ANDREAS STENO LARSEN: Happy Friday, folks. And welcome to the Real Vision Daily Briefing. I'm Andreas Steno, the senior editor at Real Vision, sending to you live, Friday, the 29th of July. We're basically heading towards the conclusion of the all-important Federal Reserve week. And equities are still partying like there is no tomorrow after this rate hike from the Federal Reserve earlier this week.
I'm pleased to be joined today by a macro heavy waiter, the founder of Bianco Research, Jim Bianco. Welcome, Jim. Good to see you.
JIM BIANCO: Hey, thanks for having me.
ANDREAS STENO LARSEN: Jim, watching the price action this week, equities have been partying since Wednesday after the 75 basis points interest rate hike. What the hell's going on?
JIM BIANCO: Oh, I think a couple of things. Don't underestimate a short squeeze. About a half hour ago, the commitment of traders report came out. And as of Tuesday's close, you had a pretty hefty short the S&P futures, which are now not in a good place if you're still short after Tuesday's close. So, there was probably a lot of short squeezes in the market. But I think that what kicked off this rally on Wednesday was when Jay Powell basically said three things.
One, he said that there might come a time when they're going to reduce the rate hikes from 75 to 50. Two, he said that they're probably very close to neutral. I understand why said it, I just think he's wrong. And we can we can talk about that later. And three, he abandoned forward guidance. So, he's set it up that the market is saying be interpreting all of this as the end of the rate hike cycle can be seen, and it's not too far in the distant future. And it's rallying anticipation to that.
ANDREAS STENO LARSEN: Jim, we are currently at 2.5% for the Fed funds rate after the rate hike this week, at least the ceiling is 2.5%. And Jay Powell is now talking about being close to neutral. The neutral rate is obviously a phenomenon that you cannot just leave your house and observe. How do you assess the neutral rate? And how do you do it, basically?
JIM BIANCO: Let's talk about how the Fed does it and how he arrived at 2.5%. The Fed believes that the neutral rate is 50 basis points above the inflation rate or a 50 or a half a percent real if you want to put it in those terms. The Fed believes that the long run inflation rate is 2%. They then think, okay, if we're at 225 to 250, we're approaching what we believe is the long run inflation neutral rate by 50 basis points over that number.
Now, there's an assumption embedded in there and that that 2% is the long run inflation rate. I don't believe that. I think that that was the case, it ended in March of 2020. We're in a new regime, and that new regime is stickier and much higher inflation. And by the Fed intimating that they're still around somewhere near neutral, he's suggesting that they're still operating with a pre-COVID model, the same model that they gave them transitory last year, they really haven't learned their lesson. And I think they're making the same mistake, because we can align it. But I think inflation is a bigger problem, then the Fed is letting on to it, most of Wall Street too.
ANDREAS STENO LARSEN: Earlier today, we got the latest print of the PCE inflation measure. So, the official target of the Federal Reserve. It printed at 6.8%. And I think we need to head back to the early 1980s to find similar numbers, right? If you look at the current inflation and the forecasts made by Wall Street and the Federal Reserve, what do you think of those forecasts initially here?
JIM BIANCO: You're right. PCE is the highest since 1983, like CPI. So, you got to go back 40 years to find another number that has been that high. But if you do it, if you look at the forecasts on Wall Street, there's a chart we have it. Hopefully we can throw that out there. What it shows is there it is, all those colored lines are Wall Street's forecasts going back to 2018.
They asked about 70 economists, what do you think the forecast is going to be for inflation in the next six quarters? All the lines converge at 2%. Before COVID, the inflation rates going to be 2% every quarter for the rest of humanity. Then when COVID hit and inflation dove, it's going to rise to 2% and stay there for the rest of humanity. Your inflation started moving up since 4% than inflation, every forecast has been, this is the peak, it's going back to 2%. And it's going to stay there for the rest of humanity.
Everybody is have this belief that in inflation is permanently not a problem. It was maybe the case pre-COVID. They still believe it's the case. Now, this is what's driving them when the Fed says, no more forward guidance. Good, Jay. Because you watch all the inflation numbers are going to show a rapid deceleration and inflation and give you reason to stop. That, I think is also underpinning the rally.
Now, what I suggested earlier is, I don't think this is the case anymore. I think that we've entered a new economy, we've entered a post-COVID economy. It is not like the pre-COVID economy. And for those who have been heard me before work from home, a lot of other things have fundamentally changed this economy. Fundamentally changed, it does not mean dystopian, it means different. We don't want to recognize that. We want to have an argument as to whether or not the economy has changed.
Raoul likes to use the example that this is like the late 1940s. I agree with him. It is like the late 1940s. The difference is in September 1945, we lost 2 million jobs in one month. We all knew why. The war was over. Japan signed the peace agreement, or the surrender agreement at that point. And we stopped with the tank in airplane production. We weren't happy 2 million people lost their jobs. We knew we weren't going back there. We were going to some different economy.
By 1947, no one said, when are we going to be back to 1944. In 2020, we lost 14 million jobs in a month. We are not of the opinion unlike 1944 or 1945, that this is a different economy. No, this is the 2019 economy. We're just waiting for it to return. So, here we are in 2022, three years later, and we're wondering, when are we going to return to their pre-COVID economy? Not whatever it was pre-2019, don't even send that to the Economics Department, send it to the Anthropology Department. They could study that history.
We are now looking at what is 2024, 2025, 2026 going to look like. It is different from 2019. I think it is an economy with more frictions, with more onshoring, with more labor shortages as well, too. And that is going to lead to vastly higher inflation, not 9%, but maybe 4% or 5%. And the Fed is going to have to come to grips with, they're not close to neutral. The markets do believe that, is I've often argued.
Transitory is a word you're not allowed to say in economics, but everybody still believes it. That's what the forecasts show with the inflation rate going to 2% staying there. Everybody still believes this is a temporary inflation, not something more permanent. And that's going to be the question for the rest of the year. Does inflation moderate of justifying the rally in risk markets? Or does it wind up showing some resilience? Yeah, sure. It might peak at 9.1%, but does it show some resilience, questioning whether or not we're close to neutral?
ANDREAS STENO LARSEN: Jim, if we look at the current market pricing of inflation, it tends to agree with the full cost that you've just showed on screen here. If you look at inflation forwards, they tend to converge towards 2% over like 18 months from now. And they've done so over the course of the spring in the early summer here as well. What are the ramifications if the market is wrong, and the Wall Street economists are wrong on inflation?
JIM BIANCO: Yeah. The inflation swaps curve has been converging at 2%. It's been converging on 2% since 2010. So, this is nothing new. It's been doing this for about 12 years right now. And it's consistent with the economist, quick word about forward curves. They are useful, because they tell you what the market thinks, whether you're talking about the forward curves in Eurodollar strips or Fed fund futures or the swaps market that saying the Feds going to cut rates next year, or you're talking about the inflation forward curves, or are you even talking about the forward curves in the tips market. They tell you what market players think.
They do not tell you what will happen in a year or two. In fact, all forward curves have a pretty bad track record and ultimately telling you what's going to occur. A year ago, the forward strips was pricing a one rate hike for all of this year, a year ago. How's that worked out so far? So yes, if we wind up not having what the market suggests, I think there's going to have to be an adjustment. Now, of course it could wind up being exactly right. It could wind up that inflation comes in way higher than we think are coming way lower than we think.
But to assume that because the forward markets are saying 2% inflation in a year or the Feds going to cut into your debt, that's like saying, I saw what Wall Street's estimate was for Apple. They don't have to bother reporting. I already know what they are. In fact, oh, you want another example of a forward market? I just saw what the London bookies have got for Chelsea manual, they don't have to play the game. We've already decided what the outcome is. The game is irrelevant but no one thinks that.
But somehow when we get to these forward markets, that's the way we think, right? The market says 2% inflation in year. So, we don't have to bother measuring it. It's going to be 2% in a year. So, that's why I think we have to watch. If it is wrong and if it winds up staying sticky high, then we're going to start to realize the Feds not close to neutral, they've got a lot more to go. And in a liquidity driven financial conditions driven market, that could be problematic.
Not problematic now. The markets all excited that the Feds off of forward guidance, and it's all hoping that it's going to see data that's going to say inflation is going to collapse. And that's going to justify that 50 basis points of September 25 and November, and they're done. And maybe that's the case, but I don't think it will be.
ANDREAS STENO LARSEN: Jim, let's allow you to hypothetically replace Jay Powell as the Fed Chairman for a while here. What do you think is needed to bring inflation yet down at this juncture?
JIM BIANCO: Oh, the famous Groucho Marx line, any organization that would have me as a member I would immediately resigned from it. So, what do we really need to have inflation come down? I think is a frank discussion. It's not even just monetary policy. It's a frank discussion. Let me go back to my 1947 example. We weren't going back to 1944. Everybody knows it. 2022, we're not going back to 2019.
The president should stop giving speeches telling people go back to the office, which he did. The Federal Reserve Chairman should stop talking about the long run rate of inflation is 2%. We don't know what it is, we need to start thinking about why we have this chronic inflation problem. And I'll give you one example. I think that work from home, a third of the workforce works from home.
What that means is you consume more things, less services, and that again showed up in today's personal income numbers, that stuff rose faster than services. We have a chronic shortage of stuff, because we're demanding more of it. And that's why we have a supply chain problem. And yesterday, the shipping journal Freightways reported that if you add up all the ships that are anchored off the coast of the United States waiting to unload the container ships, we just made a new high. We just made a new high last week.
This shipping problem, the supply chain problem might have been a disaster last fall. It's just very bad right now. But it's not, it's relatively gotten better. But it is not getting back to normal. It's not close to being back to normal right now. And this is because we don't want to have a discussion. How do we fix this? How does the supply chain fix this? If you listen to Wall Street, the answer is hold your breath and wait, it will magically go away in six months or nine months, the supply chain problem.
How about the answer is a trillion dollars of spending in manufacturing and supply chain, a restructuring is how we're going to fix the supply chain? And until we do, we have to be prepared for higher friction costs which is war inflation for the foreseeable future. Quick word about shipping, the World Shipping Council ranks the efficiency of ports 370 of them. Last is Los Angeles. Second, the last place is Long Beach.
Tunisia, Algeria and Nairobi rank ahead of Los Angeles, as far as being more efficient reports. Algeria has a more efficient port than the largest port in United States, which is Los Angeles, which shows you how brittle our system is, and why when the economy changed it can't cope with it. And that's why we have this chronic supply chain problem which is leading to higher inflation costs.
ANDREAS STENO LARSEN: If you look at the current supply chain issues, at least the Wall Street economist would argue that it's partly driven by the zero-COVID policy of China. What do you make of that discussion, Jim?
JIM BIANCO: I think it is. I think it is partly driven by the zero-COVID policy of China. And I think they have to realize that the zero-COVID policy for China is semi-permanent. If not permanent, it's going to go on and off in China for many years. Yes, you've identified the problem, and it will also be a problem in 2026. It's not going away. China is not changing their paths. They just like that another million people in Wuhan. Remember Wuhan, they just locked out a million people in Wuhan earlier this week because of four COVID cases. Four.
Go ahead, we could all shake our head and I could shake my head with you and go, that's insane. But that's the reality of China. And China has become an unreliable supplier of goods because of the zero-COVID policy. They're not going to change it. So yes, Wall Street is correct. But where they don't go, the next step is to say, we have to now incorporate that into it. And maybe companies need to start thinking about Vietnam, Indonesia, or maybe the United States to reshore and find other supplier outlets, because China is unreliable, in part because of their zero-COVID policy, also, in part because of the bad politics they have between the United States and Beijing.
ANDREAS STENO LARSEN: Jim, some of the portfolio managers and strategists taking the other side of the bet on inflation compared to you. They refer to the potential recession as a catalyst of lower inflation. And I wanted to play a soundbite for you, from a debate between David Rosenberg and Raoul Pal airing today on the Real Vision platform in relation to that recession debate. So, let's listen to the soundbite and get back to that recession discussion.
DAVID ROSENBERG: Because historically, the stock market puts in the fundamental low, two thirds of the way through the recession, whatever that low is going to be, will it be 10% down, 20% down, 30% down. The major point is that instead of trying to pick at what point we bought them, it's more important to identify when is the start of the next bull market? When will that start from whatever level it's going to be?
And historically, that's two thirds of the way through the recession. That is actual people say that nobody rings the alarm bell at the lows. Well, actually, if you can try in time, the contours of the economy through the legs from Fed policy, you can come up with a reasonable approximation as to when as opposed to what level but the timing of when it's going to be safe to dip toes back into the risk pool.
Outside of these intermittent bear market rallies, what's the fundamental law? The fundamental law takes place at the tail end of the Fed easing cycle and the tail end of the economic recession. So, that's next year story, probably second half.
ANDREAS STENO LARSEN: The entire interview is available at the Real Vision platform full essential plus or pro subscribers to Real Vision. Jim, I want to ask you a question upfront after this soundbite from David Rosenberg. Are we in a recession now, even if the White House refuses to admit to it?
JIM BIANCO: Alright. Let me try and be clear here. Yes, we're in a recession full stop question over, it's a recession. Now, you could argue it's a shallow recession. Sure. Alright, it's a shallow recession check back January 1st and let's see if it's still a shallow recession. This is not new, what the White House is doing really quick. In 1978 under the Carter administration, there was an economist, Alfred Cohn. And he started using the words that if inflation doesn't come down, we might see another depression. And the White House went crazy on him.
And so he started, he gave a famous speech where he said he was going to refer to it as a banana. And that he was worried that we were going to have a banana. Out of that discussion came the word recession, because prior to that, we used to call them depressions. In the 1930s, the Hoover administration went crazy, because we used to call them panics than 1893 panic, if you remember that from your history books. Don't call it a panic what we're seeing, so they invented the word depression.
So, we [?] to panic. The White House didn't like that word, so we invented the word depression. Then in 1978, they didn't like the word depression so we invented the word recession. It seems like we're now in the process of finding a new word to mean exactly the same thing. My point is, my God, this is not new. We have done this now for 90 years between White Houses and recessions. So yes, it's a recession stop asking. It might be a shallow recession, if I'll agree with you there. But let's see in January, if it's still a shallow recession. I believe in that I have no opinion.
ANDREAS STENO LARSEN: I perfectly agree with that assessment, by the way, Jim. And I could tell you from 10 to 15 years of experience as a sell side economist, it's not uncommon for investment banks to bend the word recession in the economic research departments. That's why you don't hear it. But