MAGGIE LAKE: Hi everyone. Welcome to the Real Vision Daily Briefing. It's Friday, June 24th, 2022. I'm Maggie Lake and here with me today is Jim Bianco, president and founder of Bianco Research. We apologize for being a couple minutes late. We had some technical issues. But Jim's well worth the wait. Hey, Jim.
JIM BIANCO: Yeah, those technical issues are on me, so I apologize to everybody for being a few minutes late.
MAGGIE LAKE: Listen, anytime we get to the end of a long week, especially one like this, it's bound to happen. But for a change, I feel like lately on Fridays, it's just been fraught, and we've been so nervous negative going into the weekend, we got a rally on our hands this Friday. The Dow up over 800 points and NASDAQ up well over 3%, it was not easy for me to say.
But what was really interesting is right at the end, I was watching, and it took like a half a percent the NASDAQ in just the last few minutes to trade. So, we had buying right into the close, and it caps off a week of really nice-looking gains. But I know what everyone's thinking. Is this real? Is it going to last? Are we trying to put a little bit of a floor in? I don't know. What does it feel like to you? Should we be feeling a little better? Should we be weary?
JIM BIANCO: Well, I think the jury's still out to be charitable about it. Look, this is the second up week in the last 12. And this is we were down 10 of the last 11 weeks. And there's Dow Jones industrial average data back to 1900 and we had not been down 11 of 12 weeks in 122 years of data. So, this market was massively oversold.
Also, it's the 24th of the month, where you've seen a very strong pattern of the market rallying right into the end of the month. And that corresponds, I'm going to give credit to Mike Green over at Simplicity for pointing this out. There's $3.5 trillion of target fund ETFs that need to get rebalanced at the end of the month. And that usually puts some buy pressure. And we see this pattern happen over and over. The last week of the month, we have a big rally.
The last time the market was up was the last week of May. And then we all say, well, that's it, maybe the recession's done, maybe things are getting better, maybe the Fed's going to back off. And then the exploding cigar blows up in our face in the first week of the new month. So, I will recognize that we're due for a rally, we'll probably follow through next week. Let's see what happens after the Fourth of July weekend, whether or not we can hold this. Because if this pattern repeats, the market will just roll right over again once all of that forced buying from target date funds is done.
MAGGIE LAKE: Yeah, it's so important to point that out, Jim. So important, market dynamics matter when you have something like that going on. And we do seem like we're data dependent here. We did have the consumer sentiment reading out today. And this is the interesting thing.
Sometimes these things are just coincidental. So, if you're thinking about the rebalancing and the force of all that, you did have this number out and some people make that connection. Maybe it was, maybe it wasn't, but the University of Michigan consumer sentiment-- I know a lot of people watch this closely, because they do think it's a little bit more of a forward-looking indicator. And June saw a record low of 50, but also showed inflation expectations easing back just a little bit. It's one reading, we're obviously going to have to see what happens. But what do you make of that?
JIM BIANCO: Well, first of all, two things. I am not a fan of consumer confidence surveys. I don't think they tell us much of anything. But now that I've said that, the Federal Reserve is a huge fan of consumer confidence surveys. And Chairman Powell specifically cited the University of Michigan inflation sentiment reading as the reason that they moved from 50 to 75 basis points at last week's hike.
So, in the pantheon of economic statistics, the most important one right now is CPI. Next most important is Michigan consumer confidence. Third is probably payrolls and fourth is everything else. So, this matters. And now that it came in, the final number came in, downtick from 3.3% for the five to 10-year outlook for inflation, to 3.1%, downtick that really sparked the rally. Not only to spark the rally, but if you look at the swings in Fed Fund Futures, the minute before that survey came out, they were placing a 48% chance of a third consecutive 75 basis point hike at the September meeting.
So, we did 75 last week. The market is fully expecting another 75 to come in July. They were 48% for a third one in September. Three minutes after the number came out, it was 16%. Only the payroll report and maybe CPI would move those odds that much in three minutes. And so, yeah, this thing matters a lot, this survey. I could argue to you blue in the face that the 600 people that they asked what their outlook on inflation is really not that important. But Chairman Powell and the staff at the Fed have decided this is the holy grail, so we have to pay that much attention to it. And it came in better than expected, and the market responded in kind.
MAGGIE LAKE: Yeah. And better than expected on the inflation expectation part, what are you thinking in terms about recession? Because, okay, 600 people, you don't give a lot of credit to that. But we have seen consumer sentiment come in. And it's not the only indicator we've seen suggesting things might be slowing, although it's still very mixed. And we'll get into that a little bit later. But generally, what do you see happening on the economic side?
JIM BIANCO: So, let me put this number in context. The University of Michigan survey started in 1952. So, we have 70 years of data. The worst reading ever was the one that came out today, ever. Not the Kennedy assassination, the 1987 crash, the Vietnam War, the financial crisis, the 1970s gas lines, not the COVID lockdowns, now. Now is the worst number in 70 years. That's quite stunning to think about that the public is telling you, this is the worst they've ever felt about the economy in 70 years.
You combine that with the downtick in the inflation number, and you got a lot of people hoping that the Fed isn't true to their word that they're going to fight inflation, that they're going to back off, recognize that the economy is downshifting maybe in recession. My personal feeling is the recession is already begun. I think the data is overwhelming that the recession is already begun. I think those that don't think the recession has begun, they're the ones that have to explain, I just could just throw out a litany of statistics that only happen in a recession.
Down 20% corrections only happen in recession, 70year lows, all-time lows in consumer confidence only happen in recessions. The Atlanta Fed at zero after a negative number is targeting a recession and the like. So, there's a hope that the Fed will downtick and say we can't keep going like this because we're going to hurt the economy. And this is the crux of the question.
When Chairman Powell tends to speak, he tends to come off as either not committed or somewhat dovish when it comes to the inflation fight. And markets tend to rally. That's what happened this week. Then you have to get people like Neel Kashkari, who's a noted dove to come out and say, I'm fully on board for 75, Chris Waller, a governor, saying I'm fully on board with 75. Now, maybe this is part of the market just doesn't want to believe that the Fed is going to basically break everything to try and break inflation. And it really believes-- or maybe this is just a legacy that there are people in their 50s that have been in this market that have never seen anything like inflation taking dominance over growth. They still think if growth is slowing, the Fed has to respond to that by cutting rates.
And when you say no, we got 8.5% inflation, that's never worked that way in my career. And so, they're having a hard time getting their head around this idea that inflation is the priority and not growth. I completely understand that. I happen to think that the Fed is going to stay true to their hawkish intentions, they're going to go 75, they're going to probably go 75 again in September, they're going to break things until inflation breaks. And that that's because their credibility is on the line right now.
They have taken as an institution in enormous hit because of transitory last year. That thing is going to be generation defining for the Federal Reserve, the transitory argument from last year, and they have to try and offset it. Now, other people have argued that's not the case. They'll break this economy, no bad recession. And they might not do anything about inflation.
And they might be right on that. But I don't think the Fed's ready to back off the inflation fight. So, I'm ready to or continue to err towards the hawkish side instead of the dovish side, which is what the narrative was in the market in the last half of the week.
MAGGIE LAKE: Yeah. Excellent points, Jim. Andreas, and there are others who agree with you, Andrea Steno Larsen spoke with Eric Johnston the other day, and he also is very worried about the potential of a policy error or policy overshoot, let's have a listen to a clip from that.
ERIC JOHNSTON: So, I think the lack of trust in the Fed right now is very high and well deserved. And I think that right now, my view is that they are going to potentially, I would say likely, overshoot because one of the things that the Fed has shown is that they're doing very little-- their predictive power is not good. And so, my concern is that you're not necessarily going to see it show up in the actual inflation data, even though it's highly likely that inflation is going to turn down very shortly. And that may cause them or likely will cause them to overshoot.
MAGGIE LAKE: And that full interview is available to Essential, Plus and Pro members on our website. And it's worth noting, Jim, I think you pointed out that there are many that share that view, but then there are others who-- there's a lot of criticism of the Fed, I wouldn't say they think the Fed had a clean record through handling this. But they do think that the bond market is listening and is responding to the Fed, and that they are having an impact. So, there's a lot of different views, we try to bring them all to you so the viewers can make your own decision about what you're hearing.
But there's a lot of indecision or dissent out there. There's a lot of debate, because we're in this pivot time. So, Jim, I just want to-- Adam writing and saying, Jim, you nailed the inflation call. Are you ready to call the top and move into bonds? If so, what duration do you think has the most juice?
JIM BIANCO: So, just in the first half, normally in a market, and this will get to my bond call, is that we all agree on what the reaction should be, the reaction function is the Fed like call, if the data says x, then we do this. If the data says y, then we do this. What's unusual about this is, first of all, if the data says x, we're not sure what we're supposed to do. Are we supposed to say, the inflation data is high, but the economy is going into recession, so cut rates? Are we supposed to say the inflation data is high and the economy is going into recession, so raise rates?
So, we're really stuck with now, we're trying to figure out what the economy's doing, we also got to try and figure out what should be the appropriate reaction if we have something that looks like stagflation. Now, to the bond call, I've argued that stop going up with inflation is not enough. Now, we're going to get in two weeks, the June inflation data, second week of July, the Cleveland Fed has a nowcast where they updated every day and they've got that the inflation rate for June is going to be another 1%. And that's driven largely by gasoline prices going over $5 a gallon nationally.
That's going to equal May, that should put-- if the Cleveland Fed is right, that should put the year-over-year number at 8.7 from 8.6. Well, we'll see if it's right. But I think at a very minimum, we're going to get another big number in June. And even if it doesn't get us above 8.6, I don't think stop going up is enough. I think that we have to see serious signs that inflation is decelerating in a big place. So, no, I don't think that the bond selloff is done.
Let me put it to you in a different way. If you believe what the fed fund futures are telling us, we're going to have a 3% funds rate by September. We have 3% 10Y note right now, we have 3% 2Y note. What the 10Y note and the 2Y note would be telling you is the Fed's done raising rates in September. I don't think that's the case, I think when we get to September, there will still be a positive spread between the funds rate in the 2Y note and the funds rate in the 10Y so they're going to keep moving higher.
If I'm going to revise my call, I want to see the yield curve severely invert. I want to see the 10Y come way below the 2Y. Why? The 2Y stays up because the Fed's not going to back off on their rate hikes. The 10Y sniffing out a real recession zooms down below the 2Y note because it's free to do that, because it's not as tied to the funds rate as a 2Y note, the curve inverts. If we see that, I might change my opinion. But right now, I'm still maintaining a defensive opinion on the bond market.
Yes, inflation might be peaking, but that's not the issue. The issue is when is it going to go to 5? It's not going to be one, does it go to 8.4 and it stops at 8.6 hold? When we're going to be a 5, then we could start talking about the Fed backing off. Because if it peaks and it goes to 7 at the end of the year, 6 at the end of the year, they're going to go 75, 50, 75, 50 the rest of the year, and we're going to be 3.5 on the funds rate by December.
So, that's why I'm not ready to say that the inflation story is quite done and that the bond market's quite done just yet, but if the curve were to severely invert, then I might reconsider that.
MAGGIE LAKE: I want to dig a little deeper into that. We have a fantastic question from Cryptic Eon, I think Cryptic Eon, it's a little confusing to look at from The Exchange, but we see, sorry for mispronouncing it. But he says hello, or she, I'm very new to bonds, fixed income market and macro. I come from a crypto background. From what I understand, bond yields drop when interest rates drop, yet in the last 24 hours, the 2Y yield has dropped below 2.9 despite the Fed planning, signaling a series of rate hikes.
Why is this yield drop happening? I just want to really dig in there and clarify, and I'm so happy that you're in this conversation from the crypto background. These are all markets. We need to understand all of them. We shouldn't be siloed only talking about one or the other, because they're all going to be impacted, as we've seen in this month. So, it's really important to do that.
So, Jim, can you, for those who are newer, you hinted at the fact that it is really tricky right now. And it is a little counterintuitive. But can you just walk through that again, because it's really the pure play between inflation and recession fears, isn't it?
JIM BIANCO: Right. So, let's remember that the bond market is the intersection of buyers and sellers like stocks and like crypts are, and it's subject to hope, greed and fear like every other market. When prices fall, interest rates rise, and vice versa. If you go back to June 10th, that was the date that the May CPI came in at 1% way above consensus, and we got that hot University of Michigan preliminary reading for June. Today, we got the final reading for June.
And you saw an epic selloff in the bond market. You saw what happened to Bitcoin in the last two weeks in the bond market, the 2Y note yield in five days went up 70 basis points. You got to go back to 1982 when the yield was at 12% to find another time it moves 70 basis points in four or five days. That was a massive, massive move, one of the largest ever in the bond market.
It had sold off-- since you're from a crypto background, it was the equivalent of Bitcoin being at 17,600 by last Thursday. So, that market was deeply oversold to record proportions. And what you've seen is the rebound from that. Every move in a market is the function of the previous move. So, if the previous move was the biggest rise in yields in 40 years, you're going to have the biggest fall in yields in 40 years. And that's almost what we did in the bond market.
But does that mean that last Thursday was the high in yield? Look, this is about the sixth or seventh time this year that we saw high in yields, a big move down, and everybody said this is the highs for the year. At some point, it will be. But as I mentioned with the previous question, I'm not there.
So, what happened with the bond market is what happened with Bitcoin at 17,600. It just got sold off way too much. It got way oversold and just like Bitcoin's up and Ethereum is up nearly 50% this week, or at least from Saturday night's lows, you saw something similar in the bond market for the same reason, essentially, it was massively, massively oversold going into late last week.
MAGGIE LAKE: Yeah, excellent. And I hope that answers your question. It's a really good question. It's been one of the toughest times in the bond market. So, Jim, if yields move higher, people are anticipating more tightening for the Fed, that inflation is still a problem, the thing that's going to pull it lower and why you're all waiting for this pivot is if growth, if recession is coming, and then the Fed will back off, then you'll see yields go. It's the timing of that move that's really