Inflation vs. Reflation: Why Risk Asset Prices Hinge on the Difference

Published on
January 22nd, 2021
Duration
81 minutes

Everything You Wanted to Know About Inflation, Round 2 — Ask Me Anything with Steven Van Metre and Michael Ashton


Inflation vs. Reflation: Why Risk Asset Prices Hinge on the Difference

Live ·
Featuring James Bianco and Ed Harrison

Published on: January 22nd, 2021 • Duration: 81 minutes

James Bianco, president of Bianco Research, joins Real Vision managing editor Ed Harrison to discuss whether inflation or reflation is on the horizon and how either would impact risk asset prices in 2021. Bianco explains that markets often react to the start of the nominal growth cycle similarly—whether inflation or reflation is occurring—as it’s difficult to distinguish which phenomenon is leading economic growth. Even as the consensus is reflation, Bianco expresses his concern over inflation posing an issue. He also reflects on why the valuations of non-profitable tech stocks have risen so rapidly and expounds on how this is in part due to a significant shift in the investors’ preferences for trading in individual names.

Comments

Transcript

  • DG
    David G.
    27 January 2021 @ 00:43
    Buy them all and see what has value in ten years, or let them all drop and see what drops the least and bounces first?
  • SB
    Steve B.
    26 January 2021 @ 02:52
    Always love hearing Jim Bianco speak. I also follow him on Strava. Dude is a total savage riding in those temps! :)
    • EH
      Edward H. | Real Vision
      27 January 2021 @ 00:11
      Go Steve!
  • NL
    Nikola L.
    26 January 2021 @ 22:55
    thank you both.
  • PG
    Philippe G.
    26 January 2021 @ 18:15
    Interesting comments on crypto and adoption in EM/3rd world vs. USA
  • tc
    thomas c.
    26 January 2021 @ 11:19
    great conversation on both sides of the mike. I don't agree with many things but I he adds a perspective that I find most valuable. At least he offers an explanation for why some of my small tech stocks have gone up as much as 4x.
  • mw
    michael w.
    25 January 2021 @ 22:18
    Personal income booming? That's only the people on unemployment, they aren't buying new things or "improving" their lives. Most Americans are broke.
    • JL
      J L.
      26 January 2021 @ 00:39
      The personal saving rate is the highest its been in decades, and U.S. household net worth hit a new all-time high in the second quarter of 2020. The lower half of the economy may be broke, but the upper half is not. https://fred.stlouisfed.org/series/PSAVERT
    • PW
      Patrick W.
      26 January 2021 @ 02:04
      J L, in aggregate, yes, but most of those savings may not be readily deployable as it is concentrated in the top https://realinvestmentadvice.com/the-illusion-of-soaring-savings-amid-rising-economic-uncertainty/.
    • JL
      J L.
      26 January 2021 @ 08:49
      Yes, that is why I said "the lower half of the economy may be broke." Again, the split is somewhere around 50/50 to 60/40. The upper one-third to one-half is doing fine. The bottom half is not. Americans who make $60K or more have already seen average income surpass the Jan 2020 level, which means they are economically over the pandemic. This matters to the inflation outlook, specifically, because it suggests inflation-generating velocity and demand from fiscal efforts.
  • JL
    J L.
    26 January 2021 @ 00:35
    Truly excellent. So many high quality observations. One of the best conversations on RV in a long time. You really nailed the various aspects of the current mania and what's driving it, along with the dangers posed. The "retail venture capital" model, where investors are buying lottery tickets in the hope of finding the next land grab technology winner, made a lot of sense. Bianco's point about investors pricing in decades worth of gains — ten years for Amazon post-2000 and 30 years for RCA post-1929 — was also powerful. Maybe Tesla really will grow into its valuation — by the year 2050 or so, with a 90% drop between here and there. And Bianco's point that beyond wage growth as an inflation driver, personal income growth (via direct government spending) is potentially an even larger one, overpowering the output gap at the margins, was very good. It highlights the manner in which fiscal policy, when done a certain way, is true "helicopter money" in a manner monetary policy can't touch. It was eye-opening, too, to be reminded that the S&P lost two-thirds of its inflation-adjusted value between 1966 and 1982, and that it took from 1966 to 1993 for the S&P to reach a new inflation-adjusted high. One has to wonder: What happens to not just the 60/40 portfolio but the entire passive investment paradigm, if the S&P 500 goes into another period of negative real returns (nominal gains below inflation) that lasts for a decade or more? If it happened back then, it can happen again. One quibble with the viewpoint on central bank digital currencies (CBDCs) near the end. I would suggest sovereign governments have a compelling reason to issue CBDCs — even if they are held in traditional bank accounts — because of the programmable money aspect. The two big draws of CBDCs are likely to be data-driven and policy-driven: By using them, governments will have much more granaular data on where money is moving and how, and they will also be to run fine-tune their policies in an extremely granular way. Those advantages could be potentially huge, as evidenced by something that was said earlier in the conversation: In the current system it is hard to get currency to the people who actually need it (e.g. the nearly evicted), without sending currency to people who don't need it (e.g. millennials on Robinhood buying weekly call options on GameStop). That distinction — sending targeted stimulus to specific demographics, regions and households, or having different tax rates per region, or even different interest rates for different types of accounts — is exactly the type of granular policy-targeting that CBDCs will enable.
    • LJ
      Lynn J.
      26 January 2021 @ 03:24
      your idea of granular policy-targeting for CBDC is genius!
    • JL
      J L.
      26 January 2021 @ 07:25
      @ Lynn J. Heh. Well I should clarify it's not "my" idea :) More so that visibility and policy fine-tuning -- not just for the central bank, but the treasury / exchequer too -- are two big reasons why +70% of the world's central banks are either researching CBDCs or working on test programs.
  • HM
    Harold M.
    26 January 2021 @ 02:46
    Awesome discussion gents!
  • JS
    John S.
    25 January 2021 @ 22:06
    I think we are all mislead but all these tesla etc and the stories behind. I do not really see any logic for the big run of tesla. This was a simple coincidence and some put their life savings on it and got millionaires but they could have also go busted. It has been simply a coincidence feed by a piramidal typical bubblish structure.
    • JS
      Jon S.
      26 January 2021 @ 02:39
      Good comment my brother.
  • MS
    Mark S.
    26 January 2021 @ 02:30
    I love listening to Jim Bianco. That said, the claim that you need to get the dose 3 weeks after or it won't work, isn't necessarily true. Studies could have been conducted in that matter but that doesn't mean you two doses if it is say a 0 and month 4 can't be stated as not beneficial until you have a study displaying that which we don't have.
  • HC
    Hiu C.
    26 January 2021 @ 02:10
    For the Moderna vaccine, you take the second shot 28 days after the first shot. Within 3 weeks is not exactly accurate but running out of vaccines for the second doses is a real concern. I don't know about the Pfizer one.