DION RABOUIN: Hey, welcome to the Real Vision Daily Briefing. It is Friday, September 17th, 2021. You could have been anywhere in the world but you're here with me and we thank you for that here on Real Vision. I am your host, Dion Rabouin. And with me today is the original gangster himself, Jim Bianco of Bianco Research. Jim, thanks so much for being with us here on Real Vision.
JIM BIANCO: Thanks. I didn't know I was an OG, but I'll take it.
DION RABOUIN: That's how you know you're an OG when you don't know you're an OG. I think that's [?] what I say. So, Jim, we're going to talk a lot of things. We're going to talk what's going on with Evergrande. We're going to talk a little crypto. We're going to talk about some of these economic reports that we've seen in the past couple days.
But I want to jump into the market action today, what we saw on the markets. And stocks are down again. I think we're down seven to the past nine sessions. But when I talked to you before we jumped on today, the thing you wanted to talk about was bonds and what's going on in the Treasury market. So, what's caught your eye right there?
JIM BIANCO: Interest rates all of a sudden have stopped going down. They bottomed out at 112 in late July and then in early August, and now we're back near the high end of the range. The 10-year yield as I look at my screen right now is around 137 which is right at the top of that recent range that we've been in. But now it's occurring with the stock market being a little wobbly. As you mentioned, we're down seven in the last nine sessions. We're total and total down about 2.2%, 2.3%.
So, it hasn't morphed itself, maybe the word is yet in this something significant. But normally when the stock market gets a little bit wobbly, bonds would catch a bid and you'd see yields falling. And we're not seeing that right now. Maybe I'm speaking a little early. Give it another week or two and we'll see how things shake out. But if we were to break through to the upper end of that range next week, look, we're only three four basis points away now from doing that. And you see a solid 140-ish handle on the 10-year yield.
I think that the narrative could be on the verge of changing from transitory inflation, and stronger and weaker growth to potentially some stronger growth and more persistent inflation. Stronger growth coming from the idea that the Delta variant and COVID cases seem to have peaked in the US and they seem to be receding least a little bit right now. But normally in biology when something turns, it doesn't do an oversold bounce like markets, it keeps going. So, that's why I think a lot of people got hopeful that it will fall.
DION RABOUIN: Real quick, Jim. I want to ask you how much of that thesis is based on that retail sales report we got this week? And how much of that is based on-- I mean, what's got you thinking about that?
JIM BIANCO: Not much because I suspect that what you've seen in the second quarter or in the third quarter, excuse me, in August and September is a bunch of weak data. Look, the payroll report was weak, the retail sales numbers weren't weak, the GDP numbers are coming down, as well, too. I'm thinking ahead to October's numbers, November's numbers, if we were to see the Delta variant come down. And if we were to see some more reopening in the economy as we move forward from here, and you were to see a little bit higher bond yields. I do think the narrative could change. So, no, I'm not basing it on the data that we've seen yet. It's better fact.
If you want to go one step further, I wouldn't be surprised if the September payroll report is winds up being a little bit weak too because you still have the effects of Hurricane Ida in New Orleans. You still have the effects of the hurricane that made landfall this week in Texas, that would probably retard jobs because remember this is the survey week. They call your company this week and they asked how many people you are employing. And if you don't answer the phone, they put you down for zero, have a pickup with you. You might go back next month and tell him that you're all employed. This month, you go down to zero, and that's how could depress the numbers.
DION RABOUIN: Absolutely. And by the way, I want to let everyone know, if you've got questions for Jim, be sure and drop those on the exchange. That's Real Vision social media platform, that's the exchange. Be sure and send your questions there. And we'll get those asked to Jim. So, stepping back into the arena, Jim, as you're watching the stock market, you mentioned it, but I want to dig down a little bit here. Down seven of the past nine days, we're seeing bond yields start to rise and elevate. As you look at the stock market, are you starting to get a little worried or is this something that it's just September it's normally week month? What are your thoughts?
JIM BIANCO: A little bit of a mixed bag, but I would argue probably not worried. Yes, we've gone 200-plus days without a 5% correction. That's the second longest period in 25 years, the longest was 400 days in 2018 which ended, for those of you that are real nerds in the market, it ended with the Volmageddon episode in February of 2018. So, that gets you a little bit nervous when the market gets that extended, that you might be vulnerable to some pullback. But then, again, it's been 10 days. The all time high was September 2nd. We're not even 2.5% off the high yet. Markets go up, markets go down.
So, for the moment, I don't think it's anything to be particularly concerned about. And the other thing I see in the data is if you look at the reopening stocks, the restaurants, the cruise ship operators, the hotels, they're starting to catch a bid a little bit in the last couple of weeks as to market has been turning down. Consistent with this idea the Delta made it FP. By the way, they correlate very well, the relative performance of the reopening stocks to the bond market. So, if we do get a reopening bid in the market, we should also see higher rates.
DION RABOUIN: Very interesting. You say you're not concerned. I think one thing that's sent some ripples of concern through the markets and through some folks who have been on the outside looking in, who haven't really watched China that closely is this Evergrande situation and then the bond situation the possibility to fault over there and China broadly. I want to bring in and I want to play this clip that we've got from Real Vision CEO Raoul Pal interviewing James Aitken of Aitken Advisors.
And James is going to talk through what he sees and what he sees going on in terms of Evergrande and in terms of overall China's situation broadly, but more specifically what this means for the market overall. So, this is James Aitken of Aitken Advisors talking with Raoul Pal.
JAMES AITKEN: Evergrande's been pending for two and a half to three years. Not just because it's a huge dollar borrower, but because it's been clear for three years that these guys had an issue. And I think it was two and a half years ago, they issued a two-year dollar bond at 11.5%. Now for someone with that much dollar debt to be rolling to your dollar paper at 11.5%, 50% of which, Raoul, was bought by the chairman. There's a bit of a tip off that these guys have a few issues.
Now, at various times over the past, say five or six years, many of us have raised concerns about a potential dollar funding crisis in China, rollover risk, and all those sorts of things. And these are good questions to raise, but again, it hasn't happened. But as a result of what I think of as most unfortunate, automatic, ongoing, massive, passive inflow into Renminbi assets--
RAOUL PAL: Because of the MSCI change and the other ones, yeah.
JAMES AITKEN: Guess what, mate? The foreign currency deposits in the Chinese financial system, onshore, record high, record high. And I was like, maybe that's it. As absurd as it seems to any of us who experienced Lehman, you're really trying to push a very leveraged borrower with something like 340 odd billion of bonds that they're going to struggle to refinance, you're going to push them over, and nothing's happening is part of the answer that why there's no contagion, because the Chinese financial system right now has never been more awash in dollar liquidity onshore.
DION RABOUIN: And that was James Aitken of Akin Advisors talking with Real Vision CEO, Raoul Pal. Jim, I want to step back and get your thoughts on this. This whole Evergrande situation and about what James had to say there.
JIM BIANCO: First of all, let me say I'm a big fan of James. Bill Fleckenstein nicknamed him The Lord of The Dark Matter. And if there's anybody that understands the plumbing of the financial markets, it's James. If James can't figure it out, we're all in deep trouble. Let's just put it that way. But now that I've said that the Evergrande bonds are already trading in the 20s right now. Whatever damage that Evergrande is going to cause to the financial system, and I'm talking about outside of China now. It's already occurred. It's already in the past at this point.
If there was going to be a knock-on effect because somebody was over leveraged in those bonds caused too many losses, I think we would have seen it already right now. Now, I'm separating this from China. We'll talk about that in a second. So, I think that the contagion of this is going to be somewhat contained within the West. I liken it to the Archegos situation, their leverage hedge fund that blew up earlier this year. And a lot of people thought that that would lead to some kind of a contagion effect. And it largely did not, it was basically isolated to them and to the immediate borrowers of them, but it didn't go much beyond that.
DION RABOUIN: And just for those who don't know, if you don't follow the bond market closely particularly emerging markets bonds, when you hit that 29 really under 30 level, that basically is the bond market saying, hey, this thing's going to default. We're already trading it as if it's going to default. And that's likely what's going to happen. So, that's why that level is so vitally important when you're watching bond markets and particularly emerging market bonds. So, Jim, talk a little bit about China more generally. You said you want to separate that from your overall thoughts in China. What are your overall thoughts in China?
JIM BIANCO: See now, Evergrande I think is a bigger deal for China, and it might fit in to the larger hole. And what I mean by that is clearly the Chinese economy is slowing. I would argue that the Chinese population has been showing discontent about their situation over the last 18 months, being in brutal lockdowns to get rid of the virus, having their economy fits and starts, and it's been very, very difficult for them.
And in the process, I think that the Chinese government has responded with widespread crackdowns whether it's been to Jack Ma and financial Alipay, DiDi, the After School Tutoring GAP Programs, and all everything else that's come down the line, the Macau casinos earlier this week and now Evergrande. I think that all of this has been a reaction to the slowdown in the economy. And what do I think it is, like they're going to have to bail out Evergrande. They're going to have to bail out the 300 billion US or so of lens loans that they had.
But what they don't want the population seeing is the rich privileged in China get to screw up and they get to stay rich privileged, and you don't. So, they've been really hammering them. Why do you think I think they did Macau? Because what a rich privileged do, they go to Macau, and they gamble like a bunch of drunken sailors. We're not going to let them do that anymore, as well. So, every point you see the Chinese economy is slowing. And I think what Evergrande is telling us is more of that that China has an issue here, not so much Western capital markets.
Now, maybe there's a knock-on effect that if China's slowing down hard and it causes problems say with the supply chains or something else that yes, it could then metastasize itself back to the problem for the West but not a direct financial problem with default on Evergrande. That would be my take.
DION RABOUIN: You talk about China has been slowing down, Chinese retail sales, Chinese growth rates, all those things have been showing some significant signs of a slowdown. And when you talk about global growth, China is really what leads that. So, just to piggyback on what you said right there is this or should this, you talked about maybe Evergrande itself not a huge concern, but what it represents, that slowdown that the Chinese authorities are trying to attack or trying to hit in a way where it doesn't look like they're bailing out the rich, which was the issue with Lehman. So, what does that tell you about the economy broadly in the global economy?
JIM BIANCO: The global economy I do think is definitely showing signs of strain. We talked we are being the larger hole of the financial markets. We talked a lot about the global supply chain issues, and we somewhat dismiss it as being transitory. Except if you look at the measures of the global supply chain, it's worse today than it's been at any point this year. It's not being transitory. It's actually worsening as we go forward. Part of that reason might be China is slowing as well, too. IHS market came out today and slashed their global auto production numbers by 6% for 2021 and 9% for 2022. These are big numbers. To say nearly a 10th of global auto production is going to disappear next year and they blamed it on the chip shortage.
So, what did they just tell me, the chip shortage is going to go on for at least another 18 months, that's not transitory as well, too. So, when you sum it up what's going on in China and the struggles in China, I think that can be an issue. If you're waiting for the global supply chain to heal itself and you're waiting for inflation and higher prices to show their transitory nature, that could be very slow.
Let me put it to you this way. A guy I was talking to that's very well versed in the global supply chain was suggesting to me, he said I'll tell you what I'm doing about the global supply chain, I'm telling my wife to go out and buy Christmas presents right now because I want to make sure that everybody that we want to send, all the kids and all the relatives that want a Christmas presents, we want to make sure that we could get them for him. As like, wow, that's quite a statement.
DION RABOUIN: I guess he thinks the economy is going to need more help. Now, here we are in September moving into October than it will in that November, December period which is interesting. I want to point out again, we are taking your questions right now on Real Vision's The Exchange. Please submit them there. We've got a couple questions coming in from Tanker. He asked, which is more critical for the market, Evergrande or FOMC?
I think I can guess what you're going to say Jim, but he says the only solution is for the government to purchase Evergrande's housing project. What's your take? Then we've got Ryan Schneeberger. Sorry, I'm going to throw these both of, Jim, my apologies. He says, what is BlackRock's exposure to Evergrande? How much systemic risk could overflow to the US in general and what is the exposure to US pension? So, I just wanted to throw those to you Jim.
JIM BIANCO: Okay, so let me take the second one first, BlackRock's exposure to Evergrande. You pointed it out. The bonds are already in the 2020s. BlackRock has already realized the loss. It is not to come it has already occurred. So, whatever is the reaction in the market is already factored into Evergrande. These are not bonds trading at AD that we anticipate will go to 10. They're already there right now. That's why I say that it's already filtered in the market, as well, too.
But as far as the larger question about Evergrande or the FOMC, well, it depends on what we're talking about. If we're talking about the global economy, I think Evergrande as a symbol of Chinese slowdown is a bigger deal. If you're asking what's going to make the US stock market wobble more, let me use the word wobble, I think it's definitely going to be the FOMC. And I think that really the FOMC, the meeting is next week, they're going to do nothing next week.
The Wall Street Journal already had a story by Nick Timiraos last week which read like Jay Powell called him up and said, to write a story that we're not going to taper until November, and he did. So, we don't expect the taper until November. So, nothing's going to happen next week. We'll check in on the November second third meeting, as well, too. The real question becomes, if this Delta variant decline, does not immediately produce good October economic numbers, and we see a wobbling of the world economy. Does the Fed then figure out a way to go to December? Say I think they will. I think that the Fed will taper unless they could talk themselves out of it.
And they already talked themselves out of September because of one bad payroll report. And they've still got another six weeks to talk themselves out in November, as well, too. So, when the Fed taper in November, yes maybe unless they can push it off. That will matter more to financial markets then I think Evergrande will directly matter to Western markets.
DION RABOUIN: Very interesting. You set that up really well. May I ask you about this tweet you sent out a couple of days ago. And you were saying that some economists are discussing the possibility that maybe the Fed raises rates first and then tapers later, because the tapering could actually be the more difficult part than the raising of the rates. Talk to me about that and just walk me through the thinking there.
JIM BIANCO: Yeah. So, the assumption is that bond buying is the unusual circumstance which Ben Bernanke he used to call unconventional policy. Now, we've been doing it for 14 years. So, I don't know how much unconventional it's been at this point. And the assumption is that pulling back on bond buying is going to be much easier than it would be to raise rates. But what happened in 2014, we had a taper tantrum. Why did we have a taper-- remember,