ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Friday, June 3rd, 2022, the first Friday of the month. Happy NFP Day, everybody. I'm Ash Bennington, joined shortly by Jim Bianco, President and Founder of Bianco Research. Before we jump in with Jim, a quick look at US equity markets.
NASDAQ down for the day flirting with almost 2.5% decline as the numbers bounce around here on the close. Looks like 12,012.73. NASDAQ is the leading loser of the day. I don't know if that's such a thing, a leading loser. It's the worst performer of the day. S&P 500 off 1.64%, closing out the week at 4,108. Dow Jones Industrial Average off, the least of the major indices, off about 1%, closing out the day at 32,898 just below the 33-handle.
Jim Bianco, welcome back to the show. Great to have you here, especially on nonfarm payroll day. We've got volatility in markets. We've got a lot going on. Jim, how are you taking it all in? What are your thoughts?
JIM BIANCO: The payroll report, I think, was very telling, because I believe we're now into a period that good news is bad news. And that's what you saw today. 390,000 jobs were created in the month of May, at least the advanced estimate. That puts us less than 800,000 jobs away from restoring all the jobs that were lost during the pandemic. At one point, there was 20 million jobs were lost. Now, we're only 800,000 away from restoring them.
But more to the point, when you see this kind of job growth, what does it mean at the Federal Reserve? Well, we could just hike and hike and hike and hike and hike, because we're not going to create unemployment. And if we tighten financial conditions, the use of it is that's a euphemism for make your life miserable if you are in the financial markets, you'll stop buying things, and that will cause inflation. If you continue to throw up strong labor numbers, it emboldens the Fed to be even more aggressive.
Now, the narrative has shifted a little bit in the last two weeks or so. The narrative is gone from the Fed has already done enough damage that they are going to really pause in September to the Fed will do enough damage that they will pause in September. In other words, the narrative could no longer stand up to the idea that we've done enough damage that the Fed would have to reverse course, they haven't. And the only hope is what you heard from Jamie Dimon and what you heard from Elon Musk this week.
A hurricane is coming. It's not here. It's coming. I have a super bad feeling about the economy. Not a feeling, not a bad feeling, but a super bad feeling about the economy. In other words, everything on June 3rd is fine. But my bet is everything soon, 60, 90 days, won't be fine. And that will cause the Fed to pause. And somehow that's supposed to be bullish for the market. Because never mind the fact that it should whack earnings, it should whack the economy, it should create all kinds of economic damage.
When you get a strong payroll number, if you're in the equity market, that's not good. You would have preferred a weak number because then you could talk about a September pause. Last thought for you. Last I looked, the odds of a rate hike in June are 100%. And the Fed has never failed to deliver on 100% rate hike. The odds for a July rate hike are 100% as well too.
September is really what we're focused on. That's back to 71%. Sorry, a 50-basis point hike, a 71% for September, so it is hike, hike, hike for the next three meetings. And all you've got is don't worry, there will be a calamity in the near future that will stop the September rate hike.
ASH BENNINGTON: Yeah. Well, Jim, there you have it. You've sketched out in three minutes or less the central challenge, the central dialectic that's happening right now in these markets. All the core issues are there. You talked about this idea of good news being bad news. We're in this weird mirror image phrase from the 2008 days when bad news was good news. Now, good news is bad news. It's this weird world turned upside down proposition that we see when you have unconventional monetary policy, ultra-accommodative monetary policy stretching back over a decade.
We were talking a little bit about this in our meeting earlier, talking about how markets have always been obsessed with nonfarm payrolls. But now more than ever, you hit this idea about the damage that's been done to markets. This question of, has enough damage been done already or does more damage need to be done in the future? That is again, the central thesis and also quite a grim proposition for the place that we find ourselves with inflation above the 8-handle contraction in GDP, not two consecutive quarters yet, not officially a recession, but contraction in GDP and the challenges that we're seeing in equity markets as well as fixed income.
JIM BIANCO: That's true. To answer your question, I want to address my comments to one person, Raoul Pal. And I want to say to Raoul that the game has changed and that everything is about inflation. And that we are now in a period where it isn't that the Fed hikes until they break things. It's they hike until they break enough things that it causes inflation to crater. Not peak, but crater. And I don't think we're close to that. And let me add in another aspect of that as well too.
ASH BENNINGTON: Explain that, Jim, just explain that mechanism that you're talking about there, and the nature of the risk you've just described.
JIM BIANCO: For the last 13 years, let me go with that, and even longer, you can even go for two years. What do all macro analysts focus on, obsess about, talk about nonstop all the time? Growth. Is the economy growing? Is it creating jobs? Is it creating opportunity? Is GDP expanding? That is the central nexus of the world when it comes to macro research.
That was the case. Now the central max and nexus of the world is inflation. What are prices doing? Are they going up? Are they going down? And you hear enough macro analysts go, what about growth? It doesn't matter. Growth doesn't matter right now.
Only to the extent that you could say that growth has gotten so bad that it actually makes everybody listening to this podcast say, I don't want to buy things anymore, because I'm so worried about the economy. That would bring down inflation. Only when you get it that bad will it stop. So really, the obsession is going to be about prices.
Now, a couple things about prices. First of all, the Fed made a catastrophic mistake last year with transitory. I don't need to rehash that. We know that. This week, the President sat down with Janet Yellen and with Fed Chairman Jay Powell. And let's not mince words here, Ash, he ordered him, ordered him to bring down inflation is what he did.
And then just to reiterate it, Janet Yellen came out that evening, and said she got it all wrong when it came to inflation, and that it is much bigger than we think. I find it very difficult to believe that in 2022, the Fed is going to make a mistake of being too dovish. They were too dovish last year and they're paying the price for it. The mistake the Fed is going to make this year is they're going to be too hawkish.
They're going to hike rates way too much, and they're going to create all kinds of havoc. And I think that that's still coming, unless you want to make the case to me that the inflation rate is going to organically peak and come down a lot in order for the Fed to back off. Now, before you make that case, Janet Yellen admitted she was at a mistake. Jay Powell said it was a mistake what they did with the inflation rate and that we need to retire the word transitory.
Ben Bernanke has come out and criticize the Fed. Basically, everybody has criticized the Fed for getting this inflation thing wrong. Before we start announcing where the inflation rate is going to go next, I think we need to understand or ask the question, why did we get it so wrong up till now? And I do think that the error we're going to look at is hike rates till it hurts and then do one more 50. It's not going to be a pause in September.
The only way that happens is if you get a severe contraction in the economy. You'll know that. We'll be at 3000 on the S&P if we get a severe contraction in the economy. But I still think that the risk moving forward from here is more rate hikes. The problem in the market is there's a huge denial right now.
Now, the Fed can't do that. Because my whole career, it's been about growth, and growth is going to slow. And when growth slows, the Fed turns on the printing press and supports the markets. They're going to do that again. They did that every single time that we did not have a percent inflation. But now that we have a percent inflation, they're in a new dynamic. And we need to understand that this dynamic is all about prices.
And that's why, going back to my original comment, that's what today's number was not a good number. It just tells Jay he can hike rates without creating unemployment and that's exactly what he's going to do.
ASH BENNINGTON: You tell this story. Almost of a Fed being like a general who's fighting the previous war, this idea of my favorite Real Vision Daily Briefing drinking game, drink whenever I say Scylla and Charybdis, trying to steer between these twin demons and effectively, what you're saying is that the paradigm is shifting. It's shifting rapidly. And now, the risk is that there's going to be this overcorrection against the policy error that quite frankly, Chair Yellen more or less stated had been the case.
JIM BIANCO: Yeah, let me put it even more stark terms. After the President meeting with the Federal Reserve Chairman and reading off his cue card, it's the Fed's primary goal to bring down inflation. If they wind up undershooting, they pause in September and inflation stays sticky. Now, to be clear, count me in the camp that says 8.5% might have been the peak in inflation, but count me in the other camp that says that's an irrelevant statistic. What is relevant is how fast does inflation come down?
And I've used a very technical term for this, "not very", and that if it is not very fast coming down, then the Fed risks the institution if they allow it to stay sticky high then they pause. The institution is better off breaking the economy into recession. But hey, you wanted us to fix inflation? We're going to do what we can to fix inflation. I do think that the error, or the mistake that will be made is not going to be towards the September pause. That's what everybody wants. It's going to be towards too much rate hiking.
ASH BENNINGTON: Headline Bianco, Second Derivative, Not Very Fast.
JIM BIANCO: You need 30 years of experience to come up with those kinds of spiffy terms.
ASH BENNINGTON: Yes, it's like when the plumber tells you you're not paying me for my 10 minutes. It's my 30 years of experience. Hey, listen, Jim, let's talk a little bit about this, just to frame this out for people. Fed chairs, of course, for people who may not be familiar with the way this works, are appointed to four-year terms, they don't serve at the pleasure of the President. It is, in theory, at least an independent body.
Are you suggesting that some of the pressure coming from the powers that be in Washington, whether it's Congress or the executive branch, that that is going to have this impact that is going to push them to overcorrect on inflation and continuing to hike too fast for too long?
JIM BIANCO: I don't think it's going to be the powers that be. I don't think that there's some kind of a threat by the President, Jay, if you don't get inflation down, this or that. But I think it's more about the institution. And that people that work at the Fed, when you go to work at the Fed, what is your primary job? Your primary job is to protect the institution. And then your secondary job might be stable prices and high employment, all that other stuff.
If the President of the United States announces to the public, this guy named Jay, it's his job to bring inflation down, and he doesn't, then the whole institution of the Federal Reserve is going to have a big credibility problem. Their credibility is on the line right now. They're going to do something to make sure that their credibility is saved. You want inflation down, I'll get inflation down. You might not like what I have to do to get it down, but you told me you want me to get rid of inflation, then by God, I'm going to get rid of inflation.
That's my mentality on this. I think the only way you can see a September rate pause, I just want to say this again, I think that this is way off base, this idea that they're about ready to stop, unless we get a serious set of very bad numbers. But then, like I said, you'll know that because watch the S&P and the NASDAQ and everything else take a severe hit off of those very bad numbers. You don't need to be an economist, the markets will tell you that. We don't have that just yet.
The Fed is going to keep raising rates. Yes, eventually, I think they're going to raise rates to the point where we might have a recession, or they will break things into a recession. That could give you a better than 50% chance that happens by the end of next year. But I don't think that's imminent as everybody thinks it is. And that's why I think the Fed is going to stay super aggressive.
And again, I don't care what the payroll numbers say, I don't care what the GDP numbers say. I don't care what the retail sales numbers say. It's all about prices in 2022.
ASH BENNINGTON: But by the way, that U3 number, the unemployment rate number out today and the payroll, that great chart from the Wall Street Journal based on the NFP data that our producers showed earlier. That suggests that the thesis is very much in keeping with what you're saying, U3 rate of 3.6%. We're essentially back at the 50-year low levels that we had going into the COVID crisis before we saw that just dramatic down shoot in employment.
That's very much supportive. Chair Powell has very much been involved in this narrative when he comes out and says labor markets aren't very tight. Again, more to your point, more room to hike.
JIM BIANCO: Yes. Let's pivot to another market, the bond market. A week ago today, the 10Y yield was at 271. It was near the low, nearly 50 basis points off its May 9th low. Monday was a holiday. In four trading days, we have now reversed half that rally. We're up 26 basis points in four trading days since Tuesday morning on the 10Y yield.
We're back to 295, 296 on the 10Y. The bond market going up, one of the tells I've often said is I'll know when we've broken enough things, because the bond market yields on bonds fall, and they fall, and they fall. Well, they fell for a couple of weeks. And then we had a decent week in the stock market, and what happens in the bond market? We give back half the rally.
The bond markets not ready to say we're on the verge of a recession. Let's all pile in the bonds next up, 250 or 225. Now, eventually, we might get there. But I do think that the bond market signaling this week by giving back half the rally since May 9th is basically telling us, now, the Fed's got more work to do. And there's going to be more pain to come in these markets.
I wish I had a more positive message, but this is the problem when you have inflation. It has always been painful and difficult to get rid of. And this one is going to be no different. And what you see in markets is widespread denial. Oh, yeah, they're going to stop in September. Oh, yeah, inflation might still secretly be transitory. That kind of stuff to get people to believe that the next thing that's going to happen in markets is this widespread belief this is going to go away.
Now, that doesn't mean we can't rally next week. Sure, the market gives you higher points to sell the market. But we're not getting rid of this underlying economic problem unless we do something about demand. And demand has to come down quite a bit. And we haven't begun to do that yet.
ASH BENNINGTON: Jim, a very sophisticated analysis. This is where your 30 years of experience comes in handy. Because it's not just looking at the theoretical constructs of how these relationships work in macro-economic models, but also understanding the institution. I think that was such an interesting point, talking about almost this idea of a single mandate. The single mandate is defend the credibility of the Fed, so that you can then execute on the dual mandate, which is the official view of how the monetary policy gets construed at the Eccles Building.
JIM BIANCO: Yeah, it is important. By the way, on that 30 years of history on the Fed, unlike your plumber, I'm not going to show you my butt crack either.
ASH BENNINGTON: To the host [?] I'm sure.
JIM BIANCO: Right, I bet you that's the first time the word "butt crack" has been used in the Real Vision Daily Briefing. I'm a trailblazer. I'm a trailblazer, Ash, what can I tell you? But I do want to mention one other thing in all seriousness. I know there's probably some people screaming at me, supply chain, supply chain, the Fed can't print chips, the Fed can't print oil.
The San Francisco Fed did a study. And what we found in their study was two things. One, the US has the highest core inflation rate in the developed world. We're number one, the highest one. Now, every country has got the same problems because of the Ukraine war, because of supply chain constraints, and because of high oil prices. All of them have it. But yet we have a higher inflation rate than Europe, than Japan, than Australia, New Zealand and all the other developed countries in the world.
Now why is that? Well, the San Francisco Fed went one step further. We stimulated. All of the Fed printing, the fiscal stimulus, the giant deficit, the mailing of money that we did through all the stimi checks, we were also number one. We did more of that than any other country. And we actually had one thing happen in our country that didn't happen anywhere else.
Personal income, that's your wages, your gains in the