set the tone then for a sustained rally in bonds. The problem with if 475 was their high or 440 now at 35 basis points, if you believe the old adage, which I do, a bull market climbs a wall of worry. What that means is there's people on the sidelines and you have to convince them to get in. There's not a lot of money on the sidelines waiting to get in the bond market. It's already in. And if bond yields continue lower, they're going to say, thank you very much. Let me go and buy ARK or let me go buy the Bitcoin ETF or let me go buy double levered QQQs because those will go if rates are going to go down.

17:32There's no reason to think about buying TLT or something along those lines. No one's interested in that product if yields are going to continue lower from here. So that's why I think we need one more move up. And then we'll set up a wall of worry that we could get people back into the bond market. One of the things we saw in the data that's been coming out as well, and you mentioned the jobs report, which will be important, is this weakness there, right? Sort of signs that the economy might be rolling over. Now, that was greeted as good news because it meant the Fed was not going to hike rates, certainly, and maybe an easing was back on the table.

18:07But for profits and for the economy, it was a bit worrying. What are you anticipating? Because we had been in a sort of narrative where the economy was stronger than anybody expected. Maybe there was no landing. Maybe it was the resilient economy was the theme. And then we started to see some at least some of the data turn. Where do you what's your outlook for the economy itself? So let me start with a big picture thing. Rudy Dornbusch is an economist at MIT. He's worked with the Fed. Had a famous line that Bernanke's used forever that expansions, economic expansions, do not die of old age. They're murdered.

18:45What he means by that is that, what you said, economies don't roll over. They just don't. Every time we have a contraction in the economy, a recession in the economy, something murders it. COVID was the last murder weapon. Collapse in housing prices was the murder weapon before that. 9-11, the tech bubble, was the murder weapon before that. The natural state for an economy is to expand. And what I think we saw was for the last five or six quarters going into the beginning of this year, the economy constantly beat to the upside, constantly was doing better than potential. At the same time, everybody was telling me there's going to be a recession.

19:27There's going to be a soft landing. And nothing of the sort happened. It just continued to go. So we finally had an economic capitulation in the first quarter. OK, forget the soft landing. Forget the recession. This economy is going to continue to grow at potential. And what have we seen happen since then? It's moderated some. Now, the economies do this all the time. They grow a little bit above potential. They grow a little bit below potential. They grow a little bit above potential. I think this is just one of these periods where we're growing below potential. I don't think there's a real problem in the housing market, at least yet.

20:03It's not showing up in payroll. 176 ,000 jobs, which was a miss on the payroll report, is not a weak number. It's just a miss is what that was. And that 240 ,000 estimate that we had going into that number was a two-year high for the estimate, talking about the capitulation, that now we're guessing that payrolls are going to be at a two-year high. And when they're merely 176 ,000, which is a strong economy number, we're disappointed. Claims are not showing much of anything in the labor market. I know that everybody wants to start with the conclusion that the labor market sucks. So let's go find some data that proves it.

20:40And the newest iteration of that is foreign-born workers versus U.S. foreign workers. But I also think that that kind of overstates the case as well, too. Now, something could come along and could murder this economy. It could be at any moment, you know, something out of the Middle East that you look at and say, oh, here comes$200 crude oil. Or it could be something geopolitical or it could be something that no one has anticipated that you look at and go, wait a minute, that's changed things. Now, occasionally we get those things happen. Silicon Valley Bank a year ago, and we think that's it. We thought I thought it was a murder weapon for a while there, but it turned out not to be that.

21:21but so the economy it it ran above a little bit above potential for a while now it's going to run a little bit below potential but i think when you even it out we're just going to continue to move along with a decent economy until something murders it now you know maybe it's you know no one thought you know a pandemic could do it maybe it's going to be something else that no one is considering that pops up and really causes a big problem in the economy. But the natural state for an economy is to expand. And I think the biggest mistake people make is the economy is going to roll over. It's going to pop.

21:59It's going to go into a recession by itself. They don't die of old age. And that, I think, is a very good argument that, you know, Rudy Dornbusch was making. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision daily briefing.

22:21Yeah, I love that idea because I think we can all really understand that. And you're right, the problem is sometimes you don't know where it's going to come from. I want to touch on what's happening in the world of crypto. And I think it was Oliver was joking 60-40, 60 % NVIDIA, 40 % Bitcoin. And then this is the best. He said, just kidding, sort of. because I think that we're all trying to figure this out. So we saw a huge move in ETH on speculation that there would be a change and maybe the spot ETH would, ETF would be approved. How high is your confidence? And talk to us about that narrative because that is drastically different than what a lot of people were thinking, hence the 20 % move we've seen.

23:12It is drastically different than what people were thinking yesterday. I mean, if you went back yesterday morning and got into a room with all of the ETF providers and all of their lawyers 36 hours ago, they would have told you that this ETF is nowhere. And then all of a sudden, the SEC came back to the ETF providers and said, you need to fix A, B, C, and D in your perspective filing and resubmit it, which is code word for make these changes and we'll approve it. And all of a sudden they went from yesterday being nowhere to it's going to get approved by the end of the week is where it was. Now what happened?

23:55And why did ETH rocket so much off of that? I think that there's a bigger theme in here. It's not just ETH. It was SAB 121 was voted to be repealed. Now, that was the SEC had an accounting rule where banks and financial institutions can't custody crypto on their balance sheets. And Congress has the ability to change anything that they do. And they actually put up a bill and they passed it 60 to 38 in the Senate with 12 Democrats voting for it, including Chuck Schumer, even though the president said he would veto it. Then with this ETH reversal yesterday, and then I'll throw in one other one to you, Martin Gruenberg, the FDIC chairman, resigned yesterday.

24:43He's been kind of the point of Operation Chokepoint, Operation Chokepoint 2.0. Operation Chokepoint 1.0 was run under Martin Grunberg when he was the FDIC chairman under Obama. And that's when the FDIC was kind of whispering to banks, look, you don't want to use, you don't want to approve transactions where people are using their credit cards or their bank accounts to buy porn or guns. But Operation 2.0 is you're kind of telling banks, you don't want to be approving any transactions involving crypto. So what I'm trying to lead up to is all of a sudden there's been a massive regulatory change in the last 36 hours.

25:23Congress is on board with letting crypto run. Maybe the banks being told quietly, don't do transactions involved in crypto. We actually bankrupted Silvergate Bank a year ago and Signature Bank because of their involvement in crypto. That all of a sudden, we're going to say, no, these are legal transactions that you could do that. The ETH ETF is just another signal of that. And maybe Biden, after Friday saying he was going to veto SAB-121, might actually not veto it and sign it. So what has got ETH going is it has been under the cloud of this massive regulatory call of, you know, it is a proof of stake coin, that should be a security.