James Bianco: “Is The Fed’s ‘Cure’ Worse Than the Disease?” (Hedgeye Investing Summit)

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[Music]
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alright thanks for staying with us here
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this is the third one in a row again
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it’s my pleasure actually it’s the first
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time that I’ll have Jim Bianco on edge
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ITV so it’s a real pleasure to have you
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here Jim thanks for thanks for making
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the time to do it yeah thank you for
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having me looking forward to it you have
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a you have a lot of fans on both Wall
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Street and on Twitter and I think you’re
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one of the guys that can can merge the
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gap you know if you will between the
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real world and the economy and and what
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Wall Street would maybe like to see
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sometimes so I certainly appreciate that
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there’s been a lot of comments back and
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forth on free market capitalism a lot of
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people are kind of concerned that that’s
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been last year but I know that you have
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a lot of different thoughts on that and
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that’s really the first topic that I
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want to start with was you know the
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legality of what the Fed has done or
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purports to be to be doing and just
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generally how you think about that it is
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legal what the Fed is doing the 13-3
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provisions that the Fed has that were
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revised in the dodd-frank bill give them
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the ability to do this and here’s an
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important caveat provided that the
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Treasury secretary approves of it and
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that’s been what I’ve been trying to
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hammer along was that what effectively
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has happened is we’ve merged the Federal
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Reserve with the Department of Treasury
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and that what’s effectively happened is
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is that the Fed is not buying corporate
bonds or ETFs or commercial paper or now
municipal securities as of last Thursday
it is the Treasury it is the government
that’s buying it the Fed is just
providing the financing and when I hear
Fed officials say to me well we’ll get
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out of this when the time is appropriate
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no you have to get the Treasury
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secretary to approve of you getting out
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of it and that means you need Donald
Trump to say I think you guys are done
money printing I think you guys are done
ramping markets up higher and I have a
hard time believing especially in an
election year that that’s going to
happen anytime soon so getting into
these programs is easy getting out is
going to be the real tough part I think
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and that’s to come and the problems
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associated with that yep oh and we’ll
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get into like you have an explicit
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opinion on whether
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not that this creates a new version of
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economic gravity or not but just you
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know is the beginning of that I mean
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that that isn’t that essentially what at
least phase one its Trump we probably
call it of mmt looks like when you merge
the Treasury fiscal spending with money
printing I think that’s exactly right
I’ve been actually causing calling this
mmt version 1.0 is what we’re doing look
all in all the stimulus is something
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along the lines of four or five years of
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tax receipts and I think a lot of people
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have asked a question of if the Fed and
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the Treasury believes that this works
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that they can print five years worth of
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tax receipts and not have any
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consequence then why do we have a tax
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why do we have a dir S can we just give
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it the IRS then at that point and just
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have them print all the money that they
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need of course not I think that there’s
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going to probably be somewhere down the
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line some kind of consequence to all of
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this money printing what and how we can
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debate but I have a hard time believing
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that we could print several trillion
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dollars for up to a trillion dollars
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right now and it will have only pleasure
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and no pain because if it did then we’ll
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print another a trillion and then we’ll
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print another a trillion until we go to
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the point that it becomes too much well
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isn’t it doesn’t that just mean that
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your and thanks for simplifying it that
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by the way not not many people can do
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that in 30 seconds or less
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but again you isn’t that just at the
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pleasure of the people deciding to pay
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their taxes uh yeah I think that there’s
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a lot of that right now although tax
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payment is not at the pleasure of people
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you know as the great economist Walter
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Williams says you know if you don’t pay
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your taxes they’ll kill you what he said
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go ahead try and barricade yourself in
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your house and not pay your pay taxes
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and see how long that works eventually
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guys what guns will come through the
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front door looking for their taxes so it
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isn’t not quite at the pleasure of the
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people but there will be an argument to
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be made at some point that if it’s not
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let’s do away with taxes it would be why
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do we have to end the money printing why
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do we have to end this stimulus or the
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bailouts or whatever we’re calling it
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this week if there is no consequence to
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it why is it only in a crisis we can
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print
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and borrow a trillion dollars to try and
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get us over the hump but not in a crisis
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why can’t we keep doing it then – that
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will be a debate and a discussion we’ll
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have to have at that point well I mean
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there’s there are plenty of academics
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obviously you and I that’s not that’s
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that’s not where we live day to day it’s
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certainly not where I want to go I think
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I’d be pretty bored but I mean people
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always say hey look can you give me a
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white paper on why use the base effects
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– to predict their use your now Cass I’m
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like here’s the white paper the back
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test it’s like one piece of white paper
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have at it go for it but no stephanie
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kelton for example I mean what do you
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think about that I mean she obviously
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feels like she’s got one step in the
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door on this and maybe Trump or whoever
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beats Trump or if Trump wins and both
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would quite like that yeah I think so I
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think you know to put the Calton in the
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MMT argument you know – a simple task
they believe that you can print money or
borrow and you know increase government
spending pay for college pay for health
care pay for whatever you want to pay
for without inflation until you hit the
end point of inflation their argument is
we can borrow a lot more before we hit
inflation I think my argument would be I
don’t think we’re gonna be borrowed
nearly as much as you think we can
before we get to the inflation point the
emmab tiers do have a point they say
when you get to inflation then you
you’ve gone too far and they they’re
their remedy for that by the way is to
raise taxes and that’s the way you
remove money out of the system good luck
with that
you know it’s trying to turn over turn
over – they want to have tax rates be
like the Fed Funds rate where it goes up
and down with the right level of
inflation set by a bureaucrat like the
Federal Reserve I’m not so sure that
society is quite ready for tax rates to
kind of go along those lines but to the
larger point I don’t think they’re gonna
they’re gonna find we’re gonna find
they’re printing and borrowing to the
extent that we are is going to have a
consequence a lot sooner than we think
it’s going to be the mmm tears thinks
it’s like 10 20 30 trillion dollars we
could do before we hit that level I
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don’t think it’s gonna be nearly that
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much before we start seeing problems
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well what if the consequence is the one
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that we’ve already seen in o8 and again
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it’s not a wait I just don’t
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want to make sure that everybody knows
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that I don’t think it so late I think
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it’s 2020 and it’s quite different it
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could be worse but again you know what
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if the consequence is that people don’t
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believe the bullshit and asset prices
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just go straight back down that is if
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that is a big consequence I think right
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now because it’s a flip side of this
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story is we are going to take you know
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what the Fed is doing in supporting
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markets let me go back to my first
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argument what the Treasury is doing
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through the Fed is nationalizing the
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markets right they are basically taking
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them over and by the way and I’ll give
you the names to Wall Street is cheering
this as loud as they can Bob Michael
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this chief CIO fixed-income of JPMorgan
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Investment Management he’s thinks they
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haven’t gone far enough he wants them to
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set the price of every bond in the
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country
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Rick reader at Black’s Black Rock has
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been cheering this program as well Mike
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Wilson at Morgan Stanley
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David constant at Goldman Sachs has
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abandoned his 2000s a peak all because
money printing is good and what the Fed
and the Treasury are doing is good well
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we’re going to put that to a test right
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now and here’s the simple question you
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have to ask yourself is the market near
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fair value is the market somewhere where
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it would naturally be and I like to say
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if if a red headline came across my
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Bloomberg and it said Jay Powell
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changed his mind cancelled all the
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programs with the market go down a lot
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yeah what because we supported it an
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artificial level I think the Fed can do
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that for a while support a market at an
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artificial level but not forever
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eventually the weight of where the
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market should be will come to bear on it
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and it will fall and it will fall down
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so we’re gonna put this money printing
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thing to a test the difference in o.9
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was they started it after the market was
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down 50 percent and two years later so
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they got if you will lucky or maybe they
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got smart they started it when the
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market was somewhere near a fair value
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level anyway this time around they
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started it two weeks after the all-time
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high and then kept ramping it up all the
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way to last week and continue to ramp it
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up and the question is if the markets
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near
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would have been anyway then this will
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appear to work if it’s if the market
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should be severely lower and that’s what
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my fear is is then it won’t work over
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the long term and work for a while it’s
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it’s a it’s amazing thing I mean I was
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back and forth with Danielle DiMartino
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booth on this there’s this and and you
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you probably could empathize with this I
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think I’m probably barking up the right
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tree if I’m not then too bad but you
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know this this whole discussion you and
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I have discussions with the same types
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of people don’t forget the JP Morgan
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gentleman that you that you named he
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doesn’t quite want to talk to me and I’m
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not completely surprised why JP Morgan’s
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a client to be clear in terms of
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independent research they pay for a lot
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in independent research but again the
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whole haha you didn’t get it you didn’t
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know that you shouldn’t fight the Fed
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like that discussion tell you Jim that
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tries to mean bananas like that that
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tries to be bananas like all you great
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fundamental investors who only talk to
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me about how good the cycle is and how
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it’s different this time as soon as it
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turns fundamentally you turn tail to
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that and you tell me I’m the idiot III
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have a hard time with it you know let me
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let me jump in and say I agree because
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what you’re saying is and let’s let’s
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not mince words here what we’re saying
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is all this analysis we do is bullshit
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right because he works it enough where
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it works in the op but then in the down
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you can forget everything you’ve learned
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about how finance works don’t worry
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the printing press will just bail you
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out well why don’t we even need analysts
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why do we even need anything if that’s
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the way the markets going to work that
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it always is going to be supported by
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some artificial force on the way down
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you know if you believe in free markets
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free markets is remember what free
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markets are supposed to be let’s not
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forget what we were talking about here
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we have an a finite source of capital we
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don’t have is all the money in the world
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you think we did with the Fed and we’re
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trying to efficiently allocate it we’re
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trying to give it to good ideas and take
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it away from bad ideas if we continue to
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go down this road where I’m going to use
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an Austrian term we’re gonna create
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malinvestment we’re gonna just give
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everybody you know Bob Michael JPMorgan
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he wants to fix the price of every
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corporate bond at 2% he said that last
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week on Bloomberg TV
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okay if you fix the price of every
11:14
single corporate bond at 2% there’s no
11:16
point in doing credit analysis everybody
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gets the same price whether it’s
11:20
Carnival Cruise or it’s Amazon whether
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it’s a disastrous business model or a
11:25
great business model everybody’s going
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to get funded and you’re going to create
11:29
an all kind of dislocations and problems
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in the economy because you’re not being
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efficient with getting rid of bad ideas
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and rewarding good ideas well you’re
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being you’re being you know completely
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conflicted and compromised for your own
11:43
interests I mean you know that Bob
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Michael I don’t know who that it now I
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know but his son if he has a son named
11:49
Billy Bob Michael isn’t gonna work on
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Wall Street because like he said there’s
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no job to do right exactly and I think
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you know you know this is what this is
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what the the idea is supposed to be I
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mean in in theory if you believe that
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the market was overreacting in March
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because the what’s happening with the
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virus is not nearly as bad as the market
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was saying then bring it on give me
12:15
great opportunities to make money but if
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you’re going to arrest it before we get
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to some kind of a settling out in the
12:24
market you’re just gonna create more
12:25
problems in the long run I think at that
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point but you know what if you look at
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Wall Street and if you look at policy
12:31
makers no one’s thinking about the long
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run one of the things I’ve really been
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railing against is everybody talks about
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well what’s the second quarter gonna be
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like and what’s the third quarter gonna
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be like when’s the restart gonna start
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and I’ll use some some technical terms
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for you here the second quarter is gonna
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be a shit show the third quarter is
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gonna be less so of a shit show that’s
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all the analysis you need to know what
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we really need to discuss is when this
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is over the virus and it will end what’s
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the long-term consequences of it are
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there going to be changes in social
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behavior are there going to be changes
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in the way we conduct business is there
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going to be some kind of de
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globalization as well and those 17
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million Americans that have been
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unemployed in the last three weeks if
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you believe tomorrow’s numbers supposed
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to be another five million added to that
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role 22 million how many millions of
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those people
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don’t get their job back or have lost
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their businesses because of that what
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kind of anger resentment does that bring
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up to boy these are questions everybody
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looks at their shoes and says point
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let’s just not go there let’s just talk
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about how bad the second quarter is
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going to be so we could talk about how
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much less bad the third quarter is going
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to be and that seems to be the extent as
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far as they want to take it right now
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well I and Wall Street just voted on
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that I think like if you even if I look
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at my own client base which is you know
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hedge funds mutual funds I think we have
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actually the same client base so you
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probably had the same feedback there’s
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this like super super short-term panic
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obviously the pressure on people to
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perform on a very short-term basis at
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the hedge fund level in a quote-unquote
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neutral environments never been higher
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so people are just flat-out you know
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running in fear of their own job but
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yesterday JP Morgan was quote-unquote up
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on the bad news and I’m like just chill
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out I mean let let gravity play out I
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don’t think that people are gonna
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actually believe Jamie diamonds loan
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loss reserves here I don’t think that
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they’re gonna believe his outlook and by
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the way I do believe in economic gravity
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so the credit cycle exists gravity
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exists and we’re gonna go through it so
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I agree you’re gonna have to go through
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the shit show and look at what the
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financials have done in the last 24
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hours
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I mean they’ve led the market lower and
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they’re the first ones to report their
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version of reality which I don’t know if
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you agree or disagree whether you call
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it a shit show or not they have no idea
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yeah I know not only that they have no
14:49
idea but if you look at what they’ve
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done is they just made a guess as to
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what their loan loss reserves are gonna
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be exact yes it’s on those long lost
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reserves are much larger than the
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analysts to cover these companies
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thought that they were going to be as
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well so there is just a guess so far cuz
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for the moment no one has really
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defaulted on a loan if you stop paying
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at three weeks ago it’s not in default
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yet it will be soon but it isn’t there
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just yet and so we have no idea you know
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where this ultimately is going to go and
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that’s what we’re what we’re trying to
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guess and stuff but I ultimately think
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it really comes down to that long-term
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question that no one wants to touch
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right what happens on the back side when
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this is over do we want to have a more
15:36
conservative attitude do we want to
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de-risk
15:39
we wanted to globalize away from China
15:41
do we want to reward to use a Mohamed
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el-erian term do we want to reward
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resiliency in a company’s business plan
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/ efficiency in a company’s business
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plan right now it’s closed everything
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and send it to China cuz it’s cheaper
15:56
but now we’re might say in the bet and
15:58
on the other side we might say how is
16:01
your company going to respond when we
16:03
have to close again for three months are
16:05
you gonna be able to survive and are we
16:06
going to reward companies that set
16:08
themselves up like that well that means
16:10
that we’re going to have a slower growth
16:13
less aggressive attitude than we did
16:16
have say in January of this year now
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Wall Street wants to believe there’s
16:20
going to be none of that that it were
16:23
just it’s gonna be right back to January
16:24
2020 as soon as we’re done with the mass
16:26
graves on Hart island it’s right back to
16:28
2020 and everything’s going to be okay I
16:31
tend to think that that’s not going to
16:33
be the case there is gonna be changes in
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how we do things I may be wrong on what
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the changes are but what would shocked
16:39
me is if the answer is nothing changed
16:42
by the end of the year now we’re just
16:45
back to the way it used to be less
16:48
25,000 dead people yeah that’s I say
16:51
that sarcastically it kind of men you
16:53
know emphasize my point no it’s it’s
16:57
it’s classic actually and predictable
16:59
proactively predictable indeed you know
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that’s how Wall Street thinks they think
17:03
linear and on a linear basis they think
17:05
you go down to one side of the Vienna
17:08
linear basis you could go right back the
17:09
other side of the vena Bob can mark all
17:11
the prices at the top end of the V you
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never have to worry about having any
17:14
double use in between so it’s like it’s
17:16
a that is a shitshow in my mind I mean I
17:19
wonder what you think about this
17:20
framework because you know on the fly
17:22
I’m trying to go from depression to
17:24
what’s the recovery into some version of
17:26
a recession to an actual recovery
17:28
there’s a the work out period you know
17:30
of unemployment what that means and the
17:33
credit cycle which is one in the same
17:34
thing you lose your job if the company
17:36
loses their cash flows liquidity is not
17:38
solvency you know so again that’s one
17:40
two is behaviorally like to your point I
17:43
don’t know point number three is
17:45
actually the one we start talking on a
17:47
research call about a little bit more in
17:48
the last couple days which which is the
17:50
regulatory environment like you know
17:52
what is the new America in terms of how
17:54
you’re allowed to operate how you’re
17:56
allowed to have your liberties or civil
17:58
liberties and your consumption versus
18:00
the prior like this a whole new world so
18:03
those three things to me like and that’s
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that’s starting with a lot you know have
18:08
I left anything big out that I need to
18:10
think about from a from a intermediate
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to longer term cycle perspective no I
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think that that’s exactly right I mean
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those are going to be the things and
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you’re right about the third one which
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doesn’t get which gets talked least of
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all is going to be the regulatory
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environment look what a lot of these
18:26
states have done has been nothing more
18:28
than turn their state into a police
18:30
state now I get it
18:31
there’s a virus out there and we need
18:34
the social distance in hand wash and
18:36
what are we hearing from the White House
18:38
right now hey it’s not gonna be a
18:40
hundred to two hundred thousand dead or
18:41
two million if we did nothing but it
18:44
might be far less than that because
18:46
everybody understood and I was like you
18:49
know you don’t trust people why don’t
18:51
you just lay out the case here’s a virus
18:53
this what you need to do stand six feet
18:54
apart wash your hands wear a mask and
18:56
McDonald’s you can stay open but figure
18:59
out how to work within that framework
19:01
instead of just some merrily closing
19:03
everything right and then deciding when
19:05
we’re gonna open or doing like the the
19:07
governor of Michigan has decided big-box
19:10
retailers have to close their garden
19:12
department but can keep their grocery
19:13
Department open so if you so if you go
19:15
to Target and you buy groceries it’s
19:17
okay but if you go to Target and buy a
19:19
garden hose you’re gonna be arrested I
19:20
mean they’re coming down to that level
19:22
of detail right now in terms of what
19:25
they’re doing with a lot of these
19:27
companies I don’t think they’re going to
19:28
give that back so easily and I do think
19:31
that there’s going to be some anger and
19:32
resentment as they are very very slow to
19:35
give that back and they’ll use the
19:37
argument of reinfection way and when
19:40
months come one week’s come in two
19:42
months which come in two quarters of
19:44
having these restrictions it’s going to
19:47
weigh not only on the economy but on
19:49
society in general
19:50
well that work out period I mean if you
19:53
only use economic never mind
19:55
shallow recessions which we had a very
19:58
long work up
19:59
of corporate leverage come you know in
20:00
as you guys could throw up the history
20:02
of it all guys if you can on slide 33
20:05
we’re just showing Jim what you know
20:06
obviously on the back side of your hand
20:09
what’s happened economically across
20:11
cycles but you know you can look at some
20:13
of the the most actually slide 34 the
20:16
shallowest recession which was again a
20:18
corporate credit bubble in 2001 you know
20:21
the work out period was nine months the
20:23
similarity was that you had an economic
20:24
shock at precisely the wrong time in the
20:26
cycle I think a lot of people screw that
20:28
up too
20:28
they’re like nobody could see this
20:29
coming that’s total bullshit just like
20:32
you know one the economy was slowing in
20:33
2019 and then it just made the virus and
20:36
in that case 9/11 made it slow faster
20:38
but again the work out period was at
20:40
least nine months for the corporate
20:41
credit cycle you know and in terms of
20:44
the economy actually bottom Dazz you
20:46
know in oh one before
20:48
actually the stock market did and and
20:50
that’s that was back that took them till
20:52
Oh – so I don’t even know like where
20:54
people are going when they think like if
20:56
they only studied economic history I
20:57
know it’s never the same but even if you
20:59
took the 44 months of the depression in
21:01
the nine months of oh one you know it’s
21:02
not two months no exactly if you could
21:05
put that slide back up I’d also point
21:07
out something else too if you look at
21:09
the Oh 8 December December December oh
21:13
seven oh nine period peak to trough
21:15
decline was five percent right we’re
21:18
expected in the second quarter to have a
21:21
decline and a total decline in the US
21:24
economy is six percent just in the
21:26
second quarter the second quarter alone
21:28
will be worse than the entire Great
21:32
Recession will be and you know I’ve
21:35
heard people say this without
21:36
understanding some of these numbers
21:38
they’ll talk to me about China and
21:40
they’ll say well China’s 80% of the way
21:42
back to where it was as if that’s a
21:43
bullish argument you mean they’re 20%
21:45
off the top
21:46
you mean that the Great Recession was
21:48
five percent off the top dates four
21:50
times worse that’s it that’s a
21:51
depression it’s what you’re in if you’re
21:53
20 percent in the way the time you have
21:55
to get back to 98 99 percent of what we
21:59
were in January in order to say that
22:02
there’s really no impact if we get back
22:05
to 90 percent of where we were in
22:07
January it would be devastating for I
22:11
think a lot of people keep him
22:12
– at the bottom of the Great Depression
22:14
in 1934
22:16
we still had 75% of the economic
22:19
activity we had at the top and we had
22:22
78% of people still had their jobs that
22:25
means moving 25 percent off the top we
22:27
had 22 percent unemployment so I think
22:29
what you need to understand is it
22:32
doesn’t take much for this to upset the
22:35
applecart as well as where we’re gonna
22:37
go and people are not ready to go there
22:40
they’re all mean reverting thinkers they
22:42
all have their model that’s pre virus
22:45
and they think that the virus is just a
22:47
temporary interruption so we can go back
22:49
to that model and we revert back to that
22:52
mean but what I’m worried is they’re not
22:55
really understanding that this is a new
22:57
era and that we need a new model of
23:00
where we’re gonna go it doesn’t have to
23:01
be a disaster
23:04
Madonn handle it right we’re gonna make
23:07
it a lot worse than it needs to be god
23:09
I’m a amazing disconnects between what
23:12
you just said and where our friend Bob
23:14
wants to mark the price or the valuation
23:17
ever you want to you know contend it
23:19
should be there of markets it it’s just
23:22
that is the disconnect and I guess to me
23:24
if that’s what you’re saying is if the
23:26
if there’s a widening disconnect between
23:28
where the officialdom wants the market
23:30
to be priced you know again centrally
23:32
planned in price versus where the actual
23:34
economic gravity is everything in
23:36
between last price to where that washes
23:40
out is the risk I mean that right so
23:42
like have at it I mean it’s a I don’t I
23:46
don’t I don’t I don’t know how else to
23:48
think about that and the answer isn’t
23:49
buy stocks right you know I’ll give you
23:52
an giving an example of what we’re
23:54
talking about with the disconnect if
23:57
something interesting has been happening
23:59
in the bond market which has not been
24:01
appreciated so on march 13th the Fed
24:04
ended this not QE QE argument by saying
24:07
okay we’re going to do a QE we’re gonna
24:09
buy out two 30-year bond and they ramp
24:12
that up to two weeks ago they were
24:14
buying six hundred billion dollars a
24:16
week a week in bonds that since March
24:19
13th they fought over one and a half
24:22
trillion dollars worth of bonds now
24:24
these numbers are hard to understand
24:26
that you bought a trillion and a half
24:28
dollars worth of bonds you know if you
24:31
watch mutual fund flows if you had like
24:32
a two hundred billion dollar year that
24:35
would be a big you know this is a
24:36
trillion and a half in a week so now if
24:39
you look at yields you go okay
24:41
but they haven’t moved much in the last
24:43
two weeks and I’ve argued if this market
24:45
was anywhere near normal with that kind
24:47
of borrowing the 10-year yield would
24:49
have opened at zero and it would have
24:50
been on its way to negative why hasn’t
24:53
it moved because if you look at bun
24:55
flows from ETF’s for mutual funds from
24:58
households from central banks you can
25:00
measure six hundred billion plus of
25:03
selling that has been going on and
25:06
that’s just from the finite set of
25:08
measures we have there’s four other
25:09
metrics that we haven’t seen so when you
25:12
add it up what is happening is official
25:15
term has been buying bonds at the rate
25:17
of trillion plus a month and everybody
25:20
else has been saying you’re holding it
25:22
this at the wrong price and if you’re
25:24
gonna do that I’m selling it to you and
25:27
they’re selling it to their their
25:28
massively liquidating to the central
25:31
banks in a big way they’re making a
25:33
powerful statement that when all of this
25:35
is done I think interest rates are going
25:37
to be a lot higher than they are right
25:39
now either it’s a combination of
25:41
inflation is returning or it’s finally
25:45
that supply is going to crowd out the
25:48
market I started in the bond market in
25:49
1987 and for 33 years I’ve heard people
25:53
say to me that we’re gonna have these
25:55
massive budget deficits that are gonna
25:57
crowd out and drive up interest rates
25:58
and for 33 years that wasn’t the thing
26:01
because we were playing child’s games
26:04
between a 1 or 2 or 3 percent deficit
26:06
maybe 4 or 5 in the middle of a
26:09
recession now we’re talking 15 to 20 is
26:11
what we’re talking now you’re gonna
26:13
finally start to see that crowding out
26:16
so the bond market is trying to tell you
26:18
that the that the fair value is probably
26:22
a far lower price or a much higher yield
26:26
and the only reason you’re not seeing
26:28
that is you’re getting astronomical
26:30
types of buying out of the Federal
26:32
Reserve through their quantitative
26:34
easing program that’s all holding it up
26:36
but eventually like I said they can’t do
26:39
that
26:39
forever and I think that that will
26:41
eventually give away to higher interest
26:43
rates as we move forward from here well
26:46
if you look at them and when you come on
26:47
and people like to talk about the other
26:49
side the other side could also be
26:50
stagflation a recessionary stagflation
26:53
and to get that in the way that my model
26:56
works my 4 quadrant model is that the
26:58
the faster and deeper you go and what I
27:00
call call quad for both inflation and
27:03
growth slowing at the same time quite
27:05
clearly that’s happening despite
27:07
president pump on oil you know to the
27:10
point that you get deep enough you can
27:12
only reflect from there so it doesn’t
27:14
take much you know for that switch to
27:16
turn for you to go from deflation to
27:19
reflation and you know given the
27:21
economic conditions I mean that to me
27:23
every single time I make a call on
27:24
reflation it’s not like german-style
27:26
reflate it’s reflation or inflation and
27:28
i don’t know who knows it could be
27:30
anything to me I don’t I care but I do
27:33
more what the markets doing that’s the
27:35
point
27:35
and it isn’t it amazing that you know I
27:38
call net I think just because it’s got
27:40
some good alliteration and he’s a good
27:41
marketer so I mean I think that wheat
27:43
you and I can do some good marketing to
27:44
president pump did everything that he
27:46
could he made up quite literally the
27:47
barrels per day on one day of tweets
27:49
because he saw that you know he saw he
27:51
was having some impact in the equity
27:52
market and look what our oil does today
27:54
I mean oil the feds not buying oil the
27:56
feds not buying Jamie Dimon stock you
27:58
know so they’re free to fall you know
28:00
and and at some point they’re gonna stop
28:03
falling I guess right you know oil oil
28:06
what’s happened when oil by the way I’ll
28:09
tweet this out for anybody’s watching
28:11
after I get off this call with you is
28:13
the DIA the energy and information is
28:16
association put out there implied
28:18
gasoline demand numbers lowest ever yeah
28:21
down 50% in a down 50% in three weeks in
28:26
other words think a gasoline demand as a
28:29
metric for economic demand and it’s half
28:32
it’s half in three weeks yes man that it
28:36
means it if there is a world of hurt out
28:38
there but to the inflation argument yes
28:41
for the next couple of quarters the big
28:43
story is going to be deflation as we
28:45
deflate the economy but if you’re gonna
28:48
print and borrow trillions of dollars in
28:50
hand 22 million people unemployed
28:53
an extra 600 bucks a week and maybe
28:55
paycheck protection loans and try and
28:58
support these markets you’re gonna
28:59
support demand as best you can but
29:03
supply company’s not working going out
29:06
of business they’re gonna produce less
29:07
stuff higher demand less supply on your
29:10
prices more inflation that seems to be
29:13
where we’re gonna go after we go down
29:16
because I think what we’re doing when
29:18
people ask me what letter we’re gonna
29:19
have I used to say we’re gonna both avi
29:21
in and out we’re gonna have a V which
29:23
means we’re gonna have a big sharp to
29:24
contraction we’re gonna recover some
29:26
after the ricotta after the virus passes
29:29
but we’re not gonna go all the way back
29:31
to the high so that’s your L and if
29:33
you’re going to artificially support
29:35
demand even though you don’t have that
29:37
supply going on you know that we’re
29:39
making things you’re going to have
29:42
higher prices at the end of the day
29:44
you’re going to have some lower prices
29:47
in the form of commodity prices gasoline
29:49
and other things are going to be
29:51
demanded less but people are gonna be
29:53
out there going well I got some money
29:55
here I might as well go buy a
29:57
Playstation or I might as well go buy an
29:59
iPhone because the government’s been
30:01
giving me money they’re not gonna be
30:02
making as many of them because the
30:04
D’Amico’s the supply constraints are
30:06
going to be on them as well – you’re
30:08
gonna have all kind of distortions in
30:09
the economy of course so yeah you can
30:11
have both deflation and then inflation
30:13
be coming out of this both at the same
30:16
time I think I mean that that’s classic
30:18
what the market the market stocks and
30:21
credit which have had you know basically
30:23
a hundred different w’s in terms of
30:25
expectations into it since the market
30:27
crash you know the bond markets got that
30:30
they had that right deflation that’s
30:31
when bond yields go down obviously it’s
30:33
where the Fed panics it’s what the
30:34
commodities markets told you it’s what
30:36
the foreign currency markets have told
30:37
you it’s just this this this this
30:39
incessant debate about the stock market
30:41
that can drive can drive human beings
30:43
mad okay I’m gonna start – if you don’t
30:47
mind gonna start to knock out some of
30:48
these questions here in the queue
30:49
because sure you have a lot of like I
30:51
said wide following and some there’s
30:54
some really good questions here on on
30:57
the first one you know why why why there
31:00
seems to be no movement or revolution
31:02
away from the Fed I think that this is
31:05
like you know why are in bay
31:06
who the question is why are Americans
31:07
fine with this I don’t know if they are
31:10
they’re fun they’re fine with it because
31:13
they think it’s gonna work
31:14
they’re like wall street at the end of
31:16
the day you know Wall Street can say
31:19
this is how the world works this is what
31:21
I believe but all they want is they want
31:24
prices to go up
31:25
and if they think this is gonna work
31:27
there’s going to be no pushback on it
31:30
right now and their argument is going to
31:32
be has it worked the last time they
31:34
tried it which was in o8 and so I think
31:38
the pushback comes at the failure of it
31:41
to work at the failure of it who to come
31:46
to pass and I’ll give you if you want a
31:48
statistic to look at in fact I was just
31:50
writing this a few minutes ago I think
31:53
right now the most important economic
31:55
statistic everybody watches his initial
31:57
claims how many people lost their jobs
31:58
this week
31:59
remember that’s initial how many people
32:01
filed this week for unemployment
32:04
insurance there’s another statistic
32:05
called continuing claims how many people
32:07
are staying on unemployment next week in
32:10
the week after the week after that
32:12
number is expected in the next two weeks
32:15
to go above 20 million well if the
32:17
Paycheck protection plan loans and the
32:20
Fed is going to work that 20 million 25
32:24
million of people on unemployment claims
32:27
should start to follow fast because not
32:30
because the economy is recovering but
32:32
because the assistance programs are
32:34
getting them back in their jobs even
32:36
though they’re getting paid to do
32:37
nothing I’m a fear it’s not gonna happen
32:40
that they’re gonna stay unemployed and
32:43
then at the end of the day all this talk
32:46
about this program and that program and
32:49
the Fed did this and the Fed did that
32:50
I’m gonna look at continuing claims
32:52
you’re gonna look at continuing claims
32:54
I’m going to go there’s tens of millions
32:56
of people that have lost their jobs yeah
32:58
it nurse that is going to then feed that
33:01
resentment that we’ll see look we could
33:04
be wrong and maybe that 20 million of
33:06
Continuing claims will quickly become 8
33:10
million or 7 million of Continuing
33:13
claims because remember if a company
33:15
takes out a personal a paycheck
33:17
protection a ppthey alone they have to
33:19
hire bad
33:20
everybody and then they have to apply at
33:22
the end of the summer to show that they
33:24
still are they still have everybody
33:26
didn’t lay off of anybody and then that
33:28
loan is forgiven and they get to keep
33:30
the money so if we see that continuing
33:35
claims dwindle away to very little
33:37
numbers then these programs work if we
33:40
don’t they didn’t work and if they
33:42
didn’t work then you’re going to see the
33:44
resentment right now no one’s mad
33:46
because they think that these things may
33:50
work they’re waiting to see whether or
33:52
not they work or not but if they don’t I
33:55
don’t think you’ll see that resentment
33:56
well that’s that’s another way to talk
33:58
about like the short-term panic by both
34:00
the Fed and the fiscal is that it’s
34:02
trying to get it all done now in the
34:04
absence of having the time for it to
34:06
actually play out and the way that I’ve
34:08
looked at that is that it finds its way
34:10
into market volatility so the market
34:12
volatility shows you that markets are I
34:14
think there are equity markets and parts
34:16
of high-yield are uninvested but again
34:19
until the volatility goes away the
34:20
volatility goes away when the economic
34:21
circumstances become clear that
34:23
generally is a function of cash flows
34:25
coming back people getting their jobs
34:26
back but on slide 78 guys just so that
34:29
people can see what Jim means because
34:31
III think I said this every meeting that
34:33
I had for the last year because US
34:35
economy as you know peaked at the end of
34:37
q3 of 2018 you know initial claims in a
34:40
recession is weekly number the number
34:42
one causal factor to be watching in
34:45
terms of the pace of the economy this
34:46
thing is way off the chart like there’s
34:49
no like if you and I like bean counters
34:52
like we can’t analyze it I can’t believe
34:55
that all these people are so certain in
34:57
their grand central plans that you can
34:58
knock out essentially don’t forget to do
35:00
not you’re gonna knock out depending on
35:02
what this number is on the right side
35:03
there the cumulative employment gains
35:06
you’re gonna knock up 90 percent of the
35:08
cycle that’s a hundred and twenty nine
35:09
month economic cycle and then
35:11
everybody’s just gonna magically come
35:13
back I mean our our you know we’re
35:15
saying that at least two-thirds of the
35:17
jobless claims are permanent right and I
35:20
think that that’s going to be the real
35:22
fear is that the officialdom is hoping
35:25
that these plans are going to get
35:26
everybody back to their job and that
35:29
their you’re going to get paid to do
35:30
nothing but you’re going to be there for
35:32
the restart is what they’re going to
35:33
want
35:34
to do right um but if you’re right
35:37
two-thirds of it is permanent there’s
35:40
gonna be a big backlash that’s going to
35:41
be considered a gigantic failure on the
35:45
part of official demand if that happens
35:48
and at the same time those markets are
35:52
perceived to have not fallen apart which
35:55
is for the moment where the authorial is
35:58
on this 50% retracement of the decline
36:00
you’re right back to the anger that you
36:02
had in late oh nine with the Tea Party
36:06
movement in Occupy Wall Street that the
36:08
rich and connected got bailed out
36:09
through artificially supporting in their
36:12
their asset prices at high levels but
36:14
everybody else didn’t get bailed out as
36:17
well too so that’s going to be a real
36:19
problem I think you’re right that
36:21
ultimately the thing that’s going to
36:24
matter the most is going to be that
36:26
initial claims which becomes continuing
36:28
claims yeah how many of those people get
36:30
their jobs back because if not enough of
36:33
them get their jobs back then this
36:35
didn’t work this being these bailout
36:37
plans and everything else to try and
36:39
support the economy didn’t work and if
36:42
the stock market decides to have you
36:44
know bubble fever again and make a run
36:46
at 3,000 on the S&P and you’ve got CNBC
36:50
and Bloomberg and Fox Business telling
36:51
you the markets are okay but you lost
36:54
your job you lost your life savings in
36:56
your restaurant yeah that’s not gonna
36:58
sit well those two things are not gonna
37:00
that’s oil and water trying to put those
37:02
two things together at the same time
37:04
yeah that’s that’s correct that’s
37:06
Batsuit crazy I mean to think that
37:07
that’s all gonna work on a linear basis
37:09
right the another question here and this
37:12
is this is an important one as well and
37:14
and you know Trump being as
37:16
chameleon-like as he always is as most
37:18
likely and already has moved towards the
37:19
new narrative like calling it the Wuhan
37:21
crisis one of our clients the other day
37:23
called it the China 19 you could see how
37:26
people go there on the blame game but as
37:28
US companies reassess their reliance on
37:31
China or wanting to do with them at all
37:33
is there a possibility of another China
37:35
trade deal follow up before the election
37:37
oh I think that there’s very little
37:40
chance of a China trade deal before the
37:42
election at this point I do think
37:46
the thing about whether or not you think
37:48
China was at fault or not the fact of
37:51
the matter is it started there and it
37:52
came out of there and so we know that
37:54
when you start hearing rick scott
37:57
senator from florida last week on TV
38:01
getting very emotional and angry and
38:03
saying something along the lines of
38:05
anybody that buys a product made in
38:07
china is immoral now 60 days ago he
38:10
would have been mocked and laughed at as
38:12
a kook for saying that today who’s gonna
38:15
support china who is McCrone gonna
38:18
support china he’s got 17,000 dead
38:20
people in his country is italy gonna
38:22
support China is Boris Johnson go to
38:24
support China he nearly died himself
38:26
from this as well so anybody that’s
38:29
gonna want to push on China and say
38:32
they’re at fault remember it came out of
38:34
there and it’s your fault and we need to
38:36
punish you there’s gonna be no natural
38:39
constituency that’s gonna push back
38:40
again is Biden gonna push back against
38:43
it does he think that that’s going to be
38:44
a winning strategy to defend China after
38:47
what everybody has gone through so there
38:50
is going to be the scapegoating from
38:53
China now maybe it’s not skipper maybe
38:54
it is appropriately assigning blame
38:56
because of the way that they’ve
38:58
mishandled it as well too and I think
39:00
Trump opened the door for that yesterday
39:03
with his I’m not gonna fund who anymore
39:06
the World Health Organization that is
39:09
almost by definition saying that who got
39:12
it wrong because China told them to get
39:15
it wrong and that’s what we’re gonna go
39:17
so there’s gonna be a lot of anxiety
39:19
let’s put it that way with China I don’t
39:21
know if I I’d be shocked if we’re gonna
39:23
be looking at more trade deals look over
39:26
the weekend Larry Kudlow who signed off
39:29
his shelf for 10 years I believe free
39:31
market capitalism is the best way to
39:33
prosperity said the government should
39:36
pay the moving costs of American
39:38
companies to relocate back to China
39:40
that’s not very free-market capitalist
39:42
but it might be something that will get
39:45
a lot of play and a lot of understanding
39:48
in the country as well too so in that
39:51
environment no there’s gonna be no trade
39:53
deal Trump I think is you know he keeps
39:57
saying the Chinese are gonna buy all
39:59
these soy bean
39:59
from us and we’ll see whether they do it
40:01
I think he’s waiting for them to not do
40:03
it and then he’s gonna unleash on them
40:05
as well – funny – do it
40:09
the cuddler thing just cracked me up but
40:11
I mean I remember going on Kudlow and
40:15
company for probably as long and not as
40:17
long as you did you’ve been doing it for
40:18
longer than I have but I’m 45 years old
40:20
I was he would start every show with you
40:23
know like you said free market
40:24
capitalism King dollar Jim King dog you
40:28
know right and cash flows are the
40:31
Mother’s Milk of the stock market now
40:35
you have cash flows pre virus that it’s
40:37
loads of 0% growth in the US he doesn’t
40:39
say jack shit about the dollar at all it
40:43
got this part which is just like I mean
40:46
I yeah yeah some of these questions – in
40:48
the queue and maybe you know I don’t
40:50
know if you want to address it just
40:51
generally but people are apoplectic
40:54
watching like these discussions saying
40:57
how can these the kinds of discussions
41:00
that that you and I are having right now
41:01
how can this not be had in America you
41:04
know as in the face of the establishment
41:07
like you have any ideas on that because
41:09
I’m certainly a game for it if there’s a
41:11
way to do it right I mean these
41:13
discussions again I think they really
41:15
come down to this giant hope that that
41:19
official term whether it’s the Treasury
41:22
it’s Washington it’s the Federal Reserve
41:24
it’s the foreign entities that are the
41:27
equivalent of them all together can fix
41:30
this problem and that’s what they’re
41:32
really hoping for is that they can fix
41:35
this problem this problem really being
41:38
that my portfolio has lost a lot of
41:41
money and that’s really what’s untenable
41:43
and I need that to go back up they don’t
41:46
believe in the Schumpeter creative
41:48
destruction for every decline in every
41:51
change there’s an opportunity and if you
41:53
let the if you let the organism of free
41:57
market capitalism exist it will bend and
42:00
fold and change itself into something
42:02
else that’s better we don’t want to
42:04
change anything right now we want the
42:07
status quo and that’s what they’re
42:09
really pushing on is the status quo to
42:12
hold
42:13
print all this money hold the market up
42:15
at these levels as well too if you want
42:19
to look at a good example is you know
42:22
the the auto bailouts of ten years ago
42:24
we couldn’t allow because everybody’s
42:27
got this perception that when a company
42:29
goes out of business it goes away it
42:32
doesn’t go away it restructures is what
42:35
it does it changes in what it is and
42:38
that we didn’t allow the auto companies
42:40
to restructure and change to the point
42:44
that we allowed a Tesla to become the
42:47
bubble that it became because everybody
42:48
looked at Tesla and said they’re leading
42:51
the way to where autos can go now maybe
42:54
the evaluations became insane and
42:57
ridiculous but what we also are saying
42:59
at the same time is for GM Chrysler and
43:01
the rest of you you can’t you are
43:03
incapable of leading us to where we need
43:06
to go so we look to these messiahs like
43:09
the Tesla’s of the world and say they’re
43:11
going to show us where we need to go
43:13
with these industries because we don’t
43:15
allow them to change because change
43:17
means somebody might lose a job but
43:20
another job might be created along the
43:22
way so we are really trying to really
43:26
recreate January 2020 that’s what we’re
43:29
really what we don’t want anything to
43:31
change from that but it’s going to
43:33
change from that and that doesn’t
43:35
necessarily again that doesn’t mean it
43:38
has to be a disaster it can just be
43:41
different but we don’t even want
43:43
different we want January 2020 and
43:46
that’s why we’re printing all this money
43:48
and doing all this stuff to try and go
43:50
right back to there and you know the
43:52
political establishment Trump he wants
43:54
twenty twenty more January twenty twenty
43:57
more than anybody else
43:58
remember he famously tweeted in January
44:00
twenty twenty the stock market’s up
44:02
ninety percent since I got elected
44:04
you’re not up for ninety percent what
44:05
did you do wrong that’s what he wants he
44:08
based his whole election strategy on the
44:10
Dow going higher and higher and higher
44:13
and and so we’ll see right now there’s a
44:17
big hope especially among the JP
44:20
Morgan’s of the world and the Goldman
44:23
Sachs’s of the world that this will work
44:25
in
44:25
them back to where they were in January
44:28
but when the reality comes in that they
44:30
can’t get us back to January then we
44:33
have to start asking a hard question
44:34
okay we don’t have no economy we have a
44:38
different economy and how is it
44:39
different and who are the winners and
44:41
losers in the new economy we’re not
44:44
ready to go there just yet yeah that’s a
44:46
that’s a good wind up here man that’s
44:49
that’s that’s a lot and it’s and it’s
44:51
the truth and and maybe my last question
44:53
on that is you go back to January and I
44:55
mean not withstanding when it was
44:58
shortly thereafter that Robin hoodie
44:59
accounts for driving Tesla to 925 bucks
45:02
I mean there’s you know people couldn’t
45:03
see any of this coming of course we had
45:05
we work we had plenty of imbalances the
45:06
biggest corporate credit credit bubble
45:08
in US history but I remember and I’ll
45:11
never forget I live in the great state
45:13
of Connecticut which sure certainly is
45:15
in a Republican state I’m not a
45:16
Republican or a Democrat I’m a Canadian
45:17
guy I just don’t like politicians
45:20
generally but my most raging Democrat
45:25
clients let’s just say in you know
45:27
institutional money managers they were
45:29
kind of okay with Trump you know they
45:31
they’re okay because it was working
45:33
right they’re getting paid markets going
45:35
up they’re levered long they say yeah
45:37
you know he’s clever he’s gonna keep it
45:39
going you know I don’t know how much of
45:40
that you’ve got in your neck of the
45:43
woods but man they’re gonna be quick to
45:45
turn if that if if what was getting em
45:47
paid through the lens of dig they were
45:49
willing to ignore it but now they’re
45:52
certain ask the questions was he telling
45:53
the truth it’s just like the words
45:56
turning pretty quickly here you know
45:59
everybody that’s listening to this
46:00
podcast isn’t is interested in the
46:02
investment markets in one way or another
46:04
has their in the history of the world
46:06
ever been anybody to bitch and complain
46:08
that they made money whether or not it
46:11
was they made it by luck or they made it
46:13
by smart or they fell into it or they
46:16
saw it coming if they bought something
46:18
and it won up they’re good with it and
46:20
you know don’t don’t start telling me
46:22
that I got lucky or I maybe I did and
46:24
I’m I’m good with the president good
46:27
with every if this guy keeps tweeting
46:29
every three days that he’s causing the
46:31
stock market to go off even though I
46:33
might believe he didn’t it’s going up
46:36
and I’m making money and there’s no
46:38
complaints here
46:39
and then the minute thought stops going
46:41
up this one everybody then starts asking
46:43
the real hard questions yeah that’s a
46:45
real hard questions it’s getting harder
46:47
I mean he had a tough trade their
46:48
president pump on that oil trade right
46:53
you know it’s it’s it’s an amazing thing
46:56
that what’s happening with the with the
46:58
oil trade is Trump has you know he might
47:01
not be wrong on it but he’s he’s decided
47:04
that the energy sector is as important
47:08
as the consumer sector now from an
47:10
economic standpoint that’s actually
47:12
right if you look at the amount of GD
47:14
the energy sector puts out and the
47:17
amount of GDP would that would be
47:19
enhanced by an oil price cut it’s about
47:22
50/50 and so he’s not entirely wrong on
47:25
that but boy he does really come off as
47:28
is trying to say that he doesn’t want
47:30
anybody to have a cut of gasoline prices
47:32
they should if the economy is gonna go
47:34
down this hard then that should be the
47:36
natural consequence of it is one dollar
47:38
gasoline is what it would be um gasoline
47:41
is supposed to represent some measure of
47:44
economic prosperity in the country too
47:46
because it’s its demand will move up and
47:49
down with it and if we are unemployed
47:52
remember the biggest reason you drive is
47:54
to go to work and if you are unemployed
47:57
then you get the gasoline demand numbers
47:59
we got today the lowest ever cuz
48:01
everybody’s sitting around talking to
48:03
people on skype like we are right now
48:06
and we’re not in our car yeah and that’s
48:08
going to continue to be the case as we
48:10
move forward yeah if you haven’t looked
48:11
at it which I’m sure you have maybe
48:13
others haven’t the mannheim index you
48:15
know used cars just complete collapse
48:18
and that that index used cars has been a
48:20
pretty good leading indicator for a long
48:22
time but it’s it’s episodic and
48:24
generally not trending but when it
48:25
crashes it crashes for for a reason and
48:28
adjust it again so that’s kind of sad
48:30
there’s a lot if there’s a lot of about
48:31
this Jim that’s that’s just set and you
48:33
know I appreciate that you’ve been open
48:37
and honest about it I think there’s a
48:38
there’s an analytical weaponry to that
48:40
but there’s also a courage
48:42
you know not everybody to your point on
48:44
Wall Street’s willing to again we’re not
48:47
making shit up here this is the truth
48:48
and you’ve been illuminating suffice to
48:51
say and
48:51
educational in terms of laying it out
48:53
there so thanks for thanks for taking
48:55
the time to do that with me
48:56
thank you I appreciate it he’s Jim
48:59
Bianco you can actually find him on
49:01
Twitter he’s a great contributor to the
49:03
debate out there and I think he’ll be on
49:04
the front lines of it I think you’ve met
49:06
three people in particular today that
49:08
that will be I think courage is a big
49:10
part of leadership and I’m gonna you
49:12
know it depends on what people wanted to
49:13
find Americas but that’s how I’m gonna
49:15
define mine thanks for joining us today
49:17
we will be right back at it tomorrow for
49:19
the final day of the investing summit
49:21
[Music]
49:28
you