Jim Bianco Warns and Challenges Our Economy Understanding – Part 2/2 RCS Ep. 49

This is a must-read must-watch interview. Please, take some minutes, hit the play button above, and learn from one great expert.

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Challenge your macro mind with Jim Bianco!

He is a well-versed macroeconomics and bond expert, President, and founder of Bianco Research with great experience in monetary policy, the intersections of markets and politics, the role of the government in the economy, and the financial markets.

This interview will by far change your perspective and help you understand the reality of our economy.

Jim explains, from a very practical standpoint, the MMT approach, the repo market crisis, the government directed economy, the relationship between interest rates and risk markets, and much more!

This one, you really can’t afford to miss.

This is part 2 of my interview with Jim Bianco, if you would like to catch up with part 1 of the interview, click here.


Jim Bianco’s Background

George Gammon: All right, guys, it gives me a great deal of pleasure to bring someone to the Rebel Capitalist Show that I have a tremendous amount of respect for. 

I’ve been super excited about this interview. He is an expert on the bond market and macro. 

His name is Jim Bianco. Jim, welcome to the Rebel Capitalist Show.

Jim Bianco: Thanks for having me.

George Gammon: All right, so, for my viewers who might not know your backstory. Can you get us filled in on that?

Jim Bianco: Sure, and I might say that I’m a big fan of your show, so I’ll do my backstory in three steps. 

But I came out of Wall Street in the 1980s. I used to work for Shearson, Lehman Brothers, and First Boston before it was Credit Swiss.

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I’m originally from Chicago. In 1990, I got affiliated with a bond brokerage firm here in Chicago, which is where I’m at right now called Arbor Research and Trading. 

And in 1998, I spun myself off into my own research firm called Bianco Research. Still affiliated with Arbor. 

Most of my research tends to be more fixed income-oriented, and macro-oriented as well. 

My audience is largely an institutional crowd. It’s largely a fixed income crowd too. 

The benefit I have with a firm like Arbor is that while I’m affiliated with a brokerage firm, they don’t really position. 

So I don’t have to go to them and say, “Hey, you know that big inventory of securities you have that’s about to go down in prices?”

They don’t have a big inventory of securities. They don’t care as long as… All they care about is what most brokers care about, just volatility. 

Just make it go up or down, just make it do something. So that’s been very good. 

So it’s really gotten rid of my conflict of interest as well too. I tend to be more quantitatively oriented toward the way that we attack the markets more than anything else. 

I taught myself how to program. I use a lot of sophisticated programming languages too. 

I’m always on the hunt for data to try and come up with a lot of different charts and statistics in ways to show things. So that’s my backstory in a quick second there.


The Problem Of The Government Directed Economy

George Gammon: I'd love to get your opinion on is… 

If you had a situation in the United States where the U.S. treasury market traded or didn't trade, like the JGB (Japanese Government Bond) market…

How does that work with the U.S. dollar funding markets, more specifically the repo market?

It seems like it would just blow up.

Jim Bianco: It would, because, keep in mind, there is something like $800 billion of currency in the world, the actual physical bills, but the amount of cash, or the things that we think of is cash are many, many times that. 

What we do is we use the government bond market, the Treasury bill market, and the like, as a cash substitute. 

So that any time a big company needs to send another big company a billion dollars, they don't send them a pallet full of dollar bills, they send them, they wire them Treasury securities, so we use them as cash substitutes. 

As long as there is a vibrant liquid market, we could creative derivatives off that market like repurchase agreements and the like.

When the volume of those was to shrivel up and go away… 

And the only reason that would happen, is if by government fiat we set the wrong price. If that happens those markets would become dysfunctional. 

You would either perceived as, like I said, the price is too high and I want to buy it, but nobody wants to sell it to me, or the price is too low, and I want to sell it but nobody wants to buy it. 

In a free market, the price should always be somewhere near-equilibrium so that I can attract buyers and attract sellers and transact at some point. If you don't have that, the plumbing of the financial system, the ability of large institutions like financial institutions to send cash back and forth to each other, to balance their books, starts to become a problem. 

Our financial system is not structured that way. It won't work properly if we wind up having the markets go in that direction.

Now, let me say, a lot of people in the Fed, if they are listening to this, they'll say, “Yeah, but we're doing this in an emergency, and then when the emergency passes, we'll back off.” 

Jim, I agree with you that if we did this too much, it would become problematic.

George Gammon: That's QE1 right there.

Jim Bianco: Right, QE1. 

We're in Year 13 of QE1 that morphed into two, three, four, and everything else. It never went away. 

Furthermore, let me give you another sobering statistic since I'm Johnny Raincloud on this interview here. 

Larry Kudlow said that to date the total amount of Fed printing and promised borrowing from the government is $9 trillion. 

Earlier this week, the Democrats put up a bill for another $3 trillion, that's $12 trillion. Let me put that number in a different perspective. That is approaching four and a half years of income tax receipts. In the space of two months, we said here's the problem, we're going to just whip up four and a half years of income tax receipts to solve this problem. 

We're either going to print it or we're going to borrow against it.

Now, if you are an optimist, a government optimist, and say “we're going to do this, we're going to support the markets, we're going to support everybody with a job, we're not going to produce inflation, we're not going to produce malinvestment.” 

Let's just suspend reality and think you're not going to produce inflation and/or malinvestment, why would you stop? Why would you stop after the problem is over? 

This is MMT, modern monetary theory 1.0. If you do it and there isn't a toxic reaction and bad malinvestment or a plunging dollar or rising inflation…

George Gammon: Why are we going to work Jim? Why? Why on earth is anyone working?

Jim Bianco: That was what I was going to lead up to.

George Gammon: Why don't we just print the money, and give it to everyone? 

If there's no negative consequence to money printing, what are we doing working?

We're just a bunch of saps.

Jim Bianco: Right, right. What I was going to lead up to is why are we even paying taxes anymore? 

Because if you can print up a year's worth of taxes, you know, our taxes are not due until July 15 and there are already stories I'm reading that they may push that off until December 31st. 

In Chicago, my real estate tax bill, which is normally due in the first week of August, they said now I could pay it October 1st. 

If you start pushing this stuff off, it's going to be hard to turn it back on, after a while, unless there is a bad reaction, like, “you didn't pay your taxes and look at how bad things got because we need the money for the system to work properly.” 

Okay, well then I guess I have my obligation to pay taxes. 

But if you tell me I don't have to pay my taxes and the stock market keeps going up, and everybody gets their job back, and there's no problem, you're going to completely pervert the system. So what I'd like to say is that this government expansion, no matter how well-meaning it is, will continue to expand and expand until it becomes a problem.

When my friends at the Fed say, “Oh well we're going to do this with the government bond market, we're going to do this with ETFs. It's not going to be a problem for the market.” 

Yeah, and it will be a pleasurable experience if you're right and the demand will be not for you to stop doing it but to do more of it. 

If that's a pleasurable experience you'll do more of it until you've gone too far. So we eventually will. 

Like you said, QE1 became two, three, which never went away. Now we're buying corporate bonds, we're buying ETFs, we're going to buy municipal securities. 

I don't know how these programs ever go away. I don't know if they ever will go away and that's going to be a big problem as we move forward.


The Consequences Of Today’s MMT Approach

George Gammon: What I'm thinking through in my mind here, and let me try to articulate this as well as I can. 

So we've got all of this money printing in the form of MMT or helicopter money going to people. 

They like this, they want it to continue, then at the same time, we have all these programs that are being set up where there is more bank reserves, and who knows if those are becoming deposits in the retail banking system. 

Therefore, increasing M2. 

And if we're getting helicopter money at the average Joe and Jane, that most likely will increase velocity.

And then you got the Fed trying to peg the yield curve because they don't want interest rates to go up, because we know that if the 10-year goes up to let's say to 3, 4%, then that almost has the same impact as the virus.

It's extremely damaging when you build an economy that gets addicted to 0% interest rates, but in order to do that, the Fed has to buy treasuries and become a bigger part of the market. 

Then, you reduce liquidity in the treasury market, going back to the Bank of Japan, and if the Fed has to continue to buy, buy, buy, buy, buy to control the yield curve…

Is there a point where the Fed can't buy any more treasuries because the dollar funding markets need collateral? 

So they paint themselves into a corner and inflation takes off because you have all this increase in M2 and velocity because of the helicopter money.

The September 17th Repo Market Crisis Explained

Jim Bianco: Sure. We saw it last September with the repo market

In 2008 we had a financial crisis. One of the problems with the financial crisis was the banks over-levered, they went too far, most famously Lehman Brothers. 

So, for the last 12 years, we've been putting governors on the banks. You can't do this, you can't do that, you can't lever. 

What's important to understand about that is it wasn't just the Fed that did it, it was everybody that did it. 

It was the European Banking Commission, it was the OCC, the Office of the Comptroller of the Currency, it was the Fed, it was the FDIC, it was the Treasury Department. On and on and on. 

So we kept limiting the banks to what they could do.

George Gammon:

Just to be clear to the viewer, you're talking about Dodd-Frank, the GCIB, and Basel III? 

Those types of regulations?

Jim Bianco: Yes, yes, yes. GCIB, the globally systemic important banks, Dodd-Frank. 

What I'm trying to tell the viewer is it wasn't just the Fed that put together these rules. 

It was all kinds of regulators who put together these rules. We want to limit the banks, limit the banks, limit the banks. 

What were we also doing for the last 12 years? 

Borrowing more, borrowing more, borrowing more, so the treasury market kept getting bigger, bigger and bigger, but we kept putting limits on the banks, and then it broke in September. 

Because the banks couldn't handle to expand to meet the ever-expanding treasury market and the ever-expanding repo market anymore, the market broke. 

When the bankers came in and said to the Fed too many rules, you want us to expand our balance sheets to meet these larger needs for borrowing, we can't do it.

Then the Fed said, “Okay, we'll suspend our rules,” and they said, “No, it's not just your rules, it's everybody's rules and you don't have the ability to suspend everybody's rules.”

That's when they came in with all these repo operations and everything else to try and artificially expand the market. 

All I'm trying to say is we have an example of that happening. It happened last year. 

So as the market continues to go, we were going to continue to have these problems. 

The Fed will continue to try and push and push money in the system to try and meet these ever-expanding problems. To that end, I have been one that's been very worried that on the back end of this, we're going to have a problem with interest rates going up, and maybe going up in a big way.

Jim Bianco: What I mean by the back end is this. I understand in the second quarter, in the third quarter, we're going to have contracting GDP. 

We're going to have the economy going down, we're going to have maybe deflation happening in the immediate quarters, maybe a year ahead, but at the other side of that, we've got two things going on at once. 

One, we've got a massive amount of borrowing going on right now. I started in the bond market. 

When I told you I worked in the beginning, I worked at First Boston and Shearson Lehman Brothers. 

That was 1987 when I started. I was there around the stock market crash. It was 33 years ago. I was a young guy then. 

Now, 33 years ago, when people used to tell me almost from Day One there's going to be a crowding-out, that government's going to borrow so much money they're going to push up interest rates and for 33 years, I kept saying that's not a thing, and it wasn't a thing.

Well, welcome to the post-virus world. Now it actually might be a thing because the amount of borrowing that the government is going to do now, will be numbers that are hard to understand. 

In January, when the Treasury comes out and says, “Here's our borrowing need for the first quarter, $360 billion.” 

Everybody said, “Holy crap, $360 billion? I thought it would be $340 billion? You put $360 billion to borrowing?” 

Then the second quarter numbers come out, $3 trillion. How am I supposed to process that number if I thought 360 was a big number over 340, and now we're at three trillion? 

So the amount of borrowing that is going to come down the pipe is going to really stress the financial system, I think, and that can be problematic.


The Side Of The Economy We’re Missing: The Supply

Jim Bianco: I've talked about this repeatedly. Since March 13 when the Fed formally restarted QE, they have bought $2 trillion with T dollars of securities, another number no one understands.

They bought $2 trillion worth of bonds since March 13. March 16, the 10-year treasury was 72 basis points. Tuesday, it was 72 basis points. 

I said if this market was anywhere near normal and you said here's a normal market and the government prints up $2 trillion and buys bonds, where would the yield be? Zero, if not negative. 

You would have had the biggest rally you've ever seen. Why didn't we have that rally? 

Because away from the Fed, everybody's liquidating, and the reason everybody's liquidating is they see this massive deficit coming and I think that on the backside they see inflation. 

If inflation is the intersection of aggregate demand and aggregate supply, what do I see coming on the other side of this? 

Aggregate supply is going to go down. If we're going to have 20% unemployment, we're not going to be making as much stuff as we used to make.

George Gammon: Exactly. Everyone misses the supply side of the equation. Everyone. They just focus on demand.

Jim Bianco: Supply is going to go down. Everything is going to be less of everything. Aggregate demand. 

If we keep giving everybody $1,000.00 a week, you're going to keep wanting to buy stuff. That's going to give us inflation on the other side. 

We're going to keep that market out of balance. So the fear of way too much supply and inflation, I think is really pushing up interest rates. 

Because like I said, incredibly, if this market was anywhere near normal right now, interest rates would just be plunging and plunging. 

They'd be where the German 10-year bund is, minus 50 basis points, or they'd be where the Japanese 10-year is, somewhere below zero. 

They wouldn't be stalled at 60 or 70 basis points like they have been for two months.

I already see those problems manifesting themselves, but I understand, I work on Wall Street, and I know how problems work at Wall Street. 

You identify a problem, people look at their watch and go, “Well it's been eight, nine, ten seconds and it hasn't blown up, so I guess you're wrong.” 

And that's kind of the way everybody works with this stuff until it then becomes a problem and they go, “Oh, I guess it really was a problem after all.” 

People get very impatient when you tell them that there's a problem, but I still think that this market is not really behaving properly given what is happening to it and the lack of where it's going. 

In fact, I'll take it one step further. I think we already have yield curve control. 

I think there is a de facto yield curve control. Every week the Fed adjusts the amount of buying that they do.

Let me give you a definition of yield curve control. The Japanese modernized it in 2016. They said, “We're going to peg the 10-year yield at zero, a zero yield. We will buy or sell as much as necessary every week to make sure that the yield is at zero.” That's yield curve control. 

And the problem like I said is, “Well, maybe the week you did it, it was fine to be zero, but if you're saying that the proper interest rate every week for four years is zero, eventually it's not going to be and that's when volume disappears and everybody just leaves the market.”


Is The U.S Economy Starting To Look Like Japan?

Jim Bianco: I think for the last couple of weeks, for the last two months or so, we've got a de facto yield curve control in the U.S. 

We seem to be right between 60 and 70 basis points on the 10-year yield. It doesn't go anywhere. Its volatility measures are plunging. The volatility measures of the stock market and commodity markets and FX markets are not plunging. So there's a big disconnect between what's happening with the bond market and what's happening with everything else. 

But I'm pointing out a disconnect of a lack of volatility so everybody goes, “Well it can't be that important because it's the lack of volatility disconnect,” but it is. 

It's a signal that is telling us that the market is not right.

George Gammon: Yeah.

The lack of volatility is potentially a signal telling us that the Fed is getting a lot closer to the BOJ, meaning that they're a lot bigger portion of the market and it's just not trading like a healthy market would.

Jim Bianco: Right. I mean they really are

Ken Rogoff came out today. He's a Harvard professor and he's a big, let's call him an influencer, in Fed circles. 

He's got a paper out that the Fed should be putting the funds rate at -3 right now. He's not on the Fed but they take him very seriously as well. 

Naraya Kocherlakota, who is the former Minneapolis fed president, he's publicly called for negative interest rates as well too, so these distortions are out there. 

These markets are working right and the more that I think they call for that, the more that they encourage the private sector to leave. 

The only reason the market is not going up in yield is the Fed is buying, but it's taking $2 trillion of buying just to hold interest rates steady. That sounds like the path of Japan. The private sector leaving, the public sector's taking over the market. Eventually, if you have that loss of a capitalist market to seek equilibrium, you're going to get malinvestment and look at the Japanese economy. 

What is the one constant in the Japanese economy? Lousy growth. It can't ever seem to get out of its own way.

That's what I'm really afraid of. The Fed needs to get out of this. 

But the only way I see them getting out is a toxic reaction to what they've been doing that burns their fingers and says, “All right, we got to leave.” 

I'm afraid that the stock market keeps going up, everything keeps holding together, and the encouragement of “Yes, Yes, J. Paul, you're our savior. Please do more of this and please do more of this.” 

They'll credibly tell me, “But what they've done has not been over the top.” Yeah, we'll do more of it. 

We'll eventually get there. We'll just keep expanding this thing until we go too far.


The Economy’s Endgame

George Gammon: Yeah.

So how does that end game work? 

The rebuttal I think Jim, that people would say is “Okay, you're talking about Japan, they have low growth, they haven't seen a lot of inflation, so why can't we just send everyone a million dollars and we don't ever have to worry about inflation? 

Because look what happened in the United States since 2008 and look at what's happened in Japan, this inflation boogieman is something that we just shouldn't be worried about.” 

So why not just start UBI? Why not send everyone a million dollars into their checking account, we can all live happily ever after.

Jim Bianco: We're going to do that. That's exactly the road we're going down. 

We already sent everybody a $1,200.00 check. We're already giving them more money than they probably made, not everybody, but more money than they've probably made through unemployment insurance. 

We already have UBI being proposed in the Democrats' latest bill right now, a version of that is coming along as well too, but you're right. See the problem is MMT. 

MMT, modern monetary theory, if I was to boil it down to a few sentences, is: We will print the money for everything we need, we will do away with taxes except when we get inflation, then we bring back taxes as a way to drain money. 

As I'd like to say, in the current system we have, the Fed sets the funds rate, so interest rates go up and down to kind of regulate inflation. 

In the MMT system, interest rates are set at zero, tax rates go up and down to kind of regulate inflation as well too. So you're right. 

That's why I'm saying, we're going to MMT. We're already telling you, you don't have to pay your taxes, we don't have to pay them till July, maybe December. 

I don't have to pay my real estate taxes until later this year as well too. We're going to print this money, we're going to hand it to everybody.

The endgame has to be inflation, and it will be inflation because if we do this and we don't produce inflation, we're not going to stop. We'll just do more of it. We'll hand everybody $2 million. If that doesn't produce inflation, we'll hand everybody $4 million. We'll just keep going until it winds up going too far.

There is no way that we're going to say, “Okay, we did all these extraordinary actions, we fixed the market. Now we're going to withdraw the troops back to the barracks.” 

I'm all full of metaphors today. We're going to bring them all back and we're going to stop doing it. 

Nope, especially if Biden is president. He's already put AOC on his advisory committee as well. 

The idea that we need to have free healthcare, free college education, and we're just going to print the money to pay for it, or borrow the money to pay for it all will be unstoppable. 

Because we just printed and borrowed five years of tax returns in two months. 

If this winds up not being a bad outcome, then we're going to wind up printing another five years' worth and another five years' worth until we go too far.

Jim Bianco: The sooner we have a toxic reaction, the smaller it will be. The longer we play this game, the larger it will be. 

I told you, I was Johnny Raincloud on this issue.

George Gammon: Yeah. 

But the problem there Jim is that if we get this type of inflation, let's say it ticks up to 5, 6% or something like we had in the 1970s, the Fed can't come in Volcker style and take rates up to 18%. 

The economy would just be crushed because of the amount of debt. 

In fact, I think Eric said that he heard a quote from Volcker before he passed away. Someone asked him if we could do today, this was back in 2019, what he did in the early 80s and he said absolutely not, he said no chance. There's just too much debt.

Jim Bianco: I agree. There is way too much debt. And there is this undying belief in the Fed. 

We're borrowing $3 trillion worth of treasuries, why didn't the treasury market buckle under that idea? 

Because the Fed's here, and the Fed will print money and the Fed can make everything. They can fix all of the ills in the marketplace. 

So there's this undying belief that the Fed can handle whatever problems we need, that they can regulate interest rates. 

What happens if interest rates startup because there's too much borrowing or inflation? 

The Fed will suppress them back down. That's kind of a counterintuitive thing as well too.

So there's that belief in the marketplace right now, that the Fed could fix it. Look, that's what lifted us off the lows in late March. 

The Fed came in with a bunch of kitchen sinks they threw at the market in late March and we've got this rally going. 

If you ask anybody on Wall Street why did the market rally since late March, the first reason they will give you most likely is because the Federal Reserve stepped in with its printing press. 

There's this undying belief that the Fed can handle all of these problems, so you're right. 

We're not worried about rising interest rates. We're not worried about inflation because we think the Fed can fix that. 

And it will only take a shaking of that confidence in central banking or central planning that is going to create some kind of a change in the attitude, but right now, everything's okay. 

Not because the data size is okay, not because we're going to have a 98% economy, we might even have an 85% economy, because the printing press is here, and the printing press is going to fix everything.

George Gammon: Yeah, it's just inflation is the kryptonite because inflation takes away the printing press. I want to be cognizant of your time, Jim.

Jim Bianco: I got some time.


Is The Famous Risk Parity Portfolio Changing?

George Gammon: I appreciate you being so generous today. 

But one question I want to make sure I ask you because I think it applies to the majority of the people that are watching this video. 

I noticed, I think it was in your 90% conference call you did yesterday, but you talked about the risk parity portfolio. 

This typical 401(k) setup that every financial advisor out there suggests of this 60/40, and you had these charts showing that this relationship between bonds and stocks most likely has changed. 

And if it hasn't changed now, it may change in the future, but they're not tied at the hip like all these financial advisors and all of these baby boomers out there that probably have their portfolio set up this way actually think. 

So could you walk us through that because I think that's a very powerful warning for a lot of people?

Jim Bianco: 

The most basic relationship in finance is interest rates versus risk markets, the stock market versus the bond market. 

When interest rates go up or down, how do the risk markets respond to that? 

I have argued that the driving factor in this, not only me but others that have looked at this, have come to a similar conclusion: is inflation. 

So go back to the 70s and the 80s and the early 90s. That I would call the inflation mindset period. Mindset. We're always worried about inflation. 

So why do interest rates go up in the 70s, 80s, and 90s? Because there's a fear of rising inflation. 

What does that do for risk markets? It depresses them. 

When you're relieved, “Oh look, there's no inflation.” Rates go down and the stock market goes up, so interest rates and risk markets, like stocks, move opposite to each other. 

You get to the late 90s around longterm capital, the Russian debt moratorium, the Asian financial crisis, and we have a sea change view ending with the tech bubble in 2000. 

Now deflation is the biggest concern. It has been for 20 years.

Why do interest rates go up? It is a relief of no deflation. That's good for stocks because deflation is bad for them. Why do interest rates plummet? It is a fear of deflation. 

So when interest rates go down, stocks struggle. They move together with each other. I have been arguing that, starting about a year ago on the edges, but really since the virus hit, that relationship has gone away. There is no relationship now between stocks and interest rates. 

They seem to be random or they're transitioning from one version to the other. When you go from the inflation mindset to the deflation mindset, it isn't one day you flip the switch. 

I argue it took four years, that the stock-bond relationship was random for four years. They seem to relate, then they didn't relate, but then they related. 

So we've gone random, so what does that mean short-term? Your 60/40 portfolio. 

This is the driving thing that every wealth manager has. There are 36 million accounts in the United States that their money is being directed by a wealth manager. 

Why do you go to a wealth manager? Because you're afraid. You're probably in your fifties, you problem seen 2000, 2008, and this is even before the virus. 

You saw 50% correction twice, you say, “I'm afraid. I want to be invested, but I'm afraid.” 

Because if you weren't afraid you would just go out and you'd buy double levered S&Ps and you'd be done.


The Bedrock Of Wealth Management Has Become Undone

Jim Bianco: But you're afraid, so the answer that every wealth manager had for you was the 60/40 portfolio. 

60% of your money in stocks, 40% of your money in bonds because the stock market goes up, you get the appreciation but when the stock market wobbles, the bond market rallies big, and that provides you with a natural hedge. 

The 60/40 worked great until around the fourth quarter of '18, '19, and it especially fell down during the selloff in February and March because the stock market tanked and interest rates didn't do a whole lot to help offset that pain.

So what I've argued is one, the 60/40 portfolio is now two random investments. They're not related to each other anymore. Sometimes they both might go up, sometimes they both might go down, sometimes one will go up and one will go down. 

So that's going to cause a lot of consternation because it's the bedrock of wealth management. It is some version of the 60/40 portfolio. Risk parity is a version of that.

Risk parity is the ability or the way that you would trade the stock market and the bond market against each other. 

The risk parity concept was popularized by Bridgewater and Ray Dalio where they trade stocks against bonds. But that relationship has not been working. 

That strategy has not been working as well. And this can become very problematic as well for a lot of investors on both ends of the equation. 

Bond investors that own bonds and seek a little bit more risk or oomph in their portfolio, could use riskier assets because they believe there's a relationship between stocks and bonds. 

Stock investors that want to protect themselves could use the bond market as a natural hedge because they believe there's a relationship between the two. 

But if that relationship is gone and we're transitioning to an inflation mindset for 2022-2023, and right now we're in a no relationship environment, which is what I think we're in right now, it's going to take a lot of strategies Wall Street has. 

But I think they're just not going to work properly.

George Gammon: I just did a video on the 1970s and I didn't realize I found it fascinating that between '72 to '74, the S&P went down by like 60%. 

While at the same time you had inflation, the CPI, up near 5, 6, 7%. So in that type of environment, you'd see interest rates going up and you'd see the stock market go down. 

In other words, you'd see bond prices go down and stock prices go down at the same time. 

If you've got this risk parity portfolio that's nothing but bonds and stocks, to your point, you have probably done extremely well since 1980. 

Since we've been on a 40 year down cycle in interest rates where the bond side of your portfolio over time makes money and capital gains and then the stock side of your portfolio does the same. 

But, what happens if we go to the 1970s for the next five or ten years where both sides of the portfolio, the prices actually go down?

Jim Bianco: Yeah, that's going to be a shock for people because what is the one thing you do to show that you're pragmatic on Wall Street, what do you do? 

You're always bearish on bonds because you always can say the reason interest rates will go up is the economy's getting better. 

God bless America, so I'm bearish on bonds all the time. A way interest rates can go up is by getting very strong growth, because it forces real rates higher, and it forces nominal interest rates higher. 

But what we're talking about is the 70s way of rates going up, and that is we get some kind of a stagflation, too much borrowing, too much inflation, bond investors want to be properly compensated for it, and then you have interest rates go up. 

I can't tell you how many times I talk to people in the institutional community and they'll ask me about my outlook for interest rates. 

I've been a big bond bull until a few months ago, but since they've asked me and I say I'm bearish and I think they're going to go up, their reflex is oh good, oh good!

No! They're not going up because we're having real growth. 

They're going to go up because we're going to have some kind of inflation risk, and we're going to have some kind of a liquidity premium that's going to be put in them because you're going to be borrowing so much. 

That is going to be hard for people to kind of get their head around over time. 

Why do rates go up? They can go up for a good reason, but they can also go up for an inflation reason too. 

I want to emphasize again, this is the back cycle of this because whether we get a vaccine or not, eventually we'll get herd immunity. 

Whether we get to 90%, and run through a bad recession, we're going to restart the economy, we're going to make an attempt to restructure the economy. 

I think that on the backside of this, we're going to find we produce less stuff, aggregate supply goes down, we keep handing people money and say go spend it, keep boosting aggregate demand, and that's when we get the inflation. 

So it's not a story for this year, it's maybe a story for the second half of next year and as we move forward from there.


Jim Bianco’s Contact Details

George Gammon: Yeah, all right. I've got about 45,000 more questions, Jim. 

I could spend all day here but in the interest of time, we'll stop it right there. For the viewers who want to find out more about what you do, I know your website is fantastic. 

You've got a ton of research on there, I cannot recommend it enough. What's the website? Where can they go?

Jim Bianco: Yeah. Website's BiancoResearch.com, @BiancoResearch on Twitter, and if you look me up on LinkedIn. 

Those are the three platforms that I'm on, and I try to put out stuff to try and keep people apprised of what I'm doing. 

A lot of the stuff on the website is behind a paywall for paying customers, but there is a lot more stuff. 

I would start with Twitter. That's probably my basic public-facing way that I go out there is by putting stuff on Twitter.

George Gammon:

I noticed on your website you've got a free trial offer, correct?

Jim Bianco: Yes. We always have a free trial offer. Our basic business model is we sell research for a living and so we're always looking for subscriptions. 

They come in one of two ways, our institutional clients can pay us through the brokerage operation of our research through trading, or you could pay for it through a regular subscription level as well.

George Gammon: Yeah, but at the very least, I think they should go follow you on Twitter. 

If they like what they see which I'm sure they will, then just go check out that free trial offer and take it from there. Jim, thank you again. I cannot wait to do it again.

Jim Bianco: Thank you.

Summary
Jim Bianco Warns and Challenges Our Economy Understanding - Part 2/2 RCS Ep. 49
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Jim Bianco Warns and Challenges Our Economy Understanding - Part 2/2 RCS Ep. 49
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Jim explains, from a very practical standpoint, the MMT approach, the repo market crisis, the government directed economy, the relationship between interest rates and risk markets, and much more!
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