What this covers
Jim Bianco of Bianco Research and Bianco Advisors joins Monetary Matters to share his views on inflation, the labor market, and bonds. Bianco argues that the reason the unemployment rate has gone up is because the large amount of immigration into the U.S. has increased the labor force. Bianco makes the case that inflation is headed higher and bond yields now are probably headed higher. Recorded on October 14, 2024.
Follow Jim Bianco on Twitter https://x.com/biancoresearch Follow Jack Farley on Twitter https://x.com/JackFarley96
Chapters: 00:00 Intro 01:28 Why Rates Are Up 08:16 What's Driving Unemployment 21:02 The Labor Market's Effect on Inflation 30:51 Strong Wage Growth 34:48 Bianco Research's Bond Market Positioning 45:53 The Explosion of Bond ETFs 48:53 TIPS 53:08 "The Golden Age of Private Credit" 01:08:04 Banks and CRE Exposure 01:15:13 2024 Presidential Election: Who's Better for Inflation? 01:17:55 Consumer Credit Health
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Bianco argues the Federal Reserve miscalculated labor market weakness by attributing rising unemployment to job losses when it actually stems from 7-15 million new migrants entering the country with higher unemployment rates, leading the Fed to overstimulate with a 50bp cut that risks reigniting inflation despite recent disinflation.
- Rising unemployment (3.5% to 4.1%) reflects labor supply increase from migration, not job losses; job growth remains positive and separations are at 20-year lows
- Fed acknowledged migration as source of unemployment rise but cut 50bp anyway, signaling intention to stimulate further despite tight labor market and strong consumption
- Market rejected the cut: long-term rates rose 48bp after the cut (first time in 35 years), reflecting bond market concern about overstimulation and inflation reacceleration
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Since 2020, 42% of all job creation has been at companies with fewer than 50 employees, and 25% of job creation has been at companies with fewer than 20 employees, which means undocumented migrants are more likely to work at small companies where the risk of regulatory audits is much lower than at large corporations.
“the ADP the automatic data processing uh report that comes out two days before the payroll report has a unique Series in it um just so we all know ADP processes about 20 million payrolls a month they're the largest payroll processor of about 160 million people that have jobs um so ADP uses their vast network of jobs that they process to put out some statistics about the economy they're saying that since 2020 since the recover y began after the covid lockdowns 42% of everybody who's gotten a job has gotten a job at an employ at a company of less than 50 employees and 25% of them have gotten a job of less than 20 employees”
Residual seasonality in inflation data creates a U-shaped pattern where seasonal adjustments subtract from reported inflation in June and July but add to it in October, November, December, and January, meaning that as we enter October 2024, inflation numbers will likely rise from their lows due to this seasonal pattern.
“there's a big residual season Al ity in um inflation what do I mean by residual seasonality um if you look at the seasonal adjustments in inflation it's u-shaped it's it's in the M June and July it subtracts from the not seasonally adjusted number to help depress it and then in the end of the year when you get to October November December and into January it adds to it... well we're now in October and we're now in the period where that seasonality will'll start pushing those numbers higher and keeping that core number above 3%”
The Federal Reserve cut rates by 50 basis points in September 2024, which was unexpected until Nick Timiraos published a story a couple days before the meeting, and market interest rates subsequently rose by more than what has been seen in the last 35 years of initial Fed rate cuts, with the 10-year note yield up about 48 basis points in roughly 19-20 trading days following the cut.
“the FED cut rates by 50 basis points which until the Nick timos Story came out a couple of days before the meeting was not expected and the reaction in the broader markets to that 50 basis point cut and specifically I'm talking about interest rates whether you're talking about the two-year out to the 10 year year interest rates went up but they've gone up by more than what we've ever seen in the last 35 years”
The Bianco Research Total Return Fixed Income Index is composed of about 15 ETFs representing over 2,800 individual securities, and managing this as ETFs is far more efficient and cheaper than managing individual bonds because it requires only a small team rather than 50 people.
“our our Holdings are made up of about 15 ETFs if you were to look through our Holdings and you were to say how many individual Securities is that that's over 2800 individual Securities uh and we do track them not only as 15 ETFs but what if it was just a portfolio of 2,800 Securities and we do structure it in that way and we look at it in that way as well too it is I can't emphasize what a game changer it is there was a big long piece in the Ft about a month and a half ago called the ETF is eating the bond market this is exactly why because if I was to manage a portfolio or an index with 2,800 Securities I need an army of 50 people to do this but by using these ETFs I could do it with a skeleton crew and pass those savings along”
Dodd-Frank banking regulations and Basel 3 capital requirements made it extremely difficult for banks to originate and distribute loans, creating a regulatory void that private credit firms (Apollo, Blackstone) have filled by providing credit to smaller businesses without the regulatory burden of 100+ regulators monitoring their operations.
“following the financial crisis and the banking problems that we had in the financial crisis we passed odd Frank and we passed a lot of other rules basil 3 which is the capital rules for banks the international Capital rules for banks let me b a lineer for you we have made handing out a loan very difficult for a bank to do so they haven't been handing out loans filling that void now has become non-bank entities that hand out loans in the form of private credit this is why Jamie diamond loses his mind over private credit I've got JP Morgan and I would love to hand out those loans but and this is a true story JP Morgan has every day makes space for hundreds of regulators from the FDIC the fed the OCC the SEC that do nothing but sit in a JP Morgan office 40 hours a week regulating JP Morgan hundreds of them they are so hamstrung by all of the rules they can't hand out as much credit as they would like to so here comes Apollo and here comes Blackstone and a lot of the other firms that are not regulated like that they don't have to make space for hundreds of regulators to look over every single piece of their business”
Inflation disproportionately harms lower-income households who cannot offset rising prices through asset appreciation (stock market, real estate), cannot absorb price increases in discretionary spending, and face inelastic demand for necessities (gasoline, transportation), making inflation a more severe blow to bottom-half incomes.
“the inflation we really underestimate what inflation has done to the bottom half of the country we in the top half of the country see inflation go up we mutter some unmentionable words about how much more prices have gotten but then we look at the Zillow and it says our house price went up I look at my stock portfolio it's at an all-time high and I just pay it move on with my life bottom half of the country they look at prices and go okay if I have to buy this I can't buy something else and they have to make some really hard choices and they load it up on their credit cards and then they don't pay their credit card debt”
Goods (things you can drop on your toe) represent only about 25% of CPI, while services represent 75%, and services inflation depends on wage growth, making wage dynamics the key driver of overall inflation.
“when we talk about CPI and I did it myself in the previous question we assume Goods right we go to the store we buy things we buy groceries we buy gasoline stuff as my friend Dennis gartman like to say things you could drop on your toe only account for about 25% of CPI the other 75% is services so what is the vast majority of what we spend our money on somebody doing something for us Services”
The savings rate has fallen from a pre-pandemic average of 6% to a post-pandemic average of 4%, which represents a significant decline; the lower savings rate is not due to true consumption increase but rather to the wealth effect where rising home prices and stock portfolios make upper-income households feel wealthy enough to spend more and save less.
“the savings rate averaged 6% um you know uh pre pandemic it's been averaging around 4% post pandemic that's a big difference and why is it averaging I don't have to save as much of my income anymore I could spend more of my income because my Zillow because ow and and my brokerage account are telling me that that's my savings and that's what's increasing my savings so I do think that there is there is some of that”
Private credit growth is not being captured in Federal Reserve metrics of credit growth (such as bank lending growth or broader credit aggregates), potentially making the Fed's assessment of economic stimulus and credit conditions misleading.
“and this private credit numbers are not being captured in that pedit credit growth area so it has been an area which I think is growing quite a bit it has had an impact on the economy especially at the lower end and coming very soon will be instruments like some of these private credit ETFs”
Inflation concerns are the top issue voters are considering in the 2024 election, despite economist claims that inflation has been solved, because the bottom half of the country is still experiencing the pain of inflation from 2022-2023 and remains 'seething mad' about it.
“it is showing up in the unhappiness about the electorate it's showing up in how inflation is the number one issue that we're voting on when economists say but inflation's down and it's been solved but the public is still seething mad about it because the bottom half of the country still has one vote just like the the top half of the country has one vote”
The entire rate-cutting cycle was priced into the market before the Fed's September 18 rate cut; the 10-year note fell 115 basis points from April (4.75%) to the day before the Fed cut (3.60%), leaving little room for further rate declines even as the Fed began cutting.
“the market has priced in the entire rate cutting cycle so if you go back to April in April the 10e note was at 475 the day before the FED cut rates it would got down to 360 so that was 115 basis point or 1.1 .5% decline in rates from April to the day before the FED cut in September the whole move was priced in that's it it is done at that point”
Bianco Research and Bianco Advisers manage the Bianco Research Total Return Fixed Income Index, which is discretionally managed by a committee (headed by Jim Bianco) and is tracked by the Wisdom Tree Bianco fund ETF (ticker WTBN), structured similarly to how S&P manages the S&P 500 and SPY tracks it.
“we manage at Bianco advisors.com we manage the biano research Total return fixed income index big fancy long name um it's an index it's managed by committee which I head and so we put it's discretionally managed by us so we decide on waiting like duration and corporate credits and structure which would be mortgages um and whether or not we're bulleted or barbell and whether or not we have an outof index bet and our partner Wisdom Tree has it ETF wtbn Whiskey Tango Bravo Nancy wtbn Wisdom Tree biano fund is its name it tracks our index think of the S&P index committee manages the S&P 500 and spy tracks the S&P 500 so we're set up exactly under under that structure”
Job losses (measured by job separations in the JOLTS report) are at some of the lowest levels in 20 years, indicating that rising unemployment is not driven by people being laid off or fired.
“even if you look at the jolts report the job opening labor turnover report they look at they have a section in there called job separations how many people have been fired or laid off that's at some of the lowest numbers in 20 years so people aren't getting laid off”
70% of consumer spending comes from the upper half of income earners, and 85% of consumer spending comes from the upper 30% of income earners; the lower income half is defaulting on auto and credit card debt, reflecting a K-shaped economy where the bottom half is suffering while the top half prospers.
“70% of consumer spending 70 is the upper half of income uh 85% of consumer spending is the upper 30 uh 70% of income um a lot of that consumer loan when you break it down who is defaulting on their auto loans who's defaulting on their credit card debt tends to be the lower half of the country uh the lower income half of the country especially the bottom 30%”
Private credit ETFs have recently been filed with the SEC and will begin trading within a few months, which Bianco views cautiously because private credit is illiquid; during liquidity crises like 2020, the ETF becomes the only pricing mechanism and tends to exaggerate moves as investors 'sell what they can, not what they should.'
“there's about five or six uh private credit ETFs that have been filed they have not started trading yet so in the next few months we're going to get a whole slew of those”
Between 7 and 15 million additional people have entered the United States cumulatively, which is equivalent to adding another entire state of Georgia (11 million people) to the country without realizing it.
“cumulatively depending on the measure you use it's between 7 and 15 million people more in the country now than there was in 2020 just to give you an idea the state of Georgia has 11 million people so it's like we added another state of Georgia without realizing that we've done it”
Consumer credit delinquency rates for auto loans and credit cards have risen to levels not seen since 2010-2011 (auto loan delinquencies at 2010 levels, credit card delinquencies at 2011 levels), indicating stress in lower-income households.
“in terms of realized defaults on consumer credit auto loans and credit cards delinquencies are up massively uh the great Liz on Saunders I was just on on Twitter she's uh posted about how the auto rate delinquency rate is where it was in 2010 I see the credit card delinquency rate is where it was in 2011”
Port workers recently received a 62% wage increase over five years, and Canadian pilots rejected a 42% wage increase, demonstrating that employees have realized post-pandemic that they have more bargaining power than in the pre-pandemic era when workers accepted stagnant wages.
“we've seen employees realizing witnessed the um Port strike from a couple of weeks ago being the last example of it getting a 62% ra wage increase over five years 6 2% Canadian Pilots at Air Canada just rejected a 42% increase in wages over five years what we've learned is prior to pandemic the mentality was shut up be lucky you have a job don't complain today the mentality is hey Mr Boss I want a raise and I want a day at home I want remote working if you don't give it to me I am quitting and I will quit and boss is saying please please don't quit quit here here's more money here's a day at home”
Wages (Atlanta Fed measure) are up 4.7% year-over-year while headline CPI is only 2.2-2.3%, creating a 2% real wage growth gap; and unit labor costs are at 4%, meaning overall wage growth is around 4% and this gap between wage growth and inflation must eventually close or wages will continuously outpace inflation.
“uh wages from the Atlanta fed are up about 4.7% uh year-over-year for September 24 well in excess actually double what uh headline CPI is at 2.2 or 2.3%”
Agency mortgage-backed securities (MBS) backed by Freddie Mac and Fannie Mae have implicit backing by the United States government and present very little to no credit risk, but do present interest-rate risk as spreads over Treasuries are wide and likely to compress if rates fall.
“they're all agency mortgages they're all they're all backed by Freddy and Fanny uh they're all backed by the implicit in backing by the United States government it's not explicit it's implicit but that's the way that the mortgage Market is understood so what that means is that those mortgages present very little credit risk if none at all um you know this is when somebody says yeah but Fanny and Freddy won't pay don't worry about it you know then your stock market's down 80 per. because if the government can't pay everything falls apart but there but that's not the issue the issue with more agency mortgages is they become interest rate plays and if you look at those wide spreads of mortgages over treasuries I think that those spreads are going to come in which means more ages will outperform treasuries on the downside and give us a yield at the same time”
Office real estate is in distress because the pandemic-induced shift to remote work is permanent; many forecasters predicted workers would return to the office five days a week, but this has not happened; only Class A (highest quality) office space in Manhattan shows reasonable occupancy, while the majority of B and C class office space is empty or near-empty.
“I was of the opinion even in 2022 because of the nature of work changing and remote work I'm like I think that these office towers are the Titanic and I think that these office towers are going to go down but I kept hearing everybody um you know say no everybody's coming back to the office don't worry we're going to reopen we're going to have mandates to go back to the office and we're going to all go back to the office and the office Towers will be fine well that kind of has disappeared by the second half of 23 and into 24 no we're not going back to the office and no a lot of these offices are in trouble and yes in New York City in Manhattan you might look in Midtown and go there's a lot of there's a lot of a Class A which is the highest quality office towers that are fully staffed or close to fully staffed but the majority of the stuff is B and C and it isn't and these are empty buildings or near empty buildings”
College-educated unemployment remains low (around 3% handle / 97% employment rate), and college-educated workers who have jobs generate stable income and benefit from appreciating assets, explaining why consumption and GDP remain resilient despite lower-income credit stress.
“well yes it's it's it's a couple of things I mean if you look at college educated uh unemployment rate it's still in the three handle you know it's still you know 97% of people that have a a a college degree have a job that want a job um and if you have a job as I said you get money every week to spend and then if you're in that category you own a home you own you own your your you own some um assets and they're appreciating in value too”
The number of job openings to unemployed ratio currently stands above one (approximately 8 million job openings to 6.5 million unemployed), which is far and away higher than anything observed prior to 2020 and much higher than the prior peak of about two achieved two years ago.
“the jolts report also you know for those of a certain age it used to be the old newspaper wanted ads but nobody does that anymore so that we created the jolts report in 2000 job opening labor turnover how many jobs are being advertised in the United States and they do it via survey and it's about 8 million jobs right now people are looking for workers and there's about six and a half million unemployed people so the number of open jobs to the number of unemployed people is above one now bear in mind not every person who's unemployed is qualified for every one of those eight million jobs either they don't have the experience or the educational attainment or maybe they just don't live in the right area to get those jobs but that ratio above one never that before 2020 and while that ratio was close to two about a two years ago and it's come down to one and we call that softening this is far and way higher than anything we saw prior to 2020”
Fed Chair Powell created a statistic called 'core services ex-housing' (super-core inflation) specifically to measure inflation in labor-intensive service sectors, and this measure is still over 4% and heading back up, indicating persistent wage-driven inflation pressure.
“Paul invented a statistic for this called core Services you know super core which is uh core Services X housing what is that measure supposed to be that is his way of saying let's look at all of the inflation measures that are impacted by wages that number is still over 4% and heading back up”
The difference between 3% inflation and the Fed's 2% target matters significantly for interest rates because if inflation stays at 3-4%, the proper 10-year Treasury yield should be 4.5-5%, but if inflation falls below 2%, the proper yield would be 3-3.5%, and a 10-year yield of 4.5-5% would cause the stock market to have a big problem.
“the fed's target for inflation is 2% and get it under 2% or around 2% I think that the inflation rate is going to stay at around three% say between three and 4 per. okay isn't that close enough to two not if you're worried about interest rates because if the inflation rate goes under 2% you could make the case that the 10year treasury's proper yield then is around 3 to three and a half if it's going to stay between three and 4% you could make the case that the 10year treasury should be between four and a half and five and ask anybody in the stock market well if I move the 10year treasury to four and a half to five next trade what do you think the stock market would do it wouldn't like it at all it would have a big problem with it”
Alternative asset managers (Apollo, Blackstone, etc.) are better investments than traditional banks because they are not hamstrung by regulation and do not have the commercial real estate problem; banks are loaded with bad office CRE loans from a time when remote work didn't exist, while private credit skipped that era and is now funding businesses, not office towers.
“I do like the alternative managers better than the banks the reason I don't like the banks is they're highly regulated they're very constricted and they have a bunch of bad commercial real estate which I thought for a long time wasn't being appreciated by people that want to keep buying Banks now the banks have really underperformed badly over the last couple of years”
The unemployment rate rise from 3.5% to 4.1% over the past year is not due to job losses but rather to an increase in labor supply from migrants coming over the border who have higher unemployment rates than the domestic population, as acknowledged by Fed Chair Powell in his September 18 meeting.
“J Paul said in his September 18th meeting it's coming from an increase of labor Supply mainly from migrants coming over the Border who are unemployed depending on the measure you use it's between 7even and 15 million people more in the country”
The payroll benchmark revision in August showed 818,000 fewer jobs created than initially reported, but Goldman Sachs estimates only 88,000 of that represents actual job losses while the other 500,000 were likely workers paid under the table (undocumented migrants) not captured in withholding tax data.
“let me turn you to a statistic came out last month when the um The Benchmark revision of the payroll came in and it fell by $818,000 they do that measure by looking at um they they look at tax returns and they look at the number of people that are getting unemployment insurance in a number of people that are paying into the Unemployment Insurance Fund and they concluded that 88,000 people are paying taxes related to unemployment insurance or receiving it than we thought and that got spun the narrative was the economy created 88,000 Less jobs I think Goldman Sachs had it right and I've been paring Goldman Sachs that their estimates are more like the economy created 300,000 Less jobs the other 500,000 were people getting paid under the table”
Approximately 80% of migrants who have come to the country do not have work permits and are working jobs paid under the table, which means they are generating income and spending that income but not being counted in official employment statistics or withholding tax data.
“about 80% of um migrants that have come in the country obviously they don't have social security number because they weren't born here but about 80% of them have not not imp uh applied for a work permit but they still have jobs they're getting paid under the table is what they're doing”
The quit rate has declined from 3% in 2022 to 1.99%, falling below 2017-2019 pre-pandemic levels, but this reflects slower labor force churn (people are more satisfied with current jobs) rather than weakness in job creation or labor market health.
“the quits rate measures the velocity of people turning over those jobs right how many people are quitting jobs well we measure quits because what do 95% of people quit a job for another job that's why they quit I quit this job because I took another job uh for whatever reason either it was more money or geographically better or something along those lines um the number the churn in the labor market is slowing that's what the quits rate is telling us is that the churn is slowing I think people misunderstand what that churn means the churn means that people are more satisfied with the current job that they have than willing to look for another job”
There is no identifiable 'Trump trade' or 'Harris trade' in markets because both candidates would produce large deficits through different mechanisms: Trump via tax cuts, Harris via spending increases, and both deficit pathways lead to the same inflationary outcome, so economic impact is roughly equivalent.
“notice Jack you push back on this if you want I don't hear a lot of people talking about the Trump trade is this the Harris trade is that oh yeah the Trump trade is to own Tesla and some prison stocks but that's not like an asset class type of thing and the reason that there is no identifiable Trump or Harris trade is they're both kind of going to have the same impact for the bond market and for the stock market if Harris wins there's going to be more spending and a big deficit if Trump wins there's G to be big tax cuts and a big deficit so your choice is between a big deficit and a big deficit”
The Fed's concerns about recession and labor market deterioration, in the context of rising unemployment driven by migrant supply increases rather than job losses, represents a misdiagnosis that is driving overstimulation and reinflationary policy when the economy actually does not need stimulus.
“if there are a lot of immigrants who are working who are not being uh captured uh that means that the Federal Reserve could react to a rising unemployment rate when it really isn't labor weakness and they could overstimulate you call it inflation but I just say stimulate the entire economy so they're stimulating nominal growth but also corporate profits and the stock market so maybe there's a risk that the stock market could overheat”
The cycle of the 40-year bull market in bonds, the cycle of low stable inflation, and the nature of the labor market due to remote work all ended in 2020, meaning claims about the economy 'returning to normal' or 'broadly normalizing' to pre-pandemic levels are incorrect because we are in a fundamentally different economic cycle.
“I think the cycle changed in 2020 and I think what you hear a lot of economists including J J Paul uses words all the time like we're returning to normal returning to a prepandemic level the economy's broadly normalizing he uses these words all the time and I've argued what's abnormal about this economy what what what you know that what he's arguing is we're going back to a pre we're going back to a previous cycle that the cycle ended the 40-year bull market and bonds ended in 2020 the cycle of low stable inflation ended in 2020 the the very nature of the labor market because of remote work um ended in 2020 and that we're in a different cycle right now”
Regional and community banks (numbering about 4,000 in total) hold the other 20% of banking assets and are heavily exposed to commercial real estate, especially office towers that are struggling due to remote work adoption, whereas large banks (Big 4: JPMorgan, BofA, Citigroup, Wells Fargo) have 80% of assets.
“the big four Banks you know Bank of America City uh Wells Fargo and and JP Morgan Chase which have about 80% of the banking Assets in the United States those four the other Regional Banks and the smaller Banks Community Banks which number about 4,000 have the other 20%”
The Federal Reserve is managing a fixed-income portfolio of Treasury Inflation Protected Securities (TIPS) with a duration of 0-5 years and a real yield of approximately 2%, betting that inflation will accelerate above current levels and generate additional returns through accretion (receipt of additional bonds as inflation compensation).
“we own s tip stip and that is a tip that owns tip Securities between zero or you know about to mature out to five years and no longer than five years... what is a tip security it pays you a real interest rate which again is now positive around 2% and it pays you whatever the CPI rate is so you will get that 2% plus 2 . three is what you would have gotten over the last year because that's what the inflation rate is on top of that 2%”
Corporate credit spreads (the yield premium over Treasuries) are near historically tight levels, in the 90th percentile of tightness based on comparisons to 1997-present data, making corporate bonds poor value relative to alternatives like mortgages that offer similar yields but are cheaper (less rich).
“I remember at the time I did in my own histogram that going back to 1997 high yield spreads were 86% of the time wider meaning they you know 14 it's a 14th percentile they are quite rich and now the spread is even so it must be close to a 90th percentile uh rich”
The stock market has had the best year-to-date performance since 1997-1998 due to a combination of strong earnings, falling inflation expectations, and low unemployment, but much of this rally is built on rising asset prices (wealth effect) and federal stimulus rather than underlying economic strength.
“I believe the stock markets had the best year-to-date performance since 1997 or 1998”
Trump's proposed tariffs may not actually be inflationary if he succeeds in using them as a negotiating tool to extract concessions from China or Mexico, as the tariffs would never be implemented; both major parties support tariffs in principle (Trump's 2018-2019 tariffs were not repealed) so the difference is mainly rhetorical.
“there's no reason to believe he won't do that but I'll point out that in the toxic partisan environment of Washington there's really one thing economically they agree on all of Trump's tariffs that he put in 2018 and 19 largely still exist so both parties are basically Pro tariff it's just one says it out loud and the other one doesn't and so I don't I think we're just overstating the case that Trump's going to create inflation with all of his with all of his tariffs we'll see I mean he has every intention he his intention and I don't mean to advocate Trump his intention is to use tariffs as a hammer to get concessions from either the Chinese or the Mexicans orever he wants to put him on and if he winds up getting those concessions those tariffs will never come to pass in the first place”
JPMorgan CEO Jamie Dimon is frustrated by private credit competition because he would like to issue loans that private credit firms issue, but cannot because of regulatory constraints; private credit fills the void left by deregulation-driven bank deleveraging.
“this is why Jamie diamond loses his mind over private credit I've got JP Morgan and I would love to hand out those loans but and this is a true story JP Morgan has every day makes space for hundreds of regulators”
The labor force participation rate and structure of the unemployment rate have been distorted by net inflows of working-age migrants, making traditional unemployment-rate-based labor market analysis misleading; the true state of the labor market is stronger than headline unemployment suggests.
“and so what we're seeing here is a belief that the economy is slowing when it may not be and we might be trying to stimulate the economy when it may not need it and the result could be inflation and that's what the bond Market's sniffing out”
The CARES Act subsidized public mass transit in the US through the end of 2025; if a divided government emerges after the November 2024 election, Republicans may refuse to extend this subsidy for Democratic-leaning blue cities, causing transit systems (especially NYC subways) to reduce service, which would further depress Class A office occupancy.
“when we passed the car's act we had the finan we had the federal government subsidize mass transit United States um for five years through the end of next year Well in 24 days we're going to have an election if we have any kind of divided government a r behind anything the president the house the Senate all of it some combination of it there's probably not going to be an extension of mass transit subsidization through the cares act in other words the New York City subway system is losing unbelievable sums of money but the federal government's writing him a check so they keep running trains on Monday and Friday that no one uses well eventually when those checks run out in 24 days if if there's a Republican and a republican say we're not going to subsidize mass transit in blue cities like New York City and then eventually they're going to have to start changing their service and that means they're going to run Sunday service on Sunday on Monday and Friday then even those Class A offices are GNA have a problem”
Fed Chair Powell's August 2022 Jackson Hole speech was essentially asking top-half income earners (stock and real estate owners) to bear the pain of lower portfolio values so that inflation could be reduced and lower-income households could survive; the current stock and real estate rally represents the reversal of that policy and the political victory of the top half over the bottom half.
“on to the first half of your question yeah that's why if you remember Pal's famous speech in August of 22 at at Jackson Hall the the eight minute there will be pain speech is basically what what let me tell you what the speech was hey you people listening to us and you own a stock portfolio and you have your house um do your patriotic Duty and hope that your stock portfolio goes down and Zillow says your house is worth less because if that happens that will cool demand bring down inflation and help the Dollar Tree General class get by with lower inflation well we've had enough of that it's time for a stock market rally it's time for Zillow to tell me that my house went off”
Inflation peaked at close to 9% in 2022 and has since dropped significantly; headline CPI is now at 2.3%, PCE on a 12-month basis is 2.2%, but core CPI (excluding food and energy) remains elevated at 3.3%, and Bianco expects inflation to remain between 3-4% rather than return to the Fed's 2% target.
“inflation peaked at close to 9% in 2022 it has since dropped like a rock and so now see one measure of inflation on a 12mon basis is 3.3% another measure on a 12mth basis is 2.2% that's pce on a six-month basis pce is 1.9% below the Federal Reserve Target on a three-month basis pce is 1.5%”
JP Morgan and other large banks are heavily regulated—they must provide space and accommodations for hundreds of regulators from the FDIC, Federal Reserve, OCC, and SEC who work on-site 40 hours per week—making it impossible for them to compete with non-regulated private credit firms on lending volume and profitability.
“JP Morgan has every day makes space for hundreds of regulators from the FDIC the fed the OCC the SEC that do nothing but sit in a JP Morgan office 40 hours a week regulating JP Morgan hundreds of them they are so hamstrung by all of the rules they can't hand out as much credit as they would like to”
Strong retail sales and consumption numbers that continue to beat Wall Street expectations are evidence that more people are employed than official unemployment figures suggest, because income from employment is the primary driver of consumer spending.
“the biggest reason you spend money is you have a job well if people are not the biggest reason you spend money is you have a job well if people are not you know getting jobs if people are not seeing um that income they're not going to spend as much but yet the retail sales and the consumption numbers are very strong and they continually beat Wall Street's estimate why is it that they're so strong because maybe there's a lot more employed people than we think they're just being employed under the table”
Bianco's research fund (Bianco Research Total Return Fixed Income Index, tracked by ETF wtbn) is underweight duration (interest rate risk) because he expects rates to rise, and offsets this by maintaining a long dollar position through forward currency swaps (which have 6% yield) and overweighting mortgages (120% of benchmark) while underweighting corporate credit.
“we are carrying a duration of less than what the duration would be of our index so we're underweight what does that mean the duration is uh exposure to interest rates so if a duration of five meanings if interest rates go up by 1% what you own goes down by 5% yeah that's the modified duration answer it says is that yes exactly if your duration is is five and interest rates go up 1% all things being equal you're you will lose 5%”
Bianco owns Harley Bassman's mortgage ETF (MTBA) which holds only newly issued mortgage-backed securities with higher coupons, taking greater convexity risk because interest rate volatility is slightly overpriced, representing about 14% of his fund's holdings.
“I said that the reason I burn that up 14% of our Holdings is mtba Harley bassman's uh mortgage fund uh yes so we own newly issued mortgages for exactly the reasons that Harley had pointed out and we own his fund for exactly those reasons”
Office real estate valuations have fallen so dramatically (down 80% from 2019 levels in some cases, though recovering 160% from recent lows) that most of the downside is priced in; further deterioration will be limited, and value is emerging in office REITs at current prices.
“an office Real Estate Investment Trust or you know mainly mainly in New York and you know it was down uh price not including Total return not including dividends it was down 80% from 2019 so from from the low it's up 160% it's still not close to it its 2019 level”
High yield bond spreads are at a 90th percentile of richness (historically tight valuation) based on data going back to 1997, making high yield bonds unattractive on a valuation basis despite the no-landing reflationary scenario being supportive of credit.
“I did an interview with the large asset manager in the spring and I remember at the time I did in my own histogram that going back to 1997 high yield spreads were 86% of the time wider meaning they you know 14 it's a 14th percentile they are quite rich and now the spread is even so it must be close to a 90th percentile uh rich”