Episode #508: Jim Bianco on “The Biggest Economic Event of Our Lifetime” & The End of the 40-Year Bond Bull Market

Episode #508: Jim Bianco on “The Biggest Economic Event of Our Lifetime” & The End of the 40-Year Bond Bull Market

Guest: Jim Bianco is the President and Macro Strategist at Bianco Research, which offers macro investment research on financial markets.

Date Recorded: 11/8/2023  |  Run-Time: 1:23:49

Summary:  In today’s episode, Jim shares why 2020 was the biggest economic event of our lifetime, why the 40-year bond bull market is dead, and why energy is going to be weaponized going forward.  We also touch on the recent labor strikes, the impact of remote work, and why it may be time for active management in both stocks and bonds going forward.

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Links from the Episode:

  • 1:20 – Welcome Jim Bianco to the show
  • 3:25 – Evaluating the macroeconomic landscape
  • 12:18 – Identifying underrated drivers in the market
  • 25:47 – Potential market risks
  • 34:19 – Discussing the valuation of TIPS, stocks and bonds
  • 41:24 – Exploring the boom-bust cycle
  • 44:56 – Scouting for promising future investments
  • 55:11 – Spotlighting seldom-mentioned investment prospects
  • 1:03:43 – Offering thoughts on the state of cryptocurrency
  • 1:14:24 – What belief does Jim hold that the majority of his peers would disagree with?
  • 1:17:49 – Recounting Jim’s most memorable investment
  • Learn more about Jim: Twitter; LinkedIn; Strava



Welcome Message:

Welcome to The Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.


Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.


What is up, everybody? We got a special episode today. Our guest is Jim Bianco, president and macro strategist at Bianco Research and one of my favorite macro minds around. In today’s episode, Jim holds absolutely nothing back. He shares why 2020 was the biggest economic event of our lifetime, why the 40-year bond bull market is now dead, and why energy is going to be weaponized going forward. We also touch on the recent labor strikes, the impact to remote work, and why it may be time for active management in both stocks and bonds going forward. I promise this is an episode you don’t want to miss. Please enjoy this episode with Jim Bianco.

Jim, welcome to the show.


Hey, thanks for having me. Looking forward to it.


There is nobody who I’ve wanted to talk to for a long time, been wanting to get this on the schedule, and you’re one of the rare people when you pop up on my podcast feed, I get excited and I do not miss a conversation with you because every time it’s something different, there’s something new I learn. You get a lot of great charts. So I’m excited. We’re going to get into some stuff today. Where do we find you?


You find me where I live in Chicago. I’m born and bred mid-Westerner. Graduated at Marquette University in Milwaukee, Wisconsin. Spent bunch of years in New York City working for a bunch of the big brokerage houses. Lehman Brothers was one of them, Credit Swisse, actually, it was called First Boston, it was during the merger going back that far, and UBS Phillips & Drew back in the ’80s and into the early ’90s. Came back to Chicago, worked for a small brokerage firm, which I’m still affiliated with to this day called Arbor Research and Trading. Spun myself off in 1998 as Bianco Research, and that’s what I’ve been with my own shingle now for 26 years. So I guess it’s like the old line about a restaurant, the restaurant on the corner. How’s it doing? Well, doors are still open, so it must be doing okay, right?


Tell the listeners, Bianco Research, is that targeted towards individuals, advisors, institutions? How does it work?


It’s targeted towards institutional or professional investors because my affiliated firm, Arbor Research and Trading, it’s an institutional bond brokerage firm, so it’s more fixed income, macro-oriented. We don’t really have a retail product per se, but I augment that with trying to be active on social media as best I can and being as public as I can to get some of my ideas out there for people that are not into institutional products.


All right. Well, macro, you’re speaking right to our audience. Where do we begin? You talk about a lot of things, but what’s the macro picture look like here at the end of 2023, getting ready to be Turkey day? What’s the world look like to you?


To answer that question, I’d like to back up three years and I’d like to go back to the spring of 2020. The global economy did something extraordinary in the spring of 2020. It completely shut down and then it completely restarted. So we rebooted the economy. Coming out of that reboot, it has not been the same. Now, let me be very clear upfront. Not been the same is not dystopian, it is different, and because it is different, it is suffering from imbalances that we had not seen before and we are still struggling with, and those imbalances are leading to frictions, higher inflation, and a reassessment of how things work, ultimately, higher nominal GDP.

Now, what are those imbalances? The biggest one I think that we’re all familiar with is remote work. Nick Bloom at Stanford University has been studying remote work for 20 years and now he’s the most popular guy on campus because his topic became very interesting. He liked to say that before the pandemic, maybe about 3% or 4% of the workforce was remote. Remote means some days that you work not in a central office, could be five, which would be work from home or it could be one or two or something. We were increasing that at about half a percent year. Then in 2020, we went from 4%, 5% remote work to 40% remote work, and then we backed off of 40% to somewhere around 25% to 30% of the workforce is remote, and it looks like we’re settling in on that number. So I like the way he likes to say it. This was a trend that was underway anyway. We were going to be here in 20 or 30 years, and now we’re here now and we have to try to assimilate into that new trend.

Now, the problem with remote work is more and more people are accepting it, but there are some that will not accept it, and those that won’t accept it tend to fall in the industries we work in, financial services, big money center, commercial banks in Manhattan. Jamie Diamond, Dave Solomon at Goldman Sachs, these leading voices are saying, “You lazy, bum. Get out of the pajamas and get back into the office five days a week.” In fact, Goldman Sachs coined the phrase five-zero, meaning get back in the office five days a week, but we all know at Goldman Sachs that means seven-zero. That means in the office every day of the week.

That has changed, fundamentally changed the workforce and the labor market in ways I don’t think we fully understand, and I’m not going to pretend to you that I understand it, but if you look at labor markets where you see initial claims down in the low 200,000s and you see in continuing claims in the low one millions. Prior to the pandemic, that was considered boom time to see those numbers at these levels, but yet we have these levels and people are assuring me that the recession is six months away.

The other one is deglobalization. Globalization probably peaked, there are some think tanks that put up measures of this, probably peaked around the financial crisis in 2008 and we were trailing off of deglobalization, but again, what the pandemic did, what the shutdown restart did was accelerated that trend towards either friend shoring, and the most recent example of friend shoring is Google is now going to make their Pixel phone in India. They’re going to assemble it in India, but a lot of those parts are going to come from China, but they’ve already said that they’re looking with global suppliers to get rid of all of their supply chain out of China, and they hope to do that in the next several years.

Apple has been making noise about moving out of China, at least to a friend, a friend shoring place like India or Indonesia. Of course, then there’s reshoring, where we’re bringing stuff back into the United States. Political risk has become so high that it’s more expensive to make it maybe in Indonesia versus China or definitely in the United States, but when you adjust it for the political risk that you’re getting rid of, it makes it worth it.

The last trend that we’ve seen is energy, and the energy trend that has really been accelerating has been twofold. It’s been, one, the move towards more green energy, whether it is electric or it’s fuel cells or something along those lines. That’s one trend. The other trend is the existing energy producers, and I’m mainly speaking about Russia and Saudi Arabia, are more and more being more aggressive with their energy policy to achieve certain political goals, the voluntary cuts that we’ve seen from OPEC, to try and keep the price of crude oil as high as possible, and we’re also seeing that domestically where we’ve seen the president use the strategic oil reserve basically as a lever that he could pull to manipulate the price of gas. It is no longer considered to be a store of oil for an emergency, it’s something that’s got little levers and dials so we could dial in the proper amount of gas prices that we want before a major national election. So all of these trends have really changed the economy, and that’s why I’ve said it’s different. It’s not worse, it’s not dystopian and we need to start to adjust to it.

A final thought for you on this. If there’s an analogy in history, it is World War II. In September ’45, the Japanese surrendered. In October ’45, the payroll report had minus 2.1 million jobs. Population adjusted. It’s almost identical to what we did in spring of 2020 when we lost 14 million jobs in March of 2020, but the difference was in October ’45 when those 2.1 million jobs were lost, we celebrated it. Those were people that were no longer making tanks and fighters and guns and aircraft carriers because we didn’t want or need those things anymore. From the moment that the surrender took place, everybody said, “This is going to change the economy. Let’s think about what this post-war economy is going to be.”

March of 2020, something similar happened, but instead of saying, “Let’s start …” Maybe we didn’t celebrate it, but we could at least say, “What is the post COVID or the post lockdown economy going to look like?” We still have people arguing that there is no post COVID economy. You heard, when we’re recording the week before, Jay Powell gave his press conference six times. He used the phrases, rebalance or normalization. We’re going back to 2019, everything’s going to be like it was, the inflation rate’s going to go to 2%. What we’re going to find out was it was this blip that happened in 2020 and it affected us in ’21 and it’s now going away and dust off all the models that used to tell you how the world worked before 2020, they will continue to work again. That’s what we mean by rebalance, renormalization.

So here we are three years later and we’re still arguing. This would be like if it was 1948 and we’re still arguing, “Is this a new economy? Do we need to change things or do we just need to hold our breath and just wait for things to come back?” In the meantime, it keeps surprising us with economic statistics, with inflation, volatility in markets.

A final thought for you is the day we’re recording, Jay Powell spoke earlier in the day and he gave the opening presentation to a conference that the Fed is hosting, and he basically acknowledged half of what I’ve said. All these economic models that the Fed uses and Wall Street uses, boy, they’ve been completely wrong for the last couple of years and we need to be humble about forecasting the economy. Okay, but then you didn’t go to the next step, Jay. Why have they been wrong? What’s changed in the last three years? Think about this really hard, Jay. What’s changed in the last three years that might have really upset these models to not make them work right?

He hasn’t quite gone that way, but at least he started on the first part that, “Yeah, you hear everybody confidently talking about a return to 2% inflation or there will be a recession in six months and that stuff and it never seems to happen. Well, don’t worry it didn’t happen, but it will happen,” and he’s charting to say, “Maybe we ought to start to rethink what’s going on here with the economy.” So that’s where I start when I start putting the pieces together of where I think markets are and where I think the economy is.


So as we think about those different moving pieces, deglobalization, et cetera, is there one that you think it’s least accepted by the market or people that just they either aren’t aware of or they don’t appreciate of these forces, these big tectonic forces moving?


Well, I’d say the least accepted of them is probably the change and the viewpoint of energy as a political weapon, that people are not quite there and one of the reasons why they’re not quite there is because the trend in energy, we had a run to $120 crude oil after the Ukraine war started last year and then that deflated, and now we’re still somewhere in the high 70s right now. So if you say we’re using energy as a political weapon, immediately they think, “Oh, it must go to $150. Since oil hasn’t gone to $150, so therefore it might not be true.”

The other one I think that might be accepted but not appreciated, if I could use that nuance, is remote work. So we all know it’s here, we all know it’s changed things, but we’re not sure how so we then default that it must not be that big a deal. I’ll give you one example of what I’m talking about.

Prior to the pandemic, most people were home two days a week, Saturday and Sunday. Now they’re home two days a week, Saturday and Sunday, plus probably two days at home and three days in the office, and that most likely for a lot of people is Monday and Friday, but the biggerish point here is you’re home four days a week, you were home two. You’ve doubled the amount of time that you’re at home. What does that mean? Your lifestyle has changed. You demand different things. You demand less of some things, more of other things.

Who’s been on the leading edge of trying to figure this out is the retailers. The retailers through late ’21, ’22 and into 23 were struggling with inventories and we truffed it off as, “Oh, it’s a supply change problem, it’ll get fixed.” No, it was a demand change problem that people were trying, they were trying to figure out what it was that everybody wanted and that if they put the things on the shelves in the proportions that they had in 2019, they were having simultaneous gluts and shortages.

You might remember some of the big box retailers like the Targets and the Walmart’s, in ’22, if you bought certain items that they had too much of and you return them, they would refund you the money and you could take the item home, “I don’t need more sweatpants to send back to the warehouse. I’ve got way too many of them. So here’s your money back for the sweatpants you bought you don’t want. Just take them home anyway,” and we’ve never seen that before because they were really trying to understand the post COVID consumer. While it’s understood, it may not be appreciated enough.

Then the final one is probably reshoring and deglobalization. That one is largely understood, but we’re still not quite figuring out what exactly does that mean just yet. Maybe it’s filtering itself into bleeding into some of these other ones. My big theory is labor has got more power over management than any time we’ve seen in at least a generation. Just look at the strikes that we’ve had and look at the aggressiveness of just the UAW strike that has recently been settled and the amount of pay increases that they’ve gotten out of those strikes. Part of that is also coming from a change of attitude about work and it also might be that there is a shortage of workers because of reshoring and that we need more manufacturing workers and we don’t have as many people that want to work in that area. So people like the UAW have newfound power that they haven’t had for the last generation or so.


So as the people start to think about these macro forces at play, I think the main, in my mind, everyone’s always talking about equities, but the main thing that’s been going on the past few years, the cocktail party discussion has, in my mind, it was inflation and that’s, in my mind, receding a little bit to this 5% TBL number, this ability to get income when you haven’t been able to from the government in a really long time. Talk to us a little bit about those competing forces because you’re definitely a fixed income guy, so I would love to hear a little bit about … I actually said on Twitter the other day, I said, “It’s strange to me that people aren’t losing their minds more about an asset going down as much as fixed income has because if stocks were down 50 like the long bond, people would be losing their absolute mind on social media and elsewhere,” and I said, “Why is that? Why are people not thinking about it?” Anyway, kick it over to you. What do you think?


Let me start with the big picture first and then get into that why they’re not losing their mind. I’ve got some thoughts on that too. You’re right. I do think that the center of the universe is right now interest rates, and the week before we were recording was the week when we saw the 5% move up in the stock market, the S&P, and we saw the 50 basis point decline in the 10-year yield that really just turned all these trends around. It’s important to note that that all started on October 31st. Now, before October 31st, we had almost 280 reports put out by the S&P 500 companies, a little more than half. In some, they were great. They beat big, they beat broad, they gave good guidance, and the stock market kept going down and going down and going down and closed at a 10% correction on October 28th, the Friday before the 31st. So it pretty much ignored all those numbers.

Then what happened last week that got everything juiced, interest rates fell. So if you’re an equity guy, I could either give you 300 decent earnings reports or I could give you a 20 or 25 basis point drop in interest rates, and then 20 or 25 basis point drops in interest rates is going to get a response out of the broad measure of stocks more than the collective of all of those earnings reports because it’s all about interest rates right now.

Why is it all about interest rates? Dr. Jeremy Siegel just updated his famous book, Stocks for the Long Run. There’s a new edition out this year, and I’ll summarize. In the book, what is the long run potential for the stock market adjusting for the level of PEs like the cap ratio and the level of inflation and the economic outlook and stuff? He says, “Given all of that, it’s about 8% a year.” Now, that doesn’t mean 8% every year because for the last two years, the S&P’s returned to zero. Well, that means that in the year and a half or two years before that, it returned you way more than 8%. So over long cycles, you should get about an 8% return. That’s pretty close to University of Chicago studies they came up with back in the ’80s and ’90s. They did a similar study and they came up with 9%, close enough for government work, 8%, 9%.

Well, in 2019, if you would’ve said to people, “Look, the long-term return of the stock market is eightish percent plus or minus 100 basis points. What’s your alternative? There’s a money market fund here yielding 13 basis points. There’s a 10-year yielding here at 2%. So we coined the phrase TINA, there is no alternative, and everybody had to pile into equities because that was the only place you were going to make money.

2023, now there’s a money market fund that’s yielding you five. There’s a bond fund that’s yielding you four and a half. Let’s stick with money market funds. Now, you can get two-thirds of that long-term return with no market risk by putting your money in a money market fund. Is moving into the risk of equities worth that final third is really the question. In other words, there is an alternative.

This is why I think the stock market responds so violently to interest rates either going up or going down because it is now serious competition. There are people that are saying, “Look, take your SPYs and your VOOs. I don’t want them. I’m going to stick in a money market fund,” and guess what? I’ve done better than SPY and VOO for the last two years and I’m still getting five out of that thing. So unless you want to make me a solid case that the stock market’s got 15%, 20% years coming ahead and that I’m going to miss out on something huge, remind you where we are in valuations, where the valuations would have to be in order for that earnings to come through, I’m fine staying in a money market fund or in bond funds, and you’ve seen that with the flows starting to move up and down.

So it’s definitely changed the dynamic in the market that there is competition now that you cannot scream at somebody like you could in 2019. If you’re going to stay in a 13 basis point money market fund, you’re going to make the biggest mistake of your life. You can’t really say that to somebody if they’re getting five, 10 in a money market fund today and that for the last two years, the stock market has not given them much and did two years before that. So there is no mean reversion necessarily coming to the upside as well.

Finally, about people losing their mind about bonds, yeah, it’s been a real shocker. The statistics show if you look at of the thousands of ETFs, what has gotten the biggest inflow of the year? VOO. VOO is the Vanguard S&P 500. Vanguard markets that towards pension plans and 401(k). It’s exactly the same as SPY, but SPY is a trader tool. That one is more of an allocator tool. Number two is TLT, is the iShares 20-year treasury. That thing is down as you pointed out. Well, actually, TLT is down about 45% off of its high. It’s down over 10% this year. It has gotten in the last two years nearly $50 billion of money, and I’ve jokingly called it an efficient money incineration machine because money goes into something that’s gone down by half, it’s never seen flows like this, and it almost gets incinerated almost instantly until 10 days ago, that they finally started to get some relief from it 10 days ago, but it never stopped. It just kept coming and coming.

I think what has happened is people have forgotten the difference between total return and yield. They see yield, “Oh, my God, look at these yields. I got to get these yields.” Well, there’s this other part of the equation called total return. You might like the yield that TLT is throwing off versus a couple of years ago, but the price keeps going down and keeps offsetting that yield. So they’re really not learning total return. That’s why I’ve been vocal especially on social media pointing out that all of the surveys in the bond market have been extraordinarily bullish even though the prices, until 10 days ago, were just getting pummeled. There’s going to be recession. There’s going to be no inflation. There’s going to be an accident in the market. Interest rates are crushingly too high. We have to be long duration, that’s the bond markets term, because if we’re long duration, there’s going to be a gigantic rally.

Been waiting over a year for that rally. They’ve been getting crushed for the last year. The last 10 days, “See, I told you we’re going to have a rally.” Yeah, well, you’ve still got a long ways to go before you get back to breakeven on this. While I do think the market will continue to rally a little bit more, I still think the trend in yields is higher. It’s been higher since August of 2020. I think the 40-year bull market and bonds ended in August, 2020 and I think we’re in year four of a multi-year bear market in bonds.


There’s a lot wrapped in there. I think the first thing, the more I think about it, I think that investors, and this isn’t everyone, but I feel like it’s most individuals and a lot of advisors and professionals, they really only think of bonds in terms of yield. They don’t even think of the price at all. So I would be surprised if many even knew that their bond investments were down 10%, 20%, 50%. I think they would just say, “Oh, my yields are now 5%. Amazing.”


They also then fall into the idea too that, “Well, it’s a government security, so it’ll never default. It has no credit risk.” That’s technically true if you bought a treasury security, there’s a maturity date on the end, but if you buy an ETF or a mutual fund of government bonds, there is no maturity date where you will get back par at the end. So that price can go down and it can stay down if interest rates are higher. I think that that part is also people struggle with too.


Why do you think that … So you mentioned the TINA trade. Why hasn’t this, and maybe yet, caused anything to break in other areas like with equities? Equities, everyone talks about the Magnificent Seven or whatever the acronym is now.


Mag Seven, if you want to be one of the cool kids.


Why hasn’t this caused more problems? Is it flow related? Is it actually that the market cap is just being held up by this small group? Is it inevitable or is there something? We got this 50% GDP growth coming due to this AI revolution. Why have things been so resilient and where should we be looking for some of the cracks, if there are any, and where might they be?


I’m going to answer the question in two ways. If you look at the stock market, the Mag Seven stocks have a nine plus trillion dollars market cap somewhere in there, depending on what day you measure it. If you take them out of the equation, I think the S&P 493, the last time I updated it last Friday, is up 2% year to date. Now, you can get nearly three and a half to four year to date running total so far if you had been in bill, so you’re underperforming cash. Mid cap stocks are about breakeven. The Russell 2000 is down on the year slightly. The Russell micro-cap, which is the bottom half of the Russell 2000 small cap index is still down about 8% on the year. So you take those seven stocks out, the rest of the stock market didn’t do much of anything.

I’ve even gone as far as I put together a calculation of the Russell 3000 less the Mag Seven. So the 2,993 was down on the year as of one week ago. Now, it’s up, but all that gain came in the last four or five trading days, and here we are practically in the middle of November. So the stock market, I think, is signaling that things are not as great as we think they are. I think it’s largely because of the competition that that money goes either into AI stocks or some version of some AI play. Maybe it’s arc again or something along those. Maybe it’s not arc, but something along those play. Then after that, I’d rather hold 5% money market funds or I’d rather play in something that has a little bit less risk.

So when you ask me why is something break, I would say the market is signaling that when you take those seven stocks out because they’ve got a different narrative than the rest of the market. How about the economy? Why isn’t anything broken in the economy? Boy, we’ve been through this now for the last year and a half. 25% correction in stocks last year, that’s going to break something. Then we had the liability driven investing crisis in the UK with 30 year gilts, that’s going to break something. Then we had the banking crisis, that’s going to break something, and it never really seems to break something.

Now, the new thing that we have that’s going to break something is punishingly high interest rates. Jonathan Gray, who’s the CEO of Blackstone, reported their numbers about two, three weeks ago and they didn’t have a good quarter. Then he said, “Look, we didn’t have a good quarter,” and then he went on this diatribe about higher interest rates and 8% mortgages is going to kill everything. I love the guys at Blackstone, I truly do, but he sounded like somebody was complaining that my business models built on free money and when you take my free money away, my business model really struggles.

There’s this belief that interest rates have gone up so much that we’re going to break something. This is what I think undergrids this whole idea that the recession is six months away. Now, where I push back on that is the way I like to frame it is that the market has an anchoring problem. The mistake, the distortion in interest rates was 2009 to 2020, the QE period when we pushed rates down to zero, and that wasn’t even good enough for Europe and Japan, we pushed them negative. That was the distortion. What you’re seeing now at 8% mortgages, 5% or recently 5% in the 10-year treasury and the 30-year treasury is normal. That’s returning to normal.

So we look at this, and you hear this all the time, real rates, which are inflation adjusted interest rates are at 15 year highs. This is punishing the economy. You’re thinking that 2018 was normal or 2019 was normal when we were in the middle of QE, that was the abnormal period. So hundreds of basis points of that rise was just to get off the distortion of 2009 to 2020. Besides, we’re not in QE anymore, quantitative easing, we’re in quantitative tightening right now.

So if hundreds of those basis points rise in interest rates was just to get off the distortion, what I’ve been postulating is the amount of restrictiveness we have in interest rates today leaning on the economy is not that great. There is restrictiveness. I think we are above what we would refer to as fair value, but not nearly to the extent that everybody thinks, and that’s why the economy keeps shaking off these numbers. Even the housing market keeps shaking off these numbers. The housing market is being hurt by higher interest rates, but if you would’ve asked people in a vacuum 18 months ago, “What’s going to happen to the housing market when mortgages get to 8%?” we would’ve thought it would’ve been the third level of hell. It’s not that bad. It’s definitely been hit, but it’s not been devastated by it.

So I think that what we’re starting to realize is these rates are really not biting as much as everybody thinks, and that’s why I got very concerned when Jay Paul said, “Well, the market’s going to do the work for me by raising interest rates, so we don’t have to raise rates at the Fed.” I’ll give you one quick analogy. I said, “Be careful on that, Jay. I’m not trying to argue for top-down control by the federal reserve of interest rates, but that was the argument a year ago,” as I mentioned a second ago with liability driven investing in the UK.

Back in September of last year, Liz Truss was the prime minister of the UK. She put out a mini budget. Mini budget is what the word implies. It cut taxes, it increased spending, it increased the deficit. The UK gilt market, their bond market, didn’t like it. So everybody asked everybody in parliament, “What do you think of the budget?” “Oh, I got this problem, that problem, but it’ll pass.” The bond market didn’t want it to pass. So the bond market did the work of parliament. It took UK gilt yields up 150 basis points in eight days. The Bank of England’s got 300 years of data. That’s never happened before. It threw their economy into turmoil. It threw their markets in the turmoil. Liz Truss didn’t last as long as the head of lettuce. She was out after 44 days as prime minister. Rishi Sunak came in, the mini budget was dead, and they’re still trying to pick up the pieces from that whole debacle from a year ago. That’s what happens when the market does the work for you.

So if I’m right and that interest rates are not nearly as restrictive as we think they are, and we get to a point where people say, “You know what? This economy’s going hot. The inflation rate might be bottoming at something well above two, might be creeping back towards four. I’m not talking Zimbabwe here, I’m talking about creeping back towards four. Interest rates have to go higher to slow things down, but don’t worry, the market’s going to do it for us,” well, watch the market say, “Hold my beer. You want me to slow this economy? I’ll slow this economy just like in the UK a year ago. You want me to kill this mini budget? Hold my beer and watch me kill this mini budget.” That’s the way that markets work, and that’s why I’m a little bit worried that somewhere down the line you’re going to rue the day that you said, “I’m going to just let the market do it for me,” because it will, it will, you just won’t like the way it’s going to do it.


As we think about that and we look out towards next year, what indicators … You always have great charts. What are some of the charts that you’re thinking about or indicators? The one we were tweeting about the other day where we were talking about tips, which now have a yield that they haven’t had in a long time, and I was trying to think conceptually because I was like, “All right. T-bills are at five,” and I wonder at what interest rate on T-bills investors hit that point where they’re like, “I don’t want stocks anymore,” and is that three, five, seven 10?


I think it is five.


I think people don’t really understand tips, but I did a poll where I was like, “At what tips yield would you sell your stocks?” and it was like three, five, seven, never, and we’re not even at three, but it’s funny to see people large amount was at seven or never, I think, which is that ever happens. I don’t know what the world would look like, but the point being is that you have this cult of equities at any price no matter what that I feel like there might be some crumbles in it or cracks in it with T-bills at five. Anyway, you talk about tips or talk about other stuff you’re looking at. Feel free to take it which way you want.


So let me take a quick comment about tip securities. We’re talking about with real yields is. Tip security, they were first issued in 1997. These are government-issued bonds and what they do, I’m explaining this for people that are not familiar with them, what you do, you buy $100 worth of these bonds and the yield on them is about 2.4%. Well, that doesn’t sound like much, except they also give you the inflation rate. So if the inflation rate to keep them, example, simple is 4%, in a year you will be accreted more bonds. So if you bought $100 worth of bonds and the inflation rate is 4%, in a year you’ll have $104 worth of bonds and you’ll still have your 2.4% yield. Accretion, I used to think you’d have to go to the doctor to see somebody about it, but you also get it in the bond market as well too.


That’s the simplest descriptions of tips I’ve ever heard. I feel like everyone when they start talking about tips, people’s eyes just roll back, but it’s an incredible security on offering for investors, anyway.


So I’ve spent a lot of time looking at tips. I didn’t see your poll, but I will say this about the people that say seven or never. If you go back in history and say, “I can buy a security that is going to give me the inflation rate plus 7%,” I don’t believe there’s ever been a time that the stock market has outperformed that. That is a guarantee outperform of the stock market, at least based on historical perspectives.


Well, the historical global real return of stocks is five. In the US, it’s been higher real return after inflation. It’s been six and a half, but five has been equities.


A lot of those returns are also the low inflation period of 1999 to 2020. If you go back and you look at the real rates of returns of the stock market in the inflationary periods like the ’70s, ’80s, and into the early ’90s and stuff, those returns are a little bit lower, but the point is you’re right. The point is if is you could get a 7% real yield on a security with no credit risk that’s guaranteed by the government, if you’re at the poker table, you’re betting that the stock market’s going to pull an inside straight to beat that, and that’s really tough to do. You should take that with both hands. So you’re right, there’s this equities or nothing mentality because that’s the way it’s been for the last 20 years. It’s been this equities or nothing mentality.


This is a couple years ago, but we said, we were talking about valuations and we love talking about cap ratio, but I said, “At what point would you sell your stocks?” and I said, “Do you hold stocks currently?” It’s like 99% said yes. “Would you sell them if they hit a PE ratio of 50?” which is higher than they’ve ever been in history, and I think it was over half said no, they wouldn’t sell them, and then I said, “What if they hit 100?” Then I think it was still a third said, “No, we won’t sell these. No matter what, you cannot take my stocks away from me.” So there’s a whole cohort, but sentiment tracks price, right? So if we did this poll in 2009, probably a totally different response.


Exactly, and not only was sentiment track price, it also tracks the way you’ve gotten performance because let me throw my little spin on that too. You were asking people stocks, so they think SP, “When would I ever sell SPY?” and the answer is never because SPY always goes up, it always outperforms everything. I think that’s a recent phenomenon that started in the late ’90s and ran through about 2020. Now before the ’90s, that was the era … Before the mid 1990s and the invention of the ETF, that was the era of Peter Lynch. That was the era of stock picking. That was a completely different era that people not only didn’t we have SPY, people didn’t think or professional managers didn’t know what the utility of such a thing would be. My job is to pick stocks. It is not to buy the broad index.

I actually think coming out of this 2020, the biggest economic event and the acceleration of trends and that the economy’s out of balance and it needs to be put back into balance, I think we’re going to go back to a stock picking world, and I think that the max seven stocks versus everything else is the first salvo of many of those salvos in that if you want to get superior returns in the stock market, it’s not going to be pressed the bet on SPY or Triple Qs. It’s going to be picking the stock in the sectors that are going to work the best.

Now, I say that and people say, “Oh, of course, of course, I will do that. I do that.” No, we’ve got a whole generation of professional managers that are not stock pickers. If you were a stock picker, you got rushed out of this business because you got pushed into the index and sector betting because of the way that the ETF market has completely changed the structure of it, and if you are even into stock picking, you’re thinking, “Yes, I’ll have to think between whether I want software or cloud computing or whether I want microprocessors or something like that.” No, it’s not just which sector of tech. It might be industrials versus healthcare versus consumer discretionary versus basic materials.

What are all those sectors? Those are all the rounding errors that are left in the S&P, SPY that I never really thought about. Those sectors are going to have their rotations in and out. It’ll look a lot more like the Peter Lynch era, I think, going forward than not. Now, I know Mike Green of Simplify Asset Management pushes back on this argument, and the reason I brought him up by name is he’s got very good arguments against this because of the tremendous amount of flows that goes into passive investing and that it will force the rising tide to lift all of the boats.

I get that. I get that, and he might not be wrong on that, but I do think we are going to see, when you say with the surveys, “What about the stock market? When would you sell the stock market? How much should you be in stocks?” We’re not yet at the point where we’re asking, “Which stocks should you buy? When would you sell your discretionary stocks? What level would you be acquiring energy stocks?” Those types of questions, we’re not there. We’re still thinking of this as a broad SPY kind of world.


I hear Mike’s argument, but to me, it’s always like when you have the sentiment, the price, the valuations, the flows, all end up in the same place and so nothing changes sentiment like price. So things start to go down or underperform. That style of flows can be flighting. It’s been stable and robust for a long time, but as we’ve seen in many, many other countries in the world, if you look at China, if you look at Japan, on and on and on, just this just boom bust. Look, even the US wasn’t that long ago GFC and 2000 bear markets. It feels like a lifetime ago, but certainly within my lifetime of investing. So not even the prior century up in the last 20 years.


Well, I think the one big thing what we had going for the market, SPY was invented in ’93 or ’94, and then the boom followed around 2000 with ETFs and just kept going from there. That is the broad-based investing themes that you could just buy thematic ideas through ETFs is you had, I think that ’87 really when Greenspan came out the morning after the stock market crash and gave that one sentence statement that we stand ready willing to provide all liquidity as necessary to the financial institutions and that the stock market completely turned around. I remember that ’87. I was working at Lehman Brothers at the time, and I remember the 20th of October. Individually after the stock market crashed in the 19th and the 20th, it tried to rebound and it went back down below the 19th low and the specialist system started closing one stock after another after another. We got to about 90 or 100 stocks in the S&P 500 that stopped trading in the middle of the day.

There was a real concern, a real concern that we were inches away from the entire financial system collapsing. Then Greenspan comes out with that statement that the Fed’s ready to flood the system with money and, boom, everything turned around. Since that day, we’ve always responded with whenever there’s a wobble in the markets, the Fed, the FSOC, which is the Financial Stability Oversight Council or the Plunge Protection Team, if you want to call them that or the treasury or all of the above is ready to throw money at whatever they need to stop whatever unpleasantries are coming. The last example of that was COVID, when the Fed was buying a $100 billions of treasuries a day in March of 2020 to try and arrest the decline in markets.

From ’87 to 2020, the thing that allowed all of that to happen was we were in a non-inflationary world and maybe even in a deflationary world, but if we are changing to an inflationary world, now we’re in a world where when the shit hits the fan and the fed cuts rates, they go to two and they’re done, and if two doesn’t fix it, they can’t go much beyond that. Maybe they go to even to three and they’re done. They’re not going back to zero in printing gobs and gobs of money because we’ll wind up with 9% or 10% inflation again if we are in this different type of world.

If that’s the case, and if that back stop that’s been there for 35 years is no longer there, then this whole idea that I go to the HR department and I check off, take off a bunch of my monthly money and stick it 50% in the Vanguard S&P 500 fund and 50% in the Vanguard bond fund, and then I forget I did that five years ago and it just keeps accumulating and accumulating, eventually people are going to wake up and go, “Man, I better change that. I better start rethinking that.” Then that constant flow might start to change. Now, we’re not there yet, but I think we’re a lot closer to that apex or that shifting point than we’ve ever been since the invention of the ETF.


We’ve discussed some areas of warning or cracks that we’re seeing. Are there opportunities as you look around the entire global set in this world what looks good, if anything, or potentially good? What’s on your mind?


Well, I think that in some respects, that the bond market is providing new opportunities now for people. For a fixed income market, not only can you get two-thirds of the return to the stock market because of the high yields. With the flat and slightly inverted curve, and it’s been that way for a year and a half, a year, maybe not quite a year and a half, it was July of last year when twos-tens inverted, you’ve got this opportunity that with the bond market, there’s two things to keep in mind. One, I can always run back and do 5% money market funds. I can always run out of 5% money market funds into longer duration whenever I think there’s an opportunity in longer duration. So you’re going to get paid either way. You’ll get dinged when you make a mistake.

Keep in mind this about bonds. Whenever I talk about active bond management, people automatically default and think, “Well, no one could beat the index because they think of the S&P and they think that over long terms, 90% to 95% of bond managers, excuse me, of stock managers cannot beat their benchmark, and that’s been measurably shown over time by the SPIVA Report. The S&P in active investment universe shows that, but in fixed income, the numbers that can beat the benchmark index are more like 50/50. So about half the managers in fixed income can outperform the index and have outperformed the index. That’s why subtly in the bond market, we don’t measure people against the index, we measure people against their peers because we automatically assume half the universe can beat the index to begin with.

So index beating or index active management to outperform an index in the bond market has a big structural advantage over active management in the equity market. So active bond management, I think, has an opportunity set for it right now that you’ve got yield, you’ve got potentials for return, and if everything looks bad, you can sit it out with a 5% yield in cash before you move back in. So that’s the big asset class, I think, that people are starting to shift towards. They’re just not sure how they’re supposed to do it. Do I buy AGG or BND? Which are the big bond indices or do I buy TLT, but that’s got too much risk or do I just park it in a money market fund or a short-term treasury ETF? How do I move back and forth?”

The move back and forth, what you’re seeing is actively managed fixed income ETFs have been one of the fastest growing categories this year. PIMCO’s brought out one, BlackRock’s brought out one. They’re coming out left and right because it’s an area that, I think, has got some real opportunity. Now, that’s like if you’re bigger picture professional, but if you’re an investor, I would say there’s plenty of opportunity if you shift away from, “Do I buy SPY up or down? QQQ, up or down? TLT, up or down?” If you want to start thinking about sectors or stocks, thematic ideas like, “Well, Mag Seven was the big one this year, but there will be other ones as well.” Shipping was a big one in ’21 and ’22. In fact, at some point from late ’20 to the middle of ’22, the shipping stocks actually outperformed Bitcoin in a bull market. In its bull market, it outperformed Bitcoin. Those companies have done so much better.

This year, home builders. Home builders did great this year. They actually outperformed the Mag Seven until very recent, in the last few weeks. Even though we’ve had higher interest rates, we’ve seen a tremendous move into the home builders. So those types of ideas can come back and they could come back in a big way, I think, when we look at this market. So what does it mean for reshoring? What does it mean for work from home? Who’s got this figured out and how do I take advantage of these ideas?

So it’s going back to stock by stock, sector by sector kind of ideas, and I think some people are starting to get a good handle on that, but it’s like I said, this is not like 1945 where we knew day one we got to start thinking that way. It’s taken us three years to get our bearings to start to think in those terms that this is permanent what’s happening with the economy and different, it’s not dystopian, and how are we going to play this thing out as we move forward?

So those are the answers that I’ve been giving. You’ll notice I’m being a little bit evasive because I’m still struggling myself trying to figure out what are the themes that I should be playing for the new economy. What I figured out is it isn’t just SPY up down, QQQ up down. I think that those will always provide trading opportunities, but that late ’90s to 2020 period for that I think is over and we’re now shifting into a new cycle.


We definitely see it, some things you’re talking about. Some of the home builders have bubbled up as some of our biggest holdings on the domestic stock space. We haven’t talked that much about foreign equities. Is that an area that you see opportunity? Is it very specific to certain countries? As we talk about some of these trends, we’ve long discussed this foreign underperformance relative to US, but also within the US small caps, which we talked about earlier. Foreign markets, are they interesting to you, not so much? What’s going on?


They are interesting. The biggest problem foreign markets have, of course, is that they don’t have a Mag Seven. They have missed out on the mega cap tech sector. So if you actually looked at the US markets versus foreign markets removing the mega cap tech sector, the performances have been fairly similar, but you really can’t remove it. You can’t pretend that Apple never existed in the United States or that Microsoft has never existed or Amazon never existed. They did and they added trillions of dollars of wealth in the United States.

So as far as the foreign markets go, I do think that because of this reshoring, onshoring, they’re very different cycles. Chinese market, to start with one of the more popular ones everybody asks about, I think is in a world of hurt. At the beginning of the year in January, the Bank of America global fund manager survey asked the outlook for China. They’ve asked that question for 21 years. The outlook for China in January, never been more positive than it was at the beginning of the year. Why? Because they just ended zero COVID, and a billion people, literally, were supposed to be leaving their homes. They were going to unweld the door. If you knew anything about zero COVID in China, everybody lives in an apartment or most people live in an apartment and they literally welded the front door shut and they wouldn’t let you out because of zero COVID.

So they were going to let them out, they were going to go back to work, they were going to go spend money, they were going to start traveling. There was going to be this big boom in the Chinese economy. Everybody was bullish. Nothing of the sort happened. It was a big thud. Their stock market has fallen out of bed. It was down 8% on the year. As of last week, the last time that I looked at, it’s really been struggling and the Chinese have been in such a funk to try and figure out how to fix it. They’ve reverted back to, “Let’s throw all the short sellers in jail and let’s start a government fund to basically buy stocks to prop them up.”

That’s the key. That’s the sign they’re out of ideas. When your last idea is, “We’ll just throw the short seller,” and they literally do in China, “Let’s just throw the short sellers in jail,” is your idea to try and get your stock to go up, you know you’re in trouble. So their market, I think, is in a world of hurt right now, and it’s probably going to stay that way for a while.

Japanese stock market, on the other hand, looks a little bit more enticing. It has been beaten up for over a generation. Some of those stocks have extraordinary values, and most interestingly, while the Chinese economy didn’t show a pulse of life, the Japanese economy finally is. Hey, they finally got 2% inflation. They finally got real growth, something that they’ve been trying to get for 15 years or 20 years, get some growth impulse out of their economy. They finally have it. Their biggest problem they’re facing right now is they’re trying to hold back their interest rates from going up through yield curve control, and they’re not able to really hold it back as much as they can. So a lot of those cheap stocks might show some real value.

Europe, Europe is a different story altogether. They seem to be all over the place. In other words, what I mean by all over the place is there where I think we’re going. They don’t have in Europe a strong index ETF. Everybody just by the French stock market or the German stock market and forget it. It always goes up and it always outperforms everybody. That doesn’t exist in Europe to the degree … There’s some of it, but not to the degree that it does in the United States. So it’s certain sectors go up, certain sectors go down. Banking system is really struggling in Europe as for one sector, and that churn that you see is they’re back to stock picking in Europe, and that’s ultimately where I think we might be going. They don’t always lead us, but I think they’re leading us in that respect.

So that’s the problem is that it’s the 2020 mentality, “Do I buy the MSCI world index or don’t I buy the world index?” Well, this isn’t that kind of world anymore and it isn’t even, “Do I buy the French market or the German market?” I don’t even think it’s that anymore. It might be just, “Do I buy the German industrials or do I sell the French consumer discretionaries?” It’s that kind of a world that we’re in.


We have a piece. I don’t think we published it. It’d probably be out by the time we write this where we say, “It’s less about where and more about what.” It’s like what these stocks are. That’s always been true, of course, but I feel like in an increasing world where borders are meaningless, it’s particularly what are you investing in rather than where.

Any charts that you’re looking at currently right now or it could be models where these are really interesting or something that’s on your brain that you’re thinking about as we end 2023 into 2024? For me, it’s the tips yield, but is there any other charts where you’re like, “This one is just flashing in my face,” whatever it is or something that I’m confused or excited about or it’s not well discussed?


I’m going to go back to being the purely macro guy and I’m going to give you a couple of ideas. I have a Bloomberg, and the Bloomberg Professional Services is wonderful, and one of the things that Bloomberg does is they survey about 70 economists continuously. What’s your forecast for GDP? What’s your forecast for inflation? What’s your forecast for this or that? It gets updated as the 70 odd Wall Street economists update their surveys. I chart that regularly. There’s been a repeating pattern for the last 15 months in this and that has been when you ask economists what is the outlook for the economy in six months, it’s contraction, it’s recession, but then six months later when you get there, it’s 3% or 4% growth. They constantly have to … The economy’s going to suck in six months and then they spend the next five months constantly upgrading that forecast is what they wind up doing.

That’s not always been the case, though it has been. So I’m looking for that pattern, through yesterday when I was last looking at those charts, continues. I’m looking to see at the end of the year, does that pattern change? Does the second quarter of ’24, do the economists just say, “Forget the recession story. We’ll start with good growth for the second quarter of ’24 and then maybe we see them revise it the other way? Do they capitulate to this idea that there won’t be a recession?

So that would be what I’m looking for right now is as long as we constantly start off within six months things will be terrible and then we wind up having to constantly upgrade it, we’re going to continue to see, I think, upward pressure on interest rates. I know we don’t have it in the last two weeks because the economy’s not underperforming. It’s not dragging things down.

On the inflation side, I’m going to go a little different because this is something I’ve been looking at just in the last couple of days. If you look at goods inflation stuff, and the inflation statistics can be broken down, let me start off, into two categories, stuff, things, and services. What we’ve been seeing is stickiness or that’s the phrase we like to use of services inflation. It’s been staying sticky. It’s been 4% or 5% and it hasn’t been really coming down just yet and people predict it will, but it hasn’t.

Stuff has come down, but stuff looks like it’s bottoming. I’m not going to say it’s going up. It just maybe stopped going down. Now, I look over and the New York Fed has this measure of supply chain stress. It’s measured as a Z score, which is number of standard deviations off a long-term average of a various measure of metrics that measure the supply chain. It’s at the lowest level it’s ever been. I do know when you look at the supply chain, it tends to be very mean reverting.

So if we’re at the lowest measure of the supply chain right now, inflation stuff should be imploding on itself. It’s not. It’s down and it seems to be bottoming. If there is that mean reversion in the supply chain that it’s going to start getting tighter and it’s going to get more expensive to ship stuff, that will put upward pressure on stuff. That’s why I’m still in the camp that inflation is going to be problematic. It’s going to be 3%, 4% problematic as I like to joke, not eight, 10 Zimbabwe problematic.

Why does that matter? This is the third chart I’ve been watching a lot. What is the proper level of interest rates for a country? Should it be 200%? Should it be zero? Should it be eight, five? Where should they be? Start with their nominal GDP growth. Nominal GDP growth is their inflation rate, plus their real growth rate. Why does Venezuela have well over 100% inflation? Because it’s well over 100% inflation, well over 100% interest rates because it has well over 100% inflation, and that’s one half of the equation. Then even if you throw in a contraction in real growth, you would come up with sky high interest rates.

Why did, until a year ago, Japan always have zero interest rates? Because the combination of their inflation rate and the real growth, their nominal GDP, came out to zero growth, so zero, and that’s why their interest rates were there. Well, if our inflation rate is going to stay sticky at three-ish, maybe high twos, maybe high threes, not two, and we are going to continue to churn out 2.5% inflation, not 4.9 like we just did, but 2.5%, that gives you a nominal growth rate in the 5% to 6% range. So that’s the other chart I’ve been looking at and I’m saying, “Look, if nominal growth is going to stay in 5% to 6%, then long-term interest rates should start to approximate nominal growth. They’re 4.5. They’re not quite there at that 5% or 6% range, so they’ve got a little bit higher to go.”

Does that matter? If you are looking at 8% returns in stocks and you’re looking at now 5.5% or 6%, two-thirds to three-quarters of the stock market’s long-term potential with no market risk or no credit risk, no market risk government bonds, that does tend to be a more drag on the economy. The reason I say it that way is when I say, “Look, the economy’s going to continue to churn out or churn out positive numbers,” or as the parlance we like to use in ’23 is, “I’m in the no landing camp.” The economy just keeps going. It doesn’t slow down into a soft landing or a hard landing.

If I’m in the no landing camp, doesn’t that mean that earnings are going to come through? Doesn’t that mean it’s bullish for stocks, except for the competition that higher interest rates will bring to it? As I mentioned earlier, you can give me 300 decent earnings reports, but give me a 20% decline in interest rates and the stock market will react to interest rates more than 300 earnings reports.

So if the economy stays decent, if inflation is bottoming at three and that puts upward pressure on interest rates, that means risk markets, especially like the stock market, are going to have to deal with serious competition from the bond market. It did in the ’80s and ’90s, but it’s been a long time since we’ve seen this type of environment and we’re going to have to get used to it.

So your surveys where people, “Well, stocks forever, stocks at any price,” that mentality worked when interest rates were at zero from 2009 to 2020, but I don’t think that mentality is going to apply in this post COVID cycle as we move forward. It’s going to take some time for people to figure this out.


It’s not just the competing asset part from my mind too. It’s that if you model the historical, this is true not just in the US but everywhere, historical multiples people are willing to pay on stocks when inflation is north and it gets worse the higher you go, but certainly above three or four. It’s a long way down from here. It’s half of where we are today. So just that re-rating alone, and it doesn’t often play out in one month or one year. It usually plays out over extended period, but it certainly can be a headwind for the multiple. I don’t think people are mentally prepared for interest rates. The 10-year hits 6% or inflation starts creeping back up, I feel like that would be a surprise for many that are not ready for.


To put a point in it, I think what they’re not ready for is if interest rates hit 6%, they’re of the belief that we’re going to have a depression, we’re going to have an interest rate driven collapse of housing, the economy will implode on itself because of those higher rates, but what they’re not prepared for is we get to six and the sun comes out and everything … It’s a burden. I’m not saying it’s not a burden. It’s a burden, meaning it’s above fair value, but things survive and they keep going. In other words, we can handle six. So there’s no reason for them to come down, and that’s what I think they’re not ready for.


As we start to wind down, a few more questions, but anything we haven’t talked about today that’s on your mind that you’re worried, excited about, crypto?


Let me make a couple of remarks about crypto. I’ve been a big crypto fan. I like to use the word fan as opposed to bull because I’m not a number go up guy. Obviously, I think the number’s going to go up over a long period of time. What I’ve been is a big fan of decentralized finance or defi. I think what defi has the potential of is remaking the financial system into something new, something more efficient, something where in my electronic wallet I can own my assets, they cannot be subject to burdensome regulation or any of the other things that they’re subject to now.

There was a story two days ago in the New York Times that there’s been this wave of bank account closures. Let me back up. In the wake of the Patriot Act and a bunch of other things, there’s this thing called the Suspicious Incident Report, I think an SIR, if I’ve got that right, where banks will report if you engage in some suspicious activity in your bank account. You take out more than $10,000 cash, they report to the Federal Reserve a suspicious incident. You took out more than $10,000 cash. No one ever asks you why you did it. You might have a perfectly legitimate reason to do it or you spend your money on something that looks suspicious and we’re up to now banks reporting up to three million suspicious activities a year. Maybe a foreign transaction would be example of that.

What the New York Times report stood was that more and more banks are now summarily telling companies and people, “Your account is closed. Here’s a check for all of the money in your account, a paper check mailed to you. We’re done with you.” You’ve got credit cards, you’ve got bills, you’ve got automatic payment. All that stuff gets thrown up in the air and your life gets turned upside down, and it’s worse if you’re a company. I got a payroll to meet and I’ve got money in the bank to send to my payroll processing company and you just sent me a paper check for all my money. I got to pay my payroll tomorrow. How am I supposed to do that? So it’s creating havoc all over the place. When the New York Times went in to look at this and they started asking banks about why it happens and what is the decision to closing these accounts, no one has a good explanation or they don’t want to give it to them.

This is where crypto defi comes in to try and alleviate some of these concerns, and I’ve been a big fan of that. My big disappointment is while I see the potential of it, it gets subject to fraud, abuse hacks, badly written software. I keep thinking to myself, “You could be a world-class runner if you just stopped tripping over your feet and hitting your face on the track,” and that seems to be what’s been happening with crypto. I’m hoping that we’re going to get beyond that someday because in order for Bitcoin and Ethereum and the other tokens to have real value, in my mind, they need to have an ecosystem with them, and that’s the defi ecosystem.

If we don’t get any … Look, Bitcoin’s trying to create its own defi ecosystem and that’s fine too. It doesn’t have to be the Ethereum ecosystem, although I do think the Ethereum ecosystem is superior right now, but once you’ve got that going, I think then this new alternative system can really take root. I still have hope for it and I still am positive that they’re going to get their act together on it, but it is stumbled out the gate.

If you look at the history of new technologies, this is not new. A lot of new technologies do fall on their face right away and then they pick themselves up, dust themselves off, and then they eventually get it correct and they start making it onward. So I do like crypto.

One last comment for crypto. The big story as we’re discussing right now is, will there be a spot Bitcoin ETF? For everything I’ve seen, the answer is yes. The SEC is going to have no choice but to approve a spot Bitcoin ETF. In fact, I’ve even gone on to say they’re not just going to approve BlackRock’s. That’s what everybody thinks. They’re going to approve all of them because they did that with the Ethereum futures ETF two months ago. There’s a gigantic first mover advantage in ETF land. So the SEC doesn’t want to be accused of favoritism. So when they eventually said that they were going to approve an Ethereum futures ETF, they approved all nine of them that were under registration on the same day. I think eventually they’re going to do the same thing with the spot Bitcoin ETF. They’re going to approve every single one of them on the same day or within 24 hours of each other.


Who’s going to win that, best ticker or lowest cost?


Well, that’s really what’s going to be … What we’re talking about, best ticker is who’s got the best marketing plan or we’re all just going to gravitate towards cost. It seems like in Ethereum futures, it’s a little bit of both. There’s been a couple of them. I think it’s Valkyrie, I might be wrong on it, but I think it’s Valkyrie that’s been getting some traction because of their marketing and some others because of lower cost.

What I worry about is, and I guess I’m stuck with being that if markets are somewhat mature, and this is the most anticipated thing in the last year and a half is the spot Bitcoin ETF is going to open it up so that regular people can just in their brokerage account finally buy Bitcoin straight up. You don’t need a Coinbase wallet or let alone go into defi and try and do it on Uniswap through a MetaMask account, if you know what I’m talking about. That’s still complicated for the average person.

I’m afraid that when I look at the big rally in the markets in anticipation of this, this is going to be the biggest sell the news event of the last year in crypto, that we’re going to go to 40,000 when we announce it and everybody’s going to say, “See, here we go,” right back to 20 is basically what I’m afraid of is it’ll be the next step on that.

If I could give you one quick analogy on this, I’ll never forget the day that Facebook came public in 2012. I was interviewed on CNBC that day not about Facebook. It had nothing to do with Facebook, but off camera, one of the personalities asked me, What do you think about Facebook?” and then before I got a chance to answer, she asked me, “What day do you think it’ll hit a hundred dollars?” Now, remember it came public in the mid ’20s or something like that, and I demurred and I said, “I like it. I have no idea when it’s going to hit $100.” Well, Facebook came out in the mid ’20s and the first move was straight down to 11. You lost two-thirds of your money on Facebook. Then eventually, it went to $100.

Then I remember after the fact people said, “See, I told you it was going to go to $100.” Yeah, well, you lost two-thirds of your money first,” and I’d be surprised if you held all the way through that entire drawdown before it eventually worked its way out. I have a feeling that all the bullish stories about the Bitcoin spot ETF might work out, “Oh, it’s going to take us to $100,000.” Yes, it might, but the first move might be from 40 to 15 and then it’ll shake everybody out and then it’ll climb that wall of worry to $100,000. So those are some of the thoughts that I’ve had about crypto in general.


I’m really curious to see where these ETF providers come out as far as management fees. I have a joke. I say so much of FinTech over the past 20 years has just been Vanguard but with higher fees, a nicer user experience and a prettier front end, but still higher fees. So if I was one of these shops, if there’s going to be nine of you, I’m guessing they all come out at 50, 75, 90. I would hope in crypto thus far, the fact you can’t really get a market cap index that easily for 25 basis points or 10, that’s going to be fun to watch as this industry matures. Will any of them do that? I doubt it, but I would love to see that.


Keep in mind too that crypto, especially Bitcoin, it’s got five or six times the volatility of the S&P. So if you are going to roll out a 50 basis point product with that level of volatility, the fee is a rounding error and marketing might be the thing that wins it because the narrative around the Bitcoin spot ETF is the BlackRock filing for a spot ETF. So it’s almost like, “Wait a minute, there’s eight others out there that are going to come on the same day,” but everybody might just gravitate to BlackRock because that’s just the way that they think about it, that it’s BlackRock that’s doing all of this, it’s Larry Fink that’s been pushing this. So therefore, of this myriad of options I have, I’ll just go to the BlackRock one even if they all come out on the same day, but we’ll have to see.

I assume that that’s what the SEC would do because if the SEC only approved BlackRock and gave them a two-week head start, if they only approve BlackRock and give them a two-week head start before they approve all the others, they’re going to have to answer questions about favoritism or corruption because like I said, they know as well as I know as well as you know that the first mover advantage is so important. That’s why I think they’ll give it green light to all of them on the same day and then we’ll just watch the scrum from there.


It’ll be fun to watch, like you said. When you describe yourself as a fan, I have a 2013 tweet talking about the spot Bitcoin ETF not making out by year end. I don’t think it makes it out this year, but 2024 is finally my sushi dinner party when this finally gets approved.


The SEC is running out of excuses for not doing it because they keep losing in court. Now, the grayscale trust, which is a closed-end fund, is going to be allowed to convert and the SEC is not going to appeal it. So they’re running out of reasons to deny it. So all they’ve got left is delay, and you’re very well right? With six weeks left in the year, it’ll probably be a ’24 story.


Two more quick questions because I would love … We’re going to definitely have to have you back on because, again, you’re one of my favorite people to listen to. What’s something that you believe today or this could just be a framework. It doesn’t have to be this moment in time, but it could be, but it could also just be a framework belief that most of your peers or our peers wouldn’t agree with. So if we went and sat down at a dinner here in LA or Chicago and you said, “Okay. Hey, what do you guys think about this?” most of the table would just shake their head and say, “No, that’s crazy. I don’t agree with you on that.” What do you got? Anything come to mind?


Politics doesn’t matter as much for financial markets as we’d like to think. We could sit down at dinner and we could probably fight about the ’24 election. We could fight about what’s going to happen in the Middle East. We could fight about some of the cultural issues of the day that we all have opinions about but are afraid to talk about them. We would then try to frame that as, “Well, if this guy wins the election,” and you could fill in the blank as to who that guy is, “the stock market will go up or down,” or, “This guy’s more bullish for the stock market,” and we’re going to get all these stories next year.

If Trump wins or the Republican wins, these are the sectors you’re going to buy. This is what the stock market’s going to do. If Biden wins or the Democrats win, these are the sectors you’re supposed to buy. This is what the stock market is going to do. I think we way overstate it. I don’t think it matters nearly as much as people do. This is why we get confounded all the time in the economy. We have this self-selection on this stuff. I’ll give you what I mean by the self-selection.

If you look at the University of Michigan Consumer Confidence Survey and you break it down as to what is the single biggest driver between people that have a positive or negative outlook in the economy, is it income? Is it race? Is it net worth? Is it geographic location? Is it to you own your home? It’s not. It’s, are you Republican or Democrat? In other words, but that doesn’t have anything to do with it. It’s like, “Here’s the economy, a Republican wins, and now all of a sudden all the Republicans are bullish and all the Democrats are bearish. A Democrat wins and it flips.” That tells me that it’s completely irrational is what it is.

So I would argue to you that, yeah, I’d be more than willing over a couple of glasses of wine and a cocktail to talk about politics with somebody, but if you want to drag in, “So therefore the stock market will do X if this guy wins or Y that guy wins,” I don’t think it matters as much as people want to believe it does.


I’ve long thought that. My favorite take though was that the number one indicator on who’s going to win the election is the stock market performance. I forget if it’s the year leading up to it, the election, but it has an extremely high hit rate on if the market’s up, the incumbent party stays in power, and if it’s down, they get booted. We were saying when Trump got elected, I said, “Hillary needs to start buying futures because she’s going to be in trouble if this market continues,” but I didn’t place any bets on the political futures or anything else. I probably should have.


If you remember the night of the election in 2016, the night that Trump was declared the victor, S&P futures were down 5% overnight. Paul Krugman famously tweeted out that the stock market was down 5% overnight and that this was the start of the Great Depression. Well, it bottomed about five minutes later and then went up for the next year and a half. I think we actually had 14 or 15 consecutive up months right after that.


I think it was the longest period in history of consecutive up months, which I don’t think anybody would’ve predicted.


It came right off the Krugman tweet. Remember, he’s a professional. Do not attempt to make contrarian calls like him at home.


Last question. Do you have a most memorable investment? It could be also a call or just a research piece, but something that is seared in your brain, good, bad, in between?


I’m going to go give you a slightly different answer. So I’m a macro guy and I’ve been doing this for a while. So in the late ’90s, in the early 2000s, I did diverge a little bit and I started talking about specific securities. The specific securities that I was really talking about and panning at the time was Fannie and Freddie and talking about the amount of duration risk that they were taking in their portfolio, the convexity trade that they were doing, and I thought that it posed a lot of risk for them. I was writing about it and I was interviewed on TV about it and the like.

The reason I bring that up is this was one of the few forays that Mr. Macro me went into individual securities. I then in the middle of that caught somebody going through my garbage and it turned out to be a private investigator for Fannie Mae looking for dirt on me, and I was like, “Man, this is the first and last time I’m ever going to go into individual securities again on that kind of stuff.” They never were really brutal on me, but I think he wanted me to catch them to send a message.

So you hear these stories about when you pan companies like this that they could be very, very aggressive against influential voices about that. Maybe they won and you could argue they won, but I’ve decided that I want to stay in my lane of macro. I’m not ready to do like David Einhorn has done. He’s written whole books about Allied Financial and stuff like that and about the horror stories that he’s gone through in that. I read that book about the same time, I was like, “Man, I just don’t want to go through this.”


You got to be a certain type.


Right. Marc Cohodes is another name that comes to mind that you’ve really got to have a real mentality to want to do that. I floated into it just because I was talking about it. As a bond guy, it’s a natural offshoot to just start looking at their portfolio and the convexity and the portfolio and the duration and the type of trades that they were doing and saying, “This isn’t adding up,” but to me, it was a bond call. I never really said short the stock or anything like that. I was just saying I had problems with that whole business that they were in and they didn’t like it and they didn’t like it at all.

So that was my experience, and we know now that they went into receivership in 2018 and they’ve been award of the government now for 15 years, and they’re a very, very different company right now. Matter of fact, the chief economist of Fannie Mae right now is a good friend of mine, Doug Duncan.


I love it. Jim, where’s the best place people can find you? They want to follow your work, they want to sign up, they want to keep up-to-date with what you’re doing, where do they go?


So I’m going to give you a new answer to this too. So how about this? You can follow me on Twitter, @BiancoResearch. You can follow me on LinkedIn under Jim Bianco. You can go check out our website at biancoresearch.com. You can request a free trial if you want, and I’ll throw in a new one for you. I’m an avid cyclist. You can follow me on Strava too.


Sweet. Listeners, check it out. Jim, thanks so much for joining us today.


Thank you.


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