#995 - Is a June Rate Cut off the Table? | With Jim Bianco

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0:53Is a June rate cut off the table? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Jim Bianco, president of Bianco Research. Hi, Jim. Hi, Maggie. Happy Friday. Happy Friday to you. So we have, it seems like a lot of worry in the market. U.S. stocks closing out the week in the red. The yield on the U.S. 10-year now parked at 4.3%. And there just seems to be renewed concern about the economic data that's been coming in, which has been stronger than expected. And we also have this, I think it's against the backdrop of this huge overhang of debt. And these are concerns, especially on the debt front that have come up all week in the special series we've been running.

1:35Before we jump into our conversation, I just want to share some highlights from some of those conversations. Let's have a look. You know, I always go back to The Simpsons. It's the most prescient show of all time. The real mindfuck of The Simpsons is that was a show started, I think it was 1988. Homer Simpson is an uneducated blue-collar worker, and he owns a home with four bedrooms, two cars. is his wife stays at home and he could afford three kids. That was commonplace in 1988. We all just, nobody looked at that like, what the heck is going on? And then you look at today, can you have that kind of lifestyle on a blue collar salary?

2:10No. I'm a geriatric millennial. I'm sort of in that elder millennial generation. We're not angry because the price of avocado toast has increased by two or three times. We're angry because we see all the debt that's being racked up. I think that when we get to the age that the boomers and others are right now, that there's going to be nothing left for us because we've already borrowed everything. Debt is a bet. It's borrowing from the future to pay for the present. And it's a bet that the future is going to be richer than the present. And when that doesn't happen, it creates a world of hurt. You have to believe, as you do, we'll innovate our way out of this.

2:45And so that's what happens during populism. Contested elections, serious confrontation, low deglobalization, more spending to try and get votes, competitive on both sides. And that means markets go up. But in the context of those periods, just to be clear, those are eras that are very bad for moments. It's just very positive in the context of a very negative thing. We're spending, we're getting ourselves into a bigger hole. We have bigger problems. It's okay for the market. Here comes the low-off time. Be prepared on the other side. The markets go through phases like this, where they are rewarding recklessness and they're punishing discipline.

3:22There's also a real issue structurally in terms of how the market's been operating by very few cap tech stocks leading the advance by sheer force of their market cap expansions, i.e. NVIDIA, you know, adding a trillion dollars in market cap in a couple of months. Unheard of. Really, the defining moment here, as much as we want to talk about AI in kiosks and things like that and productivity, the real defining moment of this market and macro backdrop right now is the fact that we've added so much debt and we're running pro-cyclical fiscal deficits at 7 % of GDP while unemployment is below 4%. We've never really done that.

4:06It's an all-out macro fiscal experiment. You look now, profits have normalized, labor shortages have gone. net, you know, that has to make the chance of a recession more likely. So I don't think we're completely out of the woods. You know, I still worry that there is this sort of recession risk. And I think there's still some problem areas. So, you know, you have commercial real estate, which is basically frozen in time. You have various property markets around the world that are just being kept together on this assumption that interest rates can't stay this high for very long. Unless we get sort of early monetary pivot, there's still a risk that one of these housing markets is going to break.

4:48Look, if you're an investor in urban office or urban retail, I think you need to be prepared for the second shoe to drop because of a lot of space choices that haven't been made yet, a lot of debt that hasn't been refinancing yet. So if you have existing exposure, I think, be prepared if it's equity exposure to write that down if it's debt exposure to provision for potential losses.

5:21Some really unbelievable conversations. And what I love, there was certainly a lot of worry and a lot of gloom, you could say, in them. But almost everyone also had optimistic things that they were leaning into or even contrarian ideas where they saw opportunity. And we're going to dig into that next week. I'll tell you more about all of that coming up. But Jim, I just want to, there's a lot in there. I want to break down some of those topics and let's start with the Fed. I think it's fair to say the economy is acting exactly as you had predicted it would, which is that it's been stronger than anyone expected and that things seem to be different.

5:56And some of those old models that were predicting recession just have not worked. Where do you see things? And can the Fed actually cut rates with the numbers that we've been seeing? To start with the second half first, no, I think they're going to have a hard time cutting rates right now. The Fed is still a political animal more than anything else. And if they start cutting rates with a three handle on your CPI, they're going to be risking their political credibility. So they need the inflation rate. As Paul would say, he needs more confidence. We're on our way to two. Wall Street calls that the last mile, that we're on our way from 3 % to 2 % on inflation.

6:40And the reality is that the data really isn't there right now. It's too strong. Now, why is it too strong? I've often said that every financial crisis and every recession, when we come out of it, things change. The way we change this time is we have seen an increased propensity to spend. The public is willing to spend more money. Savings rates are down from 6 % average during the last recovery, 2010 to 2020, to 4%. Consumption has gone from 68 % to 70%. We buy more things. That is keeping the economy stronger. That is keeping inflation stickier. And the funny thing you mentioned about the models, most of the models that are predicting recession or soft landing or everything else did not incorporate the idea that the public would be spending more.

7:37And you know where those models are actually very accurate? The rest of the world, because they haven't seen an increase in spending. So you've got a technical recession in Japan. You've got a technical recession in the UK. You've had contraction in Canada. One negative GDP quarter in the last two has been negative in Canada and in Germany and in the entire Eurozone. So you're actually seeing what everybody's talking about in terms of potential recession and a potential soft landing everywhere but the US. And the difference is we're spending more money. last off. Why are we spending more money?

8:12I'll call it PTSD. During the last recession, we were worried the world was going to come to an end, the COVID shutdowns. Then the government mailed us thousands of dollars. So now I think the attitude has changed. I'm going to spend money. What are you going to do about your savings? What are you going to do about the next downturn? I'll take a slow walk to the mailbox and I expect another big check in the mailbox. And that's why they're not worried about saving as much. They're more willing to spend. That is the public, which is going to completely support the US economy. And you add into that a 6 % budget deficit, which is going to single-handedly keep the economy out of recession.

8:52And yeah, GDP is going to stay strong, but the consequence of that is going to be more inflation at the same time. And I think that the data between CPI and PPI showed exactly that this week. 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. Join 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, the 5th and 6th of June, 2024. Raoul Powell hit the stage with Edward Snowden, Benedict Evans, Balaji Srinivasan, and over 150 others, joining the industry's most influential to explore and unveil the next wave of transformative AI technologies.

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11:01That's so interesting, Jim. And I think that that touched on a lot of what came up, even outside the geopolitical conversation we had, we knew we were gonna focus on it there. But even in all of the other conversations that we've been having in this series, which this week is exactly how screwed we all are and is probably contributing sentiment-wise to the fact that people are gonna spend because what the hell, the future seems like it's so dark anyway, that this populist feeling they're spending and they'll elect people into office who continue to do that. There is this feeling that they want politically to keep that fiscal dominance going.

11:38And so there's this interconnectedness between the sort of political atmosphere we're in, the fact that we're facing elections, and you're going to continue to get the government stepping on the gas. It's not a coincidence that people are spending, they're willing to spend. And like I said before, you're running a$1.8 to$2 trillion budget deficit, which is like 6 % of GDP. The only other times we've run a 6 % GDP budget has been in a recession as a response to a recession. Now we're just, that's our new baseline is what it is. So we're like permanently in panic recessionary spending mode. And so, like I said, the good news from a political standpoint or anything else, GDP numbers are going to look okay.

12:25They're going to be 2.5%, 3 % real growth above the potential of the U.S. economy, which is somewhere between 2, 2.5%. That's what it's been for the last six quarters. Bad news is, I think, inflation rate is going to stay up. And it's showing up in the marketplace. I know you've got a chart, if we put the chart up, of the probabilities that the Fed is going to cut rates. It's 1%. That brown line on this chart is what is the probability they're going to cut rates next week at the March 20th meeting? It's 1%. What is the probability they're going to cut rates at the May 1st meeting, the meeting after that?

13:03It's around 10%. In other words, 90 % chance that they're going to hold at that meeting. So March and May, they're going to hold. What about June? June is slumped all the way to about 54%, 53%. It's effectively, that's the blue line on the chart. It's effectively a coin toss. And if you look at the trend, check back in about two weeks, and it should be under 50%. And the red line is July. Now, the July meeting is kind of interesting because I've argued that when it comes to the Fed, it's May, June, or bust when it comes to a cut. And it's either going to happen in May or June, or it's not going to happen until 2025, only if the data warrants it.

13:44Why? The July 31st meeting is between the Republican and the Democrat conventions. The Fed wants to be Homer Simpson, fade into the hedges, don't talk about me, don't notice me during an election. They change policy between the conventions. They become a story for the election. They become a voting issue for the election. That's exactly what they don't want to do. So if they're going to start cutting rates, it's got to be May and June, or they're going to hold till after the election. And then we're talking about November, December, only if the data weakens enough to give them reason to do it, because right now it isn't.

14:26And that's why all the rate cuts are disappearing. Last off for you on that. Why isn't that bothered the stock market until about two days ago? Because the stock market is all, I think the way that I've heard people explain it is, why are you bothering looking at the data? Why are you bothering? Jay told us he's going to cut rates. That's good enough. He promised me he's going to cut rates. I don't care what the payroll report said. I don't care what the CPI report said. I got a promise from Jay he's going to cut rates. But only maybe in the last 48 hours are they starting to realize, you know, sometimes Jay says he's going to do things and then he doesn't follow through on them.

15:02And that has happened in the past. And it maybe it might be happening again right now when it comes to these rate cuts in 2024. Yeah. I want to bring up a couple bigger picture themes, but AJ asking, what do you make of truflation numbers and lagging indicators like shelter? Maybe the Fed has already hit their target and that's why the rhetoric is so dovish? Yeah. So truflation, you can go to truflation.com and you can look at it. Here's my issue with truflation. Their measures of inflation are accurate. Their weightings of inflation is where the issue comes in. The CPI report says 40 % of the weighting is shelter.

15:42Truflation, I think, is like 26%. That right there accounts for most of the difference between them. So it isn't the prices that they're coming up with. It's how they weight these things. They overweight consumer items that you buy at the grocery store relative to CPI, they underweight housing. So I feel like what I'd like to see from Truflation is not a white paper on how they calculate their measures. They have that. I'd like to see a white paper on how they come up with their weightings, because that's really, how much do we spend on housing? That's really the question that we want to know, because then we know how much to apply housing numbers.

16:21To the other half, that the lagging indicator of OER, yeah, it is a lagging indicator, but it's such a lagging indicator. And I've talked about this. I've even tweeted about this. It's such a lagging indicator. It hasn't even caught up yet to the big burst of housing inflation that we had in 21 and 22. I think it's going to stay sticky because it still has to catch up to that before you can even talk about it slowing down. So it's going to be problematic, I think, as well, too. That's why you saw six tenths in January. I know we are a six-tenths increase in the month of January, much more than everybody expected, a four-tenths increase in February.

17:03These are numbers that are going to keep the inflation rate above 3%. And if they're above 3%, there is going to be no rate cuts. Yeah, owner-equivalent rent is what Jim was talking about. Jim, what about people who say, let's get back to that sort of big issue of this humongous debt that we have that shows no sign of slowing down, as we just talked about. There are some people who say, listen, the Fed's not going to admit it, but they're going to ease because they have to get the interest rate payments down. Inflation, no inflation. We're just going to be in a higher inflationary environment.

17:35They're just going to have to bite the bull and do it. They don't want to say that, but that's ultimately what's going to force their hand. That would be the single worst idea that the Fed could possibly do. If they did that, they're going, if they said, too much debt, so I have to make it easier for you to take out more debt, they're going to make it orders of magnitude worse. And if they say too much debt, so I'm going to make it easier for the government to borrow even more money? Are we thinking that the Fed's going to cut rates and the government's going to say, you know what, Jay, I promise I won't borrow another dollar more.

18:09We'll just pay off what we've got right now if you would just lower rates. No, if you lower rates, they're going to increase the amount of spending. they're going to increase the amount of inflation that we have. So you cannot look at it that way. Go to your bank and tell your bank you lost your job and you can't pay your mortgage. Would you cut my interest rate? It doesn't work that way. You're a bigger risk if you tell them that. You should have a higher interest rate. You become a subprime borrower. You become a higher interest rate at that point. So no, the Fed can't do that. If they do that solely for that reason, they risk more inflation and they wind up making the situation worse.

18:53As a corollary to that, I've often argued to people say, well, the Fed's going to cut rates because they want Biden to be president. And I don't believe that. I don't think the Fed's partisan, but let's just go with that. They want Biden to be president. They're going to cut rates because Trump said he'd fired Paul and Paul wants to keep the job. It doesn't work that way either, only in that you can't just randomly say on some Tuesday, I need to cut rates to get this guy elected. If you cut rates in the face of higher inflation, you risk blowing up the bond market and you've made it orders of magnitude worse.

19:26It's an oversimplification when people say that. I just think that always sounds bonkers to me. By the way, every incoming president always says they're going to fire the Fed chair. I mean, there is no job security unless the market starts. The market is the one who votes usually on the Fed in terms of confidence, honestly. Like whenever they threaten to fire the Fed chief, the markets get uncomfortable and they back off. And if they don't get uncomfortable, then they move forward. I mean, that just sounds like conspiracy to me. But I hear what you're saying about the bad spot that they're in.

19:59So let's talk a little bit about where markets are, and then we'll get to some more of these questions. So there's still a chance the Fed is going to ease. The probabilities are coming down, but they're still thinking they'll get something in June, at least a 50 % shot. I think that's what you said, right? Is this net positive for the markets because the Fed's going to be providing liquidity, or has all of that been priced in the stock market already? No, I think the market has priced in several rate cuts this year, the stock market. The bond market's a little bit different, but I think it is priced in several rate cuts, and it expects them.

20:36And if it doesn't get them, it's going to be disappointed. it. And I would argue to you, go off on this other tangent here, I'd argue to you, the market is desperate for rate cuts. It needs them. It's going to define the rest of the year. Why do I say that? This is, first of all, let me start off. This is the most concentrated rally maybe we've ever seen. I mean, it's on par with the nifty-fifty stocks in the 70s or the television stocks in the 50s or the tech bubble in 1999 and 2000. Four stocks have accounted for over half the gain in the S &P this year. NVIDIA, Microsoft, Meta, and Alphabet, Google, are the four, Amazon, excuse me, Amazon is the fourth one.

21:23And NVIDIA is a third of this S &P's gain. NVIDIA is half of QQQ's gain this year. That is extraordinary. That company was, until two days ago, up over a trillion dollars in market cap. Why is it that the rally is so concentrated? When I looked at previous concentrated rallies, I'll give you a simple start number. There isn't enough money to push all the stocks up in the world. It's$53 trillion of stocks in the United States on a$29 trillion economy. We need more money. We need the Fed to stop QT. We need them to start maybe expanding their balance sheet again. We need them to cut rates. There's a trillion and a half dollars that has gone into money market funds in the last year and a half that is sitting there getting a 5 % yield.

22:14They're happy with that 5 % yield because the long-term expectation of the stock market is 8%. So I'm getting two-thirds of the stock market's gain with no market risk. What the market needs is the Fed to cut rates so all the wealth managers could scream at that trillion and a half dollars, Tina, there is no alternative. You got to get in the stocks. So then we could take up the other, the Russell 2000 stocks, the mid cap stocks, the other 493 stocks in the S &P. We'll have some money to bring them up. This is why I think that the rally is so concentrated. It is sucking up all the money into just a handful of stocks and why we need the Fed to feed it.

22:52Now, of course, the problem is if the Fed feeds it, they risk inflation. And if they get inflation, they make it worse. That's the dilemma. The market has decided, the stock market has decided, Jay's going to cut and there is no inflation. Well, he told us he was. I mean, previously he said that. He also told us inflation was transitory a couple of years ago too. That's true. And they always reserve the right to change their mind. So maybe we should be taking that into consideration. Right. And I think as we go forward, they're going to start to realize maybe inflation is stickier than everybody thinks, and the Fed isn't going to cut, and all that money you're hoping for that's going to help push into risk assets is going to sit there in bond funds, and it's going to sit there in money market funds, and it's not going to move.

23:39Now, this is not 1999 when the yields were yield, zero, and we screamed Tina to the high heavens and shoved everybody into risk assets. This is a much different environment. That's why I think the stock market sees the bond market as competition, and it needs rates down so that you can then get that money into it, and it might not. It's not ready to concede. It's not ready to run up the white flag and say, there isn't going to be any rate cuts. The bond market, by the way, is. I think the bond market's there. Yeah, let me ask you, Tommy Thornton saying, hi, Jim and Maggie. Hi, Tommy. Two-year yield closed above Feb closing high.

24:17Across the curve, rates are close to those highs. What do you see happening with rates here? I think rates are going up. I think that if the Fed is not going to cut rates, the two-year yield is suggesting that too, that you're going to see short rates stay up. You're going to then get a reality that long rates are going to start to see sticky inflation. And that if we are in a three-ish inflationary world, which I think we are not a two, a three-ish inflationary world, and I might just throw out to everybody, remember, 2020, everything changed. Everybody tells me that we have a deflation bust coming.

24:57That was the cycle that ended in 2020. This is a new cycle that we're in right now. And the Deflation bust is the old cycle. The new cycle as we move forward is inflation. If that reality becomes more known, then people are going to look at a 430 10-year note and say in a 5.5 % funds rate world that isn't coming down and in a 3-ish inflation world, that 10-year note is too low a yield. It's got to go higher in that yield. And I think that those yields are going to continue to move higher. and they're going to pressure the market. Remember last year, last year by October, the 10-year went to 5%.

25:41And two things happened. Bond funds saw a giant suck of money come into them because people said, 5 % yield, let me in, I'm there. And the stock market corrected 10%. And that was the last correction the stock market had was by the end of October because we were at a five handle on yields. Now, so what I'm trying to argue is this whole idea that rates don't matter. Yeah, they always matter. They may not matter this week. They might not matter next week. But at some point, if they steep heading higher, they are going to matter. We're going to take another quick break to hear a word from our partners.