#976 - What’s the Best Way to Hedge Inflation? | With Jim Bianco

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0:55What's the best way to hedge inflation? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jim Bianco, president of Bianco Research. Hey, Jim, it's great to see you. Great to see you. Interesting day. We've had interesting week. Interesting day, interesting week. I'm going to channel one of our members, Rich, who's in the chat and always brings it as saying, happy Friday champions. That's right. We need to put our best foot forward to figure all this stuff out. So we had another hot inflation reading this time producer prices. That really got things going today. We saw that immediate reaction in the bond market yield on the US 10-year now above 4.3%.

1:32What do you make of what's happening with prices, Jim? Does that rate need to go higher? Are we seeing inflation re-accelerate in a meaningful way? What do you think is happening here? Well, at a minimum, I think what we're seeing is inflation might be very close to the bottom. Wall Street has had a term that it invented last summer called the last mile, that inflation was going to go from 3 % to 2%. And what we've seen with the data, the CPI data and the PPI data, and I might add, the PCE data that comes at the end of the month that the Fed looks at uses the same raw materials as CPI and PPI, uses the same survey.

2:14So you could kind of take PPI's numbers and CPI numbers and reweight them. And it looks like we're probably going to get a four-tenths rise in core PCE at the end of the month. And so all of this is suggesting that maybe that last mile that we've been looking for is already done. And it's done in the low threes to high twos on a year-over - basis for CPI inflation. And that from here, it isn't going to get much better. And there is a possibility, especially if you've seen what gasoline prices have done over the last 10 days, they're up almost 5 % in the last 10 days, that it might get worse. Inflation numbers might get worse.

2:55But at the minimum, if we're looking at the bottom being 3 % on inflation, that is going to be a problem. That is what J-PAL does not want. And that is what the bond market has been very bothered by, which is, like you said, why we're at a 430 yield in the 10-year. Yeah. You know, that really, that reminds me, it really mirrors something that Bob talked about with Harry Melandry this week. They were kind of going over what has been this sort of difficult path. And let's remember, everybody, you know, just in November, as we turned the corner to the year, we had a radically different idea about what was going to happen.

3:33I mean, there were so many rate cuts baked in. We had this narrative, as you say, of rapidly falling inflation. It was going to allow the Fed to really cut rates and maybe even preemptively cut rates. The Fed themselves sort of indicated that with their dot plot. Let's have a listen to what Bob was saying about inflation, which I think mirrors your thinking, Jim, and then we'll talk on the other side. Let's have a listen. I think the more general point, if you don't get sucked into all the particulars, it's like, look, the question is, where is inflation settling? And if it's settling at three to four, that's too high.

4:09It's not a disaster, but it's too high for the Fed. And if it's settling on CPI two to three and on PCE one to two, then it's mostly fine and we'll give them the space to cut. And, you know, PCE or core PCE is their preferred measure, but it's not preferred, does not mean only, it just means preferred. And so they're going to look at a range of different indicators. And so my guess is what we're going to see is, you know, it looks like core CPI and core and headline CPI are going to, they're just going to be a little too hot relative to what the Fed would want to achieve its mandate, in part because we're going to have some softening of the disinflation that exists in the goods prices.

4:55And that probably will moderate a little faster than the disinflation on the services side, given the sort of slower moving OER and rents and stuff like that on the services side. And so in this range, being kind of stuck in this range is probably where we're going to be at. And that's probably going to be not quite good enough for the Fed to feel good about preemptively cutting meaningfully. That full interview is available on our website. If you are not a member or you want to upgrade, go over to realvision.com and join us. We always have some fantastic offers on. So Jim, are we looking at, so if you think it's bottomed, are we in this now?

5:45Is this the new norm that we're in this higher inflationary situation? Maybe some of these structural issues that people have been pretty persistently talking about with us in the last week. And now we've seen the kind of data confirm that. And if so, what does that mean for market expectations? You know, I want to focus on the first part of what you said about a new normal. Jay Powell at his press conference two weeks ago, and even earlier this week, Janet Yellen have used similar types of talking points. The economy is normalizing, that we're returning, you know, we're getting past the pandemic.

6:23And I want to ask the question, normalizing to what? What are we currently at? what is not normal about the current economy that needs to be normalized? And I'll give you an answer. There's nothing abnormal about the current economy. This is the new post-pandemic economy, that when they talk about normalizing, they want to go back to a set of rules that were pre-pandemic, which gets you inflation to 2%. And really, this is what we're going to have to start to think about that maybe two things were true at the same time. In 21 and 22, we had a transitory element of inflation that took us to 9 % because of supply chain constraints.

7:05That went away. So the transitory crowd got that right. But when the dust settled on getting rid of that transitory element, we're left with a 3 % inflation world, not a 2 % inflation world. So the higher for longer crowd was also correct. And now it's all of a sudden a higher for longer crowd is starting to look more, you know, relevant and more correct that if this inflation level is going to stay at this at this point, let me put it in Fed terms. The Fed likes to use a term called our star to figure out what the neutral funds rate is. They think it's 50 basis points or half a percent above the long run inflation rate.

7:47They've been arguing that once we normalize, the inflation rate's long-run rate, it goes to two, and R-star means that two and a half is the normal funds rate. So at five and a quarter to five and a half in the funds rate, there's 300 basis points of tightness in the market. What if the normal, what if the long-run inflation rate is more like three to three and a half? And some Fed officials have said, maybe that R-star 50 basis points is actually 100 basis points now, it's a little bit wider. All of a sudden, you're starting to look at the idea that maybe four to four and a half is the neutral funds rate.

8:25Now, five to five and a quarter is tight, but it's not nearly as tight as if the neutral funds rate was two and a half. And so maybe the reason that we're seeing the sticky inflation, the strong no-landing economy, the strong stock market, the lack of anything breaking, is while the Fed is technically tight, they're not that tight. And that's why this economy can handle this level of interest rates. They haven't broken anything. They haven't gone too far. They haven't really solved the inflation problem if their long-run goal is to get to 2%. Hey, everyone. We're going to take a quick break right now to hear a word from our partners.

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11:22Well, that's a big if, right? So this is a question we get a lot. Okay, so say it's at three and say they have to stay where they are. They don't cut, but that we're in this 4 % to 5 % interest rate. Historically, that's still really low. If the economy's strong, does that matter? Do they have to break something? Or can we just be in an environment where both growth and interest rates and inflation are all a little higher than they were before? or it doesn't work like that? No, it does, but there's a big caveat to it. Yes, we can be in an environment like that. But we also, let's, and I'm going to talk about what the survey of consumer finances from the Federal Reserve shows us.

12:06The top 50 % of income owns 94 % of the assets, stocks, bonds, houses, retirement assets, 94 % is owned by half of the country. the top 10 % of income own half the assets in the country. The bottom 50 % of income owns over half the debt. So the unfortunate reality is the rich being the top 50 % or top 10%, they own stocks, they own bonds, they own homes. And if they're going up in price, they're doing okay. And the bottom 50%, they live paycheck to paycheck. They're dependent on their paycheck, not falling behind inflation, and they have a lot of debt, whether it's a mortgage debt, personal debt, credit card debt, student-hought debt, or all of the above.

12:55So if we are to say, no, we're in a 3 % inflation world, we're in a 4 % to 5 % interest rate world, top 10 % are fine. In fact, they might even like it. They're going to get more interest income. But the bottom 50 % that live paycheck to paycheck are going, is my paycheck going to continue to keep up with inflation if it's going to be a 3 % plus world? And what about my debt? Are my interest costs ever going to come down? That's why you can have the situation where the economy, as measured by GDP and consumption, retail sales, except for January's retail sales, but in the last several months, has looked very good because the top 10%, the top 50 % are almost all of the spending in the economy.

13:41The bottom 50 % are really hurting. They don't spend enough to change the economy, but one person, one vote, it shows up in the political numbers, in the low presidential approval rating, and that the opposition party, in this case Trump, is running competitively, if not ahead of Biden, because everybody's complaining about the current situation. But you go, but what about GDP? Yeah, it's because it's a bunch of rich people spending a lot of money. That's what's keeping up the economy. And people that are living paycheck to paycheck with debt are very unhappy. So 3 % inflation, if you're top 50%, you can handle it.

14:20Bottom 50 % is a different story. That's a great way to put it, Jim. And I think it really eloquently, we talk about income distribution and all these other words, and it can get lost in what that means. But that's really it. And yeah, now it's showing up in opposition. But at some point, And, you know, some people are starting to ask what happens when everybody figures out they're all the same and none of the policies change it. You know, do you have the potential for civil unrest in a way we never have? And, you know, there's just the feeling on the part of everyday people that they're getting screwed.

14:54And young people, young people are going to go to the polls in more and more numbers if they choose to participate in any kind of political system, which there's a question about that. So this is where, you know, we start getting into super, super dicey territory. and it's not something people are paying enough attention to from an economic point of view, I think. So that was a wonderful explanation. So we've got a lot of questions coming in, and I want to make sure we get to all of them. So I wanted to sort of jump in in just a minute. So let's just touch on yields and stocks before we do that.

15:28The market had been pricing in a lot of rate cuts. They pulled back on those bets, but where does it look like we're going? Are we going back up to 5 %? Are we shifting away from thinking about cuts at all? What do you see happening with the Treasury market? So let's start with the Treasury market and go to the stock market. I think that as we start to realize that the economy is no landing, no landing means that it's running at its potential or maybe a little bit above its potential, you know, at somewhere between 2.5 % to 3 % growth for GDP, that would be above its potential. consumption staying very high.

16:07And if it's going to run at its potential at around 2.5 % to 3%, and let's say we are in a 3 % world, there's a statistic called nominal GDP. You take the two and add them together, right? So if you're at a 2.5 % real growth world and you're at a 3 % inflation world, that means nominal growth is 5.5%. That's a good proxy for where interest rates should be. So I've been an outlier. And I mean, let me be clear on this. I am an outlier. I think that ultimately the 10-year yield could go to 5, 5.5 % sometime this year. Now, I still got 10 more months or so for that to be played out right or wrong.

16:49And I am higher than a lot of other people. But I do feel strongly that rates will continue to move up because in In a nominal world of 5 % to 5.5 % growth, you can't really run a sustained level of interest rates below that unless you're doing quantitative easing. We did from 2010 to 2020 because we were intentionally forcing interest rates down through quantitative easing, but we're not doing quantitative easing right now. That probably isn't going to be coming back anytime soon. I think that those rates could go up. What does it mean for the stock market? If you ask a lot of stock strategists, long-term, big picture, what is the potential for the stock market over many years?

17:35You do the Buffett trade, buy an S &P index fund, and then don't look at it for five years. You would expect it to probably give you about an 8 % return on a yearly basis, so 8 % every year. But in 2019, when the potential was still 8%, we coined the term TINA. There is no alternative. Money market funds were yielding zero. Bond funds were yielding in the 2 % to 3 % range. You had to get in the stocks because it was the only way you were going to get a return. Well, if we're now in a 5 % world for bonds, if assuming that I'm right, we get there, we're already in the mid to high fours all in when you added mortgages and corporates and everything.

18:19If we're in a plus 5 % world for money market funds, that provides very good competition for an 8 % stock market. A lot of people, especially older boomers, and older boomers have a lot of the money, they would say, are you telling me that I could get 8 % year over year in the stock market, but risk a bear market risk, you know, volatility, or I could get 5, 5.3 in a money market fund with no risk, that's two-thirds, maybe pushing 70 % of the long-term returns I can get out of stocks without any market risk. I'll take that. I'll take that. And I'll know that my NAV on my money fund is$1 every single day.

19:03And I don't have to worry about what NVIDIA is going to do this week, or Tesla's going to do that in that last week, or whatever else is going on in the marketplace right now. And so that's the competition that the stock market has to overcome as we move forward. Now, we had 14 of the last 15 weeks in the stock market were higher. This week, we've had another down week finally. In 14 to 15 weeks, you have to go back 51 years. Why was the stock market having its best run in 51 years. I think what was underpinning it all the way to literally a couple of days ago was this idea, interest rates have peaked, they're going to come down, the Fed's going to cut rates, that competition is going to go away.

19:52And so therefore, stocks will look more attractive, and that would start to bid them up. I think the bond market sniffed out the inflation, the bond market's closer to inflation than the stock market, sniffed out this inflation problem probably beginning of the month around the big payroll report beat. The stock market, I think, only in the last two or three days is starting to go, wait a minute, where's all these rate cuts? Wait a minute, where's these lower rates going to come from? And literally, beginning of the week, they still thought they were going to get them. And so as we go into next week, and we go into the week after and the week after, the stock market's going to be sitting there going, do I have to compete with the bond market again?

20:34Or are those rates going to go down so I can go back to screaming, Tina, there is no alternative, everybody into the stock market? Absolutely. And we know that people are afraid. We've seen this before. There's a lot of talk about whether there's going to be a bust and a significant downturn and people, if they become risk averse, will want that safety. So this is a great question. We talked about, we kicked it off saying, how do you hedge against this environment? What are your options if you are worried about that? David asking, Jim, you commented lightly several weeks ago that maybe crypto and gold are no longer really independent of stocks and bonds as new forms of ownership muddy their uniqueness, futures, ETFs, and other derivatives.

21:20Your thoughts on that? Yeah, just to be clear, what I was worried about is that the advent of the spot Bitcoin ETF and other types of derivatives was sucking those into the financial system. The beauty about crypto, Bitcoin, gold was supposed to be they're sort of independent of the financial system. They should have about a zero correlation with financial assets, not necessarily negative or positive. But since we started to suck them in the system, they've been getting more and more correlated. Crypto started to look like it was starting to get uncorrelated again to financial assets, which would have been good.

22:06But then around last summer, when we started talking about this Bitcoin ETF coming, they started to get sucked back into this system. And what I see now really worries me. Let me be clear on something here. I am a long-term bull on crypto, and I believe the story on crypto. But I don't like these ETFs. What this is doing is it's taking all of the energy of crypto and turning everybody into a bunch of DGENs chasing the flows in ETFs. Oh, they're going in today, or they're going out tomorrow, and that's all we're doing. The long-term potential for crypto was supposed to be this is an alternative financial system, especially for people in Asia, Africa, in the Middle East, Latin America, that have shaky currencies, that have shaky financial systems, that we were going to build a decentralized system in order to offer an alternative to that part of the world.

23:07And then it would kind of come back to the developed world. That was the hope. Where are we on that? Well, we mouthed that we were there. But no, we're all sitting here watching, you know, I bit and we're all sitting here watching the flows and we're all rooting for a bunch of wealth managers to plow into these ETFs to push the prices up. We're not saying I need to think about building something different. I need to be thinking about solving the problems that the current financial system has. I think we're losing the narrative and that we're all just becoming a bunch of degenerate gamblers wondering whether or not Bitcoin's going to go up or down with the flows.

23:49And no, getting a bunch of people into Bitcoin ETF is adoption. Adoption is, and I brought it here for this conversation, this is my ledger. This is my cold storage device that I own all of my cryptos on and my Bitcoin on. That's adoption. When you get people to go to this level, when you get people to say, I'm going to, in my regulated brokerage account, buy a regulated product that trades in the New York Stock Exchange. Therefore, I have found something outside the financial system. No, you haven't. We've sucked it in. And it's just become no different than buying Tesla. And you're going to wind up with the same type of thing.

24:30It will go up and down with QQQ. And the idea that we should be building something different, it's going to get lost if it just becomes a levered version of the NASDAQ 100. So that's why, like I said, I love crypto. I love the idea. I just think that what we're seeing with these spot Bitcoin ETFs and everything else is not good. And I would add, the commentary you hear out of the crypto crowd is exactly what I heard 20 years ago out of the gold crowd. Oh, if only 1 % of all people put their money in crypto. That's exactly what we said 20 years ago. 1 % of people put their money in gold. And then we're like, well, gold is too hard to buy.

25:13So let's create an ETF. Let's create derivatives. Let's create futures contracts. Crypto is too hard to buy. We created ETFs. We created futures. We're creating derivatives on it. Gold has become another fiat currency is what's happened. It has not become something independent. Crypto is going to become just another version of the NASDAQ 100. That's my fear. I hope I'm wrong on it. But every day I look at this, I just shake my head going, I think you guys are losing the narrative on this. You want to be building something different, not trying to get sucked into the current system that we have.

25:51We'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.

26:03So, so interesting. You can believe that it's going to come up. We are, because of all of the questions about not only where we are in the cycle, we have the halving coming up for those who are following in Bitcoin, but also some of these really existential questions. Should you be participating? Should it be part of your portfolio? Is it getting too sucked in? Are you not going to get the correlation you want? All of this stuff is going to come up. We are doing a crypto gathering 2024. Don't F this up edition. It's next week, the 22nd and 23rd. It is free. Just sign up at realvision.com. forward slash crypto gathering.