MacroVoices #445 Jim Bianco: Still No Landing, and Inflation is Not Transitory

[Music] and now with this week's special guest here's your host Eric Townsen joining me now is biano research founder Jim biano Jim it's great to get you back on the show last couple times that we had you on you made the prediction that if the FED did what they have now done which is to wait until September before any rate cutting they would risk the appearance of having become political uh I'm going to go out on limb here and say I I think that they've crossed that Rubicon the FED looks political uh what are the implications of that is it really change anything yeah no the FED has definitely become political um Let me let me back up and remind everybody what I said in our last conversation in May whatever the FED policy was going into Memorial Day were they tightening were they holding or were they cutting usually will make it until election day so to be clear because people kind of misunderstand what I'm saying if they were tightening going into Memorial Day they could continue to tighten through the summer all the way to election day if they were cutting they could continue to cut they were holding because their last move was in July of 23 with their last raate hike so from July 23 to Memorial Day this year they were holding that would suggest they would hold through election day well as we talk a week before the FED meeting with over a 100% chance that the FED will cut rates at their September 18th meeting over 100% means we're debating whether or not it's going to be 25 or 50 basis point cut not if there's going to be a cut it looks like the FED is going to break from its historical tradition and it's going to cut rates in September of an election year in other words change policy in September of an election year uh and that is uh unusual it does look like it's going to be very political the interesting thing about it is the Fed could cut rates and both candidates could find up winding up you know criticizing the FED for the same reason that the FED could cut rates and the Trump Administration could put out something saying see the economy's falling apart you know the Biden Harris administration's done a terrible job even J Paul acknowledges it and the Biden Harris Administration could say why are you doing this before the election to give them a talking point um as well so they're looking to be very political so yes they've decided to cross that Rubicon now I've talked to some fed officials about this exact topic and their comment to me was no matter what we do in September we're going to be criticized if we don't cut we're going to be criticized if we cut we're going to be criticized we might as well ignore the politics and do what we think is going to happen and that seems to be what they're doing they're believing the data that the economy is Cooling and that a a cut is warranted at this point final thing about this topic I also said back in May too the line that the FED is political but not partisan so what I meant by that back in May and I think it applies here is no they don't sit around the fomc table saying okay and let's cut to the chase we really want Harris to be president because they tend to be more Democrat than Republican at the Fed so what can we do to get Harris elected they do not do not do that so I don't think they're partisan and they think of it in those terms but they are political in that they are worried about their reputation they are worried about the ramifications of their policies in Washington and they care a great deal about that but given what they've told me and I think it's right if they don't move their criticized if they move they're criticized whatever if September 18th comes up they're going to be criticized whether they do something or don't do something so they've kind of said that all cancels each other out we've just decided that the data is cooling enough that it warrants a rate cut and that seems to be why they're doing it Jim you laid out a scenario for me off the air where China's economy actually figures into this whole story give us the the backstory there how does China fit into this story and how does it affect the The Narrative so we'll talk about this a little bit later but let me just say yes I am I been bearish on bonds and I still am for the moment and I am very surprised that we've gotten the 10-year yield down to 366 part of my surprise has been I don't think you can make a case with the economic data in the United States that interest rates should be this low so the question is all right let's look outside the United States and what are we finding outside the United States an acknowledge story that isn't maybe getting the coverage that it should Chinese econ is in a world of hurt right now it is really in a bad place their stock market is down over the last two years by over 25% at the same time our stock market is up and I'll remind everybody that China still has rules on their books that if you are a research analyst in a brokerage house in China and you write a bearish report you could be prosecuted if you short sell their Market you can be prosecuted so they are throwing people in jail that try to short their Market or badmouth it and it's still down 25% over the last couple of years at the same time the S&P is up 45% their interest rates are at an all-time low uh 2.1% on the Chinese 10year Bond now data goes back to 2005 but they are definitely at a 20 plus year low on that data as well so that lower interest rates isn't saving their economy their second quarter GDP grew at 5% % now that sounds like a lot from Western Market perspectives but for high growth Emerging Markets like China 5% growth there's only two times in the last 45 years it's been lower than that tanan square in 1989 and the coov shutdown and now so their economy is in a world of hurt why is that matter they're a bigger consumer Market than the United States they buy more cars every month than the United States or Europe they consume more gasoline every month than the United States or Europe if their consumer economy is really slowing now you look over and you see Brent crude oil the day we're recording is under $70 for the first time since 2021 that's not an indication of what's happening in the United States that's an indication of what's happening in China if I look at the Bloomberg commodity index that is approaching a three-year low that is an indication of what's going on in China not necessarily an indication of what's happening in the United States Andor in Europe now what makes that surprising is the Chinese are command and control economy they are a communist government it's always been believed that the Chinese you know parot Bureau will send out the word down on high Banks please start lending money people please start spending money please start initiating new projects to keep the economy moving they still have that ability to do it and for the 25 years I've been watching the Chinese economy probably Eric like you have every couple of years people say well at one point the Chinese are going to run out of the capacity to do that okay I've heard that 15 times over the last 25 years but maybe this is the time that that's finally starting to happen and that the Chinese economy is really in a bad place it is killing demand for Comm ities it's killing demand for energy those prices are way down and that's what you're seeing World interest rates respond to especially in the developed countries is that lowering of commodity prices and that lowering of energy prices not because of what's happening in Europe Andor the United States but what's happening in China now one of the predictions that had been made for many years is that China had historically been a huge buyer of us treasury debt and that they would have eventually stop doing that and it would cause all kinds of problems for the us in many ways that story already came true they really have divested a lot of their treasury Holdings but it has not caused any problems any significant problems for the us at least not so far so are you saying that it's now about to start causing those problems is is that where you headed with this well I I'll throw in the other side of the equation now too um the Chinese Holdings of us treasury debt actually peaked in 2012 so it peaked 12 years ago at about 1.2 trillion I I'm confident enough in remembering that number correctly and it's down you know probably 20% to a third so they've been divesting themselves of treasuries for the last 12 years now a big reason that they're doing that is remember that like the the conveyor belt that if if you want to think of that metaphor they produce product put it on a boat send it to the United States we pay for that product with dollars what are the Chinese going to do with all these dollars well they're not going to convert them all to youan you know that that would affect their Foreign Exchange Market so they recycle those dollars into us treasuries well the trade with China especially since the trade Wars under the Trump Administration in 2018 is down and covid and the rebound from covid never really recovered the pre-co levels so we're buying less stuff from China we're still buying you know a significant amount of stuff but less than we used to so that conveyor belt if they send them a stuff we send them dollars they recycle those dollars into the United States they're still doing that but they're doing that at lower levels which is why there are full Holdings of treasuries has been falling now on the other side of the equation there's the new country that is the largest single holder of treasuries is Japan and they've overtaken China A couple of years ago and they have been constantly hoovering up um treasury Securities under the Yen carry trade so you know the borrow money in Japan at somewhere near zero interest rates and then go out and buy something at that yields more now a popular product that they've been buying has been Mexican treasury bills because Mexican treasury bills yield over 10% so you can borrow at zero in China you could buy a Mexican treasury bill that yields 10% you have to take the currency risk you can't really Hedge by the way that trade has probably produced you more profit than owning the NASDAQ over the it actually has until about a month ago when the Yen carry trade started to get Unwound and now that's been putting that at risk as well now wait a minute shouldn't that Yen carry trade unwind in Japan being the largest treasury holder be bearish for bonds yes it should be but they're rallying so they're rallying there's something else that's going on there that seems to be a bigger positive in bonds than it is the negative of losing the the Yen carry trade in bonds and I think that is the slowdown in commodity prices the fall in Energy prices LD driven by the Chinese economy slowing so to answer your question succinctly yes you should probably see them reduce their purchases of treasuries but they have been for 12 years but on the margin what we really should be looking at is Japan and whether or not they're going to change now that the Yen peaked at 160 and it's pulled back and there's some question about whether or not the Yen carry trade will continue so will the end carry trade continue and what will the KnockOn effects be to the US economy and while we're at it let's also cover the The Landing situation are we are we at no Landing soft Landing or uh hard Landing in the United States and where are we headed with inflation all right so as far as the Yen carry trade the answer is it should continue it's still an attractive trade now what happened to cause that unwind July 31st was the bank of Japan meeting July 31st was also the Federal Reserve meeting and the bank of Japan met when all us Americans were asleep they raised rates 15 basis points now they operate a little differently than us Market thought that they'd raise rates between five and 10 and they raised rates 15 and they made some noise about that they might not be done raising rates so the takeaway here is they surprised with a bigger rate hike than people thought and said there might be more of this well if you're a lever Trader I am borrowing a lot of money in Japan financing it at their funds rate which is you know at their repo rate which is which was around five basis points or effectively zero and buying a bunch of Mexican t bills or us ten years or something that's yielding a lot more and have no currency risk I don't want uncertainty anywhere so when the bank of Japan surprises me by raising rates more than I thought surprises me by suggesting that there might be more surprises me that these rate hikes are strengthening their currency weakening it against foreign currencies as a levered Ben carry Trader this is bad news for me I don't want their currency to strengthen I don't want uncertainty to cause volatility because I'm a very leverage Trader I get out and that's what drove the Y carry trade to be Unwound where are we now we're still at 15 basis points on their carrying cost or their official discount rate you know the repo Market they're they've backed off after all of the market gations in early August about saying that they might raise rates more they didn't close the door on it but they became a little bit more ambiguous if I'm a Yan carry Trader I'd have to look and go there's still practically free money in Japan their currency ever settled out at whatever level it wants to just volatility go away I should get back into that trade and I suspect that that you might see a Resurgence of that trade largely because it still exists the the fund the underlying fundamentals that make it attract R active still exist the only thing that's holding everybody back is the is the currency volatility but that might not last much longer so I suspect you will see another leg in the Yen carry trade last thought on the Yen carry trade it's usually you borrow in Japan and you buy something with a yield well you've got the two-year note at 360 in the US I've mentioned a couple of times you've got 10% on three-month bills in Mexico that kind of a of of a trade is what want to do what they're largely not doing is what everybody assumes they're doing oh yeah we're borrowing in Japan at zero and we're buying in video or we're buying the Magnificent 7 stocks yeah if you're gonna buy the Magnificent 7 stocks given all the volatility those you could charge me 5% of carrying cost you could charge me zero because those stocks are so volatile that extra carrying cost and taking their currency risk is really not that important so I don't think that you're you're doing that trade in Japan to find a way to you know Microsoft or Nvidia or or something along those lines now to your other question as far as the economy you know Wall Street likes airplane metaphors there's the no Landing which is a recession I'm sorry there's the soft Landing excuse me which is a recession there's the no Landing which is the camp I'm in which means that the economy continues to grow at its potential you know in other words it is just cruising along and it's not showing signs of any kind of a Slowdown or recession and then there's that nebulous middle the soft landing and the reason I call it the nebulous middle is the soft Landing has no real definition you know if Wall Street forecasts a soft Landing it has a definition Joe Biden says we're going to have a soft Landing in fact he demanded allot demanded that we're going to have a soft Landing in the State of the Union Address and said a soft Landing just means the inflation rate's going to come down that's all he thinks it means and over the weekend Janet Yellen said we're going to have a soft landing and she had some three paragraph definition of what it was and it's completely different from Joe Biden's definition and it's completely different from wall Street's definition and I've often quipped Wall Street loves to forecast the no land uh excuse me the soft Landing because it has no definition so I'll tell you I'm going to have a soft Landing so in a year I can give you a definition and tell you I'm right now that I've said that I'm in the no Landing Camp the reason I'm in the no Landing Camp is when I look at the US economy I don't see real signs of a Slowdown I see GDP growing at two to 3% I see the Atlanta fed GDP tracker is still saying that we're going to grow above 2% this quarter economists have a a phrase called potential it's not an observable measure but it's what should the economy do if no one is slowing it down and no one is speeding it up it should grow at what is known as its potential that is estimated to be between about two and two and a half% well that's exactly what it's been doing for the last eight quarters and that's what the Atlanta fed GDP says it's going to be doing from here and so therefore when I look at the US economy I don't see many signs that we're in deep trouble uh and so I still remain in the no Landing Camp although being in the no Landing Camp I am as frustrated as anybody else that we have a 366 at the time of recording uh tenure note which is very very surprising how should we interpret what's happened with the bank of Japan in terms of whether it was a policy error or it's you know what we can expect more of and and so forth at least the way I experienced this whole thing it felt to me like you know first the boj hikes rates they didn't think it was that big of a deal the market freaks out and it felt to me like the boj kind of came back Maya kalpa and said oh well we didn't really expect it to have that big of a result uh we didn't mean it guys you know we're rolling it back um is that not the way the right way to interpret it because it sounds from what you're saying like this really is an ongoing thing the Yen carry trade is back in full force uh and the policy error that we thought might be leading to its demise is now forgotten is that the right way to interpret it all right so I'm going to give you an answer that's probably going to get me in trouble with a very with a cohort of people listening to this UA the bank of Japan governor who runs the bank of Japan is an MIT graduate at a hall you know he was there with dragy and with banki all the central Bankers out the economics department at n MIT and I like to quip that the MIT Central Bankers if you say to them hey you've got this giant carry trade that's going on with your currency because of zero interest rates they'll turn to you and say oh yeah well show me the measures of how big it is and I would say Well when somebody engages in the carry trade and they write a trade ticket there's not little box in the corner that says Yen carry trade please TI It Off and therefore I could tell you how much there is of the Yen carry trade but intuitively I can tell you that the underlying fundamentals and the strong circumstantial evidence that we see in the market suggests there's a giant carry trade around your currency in your funding rate and the MIT graduates would say oh so you can't measure it so maybe it just doesn't exist at all maybe you're grossly overstating the case and I shouldn't worry about it that much and then they go ahead and say given the strong inflation in Japan because inflation in Japan is finally above 2% on a sustained basis for the first time in decades uh and the idea that it might stay there they correctly looked at their economic data and said maybe we should be raising rates and let's get going and they raised rates a little bit more and said we should raise rates after that and then the Yen carry trade blew up and the MIT grad said oh I guess there was one even though we couldn't really measure it and that's where I think they got surprised by it uh so now everybody who's got an MIT grad is going to be hating me on on saying that um strong letters to follow but I think that that's where their fun FAL mistake was which is why they did a bit of a mopa with it afterwards when we had all of the volatility you may remember August 5th when the VIX Index in the pre NY in the prey hours got as high as 60 intraday and the S&P fell 3% that day was down almost 5% um intraday at one point you know that was all part parcel of that toxic reaction to the uh Yen carry trade unwind so at least now those MIT grads over at the bank of Japan will say okay we maybe we can't measure it I can't give you a chart to show you how big the end carry trade is but we'll acknowledge that that is a thing that they should have been a little bit more um cognizant of and the way you become a little bit more cognizant of it is you don't surprise the market the FED has a phrase for this forward guidance you kind of drop hints in the weeks leading up and we might go 15 basis points we might say that we're not done with that 15 basis point so we're going to keep going and to leave the market with this impression that this is going to happen and slowly over time they could kind of adjust to that reality instead of surprising them all at once on July 31st uh on it and again the reason why in the US we didn't really notice it was you know literally about 10 hours later was the Federal Reserve meeting and that kind of sucked up all the oxygen on that day when it came to central banks now the other topic that you and I have discussed in past interviews has been secular inflation and you've generally cided with me that we're more likely to be in a new secular inflation is that still your view how has that view evolved since we last spoke what do you see in terms of the uh secular inflation forces that are starting to press on the economy I still think we are still in a secular inflation and to put that into you know simple terms I think the cycle turned in 2020 that the 40-year bull market in bonds ended when the 10-year note hit 50 basis points or half a percent in August of uh 2020 I think that the inflation cycle bottomed at that point too and that we've seen inflation go up now it hit 9% in June of 22 it's at I'm going to use you over your CPI it's at 2.9% now it's expected the day after we're recording is going to be the U August CPI is going to come out it's expected year- over years should fall to about two and a half percent because you're dropping a very low number from the August 23 CPI number and you're I'm sorry you're dropping a very high number from the August 23 CPI number because crude oil prices were a lot higher and you probably replace it with a much lower number this month right now so I think what you're going to see in terms of uh the inflation rate is it's going to probably go down around two and a half percent but I think cyclically we're probably going to be at at a at a low we're not going to get back to the feds 2% Target right now so I've been of the opinion that the new level of inflation is somewhere between three and 4 per. for the last 14 months it has been around 3 or 4% it looks like it's going to dip below that because of what they call the base effect here because of what crude oil did to CPI a year ago but I think this will be shortlived and we'll be you know kind of rebounding later on in the year back to that 3% level so I am in this idea that inflation is still not really behind us now that brings up something else that you know kind of goes with what I was talking about with the no Landing earlier but what about the labor data that the unemployment rate has gone as high as 4.3 and now it's 4.2 to that we triggered what is called the S rule Claudia s's rule that when the three-month average of the unemployment rate gets half a percent above its one-year low that the US economy is already in recession that we had a big revision down in the payroll report of 88,000 there's a debate on Wall Street and this goes to really the secular inflation story that we have a measurement with the labor market and that measurement problem is because the way we measure the labor market is through surveys we do the household survey asking 60,000 households uh how many people in those households have jobs how many people are looking for a job from there we calculate the unemployment rate we do an establishment survey we survey about onethird of the payroll for so it's about 65 70 million people I think uh actually it's more like around 55 60 million um jobs we serve companies that employ about 55 60 million people every month and we ask them how many people they're employing and from there we get the non-farm payrolls report these surveys are adjusted by population well up until 2020 demographers could pretty much give you a very good estimate of where the population was going to be next year the year after the year after that that changed into dramatic way around 2021 and it changed because of migration in 2020 20 2021 the US population was growing at. 2% or 20 basis points a year in 2024 it's going to grow at something around 1.1 to 1.2 or 110 to 120 basis points that would be a 30-year High and a dramatic turnaround and a big surprise where is all this population coming from there's no baby boom in this country it's coming from migration coming from people coming over the Southwest border the unemployment rate the pon Farm payrolls report and the rest are good surveys assuming that the population growth of the country is low stable and predictable it's high chaotic and unpredictable right now that brings into question whether we're actually measuring the labor market correctly and again it's because of this giant population growth and I'll give you an example in the payroll report revisions that came out two weeks ago 88,000 reduction and that was spun by there's 88,000 less jobs than we initially thought between April of 2023 and March of 2024 that was the revision period those revisions came from looking at tax returns and unemployment data in tax returns Gman Sachs pointed out that their estimates are what happened was there was actually a reduction of around 300,000 jobs but the other 500,000 were people getting paid under the table so what we wound up doing was we wound up basically getting rid of higher cost employees that withhold taxes and replacing them with cash employees that we pay under the table and that what Goldman's point was is that a majority of those jobs were not lost they were replaced with people that are not paying taxes remember it was tax returns and unemployment insurance on tax returns that drove those revisions well if I'm paying people under the table they're not showing up in tax in tax rols so the correct assumption is we lost 800 18,000 jobs if the population growth was low and stable and predictable that would be a good assumption but but since it's high chaotic and unstable and unpredictable that assumption should be called into question where do we see this in the data if you look at the retail sales and the consumption data the US economy is seeing people buy spend money like crazy seeing that um retail sales are going very strong we're seeing the savings rate falling as well and the uh and people are surprised by all this consumption and no it's not just that prices are up because this is after inflation data we're looking at maybe another answer could be that there's actually more jobs in the United States than we think because what is the biggest thing that drives consumption or retail sales you have a job and you have a paycheck and you go and you spend money at the store even if you're not a citizen of the United States and paying taxes you still have a job and a paycheck that you can spend money at to store which is why we're seeing such strong consumption numbers which is driving the economy so if the economy is stronger than we think and if we're having a hard time getting to that 2% Target then looking at the data I think what we're seeing is a situation where the economy might be stronger might be pushing demand might keep be keeping those inflation numbers up now there will be a seasonal base effect dip here because crude oil prices got to about $95 in September of last year and that held up all of the inflation numbers but I think once we get Beyond this we might see the inflation numbers rebound back into that 3 to 4 perc range we're there right now we're 2.9 and change and that we are still in a much higher inflation era and If the Fed is going to conclude the labor market data is Cooling and it's not a measurement problem and they're going to start cutting rates aggressively and the Market is going to stigle to them you need to cut rates 10 times I fear we're going to overdo this and I fear we're going to stimulate and that the second half of 25 we're gonna be back to an inflation problem again not just that no we're we're in a 3% inflation world but we might actually be an inflation problem okay hang on a second Jim because as I take a step back from all this what I'm hearing above everything else is there's a huge disconnect around rate expectations almost everybody is you know just chomping at the bit waiting for that announcement to come where the beginning of the cutting cycle happens and don't worry there's going to be a whole bunch of these rate Cuts coming it's going to be 1 2 3 4 five uh a whole bunch of rate Cuts coming coming coming there's going to be five or six rate Cuts we're going down 300 basis points sounds like you're saying really the at least in longer term rates the 10-year rate any effect it was going to get has probably already been baked in is that right yes that is right as a matter of fact I'll even go you that City Bank is predicting that the FED will cut rates 125 basis points before the end of the year so that's five 25 basis point Cuts over the next three meetings you know simple math says that's 5050 and 25 the order to be determined at the moment it looks like maybe 25 in September then a 50 in November and a 50 in December so the reason I bring that up is yes everybody knows or everybody expects the FED is going to cut rates in September and it is going to be the beginning of a big campaign to lower interest rates and lower them a lot that is why the funds rate at five to five and a quarter called 5.375 you know the midpoint of it and the two-year note as we are talking right now is trading at around 360 so the two-year note is trading 17 75 basis points 180 basis points below the funds rate the last time it traded this far below the funds rate was the financial crisis of 2008 when everybody was panicking the world was falling apart what it tells you is yes you're going to get seven eight nine rate Cuts Market's already priced it in so if you get 7even eight n rate Cuts in theory bond market should be unchanged for the next year why the FED cuts rates nine times what's going to get a further rally in bonds that would need 10 11 12 13 rate cuts that would mean we're going in the recession what would be a good signal that we're going into recession if you saw credit spreads widening if you saw the stock markets sell off well in excess of 10% neither one is happening stock market's around 4% off its all-time high which was set in July credit spreads are tight relative to the last couple of years they've widened a little bit but nothing nothing meaningful so none of that is happening just yet right now so you've kind of got interest rates as an outlier to credit into the stock market in terms of what it's sign signaling again I think it's about collapsing commodity prices because of China is what's been the Catalyst for interest rates and why it's not you know showing up in terms of of uh credit spreads or it's showing up in terms of the stock market and if you get any kind of normalization in the bond market what is normalization well where should the two-year note trade If the Fed Cuts rates 7even eight n times it should trade at a premium above the 10e note I mean above the funds rate so if the funds rate goes to three and a half um you know 200 basis points eight rate Cuts two-year not should trade at 4% it's at 360 right now and if the two years at 4% where should the tenure be if the yield curve is uninverted it should be 50 basis points above that if 450 not 365 or 366 where we are right now so yes the answer could very well be the fed's GNA cut rates in September that's going to be set up 7even eight n rate cuts and if that happens interest rates go up a 100 basis points because we've already priced all of that in now if you want to make the case that they're going to go a lot further then you got to to make the case us econom is falling apart I'm an nolander I don't see it the stock market doesn't see it theit credit Market doesn't see it either I'm going to go out on a limb here Jim and say that if you're right it's a pretty big surprise in the sense that you know most people are not expecting what you're talking about for there to be no material change in uh longer term rates after there's maybe as many as eight uh fed policy Cuts uh if I'm right about that or if you're right and the result of that is that people are caught off guard and surprised what's the consequence of that surprise going to be so you're uh just to the first half of your question you're right if you look at the Bank of America Global fund manager survey they've got you know they've been asking the question for nearly 25 years of you know something like 200 Global fund managers every month their outlook on various things including long-term and short-term rates and they've never been more bullish than they are right now if you look at the commitment of Traders report and you look at unlevered asset managers and the 10e note Futures they're the longest they've ever been if you look at the TLT ETF which is the ishares 20 plus treasury there's been massive inflows into that instrument as well people think that the FED is going to cut rates in September even though interest rates are down 140 basis points from their peaky year ago they think no this is just the opening inning of a massive rally now what gives them that belief that it's the opening inning of a massive rally which is why they're all so bullish in all these surveys because they don't think the 40-year cycle ended in 2020 they think that we are going to have many more episodes of going to zero interest rates and quantitative easing again and again and again and that that is the normal course of Affairs as we move forward and that's where I differ from them I think that that secular era is over right now and with that secular era being over I think that we're going to it's going to be very difficult to get interest rates down that 789 rate Cuts unless you see serious and protracted weakness in the US economy Us credit market and US Equity Market all three of which are not showing that in my opinion just yet how should we be thinking about the long term of what is normal because certainly for the last several years the zero near zero interest rates have been normal of course you and I would say well that's not normal that's only been for the last few years the the normal was established in a much longer time frame but certainly there has been something over the last uh 10 years or so post 2008 financial crisis where it seems like there is a decided New Normal where the central Bankers have a different participation level than they used to in the economy um do does that mean that we are in a new era where Central Bank participation is going to be more important and rates are going going to be lower or are we moving back to historically normal interest rates I would answer this short answer is we were in in a new era that ended in 2021 2022 now let me explain um and I'll use Austin gulsby the Chicago fed president Austin gby is one of the bigger doves at the fed and has been very adamant that the FED needs to cut interest rates and he's been adamant that the FED needs to cut interest rates because he looks at real rates that would be interest rates less inflation and says that real rates are way too high and because real rates are way too high that that is a restrictiveness on the economy that is slowing things down and he would point to the labor data as a sign that these real rates are slowing things down although I would argue there's a measurement problem because of population growth as I explained earlier well here's the question from 2009 to 2022 interest rates were at zero we were in a quantitative easing era and real rates averaged from 2009 to 2022 and for those that want to know I'm talking about the federal funds rate minus core pce that's the fed's favored inflation measure that rate averaged minus 1% from 2009 to 2022 during the QE period well we're not in a QE period we ended that we're in a qt quantitative tightening period where the FED has been reducing its balance sheet so what is the appropriate interest rate when you have inflation and you have quantitative tightening well what was the average real rate before 2009 from 1982 to 2009 it was 2.6% today real rates are 2.8% they look a lot like where they were you know pre QE so this does bring up an interesting debate what is the neutral funds rate or where should interest rates be some on Wall Street think zero of course they have to be zero because that's where they were from 09 to 22 yeah well we're not doing QE we're doing QT we're reducing the balance sheet uh we're no longer in a Zer period a zero interest rate policy period and J Paul himself has said in some of his press conferences he doesn't think we're ever going to go back to that unless we have some kind of huge massive economic crisis which is what we are not having um right now so it begs to question where should interest rates be well if you look at the pree period real rates are not that far off the average of the preq period even though Aon gouby would scream he's been screaming we're at nearly a 20year high in real rates oh my God look at what it's doing to the economy what the economy is fine it's growing at Trend or potential for eight quarters in a row and are you telling telling me that real rates should maintain that minus 1% range that it had during QE when we're not doing QE or should they be closer to about 2.6 and they're at 2.8 this brings up a adjacent argument what is the neutral funds rate well the FED forever used to say that the neutral funds rate was 2 and a half per. how'd they arrive at that 2% long run inflation Target which they still believe and a lot of Wall Street still believes I don't I think it's more like three and a half a basis point our star on top of that so you take the far long run inflation rate add a half a percent you know fudge factor or they call it rstar reals on top of that you get two and a half percent well the FED has been moving that Target up it's up to 2.75 When J Paul was asked about it at recent presser I think the uh June one he said oh this is just a kind of a thought experiment a theoretical exercise uh and the like no one really you know thinks more of it than that and I disagreed I profoundly disagreed with him I understand why he said it he said it because what it's implying is a belief that maybe we're not going back to 2% inflation we're going to go to two and a half percent inflation or 3% inflation so that that neutral funds rate needs to move up and then Mary Daly at the San Francisco fed came out and said our star might be closer to 1% well if you've got a 3% to 4% inflation Target like I've got and you put 1% R star in it that means that the neutral funds rate is four a lot of people on Wall Street would argue that they could see that the neutral funds rate is three and a half to four well let me go back to what I said earlier that City Bank is saying we're going to get 525 basis point cuts by December 31st that puts the funds rate at four to four and a quarter if if I go with wall Street's estimate of neutral three and a half the four we might be in 90 days close enough to what we would refer to as neutral we should be done with this rate cutting cycle in 90 days should be done with this rate cutting cycle in 90 days because we'll be near neutral but the expectation is no no this is the early Innings so we're going to go seven eight nine rate cuts and we're going to go way too far and be way too stimulative and wind up with like I said an inflation problem in the second of 25 now I would like to see the FED address this issue why do you still think we have a 2% inflation Target give me some arguments why do you still think that the long run rate is two and three4 to two and a half when everybody else and even Market measures of the long run inflation rate are much higher than that give me some arguments the FED doesn't they just say look it's been two and a half forever and it's just going to stay there because remember the fed's not partisan but political because politically it's a good it's a good number for us and we're just we'll just go with it although no one other than the FED says that that's how far they have to go back to neutral and they've all cranked themselves up that there's going to be a lot of rate Cuts as we go forward from here and the risk is if you can't answer the question as to where neutral is you're going to start a journey on September 18th what's the destination if you can't answer what the destination is you're going to go too far and that is the real risk that we face space that has yet to be really you know articulated as to how far we're going to go and where we think we should stop Jim I'd like to tie these rate expectations into precious metals because it's a subject that many of our listeners uh you know have a trade on in so on one hand it seems to me like the reason to be long gold or the reason that a lot of people are long gold has a lot to do with rate cut expectations a lot of people think that will be a bullish Catalyst are you saying that they've got the story wrong and that we shouldn't be long gold here or is it more complicated than that no I think that we've got the story right I mean with gold you know in previous calls I've been a frustrated gold bull I've argued gold has got every reason in the world to start rallying and it it seemed to not really find any reasons to rally and then around February it really started to take off I look at gold as being one of you know it it Hedges you against one of two things first of all it Hedges you against bad things and uncertainty monetary policy is running well into the uncertainty camp and I would argue where's that uncertainty coming from you're going to cut rates and you haven't articulated where you need to go that's the last thing we were just talking about so if you just start cut cut cut cut cut cut cut cut cut like I said we could be in the second half of 25 go whoa whoa we we went way way too far in the other direction here and now we've got a problem and that benefits gold as well the other thing about gold I've said too is to my frustration with gold is that we've turned it into a quasi fiat currency you know we trade ETFs on it we trade derivatives on it we trade Futures on it that it kind of moves up and down like a Fiat well maybe what we could be doing now is finally breaking of that cycle and that if we're going to wind up with a policy error and that's what I'm suggesting is that there's a real risk of a policy error if if this is the start of a big massive rate cutting campaign uh from what I see if we wind up with a policy error then maybe we could finally break gold of that theat currency thing that it trades on an ETF it trades in the Futures market and it starts acting like it's traditional hedge store value I think that's what we've been seeing in gold with the rally that we've seen over $2,500 and all of this seems to be very very supportive of gold and I also would find it interesting to point out that in the last five or six years we've had some epic stories I I've even said this with you on previous calls right Peter schiff's dreams have happened in the last five years we have had a pandemic we have had 9% inflation we have had gations in markets like we've never seen and gold could not get out of its own way and then starting in February when everybody started talking about no the fed's got this policy all wrong and they've got to start cutting rates like Mad Gold finally started to take off and it to me it sounds like if I had to interpret the gold move it's in the policy mistake camp like I am and it is the policy mistake hedge and that's what's got it up over $2,500 up a lot from February and as long as we're continue down this road it should be very supportive for its price well Jim I can't thank you enough for a terrific interview but before I let you go please tell us a little bit more about what you do at Bianco research you're a boutique institutional research firm so for our institutional audience and for our uh better healed family office and uh private investor audience they can afford your uh your institutional price tag tell us a little bit more about what's on offer so two business signs that we're in we're in the uh research business that's our traditional line of business that's bianor research.com it is an Institutional product as you said I am active on social media at Bianco research on YouTube and on Twitter and Jim Bianco on LinkedIn the other product we started about a year ago is we manage an index called the Bianco research Total return Index this is an index designed to outperform the broader uh bond market benchmarks like the Bloomberg aggregate index or the JP Morgan broad invest grade index and there's an ETF run by Wisdom Tree that tracks are index think the S&P index committee manages the S&P 500 and spy tracks the S&P 500 well we manage our index we intentionally try to change the duration and the credit waiting and all of the other metrics in that index to up aform and wtbn the wisdom tree Bianco index wtbn tracks our index our index is now up over 5% this year it is outperforming some of the larger um you know broad investment grade benchmarks we're trying to beat and if you want to find out more about our index you could go to Bianco advisors.com and it lays out a lot about our index and that line of our business in bianor research.com lays out about our research business and again you can follow me on all the socials because I do po I'm still fairly active on all of those and again that ticker symbol is wtbn whiskey tango Bravo November Patrick cesna and I will be back as macrovoices continues right here at macro voices.com