Transcript: Jim Bianco
The transcript from this week’s, MiB: Jim Bianco of Bianco Research, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an old friend as a guest. Jim Bianco is one of the few who understood what the Federal Reserve was doing post financial crisis in ’08-’09 and made a very pressing call as to the impact of QE and ZIRP on equities. He is one of those rare bond analysts that covers the stock market and because of that, he does so from a unique perspective.
I always find his analysis and commentary elucidating. He is one of the rare people that makes you think about things that you have not thought about before. With no further ado, my conversation with Jim Bianco.
MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is Jim Bianco. He is President and Macro Strategist at Bianco Research where he covers such broad areas as monetary policy, the intersection of markets and politics, fund flows, and market positioning. Jim was a market strategist in both the equity and the fixed income research group at UBS Securities. He was equity technical analyst at first Boston and Shearson Lehman Brothers.
He is both a CMT and a member of the Market Technicians Association, James Bianco, welcome back to Masters in Business on Bloomberg Radio.
JIM BIANCO, PRESIDENT, BIANCO RESEARCH: Thanks for having me, Barry. Really appreciate it.
RITHOLTZ: So, I’ve been looking forward to having a conversation with you about the present circumstances for a while. For people who may not be familiar with you, not only do you have a background as a technician, but you were also a fixed income analyst for a long time and I find that bond analysts look at equities very different than stock guys do. Is that a fair assessment?
BIANCO: It’s more than a fair assessment. I think we’re wired a little bit different than stock guys. Bond guys are always worried about the return of their money where stock guys on the return on their money. So, you start off by thinking about things very differently than you would from an equity investor standpoint.
RITHOLTZ: And let me just give you some props about your analysis post-financial crisis. I think you are the first person I recall reading who were describing quantitative easements and zero interest rate policy as there is no option, it’s going to send stocks appreciably higher. For those of you who are pushing back on the Fed action, just lay back and put your money to work and let the Fed make it go higher.
Is that a — is that a fair assessment?
BIANCO: Yes. Early on, I did definitely think that in the 2000 to 2015 era, I was definitely on that ball. To be honest, I’ve been a little bit surprised that 12 years later, it seems to work as well as virally as it did the first time, every single time it’s tried, that there’s been no — to use the word of the day, there’s been no immunity to it in the market that the Fed is not as effective as it used to be.
Now, they have to do larger doses, but it does seem to still work. And that’s been very surprising.
RITHOLTZ: Hey, every junkie requires a bigger and bigger dose if they want the same high. Isn’t that a fair analogy?
BIANCO: Yes. In fact, that was the — that was the analogy that I was using early on was that the markets are a junkie and the Fed is a pusher and that’s seems to have worked and it worked so like I said to this day.
RITHOLTZ: So, here’s where the metaphor maybe goes off the rails a little bit. Every time I see a consensus of people discussing the Fed put and why markets can never go down, it usually means were getting pretty close to markets going way down. Think back to the end of 1999, all we heard is, hey, the Greenspan put means that that you can be more aggressive and take more risk, and that was fantastic right up till that 81 percent drop in the tech sector.
BIANCO: Yes. That’s right. And I do think that that we might be getting very close to that period one more time, that the Fed — the Fed put might have run into some trouble here.
Ultimately, at the end of the day, I think there is one other thing the people need to remember about markets, that there is a fair value. There is a level that you would look at to say that this is where the market should trade.
If the Fed is successful in keeping the market relatively near those levels, I think then, the Fed put is successful and that’s largely been the case over the last 10 or 12 years. That as the market has gone up and as the Fed is pushed, they were fairly close to what you would consider fair value.
But today now, the real question is what is the true value of the market? Where should a trade, if the Fed wasn’t in the market right now? And the big debate is how much of a long-term effect is this shelter-in-place pandemic going to have on the economy.
Do you believe that this is a supply issue? What mean by that is all we really need to do is have the governors just allow all the businesses to unlock their doors and open them up and we will return to something very, very close to normal. That’s all we need.
Or do you believe that there will be some longer-lasting demand issue? In other words, these businesses unlock their doors and open up, but now we need to get people to be convinced to resume 2019 again, that they’re going to voluntarily stay away, voluntarily change their habits, voluntarily take a more conservative approach.
If you believe the latter, that they are going to voluntarily take a more conservative approach, and I’m in the camp, then I think the markets might be a little bit ahead of themselves. If you believe the former, they just — just let these businesses open up and everybody will return, memories are short, then I think that these markets are probably appropriately valued.
So, to me, that’s kind of the crux to question. And how much of this is being held back by just the rules or how much of it is being held back by people’s attitudes that have now changed?
RITHOLTZ: Quite interesting. I have so many different places to go with you, the technical side, some of the other more interesting aspects, but I have to stay with this supply versus demand from a framework perspective.
Last week was the beginning of May. A number of states have begun to reopen either partially or more aggressively. And at the same time, on Sunday, we saw the highest level of new infections that we’ve seen since this whole thing started.
You seem to be raising the possibility that were going to look back a month or two from now, and suddenly, when there’s another surge of infections, it’s going to frighten consumers into staying home. Is that sort of the scenario you’re thinking about?
BIANCO: Yes. And I would even say it’s even one step before that. It’s not that a wave of infection is going to — is going to frighten consumers, it’s the fear of a wave, that might be enough to get them to change their behavior.
Let me — let me put this in the context for you. The worst recession in the post-World War II period was the last one, 2007 to 2009.
BIANCO: At its worst point, real GDP, real economic activity, was four percent down from its high or we retained 96 percent of the activity that we had at the high at the low. But yet, a 4 percent drop-off was enough to produce a 50 percent retracement in the stock market, a 10 percent unemployment rate, the social unrest that led to Brexit and Trump and the political polarization that we had and a lot of — and bailouts galore.
BIANCO: It effect — think you might wrote a book about bailout at that point.
RITHOLTZ: I recall — I recall a few — jotting down a few notes about the bailouts back then.
BIANCO: And all of that was from a 4 percent correction in real GDP. By the way, the worst ever was the Great Depression where we corrected 75 percent.
BIANCO: So, in other words, at its worst point, 1933, we still had 75 percent of the economic activity that we had in 1929. So, the reason I bring that up is when people say, OK, were going back. The doors are open. Hey, look at this, three people walked in to a store. It’s all OK.
We’re going to get back to 98 percent, 99 percent of where we were in 2019. Otherwise, if we make it back to 90 percent and that the cover of this week’s Economist …
RITHOLTZ: I saw.
BIANCO: … the 90 percent economy and they picked up on the same thing I was talking about. A 90 percent recovery is a disaster. It’s something twice as bad as what 2007 was and it’s something that is approaching a mini depression.
Now, I’m not trying to be a Cassandra here, but what I’m arguing is, we need to get almost all the way back, if not all the way back. Remember the way we used to do analysis before the virus, like three months ago. We used to just talk about the change of the change of the change and if something was on the third derivative moving a little, that that was somehow significant for markets.
But now, we’re talking about just basically the change, not the first derivative, not the third derivative. So, this is the challenge that we have in the economy right now. It’s not a question of unlock the doors and activity will return. That will happen. And the warm weather of summer will help activity return, would sweep the virus off for a second.
It’s do we get back to 99 or 100 percent of where we were last year? If we do, market’s are OK. If we make it back to 90 percent, think about it in these terms, 90 percent. If you went through it add it up every government, state and local governments said you just got a 10 percent loss of revenue, every business, you’ve a 10 percent loss of revenue. That will be devastating for them.
So, this is the challenge that we have, how far back are we going to go.
RITHOLTZ: So, before we wrap up this segment, I have to a question, not about how far we will get to in Q3 or Q4, but let’s stay with the second quarter. We got data on Q1, really, it was only one month, it was March, that had such an impact. But my back of the envelope calculations, you have 30 million people unemployed out of 155 million in the — in the entire pool, that’s over 20 percent.
And then you look at GDP for one month, if that continues for the full quarter, are we running at 60 percent capacity? Are we down 30 percent or 40 percent GDP for Q2 which we are now barely a month in change into?
BIANCO: Yes. It looks like that that’s going to be the case. And this will be the worst economic numbers ever recorded for a quarter, for a quarter, worst than the worst point of the Great Depression, worse than anything we saw during the Civil War.
Now, the good news is that that should not be a sustained level, that that was all from the shelter-in-place. Obviously, when we reopen, there is going to be some uptick — a big uptick in activity as we return to something that approximates normal which is what we’re talking about, what is that going to be on other side.
But, yes, we are going to see some of the worst numbers that we’ve ever seen. And I would also add to you the thing that I’ve been watching that I think is going to be really important is going to be that unemployment number. And in if I was to speak in statistical terms, we’re all now familiar with initial claims. That is when somebody’s first shows up at the unemployment office to ask for unemployment insurance.
There’s another number that they put are called continuing claims. That means that you’re still on unemployment insurance Week 2, Week 3, Week 4. That number would lack the couple of weeks, but it is now approaching 20 million. It should probably approach 25-30 million in the coming weeks.
They’ll be — it will come up a little bit short of the total of initial claims because a bunch of these companies are getting their paycheck protection plan loans and they’re rehiring the workers, but that’s only a few million out of 30 million that that’s happening with.
I think the real question then becomes, OK, this 20-odd, 25-odd million people, how fast do they get off of unemployment? Because if we’re going to leave them on unemployment for months or quarters on end, I think that that’s going to be an enormous stress point for our economy.
And so, the faster we can get them off, the faster we can return to normal. Now, that I’ve said that, we haven’t even — we’re not even done adding them to the unemployment roles right now, let alone talking about getting them off. So, if there’s one focus on that worst numbers ever, I think it’s going to be that unemployment measure.
RITHOLTZ: My special guest this week is Jim Bianco. He is President and Macro Strategist at Bianco Research where he covers all manners of markets and strategies.
Jim, you and I have been fishing pals for, I don’t know, about a decade, maybe even longer, going up to the Shadow Federal Reserve, better known as Camp Oatka (ph) up in Maine. It’s May and thinking about August and I’m having a hard time imagining getting on a plane and flying from LaGuardia up to Bangor, Maine. Any chance that we’re going to have the sort of opening that will allow that sort of behavior? What are you plans for August this year?
BIANCO: I would very much like to go to Bangor and go to Camp Oatka (ph) this year again. It’s always been one of the highlights of my summer. Not the least which is to watch a bunch of economists try and fish and bait a hook. That’s always worth the price of admission right there as well.
But I’m like you, I don’t know if that’s going to be doable. Sure, I mean, technically, there are planes that are flying right now, and technically, you and I could get on a plane. But I’ll have to see what my comfort level is to get on a plane in August, just like you. And then we’ll have to see how many people actually want to make it up there as well, too.
And this is going to be a story that we just — I just said is going to be repeated in a lot of industries and for a lot of people across the economy for the next several months. And it really impacts more than anybody else. People that have large gatherings.
One of the things I’ve always been saying to people because I’m in Chicago. I’ll know the day that we’ve hit 100 percent recovery is when there’s 41,000 people in Wrigley Field watching a baseball game. Now, will that …
BIANCO: … be this year? Will that be next year? Five years? Never? When will that event happen?
When that even happens, then I’ll know we’re all the way back. But right now, that’s an open-ended question as to when it’s going to happen. Maybe I — we should say if.
RITHOLTZ: Well, I assume we’re going to end up with some form of treatment, eventually, and some vaccine. The news this week from Pfizer and their partners in Germany is that they are very much on a fast track for a possible vaccine. If we have a vaccine before the year’s over, do things go back to normal? Can we resume our previously scheduled lives or has this left a mark that’s going to change us permanently?
BIANCO: Let’s say we get a vaccine, I’ll answer the question by posting a metric. Let’s say we get a vaccine. Let’s snap our fingers and say we’ve got them and it happens. I go back to the previous segment. We got 20 million unemployed people on continuing claims. How fast do we get that down to 3 million or 4 million? It was one before this started.
But let’s just try and get it from 20 down the three or 40. Just — if that thing can go down, that measure can go down in a few months, as everybody gets massively hired back, then everything’s cool and we’ve gone back to normal.
But if companies have gone out of business or even with a vaccine people said, yes, we dodged the bullet but I got to rethink the way that I do things, and then that number stays elevated for a long period of time, then we’ve if you would, the behavior’s already been changed. The damage has already been done. And it’s just not a vaccine that can fix it.
I don’t know what the answer to that is, but I do fear that the longer we go, the more — without a vaccine, the longer we go with this fear of health, the more people are going to be willing to change their behavior and that even a vaccine may not bring that back all the way. And it will be a while before we see a comeback like in markets parlance, a whole cycle, that we’d have to run through before we’d have to see it return.
RITHOLTZ: You know what? I think of it in terms of almost the science fiction book where there are some people who’ve had the virus, and theoretically, have the antibodies and may or may not be immune. And then there are people who live with people or themselves or people who are either older or immunocompromised or have comorbidities that put them in a high-risk category. And then there are people that — let’s call it 20-50 otherwise healthy who haven’t had it, we may ends up with different groups of people with different risk factors, and the way things come back online is going to be very dependent upon which group you find yourself in.
BIANCO: Exactly. And I think that that’s what I mean by that that even with a vaccine and assuming that one comes up, that you might you — you might have already seen the behaviors, especially among different groups change and change a lot.
And that, again, I’ll go back to what I said before. You had 96 percent of the activity of the high at the worst point in the great recession and that produced all that stress. And so, it would only take a little change at the margin get 5 percent off the high, 3 percent off the high, it’s all we’re talking about, and that produces what we would ultimately know as a recession or recessionary type conditions.
So, we’ll have to see where everybody is. Now, the last thing I mentioned is about surveys and I’m always been very skeptical of surveys too because every time a gallant (ph) organization or somebody like that does a survey of people, are you concerned? Eighty percent of the country says yes. Are you taking precautions? Eighty percent of the country says yes.
To me, that seems like that’s the politically correct thing to say. I mean, no one said …
BIANCO: … no, I don’t care about this and I’m running around and asking people to breathe on me on the subway. And so, but the question really becomes is when things open up, do you still have that attitude? And that remains to be seen at this point.
I think most won’t have that attitude. They’ll go — try and go back to some level of reality or normalness, but enough might that it could actually restrain economic activity a little more than we think.
RITHOLTZ: The problem with those surveys are it’s always a function of they phrase the question. Change a word here, change an emphasis there. You get a completely different answer. So, let me …
BIANCO: And you know there’s also a new term, just really quick, on surveys is the shy bias. And the shy bias might be working here and that is how do you answer a question when a human being ask you versus clicking on a radio button, on a webpage.
So, when a human being answer, you — how concerned are you about the virus? You’re not — you’re more willing to tell a human being, a pollster, yes, I’m very concerned as opposed to answering a question and anonymously saying not very concerned at all. So, there could be a shy bias in there, too.
RITHOLTZ: And we did see something very similar to that in some of the political polling in 2016 when supposedly, people didn’t want to say they were a Trump supporter and yet they were — that was their plans for voting and there was reasonable arguments to be made that the polls might have been undercounting now President Trump’s strength. I’m curious if this is a similar phenomenon.
BIANCO: It is. It is. And we also saw it in Brexit, too, with the same thing that Brexit was really where the word shy bias came because it has that British tone to it, is that people did not want to tell human pollsters that they were in favor Brexit, but in the online polls, it actually polled a lot better because when you didn’t have to tell a human being, you are more likely to say, yes, I’m in favor of Brexit as well, too.
So, that — I fear that there’s something like that happening again because it almost sounds irresponsible for me to say I’m not concerned about the virus. And so, therefore, when a human ask you, your natural response is, yes, but in reality, maybe you’re not. And so, we’ll have to find out where people are once things open and how we — how this all shakes out.
RITHOLTZ: If you remember that video clip that went viral of the young college dude on spring break, on the beaches in Florida, and basically saying exactly what you’re articulating, hey, man, I don’t really care about the virus, I’m young, I’m healthy, it’s spring break, I’m here for a party. Man, did that poor guy get excoriated. That is a perfect example of not having the shy bias.
BIANCO: Yes. Exactly. And you could — you could say, look, that’s his opinion and he’s welcome to his opinion and it’s not illegal. You might want to argue a little bit under margins about the morality. And maybe his grandparents wouldn’t like to hear that or see him soon, but, boy, did we jump down his throat.
And that — that’s what I mean by that. We’ve really pushed this behavior on everybody that you need to change because this is a big deal and that — taking this full circle, why I fear that even a vaccine, while it will get a lot of people to relax and try and return back to normal, if it has changed enough people’s attitudes that even vaccinated, I still think that I want to reach — maintain this more conservative attitude, go out less, spend less money, and the like, that that could wind up pushing the economy enough off of its peak that it keeps it very, very sluggish as we move forward from here.
RITHOLTZ: Let’s stick with the topic of sentiment (ph) because there’s a question that keeps coming up and you’re really the perfect person to address it to. I keep reading how many people can’t seem to wrap their heads around a market that’s rallying so strongly in the face of what looks like continual bad news. How would you explain the market’s recovery to folks who are saying I don’t get it, the death count is up to 70,000 and higher. It’s more than 1 million infected, how on earth can the market — what was April? One of the top 20 best months for the S&P 500 ever. How is his possible?
BIANCO: I think what people need to do is remember what happened before. There’s two things. First of all, there’s the obviously answer and that markets look forward and the debt count and payrolls are backward looking.
We’re bracing ourselves for an early May to get the April payroll report. It’s the April report. It’s last month’s report and we know that it’s going to show, if Wall Street’s right, more than 20 million people have lost their jobs far and away, the worst report ever seen and the markets are looking forward.
But let’s also remember what they did in March. They went from an all-time high in late February to down 34 percent and a little more than five weeks. Far and away the biggest all-time high to down 30 plus percent correction. It’s the fastest ever recorded.
That was one of the worst collapses by that measure ever seen. So, was the market overdone in late March? Yes, probably. Was the market may be overdone now as it recovers or wherever it’s peaked winds up being if it’s at this level here or slightly higher? Probably as well too.
But the market always has that irregular kind of move where it kind of goes too far one way, too far the other way, too far back the other way, one more time. And you need to look at the larger trend.
And right now, the bigger question is what is the larger trend? It’s still 15 percent off of its all-time high that was set three months ago. That would suggest the larger trend is still lower at this point. It’s 28 percent off of its March low, that would suggest that the larger trend might be back up.
So, I still think we’re very much in flux with the markets. But don’t get that nuanced with the market. I hear a lot of people get mad about the market as well, too and what I mean by that is they’ll run the statistics like for every death, market cap is increased 500,000 or for every job the market is increased $50,000 times the number of 30 million jobs lost or some number like that.
And that’s completely the wrong way to look at it. It doesn’t think of it in those terms. It’s where are we going next is where it is. And right now, I’d say the larger trend is it’s still very mixed. The market is still not telling you, it’s all OK or it’s all real bad. It’s still trying to figure it out right now.
RITHOLTZ: You are the perfect person to have this conversation with about the policy response from both the federal government and the Federal Reserve. Let’s start with the Fed. How does monetary policy look and what do you think of what Jerome Powell has done so far?
RITHOLTZ: He set all kind of records. The Fed has set all kind of records in the most extreme policies that we’ve ever seen. It’s that that they threw the kitchen sink at the market, they’ve thrown all the kitchen sinks at the market as well to.
And it’s probably — if I talk about watching financial television and talking and watching professional money managers, it’s probably reason number one why they think the market is up. Coinvest with the Fed, seems to be kind of a working thesis that you hear repeatedly from a lot of people, that the market is going to go higher.
But if the question really becomes this is he doing the right thing? I think Warren Buffett, this past weekend summed it up perfectly that the Fed actions has helped markets, and in their view, they look at the fixed-income markets, the corporate bond market is open. It’s allowed a lot of companies to get financing. It’s allowed a lot of companies to stay in business. It’s allowed a lot of people to see their losses get reduced.
And that the Fed is looking at that as being a positive. And what Buffett said is, it is now but the very big risk is that as we move forward, that distortion in markets that they’re creating, and they think it’s a distortion for the good, could wind up being a real problem down the road.
And he said, I think the word he used was an extreme problem down the road. But then he also said doing nothing and just allowing this market to sort itself out with any support, could have meant that extreme outcome happened now as opposed to later on.
So, his suggestion was which is why I’m bringing it up because in that same camp is that while the Fed has made things better now, it’s still a very open question as if they’ve made things better for good. And if there are problems a year or two now because of distorted markets are malinvestment, meaning that investment because the Fed told everybody, hey, it’s all OK, go ahead, throw (ph) your money into the market and then some investments go bad because we realize that we were buying them at the wrong price or at too high a value and then you would year or two from now, yes, they’ve really created problems for the economy, that very well might be true.
If they had that nothing, those problems would’ve been occurring now. So, I think what he’s suggesting is what they might be doing is just shifting the timelines as opposed to repairing the economy to the extent that they think they are.
RITHOLTZ: I would phrase it slightly differently. This is a hair of the dog that bit you. You wake up with a hangover, you do a quick shot, the hangover goes away, at least temporarily. We’re still dealing with the hangover from ’08-’09 and the lo and behold, hair of the dog is going to kick the can down the road a little bit, so mixed metaphors.
It is — is that that what I’m hearing you say to some degree here?
BIANCO: Yes. I think so. I think that they’ve — they have been able to use that last metaphor, kick the can down the road, right? Since we’re — since this is the metaphor segment, I’ll (inaudible), there’s no …
BIANCO: … prices. We had to do something. If we didn’t do something, that worst decline, if we ever saw, down 34 percent in five weeks, might have gotten even further worse. A bad English there. But in that — it would have created more and more problems.
But by kicking the can down the road, that gives us some time to figure out what we’re going to do. Now, what I’m arguing here is that maybe at the end of the day, we’re going to have those problems but we’re just going to stretch them out over a longer period of time as opposed to having those problems right now.
In other words, what I’m arguing is, I don’t think that the Fed can really take an economy that’s sick and make it better. They can create business. They can create revenue if people don’t want to go to the stores, if people don’t want a buy. They can create liquidity to make the market behave more in line with what you’d hope for for a shorter period of time. But that’s all they can do.
And you can hope that in that period of time, that gives us time to find a vaccine, to change your behavior, to figure out what we’re going to do next and hopefully mitigate those problems. And that’s really the big question.
So, I’m not so sure what — what they’ve done. Short term has been good because it’s made what look like a catastrophe, at least stop for now. But I’m not so sure that they prevented it forever. That remains to be seen.
RITHOLTZ: So, they can’t keep the jumbo jet in the air but they could foam the runways.
RITHOLTZ: All right. So, you’re listening with to fun with metaphors on Bloomberg Radio.
So, let me put one of my favorite powers to work. I hereby appoint you, Chairman of the Federal Reserve, what would you do under these circumstances?
BIANCO: You’ll be — I can’t take the gradual marks line. Any organization that would have me, I would immediately withdraw from.
RITHOLTZ: That’s right. It wouldn’t be a member. That’s …
BIANCO: If I was — if I was the head of the Federal Reserve, I think — I wouldn’t be doing same things that are vastly different in what they’re doing now. But I would be asking a question, kind of behind the scenes.
President Trump says, every time he talks, we have to get the economy back to where it was. OK. I would ask as the Fed Reserve chairman, can we go back to 2019 even with the vaccine? Can we get everybody to say, OK, that’s over with, let’s all — let’s all remember what 2019 was like and let’s go right back to that.
Or what I think might be the case, can we help transition from a pre-virus mentality and economy to a post-virus mentality and economy? And that post virus economy is going to be something different. And what’s the — why is that important?
Because our job then here is not to make everybody try and maintain where they were, but help them manage to where we’re supposed to be going which means, I’m going to give you some support for a while, but not forever. And while giving you the support, you need to sit down and figure out your business or figure out your finances or figure out your career and say, OK, it’s going to be different in ’21, it’s going to be different in ’22, how and what do I do to get there as opposed to when are we going to get back to 2019?
That’s the big difference, I think, we need to be talking about is what is the ’21-’22 economy look like. And my fear is too many people still feel like all it’ll be 2019 all over again and it will be not 96 percent but 100 percent. Or in the case of Trump, of 105 percent of what it was in 2019.
And maybe it is. I mean, this is unprecedented and nobody knows, but I’m going to bet that it’s going to be different and trying to preserve a status quo that’s unrealistic is where I think the problems could come.
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RITHOLTZ: Jim, let’s talk a little bit about what we were discussing earlier with the Federal Reserve and some of the new things that they’re doing. I don’t ever recall them buying ETF’s, that seems to be pretty new and then buying debt of some pretty junkie companies, that seems to be pretty new also. What you think of what’s going on?
BIANCO: Yes. They’re not only buying the ETFs but bear in mind, only ETFs that are tied to corporate bonds, so no spiders which is the S&P 500 ETF. They’re buying corporate bonds. They’re buying commercial paper. They’re buying asset-backed securities, they’re buying municipal bonds.
They’re buying paycheck protection loan, loans and trying to package them into securities as well, too. This part of the effort to try and support markets from falling much more than they can. This is them stepping in, buying, and trying to put a floor on markets to try and calm everything down to hopefully get us to the other side.
Now, there is one thing that I worry most about with all of these programs. Technically, the Fed’s not allowed to do this. So, how do they get away with this?
As I pointed out, they’re actually not doing it, the Treasury is doing it. They put together all of these special purpose vehicles or these funds and then the Treasury, the taxpayer, puts some money into these funds. The Fed offer — the Fed finances it and they go out — they buy these securities.
In other words, now monetary policy, and Jerome Powell says this every time he speaks about it, monetary policy needs the permission of the Treasury Department to do this stuff. So, the Fed has given away a lot of its independence to the administration, not just this administration, but whoever is the administration after 2020, whether it’s the same or different, because this program will most certainly continue well past the election as well too.
And that, I worry, could cause two problems. One, it seems to be like a nationalization of markets because it is the government that is ultimately buying corporate bonds and ETFs and municipal securities, the federal government in this case. And two, the Fed is going to need the permission of the Treasury Department to change these programs anyway they can. And so far, that’s not been a problem.
But later on, especially in an election year, if the Fed says, hey, we want to maybe back off of this program or not do this, the administration could say, I got an election to win, you’re going to keep buying this stuff and keep going because now you now have a say in your policy.
So, this is going to be really an experiment that we haven’t seen. Think about …
RITHOLTZ: So — yes.
BIANCO: … do this in ’08 and the answer is yes, but not to this degree. We also …
BIANCO: … didn’t really understand it in ’08 and we had a different administration that was willing to say to Ben Bernanke, Ben, you tell us what to do and we’ll agree with it.
BIANCO: Twelve years later, we’ve had 12 years to study this. We understand it and we have a very different attitude about the Federal Reserve than we did in 2008.
RITHOLTZ: So, I’m going to ask you two questions about that and one is practical and one is theoretical. Answer them however you like. The practical question is what happens if the Fed decides they don’t want to keep buying this and then the government says yes you are and the Fed says, OK, good luck. We’re done. That — so that’s the practical side of it.
The theoretical side of it is have we just de facto created a giant experiment in modern monetary theory? Isn’t this MMT writ large?
BIANCO: To take the second one first, yes. I refer to it as MMT version 1.0.
BIANCO: It’s what this seems to be right now. And the better it goes, the more, I think, we’re going to continue to see more of it. Stick with that question really quick.
The amount of stimulus or the amount of support, maybe to use that phrase, that we’re giving the economy is a between what the Federal Reserve has done in expanding their balance sheet with what the government is going to borrow and they announced this week they’re going to $3 trillion just in the current quarter which is enough — most bond people are having a hard time understanding it. It’s so — such a big number right now.
It’s the equivalent of four years of income tax receipts when all is said and done. If the federal government and the Federal Reserve can either borrow or print four years of tax returns and not have a problem, not produce inflation, I’ve jokingly said can we get rid of the IRS? Can they just print up our taxes every year and just send them to the Treasury at that point?
Because if you can do this without having any problems, then why do we even pay taxes in the first place? And isn’t that one of the arguments that the MMTers have been saying is that MMT believes that the — you don’t adjust monetary policy with interest rates, you adjust it with taxes.
It’s that when there’s no inflation, you print the money and tax rates go down a lot. When there’s inflation and you want to remove the money from the system, you raise taxes as well, too. So, yes, I do think this could be version one of MMT.
Now, to you practical question, if the Fed says, hey, we want to back off and the treasury says no and the Fed says good luck trying to do it without us financing it, they run a real political problem because then they put the Treasury, the taxpayer, at risk of loss. And then they would have Jerome Powell, whoever decided that policy, would have to stand there and say, you agreed with the Treasury to buy hundreds of billions of dollars’ worth of corporate bonds or municipal securities or ETFs and the Treasury wanted you to do more and you said no, then you backed off, and now, the taxpayer is sitting on an unrealized loss, Jerome, that’s your fault. You’re causing he taxpayer to take tremendous losses. Why are you doing that to the taxpayer?
That is an issue that they never want to be involved with. They don’t ever want to go there. So, and we — I don’t think we’d ever know it. I think that they’ll always come to some form of an agreement.
And let me emphasize. There will be no disagreement right now because we’re in the process of trying to support a crisis economy. The disagreement comes later down the road whether it’s several years down the road or several months, whenever we decide that it is now getting better enough, that the Fed can stop — start reversing out of these programs.
The administration in theory has a veto over that. And I’m just opening the question that maybe, they will exercise it when that time comes. But no one wants to exit these programs right now and right now probably being at a minimum of the year 2020, so that’s not going to be an issue right away.
RITHOLTZ: We had ultralow rates for a decade and the administration screams when Powell wanted the thick (ph) rates — wanted to normalize rates up from one and a half percent to a more normal level, I got to imagine that no matter what the circumstance is, no president is going to want to see this get normalized or am I now too cynical in the era of White House Federal Reserve jawboning contest?
BIANCO: No, I don’t think you’re too cynical. I mean, if you look at the history of the federal reserve and the relationship that the Federal Reserve has with White House, the big difference between Trump and previous presidents is Trump does it out in the open on Twitter.
BIANCO: And that — but we know for books and biographies, going all the way back to Harry Truman, Harry Truman inviting the entire — think about this, inviting the entire FOMC to the White House for lunch, and telling them that if they did not cut rates, that they were doing the bidding of Joseph Stalin to Lyndon Johnson, throwing the Federal Reserve chairman against the wall, literally, physically assaulting him and saying boys are dying in Vietnam and Bill Martin who was the Federal Reserve chairman at the time can’t cut interest rates to Ronald Reagan commanding Paul Volcker, Paul Volcker wrote that in his autobiography, to cut rates in 1984 which was in election year, to George H.W. Bush blaming Alan Greenspan for losing the election.
So, this is going on for 70 years that presidents have been at odds with the Federal Reserve. The difference with Trump is he just does it in the open real time. The rest of them did it behind closed doors.
And now that we have given the administration a veto, it doesn’t matter if it’s Trump or Biden or whoever, they’re going to think twice when it comes back — when the Fed comes to them and says it’s time to leave. It’s time to us to reverse these policies and they’ll maybe push back, that’s a very open question. So, I don’t think you’re being too cynical.
RITHOLTZ: Quite interesting. So, I recall back in 2010-2011, remember the open letter to Ben Bernanke. QE and ZIRP are going to cause hyperinflation, what are you doing, you’re going to destroy the dollar, we’re going to have crazy inflation.
And of course, none of that came to pass, the dollars was record highs for the next eight years. We saw no inflation at all, if anything, deflation. Is this similar to that and that it’s on unprecedented set of circumstances and the natural reaction from inflation hoaxes, oh, no, the Fed’s action is to send inflation much higher.
This is clearly different if for no other reason than gold has spiked, do a compare and contrast between 2010 and 2020 when comes to inflation.
BIANCO: Yes. The 2010 letter, I remember the 2010 letter, too. To be honest with you, I thought that that letter at the time it was written, was a reasonable fear that we had, that we looked at what the Fed was doing if you believe the metric too much money chasing too few goods, that the Fed was creating money, you could argue that it didn’t have the velocity that it needed to turn over that it needed in order to create inflation, but it was a reasonable fear.
And I would actually argue to you that all out of that experience, that they did that extra episode without inflation, was the catalyst for modern monetary theory to come along.
BIANCO: Saying, hey, look, what we just did in 2009, ’10, and ’11 was all that money printing and then reversed it out, when never had inflation, maybe we can start rethinking how we could run monetary theory as well.
Today, it’s just orders and orders of magnitude larger. And today, the other thing that’s going on that’s a little bit more different, at least on its surface, is a lot of these programs are trying to be pushed down to non-Wall Street, Main Street. We even call them the Main Street Programs.
We PPPT — PPP, Personal Protection Plan loans. We’re giving companies direct loans. Yes, they’re trying to support markets, but were trying to give those companies loans.
Now, the fear here is that that lending will lead to a higher turnover of that money. The problem in 2010 was the Fed printing up a lot of money, pushed it into financial markets to support financial markets, but it never made it to the real economy. People — that money never filtered into your pocket or my pocket or our neighbor’s pocket when we wound up buying a new car or buying a house or spending more on vacations or something along those lines.
This time around, we’re are trying to get it into your, mine, and our neighbor’s pocket for that express purpose of go spend it on a vacation, go buy a new car with that money as well, too. So, I think that the risk that it does create inflation is a real one and is a concern.
That goes back what I said before. If they can do $8 trillion worth of borrowing and printing and it doesn’t produce inflation, why do we keep raising $2 trillion, $2.5 trillion dollars a year in taxes? Why don’t they just print up $2 trillion a year a just send it to the Treasury and say everybody’s tax rate is now zero at that point.
So, I think there’s going to be long-lasting consequences to this either it produces some kind of a problem in the form of inflation or it doesn’t and not only — it’s like a we just talked about it a second ago that either the administration or somebody else says, well then, if it didn’t produce a problem, why do we stop? Why don’t we just keep printing more of this money? Just keep going and going?
And why don’t we — everybody gets free college education, everybody gets free healthcare, everybody gets a much, much lower tax rate and because we’ve shown that we can print this money without there being that consequent. So, one way or the other, I think we’re going to have an issue to deal with this.
RITHOLTZ: Quite interesting. The pushback against it and I’m surprised to learn that you are a Bernie bro, this is this is news to me, the pushback against the inflation argument is, hey, this isn’t money that’s going to people to buy houses or cars or vacations or if you remember the home equity mortgage with rural money was being used by big-screen TVs and do home renovations, these are people been forced to shelter-in-place, many of them have lost their paycheck, this is going to rents.
We’ve seen 30 percent of rent payments not being made. This is going to food and medicine. This is really basic survival, how does that cause inflation especially if it best were 90 percent economy and we can’t get all the way back up to 100 percent?
BIANCO: So, I think I can — I think I needed to give a little bit of a definition when I talked about inflation. There is — there will be no inflation in 2020 and there probably will be no inflation in the first half of ’21 and there is a risk of deflation exactly the way that you said.
BIANCO: But there will be — this much, I think, we can agree on. There will be a restart to the economy. We are not going to shelter-in-place for all of eternity. There is going to either be a vaccine or we’re just to get sick of this and say that we have to kind of go back to some semblance of normal and there will be some kind of a rebound in the economy whether goes it goes to 90 percent or or 100, remains to be seen, but there will be a rebound.
And it’s on the other side of that rebound does all this stimulus money which is becomes mere survival money then some people go back to work, maybe, well, quibble about how many don’t, but a fair number of people will and there will be more economic activity plus all this other money as well, too.
That’s where the fear that the inflation comes back in. Second half of ’21, ’22, in that respect. Not necessarily in 2020. In fact, not in 2020. I wouldn’t say necessarily. I wouldn’t put that qualifier on it because I think with the — with the economic contraction that we’re having, you’re not going to see it now.
But the it question is, what about on the other side? And to me, that’s where I think the message of the bond market has been. The 10-year yield hit a low of March — on March 9th of 30 basis points. Today. as we talk, it’s around 65, 66 basis points.
Now, these are very little numbers, but it hasn’t gone anywhere for two months. If a — it’s been trending sideways in the face of all of this terrible economic news and tremendous amount of Federal Reserve purchases of traditional QE type of treasury securities as well, too.
They have purchase nearly and this is a hard number to understand. They have purchased nearly $2 trillion worth of bonds. This is mortgages and treasuries and agencies. And I’m not talking about corporates and ETFs, that’s a difference program.
In $2 trillion of those bonds, in the last seven weeks, and yet interest rates are not falling and falling to the floor, we have seen in corporate bond funds, and we have seen from foreign central banks massive liquidations of treasury securities. I think the message the market might be telling us is, the bull market and bonds is over and that we are now looking at not only not looking at negative interest rates which a lot of people wondering in the U.S., we won’t get that.
But we’re looking at the fear of what comes on the other side and that fear is crushing supply and inflation which is why I think that the bond market has been struggling as much as it has for the last few months, but that’s the signal it’s trying to send us. And the wake of all that Fed buying, it still cannot rally anymore and that is very concerning.
RITHOLTZ: So, doesn’t a lot of that have to do with the fact that when you’re at the zero balance, when rates this low, at a certain point, I know it’s a cliché but you’re pushing on a string. There’s no impact. There’s no stiffness. There’s a technical terms to that that I’m drawing a blank on, but you’re not seeing resonance from the Fed buying in prices.
Is that misstating it? Tell me what’s wrong with that thesis?
BIANCO: No, this thesis is — the thesis is right. But it’s — it’s a measure about the real economy, is that lower interest rate — and this gets to the negative interest rate argument, too. Is that lower interest rates that — if you’re not to buy a house at a 2 percent mortgage, why does a 1 percent mortgage make it more attractive for you to buy a house?
And the answer is it doesn’t because the reason you’re not willing to buy a house at a 2 percent mortgage doesn’t have to do with interest rates. It maybe has to do with either you’ve lost your job or you fear you’ve lost your job or you fear that your company is going to run into trouble or something along those lines.
That’s why you wouldn’t do it. That’s the pushing on the string argument which is — which is the big pushback about negative rates. Well, if 2 percent interest rates won’t give you me to buy a house or a 1 percent interest rates won’t get me to buy a house, why would zero get me to buy a house at this point?
My problem is not that I need another $100 or $150 a month off the rent or off the mortgage payment to get me into that house, I need concern about or I need to be less concerned about the economy or my employment situation to buy the house. So, that’s the pushing on a string argument.
And I think that that’s best ultimately what the bond market has been saying is that, the problem here is not that rates are too high, the — and that the fix isn’t what Narayana Kocherlakota, the former vice — former president of the Minneapolis Fed has been saying, that we must go to negative interest rates in the U.S. like they have in Europe and in Japan.
The problem, I think, is with a fear of the state of the economy, that’s what’s holding us back and what the bond market says is I — lower rates isn’t going to help you anymore, so no point going lower. And at some point, when we get a rebound, all the support money could produce inflation. Could produce inflation.
Now, I want to emphasize that word could because we’re only at 65 basis points on the 10-year note. But like I said, the Fed has bought $2 trillion — $2 trillion with a T. And that is not pushing interest rates down. That’s a hard number for most bond people to understand, $2 trillion — and let alone non-bond people to understand. That much buying cannot get the bond rally to continue at this point.
And so, I think that what the market is fearing is that there’s going to be problems on the other side. So, yes, that’s how the pushing of a string thing fits into it and I think it’s a — it’s a right argument.
RITHOLTZ: I want to get away from the Fed but I can’t help it because there’s still one or two things I have to ask about. The arguments against the purchases and in favor of inflation seem very similar to what we heard made to the central bank in Japan. If you do this, you will cause inflation. If you do this will cause problems.
So, question one, can we avoid inflation in a similar manner to Japan? And question two, does that damn us to the same sort of problems that Japan has been suffering ever since its market peaked in 1989?
BIANCO: Yes to the first question. We can avoid the inflation. That — the support money just winds up not getting — what you need to have inflation is two things. You need to have too much money and then the other argument — I’m using this classic monetary line, chasing too few goods. It needs to chase something, that’s velocity.
So, it’s one thing for me to send you a $1,200 check, but then I need you spend it as well, too, as — if it just sits in your bank account, going good, I’ve got a little bit more money just in case things go bad, I’m not going to do anything, but let it sit there, is not to produce inflation.
But if you go out and you spend it, then that will, helpfully, get the inflation moving. And that’s always been the problem in Japan, the high savings rate, the conservative attitude that most of the Japanese have about spending money because they’ve been afraid about their economy.
Can we damn ourselves in the other way as well too? Yes. One of the things that we’ve learned about negative interest rates and very, very low interest rates is very damaging to the financial system.
As I like to joke, if I was around, if you are around in the Middle Ages or in the Renaissance, and it’s the 15th century and we’re in Venice, when we develop fractional banking, it wasn’t developed as an event, but it evolved over time during that period. And you said, look, here’s what we do. We take in — we take in a unit of account like a dollar and we put 80 cents of it in the reserve account, we lend out the other 20 cents to make some money, make some return on that money, if you were I, I would raise our hands in the 15th century, and say, hey, this is a good theory of how banking should work.
But what happens when interest rates go negative and you lend out the money and then you have to also pave in the interest payment on it, too, they would have asked to leave the room. It doesn’t work that way. But …
RITHOLTZ: You wouldn’t make the loan.
BIANCO: What’s that?
RITHOLTZ: You wouldn’t make the loan if you — in that case.
BIANCO: Right. Right. Welcome to 2020. Our 2019 with negative interest rates. So, negative interest rates is very damaging to the financial system. It has crippled the financial system, I think, in Europe. It has crippled the financial system in Japan. The Japanese stock — Japanese bank stock index has hit a 40-year low. And the only reason it’s at a 40-year low is because they started the index 40 years ago.
RITHOLTZ: All right. So, let’s jump to our favorite questions, our speed rounds. And what are you watching these days? What are you streaming on Netflix or Amazon Prime or podcasting? What are you — what’s keeping you entertained?
BIANCO: I streaming a lot more than I have in the past because I’m a big sports fan and there are no sports to be a big fan of.
RITHOLTZ: Except “The Last Dance on ESPN.”
BIANCO: Yes. That’s been fantastic.
BIANCO: I tend to like political thrillers and there’s one that I’ve been watching that’s on Netflix which is an Israeli show called “Fauda” which is the word for chaos.
BIANCO: Interestingly, it’s a political thriller about terrorism, Palestinian terrorism in Israel. And supposedly, it is one of the most popular shows in the Arab world. So, it’s an Israeli show about Palestinians attacking Israel and it was meant for Israelis to watch. But yet the Arabs love it just as much as they do.
It’s dubbed show, so a lot of it is an Arabic with subtitles. But it’s a really good show. That’s been one that I’ve liked.
I’ve also been a big fan of “Better Call Saul” and “Homeland” and a lot of those shows. “The Last Dance,” I’ve been just eating that up as well, too.
RITHOLTZ: Amazing. Amazing.
By the way, “Fauda” is something you can watch right before bedtime because it’s so thrilling, you just won’t get to sleep for hours. It’s that exciting.
What about books? Are you reading anything? You’re finding anything you’re catching you fancy these days?
BIANCO: Yes. I’ve been trying to catch up a little bit more on some of my economic reading lately as well. So, I’ve been reading you know “The Economists’ Hour” by Appelbaum which I found …
BIANCO: … to be a very good book as well. I’ve been reading the Jim Grant’s book about Walter Bagehot, learning a lot about — he was the founder of “The Economist” magazine in the 19th century and was a big thinker as far as what is the role of a central bank. He was the one who coined the term that they are the lender of last resort and what that means as well, too.
And then my kids, I’ve got four kids, so I’ve like to say that because of the — my kids all grown, but for the last 20 years, what they’ve done for me is they’ve reintroduced me to peanut butter and jelly sandwiches and I’m still a fan of those and reading children’s books.
So, I’ve I recently, within the last year, so reread the Harry Potter series which I think is just tremendous. “Island of the Blue Dolphins” is another book that I’ve read. These are children’s — children’s literature which well-done children’s literature is just fantastic as well, too.
So, I eat my peanut butter and jelly sandwiches and I read these books and I think about that I’m doing a seventh grade homework assignment all over again.
RITHOLTZ: Hey, “The Hobbit” was a children’s book and I know people who read that and the rest of “The Lord of the Rings” every year.
So, our final question, what do you know about the world of investing today that you wish you knew back in 1990 when you first launched Bianco Research?
BIANCO: That you need to question every assumption and be open to the idea that things that are not supposed to happen can happen. Negative interest rates, negative crude oil prices, the Federal Reserve buying corporate bonds. There was time not too long ago, just to use those recent example, where if you were to say that these things were going to happen, people would’ve looked at you and said, you’re off your meds because it’s not the way the world works, and you need to be open to these ideas.
Now, that doesn’t mean that you need to run around with a tinfoil hat on, looking for all of these things to happen, but that you, as an investor or as somebody who watches markets, to be open to the idea that things that you never thought were possible could wind up becoming possible especially in a period of stress.
RITHOLTZ: Quite fascinating. We have been speaking with Jim Bianco. He is the founder and chief strategist of Bianco Research. If you enjoy this conversation, well, just look up an inch or down an inch on Apple iTunes or Google Podcasts, Spotify, wherever finer podcasts are sold and you could see any of the previous 300 plus conversations we’ve had over the past six years.
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