Jim Bianco, president of Chicago-based Bianco Research, has been one of the leading independent voices on macro investing strategy over the past three decades.
He appears frequently on television, writes a column for Bloomberg Opinion and is active on Twitter, where he has over 113,000 followers.
Bianco argues we’re at inflection points in inflation, stock and bond markets, and crypto currencies.
The U.S. economy is widely expected by analysts to boom this year, with Goldman Sachs researchers expecting a 7.2% increase in 2021 gross domestic product. The benchmark 10-year Treasury’s yield has already tripled from a low last year on expectations of faster inflation as states loosened coronavirus restrictions. Stock market investors, meanwhile, have rotated into value stocks, cyclically sensitive companies and financials, selling pandemic winners such as software, renewable energy and the big tech giants known as the FAANGs, which have been spectacular performers for years.
An edited version of our Q&A follows.
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Howard Gold: You’ve been writing about inflation versus reflation. What is the difference, and which one do you think we’re going to experience?
Jim Bianco: Reflation is real growth. It’s standards of living expanding. It’s better profitability. It’s the economy getting better. Inflation is higher prices, a loss of purchasing power, so that your dollar next year will buy you less than a dollar this year.
Inflation hit its zenith around 1980. But it wasn’t really until the mid-1990’s that it essentially went away. There are three drivers of low and steady inflation — demographics, globalization and technology. When you get older, you’ve already got a house, you’ve already got a car, you don’t need to spend as much. So that helps to depress inflation. Globalization means you can search the world to find the lowest price. And technology has been hugely deflationary. Technology really kicked in around the mid-1990s, because that’s when the internet took off. So it’s been about 25 years that we’ve had very low, very stable inflation.
Gold: How much inflation do you expect?
Bianco: I’m going to look for 2.6% core PCE (personal consumption expenditures price index). It has not been above 2 .5% in 28 years.
We’ve got 100 million [checks] that are supposed to go out, each one for $1,400. So, we’re stuffing people full of money, and this is the third set of checks that we’ve had, and we’re not done. Between the CARES Act, the $900 billion that we did in December, and the $1.9 trillion [under President Biden], we are at around $6 trillion. That doesn’t include monetary policy [or] whatever else may come for the rest of this year. That has blown up the deficit to $3.6 trillion, or 16% of GDP. There have only been three years in American history that the deficit as a percentage of GDP has been that high — 1943, 1944 and 1945.
Gold: Do you think what we’re seeing now is going to be a sudden burst, a catch-up, or do you see it continuing beyond?
Bianco: Ultimately, I do think it’s going to be somewhat sustainable, because if we don’t get inflation in the second half of this year, I think we’re going to [do] more stimulus. Let me be clear on one thing: Inflation is not there right now. I think this is about something that might happen in the second half of this year, into the early part of next year. We’re talking about what’s to come. If we do get inflation in the second half of the year, it will linger into 2022 and 2023, because companies will have pricing power again.
Gold: Do you think we’re going to see inflation returning for a few years after that?
Bianco: I think if you get 2.6% inflation on a sustained level, you’re going to move real interest rates [interest rates less the inflation rates]. They are now negative, meaning interest rates are below the current inflation rate, [so we have] negative real rates. You’ll move them to positive. And I think you can see the 10-year Treasury note
go over a 3% yield. (It currently yields 1.72%.)
Gold: Over 3% if you get 2.6% sustainable PCE?
Bianco: Yes, exactly, 2.6% sustainable, 50 basis points real. If you got the 10-year to 3%, on a total return basis, that would equate to one of the worst losses the bond market has ever endured. It would be very painful. The bond market would have a problem with that. And if the bond market has a problem, everybody has a problem.
Gold: So what does that mean for stocks?
Bianco: Higher sustained inflation is a net negative for companies. Their raw material prices typically go up, their input prices typically go up more than they can pass along those costs to the consumer. So their margins get squeezed. So what typically happens when inflation returns is the first time you start to see inflation, everybody says, “This is good for stocks, because it’s the best inflation hedge.” And then a few years later, they realize that that was exactly backwards, that you wind up squeezing margins, and it turns out to be very bad for stocks as well, too.
So I think the stock market has a problem. Technology stocks have struggled, because higher rates put most growth companies in a bad place. It is a relative benefit for the value companies, so that’s why we had all this talk about the rotation from growth to value.
A lot of the big FAANG stocks [Facebook
and Google holding company Alphabet
] had peaked back in September. They’re now going on six months where they haven’t really gone anywhere. The financial stocks have been benefiting from higher rates, because it widens the yield curve, and it gives them better interest margins [at which] they can lend and make money.
Gold: We’ve seen all kinds of speculative excess, like GameStop
for months. Could this rotation be accompanied by a big sell-off in stocks if we start seeing some of these speculative names not performing so well?
Bianco: I’m not a believer in Charlie Munger or Paul Singer of Elliott Management or Leon Cooperman warning everybody that all this speculation that you’re seeing in GameStop and in a lot of the technology stuff is going to end in tears. It very well might. But it isn’t going to end in tears by those stocks going down a lot and the S&P 500
being unchanged. It will go down a lot, too. Everybody will lose when this ends. It will just be how much did you lose relative to the next person.
Gold: What about commodities? Is this going to be a good period for commodities and commodity stocks?
Bianco: Yes, it really is. I mean, most of the major commodity indexes — and I’m talking about industrial commodities now, and some of the agricultural commodities — they’re at decade highs, and they’ve been really advancing along quite well. And a lot of the commodity stocks — industrial stocks, basic material stocks — have been responding well, too.
So if I can quote my old friend, Dennis Gartman, “If you can drop it on your toe, you should buy it.” Because that seems to be a very good investment in the last couple of years, and I think it’s going to continue to be.
Gold: OK, in other words, ticker symbol ANVL, right? So, now we have crypto currencies. And you have written that crypto “is going to be the biggest game changer since the Bank of England invented the paper currency in 1693.”
Bianco: They developed the modern version of paper currencies. I think that crypto is going to be the most significant macro event of my career of the last 30 years, and it probably goes back even further. A lot of people think cryptos are a naked speculation on bitcoin
whether it will go up or down.
If you dig into the crypto universe, and you understand the phrase “decentralized finance,” or “defi,” you will find that they are recreating the entire financial system in a decentralized way, complete with borrowing, lending, derivatives trading, insurance, lotteries, automatic market making as well, too.
When Mark Cuban in the mid-1990s started looking at streaming video, you had to download and configure the browser, download and configure an application, download special files and run them on this application. They were grainy, and you could only do about five minutes at a time.
And then he concluded, “This is going to change everything.” You could have said, “Are you kidding me? This is hard. This is not very efficient.” But he said, “Look, they’re going to solve all those problems. And we’re going to get something that’s going to be useful,” and that’s what he turned into broadcast.com, which he sold to Yahoo and became a billionaire.
I see crypto the same way. It is difficult to use. It is fraught with fraud and potential for being hacked. It’s not ready for prime time. But beyond that is a complete remaking of the financial system from the ground, up, in a decentralized, digital way. I would be very worried if I was at a traditional commercial bank. You would be somewhere between where a traditional newspaper is, traditional nightly news and a yellow taxi. They still exist, but they’re a shell of what they used to be, because we’ve gone to a new digital world.
The biggest problem that I see with the crypto space is the American regulations of anti-money laundering and know your customer. Because of those rules, you can run afoul of American regulations. Now, the way you get around that is you can transfer your money to an unregulated wallet, and you can connect to these decentralized exchanges, but that’s really hard. And there’s risk that you do it wrong and you lose your money. I’ve already lost some money, because I’ve done it wrong, too.
But you’re left with a “holy s–t” moment: “This is going to change everything once they get it solved.”
Gold: So, nothing but blue skies?
Bianco: Here’s the risk. There are lots of different systems out there, and there are a lot more coming. Most of them will go to zero. And the few that make it are going to redefine everything.
It’s kind of like it’s 1997 and you correctly said, “Oh, I think search engines on the internet are going to be the next great big thing,” and you bought Lycos, and it went to zero, and you bought Alta Vista, and it went to zero. You bought Yahoo, and you were kind of successful at it. And then you gave up, and then Google was created.
Gold: Don’t these things have to fit into the legal system? And regulators and central banks are very concerned about it.
Bianco: Right now, everything’s priced in dollars, and the United States has a competitive advantage over everybody else. But what I’m afraid of is, by shutting everybody out, and by having the first world basically say, “We’re going to try to ban this stuff,” first of all, it’s decentralized. You can’t ban it.
But what I think is going to happen if you’re not careful is Asia, the Third World, and the Middle East are going to adopt some form of a decentralized exchange, some form of a decentralized token, and they’re going to adopt that as their reserve currency. And we’re going to have no say in the transition to the next reserve currency.
Go back to my Mark Cuban example. When he looked at the beginnings of streaming video, you and I didn’t do it. It was just too damn hard. But he figured out that it would become what YouTube is today: You just push one button and watch. He saw that that’s what it was going to become. That’s what I think a lot of people in the digital space see — a whole new banking system, a whole new financial system, as well.
Howard Gold is a MarketWatch columnist. His Q&As appear monthly. Follow him on Twitter @howardrgold.