Jim Bianco: Fed vs. Trump, Inflation Risks & Rate Cuts to Backfire?!
Summary
Fed and Rate Cuts: The podcast discusses the high probability of a rate cut at the upcoming September Fed meeting, despite market skepticism about its necessity given the current economic conditions.
Powell vs. Trump: A potential clash between Fed Chair Jerome Powell and President Trump is highlighted, with Trump favoring rate cuts and Powell potentially resisting, which could lead to political tension.
Fed Independence: The discussion emphasizes the need for more independent voting within the Fed to preserve its independence and avoid being influenced by presidential pressures.
Economic Outlook: The economy is described as "okay," with concerns about labor market dynamics due to low population growth and immigration, affecting job creation and potentially leading to wage inflation.
Inflation Risks: Inflation is expected to rise due to tariffs and supply chain issues, suggesting that current interest rates may be appropriate without further cuts.
Bond Market: Bond yields are seen as fairly priced, with potential risks of higher yields due to inflation and economic growth driven by AI investments.
Stock Market Valuation: The podcast predicts low single-digit returns for stocks due to high valuations, with bonds and cash offering competitive returns with less risk.
Crypto and Metals: A shift towards altcoins like Ethereum is noted, driven by regulatory changes, while precious metals are seen as a hedge against financial system risks.
Transcript
That would sound like to me that Jay Pal should go to Jackson Hole and say, "I'm not cutting rates in September." If he goes to Jackson Hole on Friday and he says, "I'm not going to cut rates," then he better hire a lawyer cuz Donald Trump's going to fire him. Hello and welcome to Wealthon. I'm Maggie Lake. This August, we're putting the spotlight on silver, featuring expert interviews, in-depth market analysis, and actionable investment insights. You can learn more by downloading our free silver investing report by clicking the link in the description below. Joining us today to talk about the macro outlook is Jim Biano, president of Bianco Research. Hey Jim, it's great to see you. It's good to see you. So, uh, we are coming off the close of a pretty strong earnings season here in the US. Equity sitting near record highs and we have Fed officials gathering in Jackson Hole this week ahead of what's going to be I think a really widely watched September Fed meeting. So I'm curious, what are you most focused on? What's what do you think is going to set the tone for the final stretch of the year here? Oh, I think that Friday's Jackson Hole speech is going to set the tone at least over the next couple of weeks. Um let's set where we are right now. the market is pricing in a high probability that the Fed is going to cut rates at the September meeting. I don't think it's necessarily the case the market thinks that's a good idea as much as it says that's what we're going to get and that's why they've priced it in. At his press conference in July, Jal said three things. He said government data is the gold standard and then we fired the BLS chief two days later. So, I'd like to hear him explain that one. He then said that the labor market was okay uh and inflation was a problem and then two days later we got a massive downward revision to jobs and a week later we've got a very sticky producer price index. That would sound like to me that J. Paul should go to Jackson Hole and say I'm not cutting rates in September. So if he's going to cut rates in September, he's going to have to explain all these other things. Um how does that all square with what you said last month? And if he doesn't and if he goes to Jackson Hole on um the Friday and he says, "I'm not going to cut rates," then he better hire a lawyer because Donald Trump's going to fire him. Yeah. This is this is sort of really setting up to be this massive clash between Powell and Trump in a way that it seems like he's been trying to avoid or at least trying to figure out a way to kind of keep the Fed's credibility if they have any. I know some some art would argue that point certainly his legacy and somehow, you know, weave that line to sort of appease the Trump administration at the at at the same time so that there isn't this, you know, massive um confrontation really with the Fed itself because I think it's a little about a little bit more than just Powell and Trump personally, isn't it Jim? Yeah, I think it is. And I also think that, you know, this is highlighting a problem. I'm going to get a little wonky here for a second. This is highlighting a problem that the Fed has had for a number of decades. Uh let me contrast that. Two weeks ago, the Bank of England had a meeting had a a monetary policy committee meeting and they voted to cut rates. The vote, they have nine members. The vote was 441. Four for cutting rates 25, four for not doing anything, and one for cutting rates 50. So they settled on cutting rates 25. 44 for one. We would never consider what would happen if our Fed had a 66 or 75 vote because the Fed has this idea that every vote has to be 120 because we have 12 voters or 111 and we've done this for decades. That means the chairman runs the place. Everybody else just does what he wants. If we had 441 votes or the equivalent of a 7566 vote, it would do the best for Fed independence. Go ahead, fire pal. Get rid of him. You're not changing anything. You're getting rid of one of 12 votes. The rest of the committee will decide what they want to do. And that if that's what comes out of this, more dissents, more independent uh, you know, governors and presidents voting on what they think is the best, that would do more to preserve the Fed's independence and insulate them from presidents. You know, last contrasting thing, you never ever hear a president say, "I don't like the way the Supreme Court voted. I want to fire the chief justice because he's only one of nine votes. They don't get together after oral arguments and say look at the chief justice and go so how are we going to vote on this? But that's exactly how they do it at the Fed and that's their biggest weakness. So if this is going to do away with that, yeah, it's going to be a little messy in the process, but in the long run it's the best thing that could happen to the Fed. I just don't think they realize it. That's so interesting. Why did didn't I I feel like that consensus really came together during Greenspan. Correct me if I'm wrong. And did didn't they do that because they felt like all the mixed messages was more confusing for the for investors and for the market. Um so you know is it is that an issue if they all start saying what they really think? It was actually before that. It was actually under Vulkar in ' 86. What happened was they held a meeting in in the middle of ' 86 to cut rates. Vulker voted against cutting rates, but the committee voted to cut rates. In the middle of the FOMC meeting, uh, this comes from Secrets of the Temple, written by Bill Grder, a book in the early 90s. In the middle of the meeting, Vulkar walked out of the boardroom, called Jim Baker, the Treasury Secretary, and resigned. Then they convinced him 10 minutes later to come back into the boardroom, and they had a second vote, and they voted to do what he wanted. And since that moment, the chairman gets what the chairman wants. Yeah, that that consolidated. That's so interesting. It consolidated the power. So, so do you, so bringing us back to Jackson Hall now, what do you So, do you think Jay Powell is going to address the fact that the conditions are not not really ripe for a rate cut? Should they be cut? What should the Fed be doing? Well, that's the the big question is there should and will, right? So, I don't think the Fed should be cutting rates. I think that the economy is strong enough. I think inflation is enough of a worry and I like to caution people. I think it's a 3ish% worry and that is too high a number or to re or to restate it differently. If we're in a 3ish% interest rate world or inflation world, excuse me, we're in a 4ish% interest rate world and interest rates are already at four. So they shouldn't go down anymore if that's the inflation rate we're at. So that's what I think. I don't think they should be cutting rates, but I'm not on the board and they the market is saying 85% chance that they are going to cut rates. So, that's really what he has to address because what Paul said on July 30th at his press conference was here's why we are not cutting rates and the data has come out worse on payrolls and worse on inflation. So, square this circle for me Jay. What are you doing and why are you doing it? I know some people said, "Nah, he'll he'll punt and he won't say anything at the meeting." Then he leaves us with that limbo. I'm not sure where he stands. I'm not sure what's going on with the with the committee or anything like that. So, I hope he's going to provide some clarity. And historically, the Jackson Hole speech has been the place that they do it. As part of our silver interview series this month, we're bringing you top tier research in a free silver investment report. To claim your free silver investing report, simply click on the link in the description below. And if you're looking for a simple, secure way to invest in physical gold and silver, check out Hard Assets Alliance at hardassetsalliance.com. Speaking of silver, Wealthon will be on the ground at the SCP Resource Finance Global Silver Conference this October in Toronto where Eric Sprat will deliver the keynote address. It's going to be a major event for silver investors. So stay tuned for more details in the weeks ahead. Yeah, it's been it's it's been a market mover for a long time, which is funny because it falls in exactly the time of year where everyone thinks they got a couple more days before they plug back in and really sort of think about uh what the what the last remainder months are are going to entail and and they tend to be hectic. See, you know, historically we have big moves in some of these months. Um it can be it can be rough sledding. Um but that that Jackson Hall meeting has been really important. Do if if Trump if he comes out and he's hawkish and we'll talk about what this means for assets in just a moment. This is a pal. You said Trump. So pal. Sorry. If pal comes out and uh says he's hawkish and kind of takes a stand against what the Trump administration and Trump himself wants. Is there a risk that he gets fired immediately? And would that would that royal the markets? Would there be a market impact from that? I don't think yes and yes and no. Yes, there is a risk that Trump could make noise that he's going to move to fire him. Now, you know, get wonky again. There's two terms of employment in Washington. There's at will and for a cause. At will means you have a a job like the BLS head. The president can fire you for what? Any reason or no reason. He could just say leave. And that's what he did with the head of the BLS. Paul has a job that is for cause. If you want to fire him, and the president has the ability to fire him, it has to be for illegal activity, malfeasants, something unethical or something. you. It's not we disagree with you on policy. Uh and that's why all this talk about the Fed renovation of the building and everything is so important. Um you know, I'm going to sell out my family here. My family is in the construction business. My name is Naval and my family's in the construction business and they do a lot of government buildings and those government buildings are rife with fraud and abuse and shady practices. Not to say that they do anything that way. They operate in that space. Every project has that in the government. So if you're looking at a government building that's being done and you want to look hard enough, you're going to find something that's untold and then you could say, "Well, J. Paul's the guy that approved all of this." That's why that's such an important issue here. So the president could use that as an example and try to move to fire him. Now what Paul will do is he'll hire a lawyer and say that's not that's not a valid for cause reason uh for whatever reason he would use and they'll have to go to the Supreme Court and and and sort it out. So the Trump would move to fire him. Trump Paul would say I you can't and so nothing then happens and then it would go to the Supreme Court and then at a later date we would have to wait for the Supreme Court to make a ruling on it. So I don't think it would be an initial market mover. would be a later market mover if the Supreme Court actually says no, you're out of here in September or October or something like that after they've heard arguments about it. Yeah. So political theater, not so much a market event. So what because there's never any political theater right now with Trump, right? No, not at all. Not at all. Uh so what what do you think is going to uh what is your outlook for bonds? And of course the Wisdom Tree ETF um that that Traction Research um is is a fixed income um ETF. So what is your outlook for bonds based on what you see happening with inflation and the economy? Walk walk me through your sort of macro setup. So I think that the economy is doing okay. And the reason I think I I want to use the word okay is I don't think we're near a recession. I think the biggest issue with the real economy right now is what's going on in the labor market and why we had that big slowdown in jobs. Now, let's keep in mind when you do the payroll report, there's 164 million people in the United States that have jobs. We do a a survey of of hundreds of thousands of homes to ask them if they're employed or they're unemployed. At the end of the day, really what these surveys are is they're surveys of population growth. And where is all the population growth coming from in the country today? It's coming from immigration. It's e first it was booming population growth in 21 22 23 because of massive immigration into the country slowed in 24 and got slammed shut in 25. President Trump has even put out on truth social that we have net negative immigration for the first time in 50 years. Now what that means is more people are leaving the country than are coming in. And he said 50 years because we only have 50 years of data. Actually, that might be the first time in American history we have net negative immigration. Now, why do I bring all this up? The population growth of the country might be the lowest it's been in 200 years right now because there's nobody coming into the country and the fertility rates are the lowest ever. And if the population growth is slow, you're not going to need a lot of jobs. The potential number of jobs. The American Enterprise Institute is saying that next year at this rate, we might need as low as 10,000 jobs or zero every month to meet population needs. So, while everybody's freaking out, 19,000 jobs in May, 14,000 jobs in June, and saying, "Oh my god, the Fed's got a cut." What they're failing to recognize is that might be enough if nobody's coming into the country. and that if you think we need to stimulate the economy to get back to 80 or 100,000 jobs, you're not going to be able to do it unless the Fed can open the border and bring more people in. Or you're just going to have to raise wages to get people that are not in the workforce, housewives, students, military, disabled, get them into the workforce. You got to give them more money. That's wage inflation. So I think that there when you understand that is a population growth is really the driver of payrolls and it's down because of the closing of the border then it makes sense that these numbers are weak. Now some people say it's demand. Well the problem with the demand argument is the two demand measures you would look at if there was if demand was weakening would be higher unemployment and lower wage growth. And we're not seeing any of either of them. So I do think it's on the supply problem. So, what I'm trying to say is there's a fundamental shift in the labor market and it started about 120 days ago when they really slam the border shut right now. And that's really starting to show up in this data. Inflation data, I think, is going to get hit by tariffs. It's coming right now. Why do I say that? Because in April when we had liberation day, everybody freaked out. Okay, here comes inflation. and it didn't show up because the stuff in April, May, and June that was on the shelves was stuff that was imported before Liberation Day. Now that we get into August, September, October, and moving forward, the stuff that's on the shelves is stuff that came in with tariffs. And so now you're going to start to see, I think, that that inflation numbers going to creep up. So, if the economy is doing okay, inflation is going to creep up. And the last thing I'll throw in there too is that the um employment um excuse me, earnings numbers looked really good. Guidance looked really good. Corporate America is feeling pretty good. That is a prescription for higher interest rates. That is a prescription for saying four and a half, four and a quarter to four and a half on the funds rate is just fine. Everything's at all-time highs. Home prices, stock market, crypto, gold, M2, they're all at all-time highs right now. There is nothing that really needs stimulus from lower interest rates. And if nothing needs it, the risk is if you give it to us, you wind up producing more inflation. So, so- which is an excellent point because the there's there that drum beat of cut rates, cut rates. Can we be guarantee that if they cut rates that actually has the effect of bringing interest rates down? Could we actually see the opposite happen? Not only can we see the opposite, we are seeing the opposite. We saw it last year when the Fed cut rates. I know Trump likes to say, "Our guy never cuts rates, but the Europeans cut 10 times." Well, he did. He cut rates four times last year and 10-year yields went up a 100 basis points. The Europeans have cut rates 10 times. The 10-year bond yield is higher today than it was before the first cut. The U um uh the UK has cut rates 175 basis points over the last year. Their UK 10-year guilt is up 70 basis points or almost threequarters of a percent since they started to cut interest rates. Why is this happening? Because a central bank, this is my take, a central bank could cut rates, raise rates, hold them steady, whatever they want to do, that doesn't mean that the broader market, long-term interest rates will follow unless the market thinks it's the right policy. So, if they're cutting rates in the in the ECB in Europe, if they're cutting rates in the UK, we cut rates last year, and long-term yields are going up, it's the market telling you that's the wrong policy. We don't need stimulus. all you're going to do is produce more inflation. And so that's really what we have to think about is if they do cut rates, if Paul signals a rate cut is coming at the end of the week, is it the right thing to do? Is it something that is needed in this economy? If the market decides the answer is no, then you could see interest rates in the long end of the yield curve go up. One last thought for you. The 30-year yield as we're recording right now is higher than it was two minutes before the payroll report came out on August 1st. In other words, all that talk, oh, the Fed's going to cut rates and here it comes. All the relief is coming. 30-year yields higher right now. The 10-year yields within three basis points or four basis points of where it was two minutes before that shockingly weak payroll report came out. there's no movement on the long end of the yield curve lower in yields because of this impending rate cut that's coming. So presumably, especially with Scott Besson as Treasury Secretary, someone has said that to President Trump as well has sort of laid out this scenario where listen, it could actually have the opposite reaction. If you force the Fed's hand, the market may punish you. Why? Why do you think they're still vocally so keen on seeing a rate cut? All right, so I'm gonna have to answer this question by being blunt in two ways. And one is Trump has said cut rates. And you know, if it doesn't work out, he said this a couple months ago. If it doesn't work out or inflation keeps up, you could, you know, go back the other way. And and he's suggesting a lot more volatile kind of policy. Cut rates. And if it doesn't work, raise rates. And if it doesn't work, cut rates. you know, but the Fed doesn't uh yo-yo around like that. Also, the blunt part about it is um he's Donnie from Queen's real estate developer. and Donnie from Queens Real Estate, like everybody in the real estate business, they are all the experts on interest rates and he knows more about interest rates than anybody else because he's a real estate guy and he thinks that rates should be low because all real estate guys think the appropriate real the appropriate interest rate is zero if not negative because they all think about mortgages on their buildings and they all think that the banks are charging them too much and they all want lower rates. And how do I say that? Why do I say it that way? Because look at his arguments that he has given for cutting rates. He is first given what's called the fiscal dominance argument. That is if you cut rates, you then lower interest costs and that helps the government finance itself. Well, everybody uses that argument. You know, I go to my bank and say, you know, if you cut my mortgage rate and lower my monthly payments, it would really help my family finances. But it doesn't work that way. you are a credit risk and you you are what whatever you are as far as going that and that gets to the second point Trump keeps saying he he wrote that handwritten note last month to Paul and he said look at all these countries that have zero and look at what we are for we're a better credit than those countries we should be at zero again he's thinking about his mortgage on Trump Tower is what he's thinking about it's the best building in Manhattan so it should have the lowest interest rate that's the way he thinks about it that argument is right for buildings in Manhattan, but that's not how you set sovereign yields. Sovereign yields are about growth, inflation expectations, and supply. They're not set because you're the best country. If you have too much growth, too much inflation, and you're issuing too many bonds because of supply, you're going to have high interest rates is what you're going to have. If you balance your budget, if you have lousy growth, and you have no inflation because you have lousy growth, you're going to have low interest rates. So on that list that Trump gave Paul and said, "Look at all these countries with low interest rates. They're all crappy countries. They're all in trouble. That's why they have low interest rates. The countries that had high interest rates are all strongly growing countries. That's why they have high interest rates." And that's the part that I think he misses. He's thinking the US is like the mortgage on Trump Tower, but it's not. It's a sovereign yield. It's a different animal alto together. Yeah, it's a good point. And we do bring our bi our you know our our bias based on the world we operate um to a lot of these decisions. So it it would make sense he's thinking about it from a real estate point of view. So you you mentioned that the US economy is not going into recession. Are we going to see enough growth to be able to satisfy some of the goals that the Trump administration has and to maintain some of this bullish sentiment and the earnings that we're seeing? Um it seems like the Trump administration has pivoted away from cutting um and is now thinking about growing their way out of the sort of deficit issue we have. Are they going to succeed? It's going to be tough. It's going to be difficult. But what we're going to get with lower population growth is uh lower population growth is we're going to get lower economic growth. The one one follows the other. If you make more people, you have more growth. If you have less people in this case in immigration, you have less growth. So growth should moderate some. So the whole bestin 33 I3 argument where we're going to have 3% growth and um you know 3% deficit that's going to be hard to reach if we're going to have slower growth um right now. Um and the other third was 3% more um 3 million barrels more of oil uh a day. That that one is independent of growth. So, it's going to be hard to get those kind of heady growth numbers with lower population numbers unless we get tremendous productivity increases. And that, you know, is the whole AI argument is that we're going to get tremendous productivity. I'll just say one thing about AI. I have two opinions about it. One, I'm in the camp that it might be a bigger deal than the internet itself. Mhm. And I'm also remember the famous line that Bill Gates said about technological advancements that over the next few years they're usually going to deliver less gains than you think, but over the next 10 years they're going to deliver more gains than what you think. So that this whole idea that we're going to have this massive productivity enhancement, yes, count me in for 2035, but necessarily get it in 2026 or 2027. I think you might be a little bit disappointed in how much we're going to see in the next couple of years, but over the next 10 or 15 years, watch how it's just going to remake everything. Yeah. And you can see, I mean, I think that's why everyone's, you know, in the earnings calls and some of the capex plans, you're certainly hearing that, but again, the timing based on some of the valuations we're seeing. So, let let's walk through some of the the implications for different asset markets based on the scenario you laid out. So, first of all, bonds, you you talking about 3% inflation and that bonds are sounds like you're saying kind of fairly priced where they are. Um, so do you think they continue to stay rangebound here on the yields or is there a chance we see a spike in bond yields again, especially if inflation starts to spin higher on the back of these tariffs? It's still a moving target, isn't it? We don't really know where these things settle. Yeah, I think you know I would say that the roughly you know the four to four and a quarter the four and a half on the funds rate and you know the high fours on the 10ear on the 30-year yield and mid-4s and the 10ear yield is about you know fair value meaning that they've got room to go one way or the other. I think the risks are, as you pointed out, higher inflation because of tariffs in the near term. And I would also put another risk, although it's not really a risk, is that this massive AI uh buildout and spend is going to push GDP higher. Now, there's been estimates they could push GDP as much as 2% higher because of the massive amount of money that is being poured into this stuff. The productivity gains will come later. So if you're talking about higher growth and higher inflation, the risk I think is these fair value on bonds move higher. They so yields move through 5% on the 10-year note. Yields move towards 5 a.5% on the uh 30-year bond. I think that that's the risk of where they go right now. Uh the what makes my argument wrong is if we were to see some kind of a a massive demand slowdown in the economy and you'd see that with falling in wages or higher unemployment because remember with all these weak payroll reports we're not seeing the unemployment rate go up meaning that the demand is is not really falling off for jobs. There's just not enough people to to fill a lot of these jobs. So I think that that's going to be the risk for where where yields are going to go. Bonds are kind of in a funky place right now because people are not fully used to it. If a four and a half or 5% yield, if I said that yields are going to go up, people hear, "Oh, that means that prices are going to go down, right? Why would I want to own bonds?" Because in that environment of having a higher coupon, you'll still wind up with a positive return in a year. You'll still wind up making money in the bond market over the next couple years. It'll be low single digits. But then that turns to the other issue too is what's the outlook for the stock market for the next few years. And the answer there is the extreme valuation in the stock market. Um stock evaluation has always been famously said it's not a timing tool. I get that you don't time because this the PE ratios are high so the market has to come down but it's an expectation tool. If you're going to be buying record pees, you're going to be buying record valuations. What should you expect the stock market to do over the next several years? low single digits. And that's what the bond market's going to do. I've referred to this as the four, five, six market where cash returns you four, maybe it's going to go down with the Fed cuts. Bonds will return you about five, and stocks will return you about six. And so cash and bonds are actually going to give you the majority of what the stock market will give you over the next several years with a lot less risk. Now, maybe over the next several months, stocks continue to do better because they've got the the bit in their teeth with momentum and they're just going because of the momentum. But over the next several years, I don't think that if you're going to buy this valuation, then you have to expect massive increases in earnings. And usually that doesn't happen. And that's why stocks struggle. That's such an interesting way to look at it, Jim, because I think what we hear and the fear that we're being fed on a daily basis if you're on any kind of, you know, financial social media is that there's a crash coming. There's a huge correction coming. This sort of level of the stock market is unsustainable. It doesn't sound like you you you think it's something that severe. It's just that that idea that the S&P is going to return 20%. These these amazing gains that we've seen over the last few years, it's going to moderate to something much much lower. Um, and that's how you have to you have to think about your allocation through that lens. Exactly. I think what that's exactly right is that a crash or a severe recur correction look what when does the market correct severely? It it needs a catalyst, right? We had the catalyst of the of liberation day in April. We had the catalyst of the Fed raising rates 17 times from 0 to 4% in 22 to get a 25% correction in the stock market in 2022. We shut down the global economy in 2020. Those are the last three crashes or really strong corrections in the stock market. Could one of those happen? Sure. But what you have to tell me is there's going to be a severe correction or a crash and then you have to say here is the catalyst for it. And that is not pees are high. That's not the catalyst for it. Pees are high is a rolling disappointment over the next several years. We need huge earnings. We're not getting huge earnings. We've overpaid for stocks. The other argument you would give about, well, we've got the momentum going at the stock market. If there's a big shift in the stock market in the last, you know, year or two or three, it's been the dominance of the retail investor that they have come in and not only are they dominating the market, but they're winning. April, if you were a professional investor, you sold after liberation day. If you were a retail investor, you bought the dip like nobody's business in April and you won. Well, now retail is really dominating this market. And you might say, "Well, that's not going to stop." Sure, but the S&P is now $64 trillion market cap. You know, we're going to need a lot of money to keep pouring into a market that is this size to keep going up. So, when people tell me, well, look at look at the flows into ETFs. It's been positive for 21 weeks in a row. Yeah, but they got to be like 4050 billion dollars a week with these kind of valuations that we have in this stock market right now in order to sustain this thing from going. And so they're working for a while, but I think over time to expect just that kind of money to just keep coming in to the market forever. There isn't that much money out there right now unless you make the case that money is going to come out of money market funds and come out of bonds. but they now have yields and they're getting money too because they have yields because of more risk averse investors. So that's where I think it just kind of slows down and the frustration is, you know, we're not getting a whole lot out of it. We're not getting killed. I mean, unless you tell me there's a big red headline on my screen that says, "Oh god, something just changed like Liberation Day." We're not going to see, I think, that stiff correction. We're just going to see it slow down to low single-digit returns. Yeah. just the buying dries up. If the buying dries up just just naturally on the retail side, what is your anticipation on the institutional side? Because we heard that really strong narrative in April that it's it's time for the rest of the world. They're going to outperform and you're going to see a generational pivot away from US assets which are overowned by everyone. um and you're going to see a redistribution elsewhere whether they repay trade at home or they put it to work um you know uh in just different parts of the world. Do you buy that or did that get muddied now when we saw this big rebound in US stocks? Sort of buy it. And I and the reason I sort of buy it is the the US has something that the rest of the world doesn't have and that's the Mag 7, the AI stocks um you know and the big technological leaders. Name me the big technological leaders that you have in Europe. You know, there's a couple of them in China, uh, but then they they've got a whole host of other risks. Name me the big technological leaders in Japan. There really isn't, you know, who's the hyperscalers in Europe right now. Um, and so that's what we've got. What Europe had was we had stocks at 20 22 pees away from the MAG 7. They had stocks at 10 or 12 pees. So the professional investors looking at the European stock market and going, "Man, it's cheap." Well, of course, it's cheap for a reason. Uh, but it's and that and what you've been seeing is this rotation by professional investors out of the more expensive market, the US, into the lower expensive market, um, Europe. It worked great, you know, during around liberation day and stuff, but that gap where Europe outperformed the US or the rest of the world outperformed the US closed a lot with the rebound of the uh technology stocks in the US. Remember, you know, um with with the technology stocks, I think Nvidia is larger than the German stock market alone right now, just to give you an idea of the unique type of stocks that we have in the United States. So yes, sort of I understand the relative argument. Let's get out of the more expensive market into the cheaper markets, but they don't have hyperscalers, AI companies, Mag 7 equivalents. So those investors are going to keep coming back to the US because that's where these stocks are. Yeah, I think that's that the size of Nvidia is what exactly what makes people nervous, I think, when they're thinking about this. But again, you know, when you're when you're trying to pick the winners, um, every uh, attempt to sort of diversify away from I7, they've just, you know, that they've been gravitydeying. Um, so can I make a quick comment about Nvidia and as far as uh really want to be worrisome about I was at a I was at a reception party a couple of weeks ago and I was talking to some people that said that they owned Nvidia and I said, "What's their biggest product? What what what do they make?" And the answer I got and they were dead serious was stock's over four trillion dollars market cap. In other words, their product is their stock price. You know that do they understand what Blackwell is or an H20 chip? No, they just understand that the stock is going up. Another stock that's kind of approaching that is Palanteer. You know, it's up 200 plus percent. Nobody can nobody can explain what they do except they could just tell you that the stock price is up. And so when these companies be their product becomes the stock price, that's kind of a real red flag as far as their outlook. Yeah. Yeah. You're you're absolutely right. And and again, this is very interesting when retail gets involved, right? Especially when they're when they're sort of chasing momentum. Um I want to ask you speaking of momentum let's round out with crypto uh we saw again this huge gains and not not just in in the cryptocurrencies but um the IPOs that have really taken off have been in that space huge uh enthusiasm around that what is your expectation and how does that fit into your portfolio thinking well I think that there's been a shift in the crypto market with the passage of the genius act I know the clarity act is a little bit stalled that's the one where it clarifies hence the name um the regulations in the crypto space and that shift has been more towards what we refer to as the altcoins and a little bit away from Bitcoin and you've seen it with ETH really soaring nearly back to its all-time high of 4700 which was set way back in 2021. Now why is that happening? Because what the Genius Act is doing is allowing the use of stable coins and potentially real world assets on blockchains. That is a winner for places like um ETH, Ethereum, the Ethereum blockchain. The Ethereum blockchain has a developed out decentralized finance. It has lending, staking, borrowing, um you know, and all of those other types of protocols that exist out there. The Bitcoin blockchain has tried to do that with the Lightning Network and it's tried to do that with Taproot and a couple of other things, but it's never really taken off. So, when you pass laws and you clarify decentralized finance and stable coins, they're not going to benefit Bitcoin per se, they're going to benefit the places like Salana, like ETH, like Tron where you can actually wind up doing a lot of that. you've seen that really showing up um in a lot of those type of networks and in a lot of the coins that are the native for those networks. So that's why you've seen I think that the movement has been more towards Ethereum and less towards and less towards Bitcoin. And if we get the Clarity Act passed that will clarify who regulates what, how it's supposed to work when it comes to regulations, you know, the adoption of real world assets. Do you go to the CFTC? Do you go to the SEC, DFDIC, the Fed? Where does all of this fit in? That that's stalled for now, but not dead. I think you're going to continue to see that movement away from being the Bitcoin world to being the crypto world. And that and that makes sense to me that that's where we should be going with this because if crypto is supposed to be the alternative finance, right? If if JP Morgan I know my friends at JP Morgan hate me for saying this JP Morgan is the yellow taxi crypto's Uber is what it's supposed to be but it's not just you know I it's not just Uber it's ride hailing so it's Lyft and it's sidecart it's all those other things all mixed into one that's what it's supposed to be it's supposed to be a different currency it's supposed to be an alternative way to borrow and lend and stake it's supposed to be a different way to have hold assets in an electronic wallet Um, all of that is what it's supposed to be, not just Bitcoin alone held at Coinbase. And so that's why I start you're starting to see it broaden out and it should start to broaden out. Yeah. Yeah. It's really fascinating to see. And so in the 4% 5% 6% return kind of scenario, which sounds like you should be diversified, but thinking about where especially if you're risk averse where there's less risk. Um, where where does sort of metals and hard assets fit in this? We mentioned earlier we're doing a deep dive at wealthy on uh at looking at silver. We know gold had quite a run when everyone was worried. How are how are you thinking about that area in terms of what what looks attractive or a way to sort of balance out as we as we head through the rest of 2025? Well, if if we're going to slow down the returns and again, I would also emphasize, you know, if the stock market's going to return you six and and if my forecast on inflation is right, it's three. the bond market returns you five and cash returns you four, that's not bad. It's just that people are like, "Anything less than 20% a year is a disaster. I'm owed a 20% gain." So, if you take that away that it's just not, you know, everything's supposed to double in four years. That's what you do with a 20% gain. Um, then you start to say, "Okay, the a lot of other options open up." Remember, we used to say, Tina, there is no alternative. Well, now there's plenty of alternatives. And then if you start to look at a world of uncertainty between trade wars, look, with all this talk of tariffs, a trade war could really spin out of control, war, everything else that's going on in the world. If you want to protect yourself, you've got two options. Option one we just talked about is crypto. If you, but then that's also a speculative option because it's also a bet on a different kind of world. Then option two is how do I get my money away from the financial system? Really can't. But the closest way you can is precious metals. And that's why precious metals have had a very good year and have have been doing very well for the last couple years and you've recently saw 3500 on gold because that now is in play. What really used to where gold used to suffer a year or two ago was why would I bother with anything but max seven stocks and triple Q because they all go up 20 or 30% a year and it's hard to make the case for anything else. Well, that era I think is ending and that's why you're seeing money go into money market funds into bond funds and into crypto I'm excuse me into precious metal and why you're seeing precious metals especially gold starting to make new all-time highs because now there's a place for it in a portfolio as a protection and a diversifier where it's not just all about greed and 20 and 30% gains and stocks that we don't know what their products are but we just know that they go up. Yeah. Um, a really fantastic point and I think a reminder to all of us to really think about diversification, true diversification, um, and take a look and see if we're overexposed um, to that world where we were expecting to sort of 10x it because I think that's what a lot of people, as you rightly point out, got used to. Um, so a reminder, if you want to take a fresh look at your investments, don't forget you can sign up for a free portfolio review with one of our investment partners at wealthy. just go to wealthy.comfree to get that. Um Jim, as always, you gave us so much to think about. Um and I know you've been making the argument that sort of things are changing and we're entering a new cycle and we have to kind of readjust our thinking to that. Yes, thank you. Enjoyed the uh conversation a lot. Appreciate it. Thanks for all the great insight and we'll see you again soon. Thanks everyone. [Music]
Jim Bianco: Fed vs. Trump, Inflation Risks & Rate Cuts to Backfire?!
Summary
Transcript
That would sound like to me that Jay Pal should go to Jackson Hole and say, "I'm not cutting rates in September." If he goes to Jackson Hole on Friday and he says, "I'm not going to cut rates," then he better hire a lawyer cuz Donald Trump's going to fire him. Hello and welcome to Wealthon. I'm Maggie Lake. This August, we're putting the spotlight on silver, featuring expert interviews, in-depth market analysis, and actionable investment insights. You can learn more by downloading our free silver investing report by clicking the link in the description below. Joining us today to talk about the macro outlook is Jim Biano, president of Bianco Research. Hey Jim, it's great to see you. It's good to see you. So, uh, we are coming off the close of a pretty strong earnings season here in the US. Equity sitting near record highs and we have Fed officials gathering in Jackson Hole this week ahead of what's going to be I think a really widely watched September Fed meeting. So I'm curious, what are you most focused on? What's what do you think is going to set the tone for the final stretch of the year here? Oh, I think that Friday's Jackson Hole speech is going to set the tone at least over the next couple of weeks. Um let's set where we are right now. the market is pricing in a high probability that the Fed is going to cut rates at the September meeting. I don't think it's necessarily the case the market thinks that's a good idea as much as it says that's what we're going to get and that's why they've priced it in. At his press conference in July, Jal said three things. He said government data is the gold standard and then we fired the BLS chief two days later. So, I'd like to hear him explain that one. He then said that the labor market was okay uh and inflation was a problem and then two days later we got a massive downward revision to jobs and a week later we've got a very sticky producer price index. That would sound like to me that J. Paul should go to Jackson Hole and say I'm not cutting rates in September. So if he's going to cut rates in September, he's going to have to explain all these other things. Um how does that all square with what you said last month? And if he doesn't and if he goes to Jackson Hole on um the Friday and he says, "I'm not going to cut rates," then he better hire a lawyer because Donald Trump's going to fire him. Yeah. This is this is sort of really setting up to be this massive clash between Powell and Trump in a way that it seems like he's been trying to avoid or at least trying to figure out a way to kind of keep the Fed's credibility if they have any. I know some some art would argue that point certainly his legacy and somehow, you know, weave that line to sort of appease the Trump administration at the at at the same time so that there isn't this, you know, massive um confrontation really with the Fed itself because I think it's a little about a little bit more than just Powell and Trump personally, isn't it Jim? Yeah, I think it is. And I also think that, you know, this is highlighting a problem. I'm going to get a little wonky here for a second. This is highlighting a problem that the Fed has had for a number of decades. Uh let me contrast that. Two weeks ago, the Bank of England had a meeting had a a monetary policy committee meeting and they voted to cut rates. The vote, they have nine members. The vote was 441. Four for cutting rates 25, four for not doing anything, and one for cutting rates 50. So they settled on cutting rates 25. 44 for one. We would never consider what would happen if our Fed had a 66 or 75 vote because the Fed has this idea that every vote has to be 120 because we have 12 voters or 111 and we've done this for decades. That means the chairman runs the place. Everybody else just does what he wants. If we had 441 votes or the equivalent of a 7566 vote, it would do the best for Fed independence. Go ahead, fire pal. Get rid of him. You're not changing anything. You're getting rid of one of 12 votes. The rest of the committee will decide what they want to do. And that if that's what comes out of this, more dissents, more independent uh, you know, governors and presidents voting on what they think is the best, that would do more to preserve the Fed's independence and insulate them from presidents. You know, last contrasting thing, you never ever hear a president say, "I don't like the way the Supreme Court voted. I want to fire the chief justice because he's only one of nine votes. They don't get together after oral arguments and say look at the chief justice and go so how are we going to vote on this? But that's exactly how they do it at the Fed and that's their biggest weakness. So if this is going to do away with that, yeah, it's going to be a little messy in the process, but in the long run it's the best thing that could happen to the Fed. I just don't think they realize it. That's so interesting. Why did didn't I I feel like that consensus really came together during Greenspan. Correct me if I'm wrong. And did didn't they do that because they felt like all the mixed messages was more confusing for the for investors and for the market. Um so you know is it is that an issue if they all start saying what they really think? It was actually before that. It was actually under Vulkar in ' 86. What happened was they held a meeting in in the middle of ' 86 to cut rates. Vulker voted against cutting rates, but the committee voted to cut rates. In the middle of the FOMC meeting, uh, this comes from Secrets of the Temple, written by Bill Grder, a book in the early 90s. In the middle of the meeting, Vulkar walked out of the boardroom, called Jim Baker, the Treasury Secretary, and resigned. Then they convinced him 10 minutes later to come back into the boardroom, and they had a second vote, and they voted to do what he wanted. And since that moment, the chairman gets what the chairman wants. Yeah, that that consolidated. That's so interesting. It consolidated the power. So, so do you, so bringing us back to Jackson Hall now, what do you So, do you think Jay Powell is going to address the fact that the conditions are not not really ripe for a rate cut? Should they be cut? What should the Fed be doing? Well, that's the the big question is there should and will, right? So, I don't think the Fed should be cutting rates. I think that the economy is strong enough. I think inflation is enough of a worry and I like to caution people. I think it's a 3ish% worry and that is too high a number or to re or to restate it differently. If we're in a 3ish% interest rate world or inflation world, excuse me, we're in a 4ish% interest rate world and interest rates are already at four. So they shouldn't go down anymore if that's the inflation rate we're at. So that's what I think. I don't think they should be cutting rates, but I'm not on the board and they the market is saying 85% chance that they are going to cut rates. So, that's really what he has to address because what Paul said on July 30th at his press conference was here's why we are not cutting rates and the data has come out worse on payrolls and worse on inflation. So, square this circle for me Jay. What are you doing and why are you doing it? I know some people said, "Nah, he'll he'll punt and he won't say anything at the meeting." Then he leaves us with that limbo. I'm not sure where he stands. I'm not sure what's going on with the with the committee or anything like that. So, I hope he's going to provide some clarity. And historically, the Jackson Hole speech has been the place that they do it. As part of our silver interview series this month, we're bringing you top tier research in a free silver investment report. To claim your free silver investing report, simply click on the link in the description below. And if you're looking for a simple, secure way to invest in physical gold and silver, check out Hard Assets Alliance at hardassetsalliance.com. Speaking of silver, Wealthon will be on the ground at the SCP Resource Finance Global Silver Conference this October in Toronto where Eric Sprat will deliver the keynote address. It's going to be a major event for silver investors. So stay tuned for more details in the weeks ahead. Yeah, it's been it's it's been a market mover for a long time, which is funny because it falls in exactly the time of year where everyone thinks they got a couple more days before they plug back in and really sort of think about uh what the what the last remainder months are are going to entail and and they tend to be hectic. See, you know, historically we have big moves in some of these months. Um it can be it can be rough sledding. Um but that that Jackson Hall meeting has been really important. Do if if Trump if he comes out and he's hawkish and we'll talk about what this means for assets in just a moment. This is a pal. You said Trump. So pal. Sorry. If pal comes out and uh says he's hawkish and kind of takes a stand against what the Trump administration and Trump himself wants. Is there a risk that he gets fired immediately? And would that would that royal the markets? Would there be a market impact from that? I don't think yes and yes and no. Yes, there is a risk that Trump could make noise that he's going to move to fire him. Now, you know, get wonky again. There's two terms of employment in Washington. There's at will and for a cause. At will means you have a a job like the BLS head. The president can fire you for what? Any reason or no reason. He could just say leave. And that's what he did with the head of the BLS. Paul has a job that is for cause. If you want to fire him, and the president has the ability to fire him, it has to be for illegal activity, malfeasants, something unethical or something. you. It's not we disagree with you on policy. Uh and that's why all this talk about the Fed renovation of the building and everything is so important. Um you know, I'm going to sell out my family here. My family is in the construction business. My name is Naval and my family's in the construction business and they do a lot of government buildings and those government buildings are rife with fraud and abuse and shady practices. Not to say that they do anything that way. They operate in that space. Every project has that in the government. So if you're looking at a government building that's being done and you want to look hard enough, you're going to find something that's untold and then you could say, "Well, J. Paul's the guy that approved all of this." That's why that's such an important issue here. So the president could use that as an example and try to move to fire him. Now what Paul will do is he'll hire a lawyer and say that's not that's not a valid for cause reason uh for whatever reason he would use and they'll have to go to the Supreme Court and and and sort it out. So the Trump would move to fire him. Trump Paul would say I you can't and so nothing then happens and then it would go to the Supreme Court and then at a later date we would have to wait for the Supreme Court to make a ruling on it. So I don't think it would be an initial market mover. would be a later market mover if the Supreme Court actually says no, you're out of here in September or October or something like that after they've heard arguments about it. Yeah. So political theater, not so much a market event. So what because there's never any political theater right now with Trump, right? No, not at all. Not at all. Uh so what what do you think is going to uh what is your outlook for bonds? And of course the Wisdom Tree ETF um that that Traction Research um is is a fixed income um ETF. So what is your outlook for bonds based on what you see happening with inflation and the economy? Walk walk me through your sort of macro setup. So I think that the economy is doing okay. And the reason I think I I want to use the word okay is I don't think we're near a recession. I think the biggest issue with the real economy right now is what's going on in the labor market and why we had that big slowdown in jobs. Now, let's keep in mind when you do the payroll report, there's 164 million people in the United States that have jobs. We do a a survey of of hundreds of thousands of homes to ask them if they're employed or they're unemployed. At the end of the day, really what these surveys are is they're surveys of population growth. And where is all the population growth coming from in the country today? It's coming from immigration. It's e first it was booming population growth in 21 22 23 because of massive immigration into the country slowed in 24 and got slammed shut in 25. President Trump has even put out on truth social that we have net negative immigration for the first time in 50 years. Now what that means is more people are leaving the country than are coming in. And he said 50 years because we only have 50 years of data. Actually, that might be the first time in American history we have net negative immigration. Now, why do I bring all this up? The population growth of the country might be the lowest it's been in 200 years right now because there's nobody coming into the country and the fertility rates are the lowest ever. And if the population growth is slow, you're not going to need a lot of jobs. The potential number of jobs. The American Enterprise Institute is saying that next year at this rate, we might need as low as 10,000 jobs or zero every month to meet population needs. So, while everybody's freaking out, 19,000 jobs in May, 14,000 jobs in June, and saying, "Oh my god, the Fed's got a cut." What they're failing to recognize is that might be enough if nobody's coming into the country. and that if you think we need to stimulate the economy to get back to 80 or 100,000 jobs, you're not going to be able to do it unless the Fed can open the border and bring more people in. Or you're just going to have to raise wages to get people that are not in the workforce, housewives, students, military, disabled, get them into the workforce. You got to give them more money. That's wage inflation. So I think that there when you understand that is a population growth is really the driver of payrolls and it's down because of the closing of the border then it makes sense that these numbers are weak. Now some people say it's demand. Well the problem with the demand argument is the two demand measures you would look at if there was if demand was weakening would be higher unemployment and lower wage growth. And we're not seeing any of either of them. So I do think it's on the supply problem. So, what I'm trying to say is there's a fundamental shift in the labor market and it started about 120 days ago when they really slam the border shut right now. And that's really starting to show up in this data. Inflation data, I think, is going to get hit by tariffs. It's coming right now. Why do I say that? Because in April when we had liberation day, everybody freaked out. Okay, here comes inflation. and it didn't show up because the stuff in April, May, and June that was on the shelves was stuff that was imported before Liberation Day. Now that we get into August, September, October, and moving forward, the stuff that's on the shelves is stuff that came in with tariffs. And so now you're going to start to see, I think, that that inflation numbers going to creep up. So, if the economy is doing okay, inflation is going to creep up. And the last thing I'll throw in there too is that the um employment um excuse me, earnings numbers looked really good. Guidance looked really good. Corporate America is feeling pretty good. That is a prescription for higher interest rates. That is a prescription for saying four and a half, four and a quarter to four and a half on the funds rate is just fine. Everything's at all-time highs. Home prices, stock market, crypto, gold, M2, they're all at all-time highs right now. There is nothing that really needs stimulus from lower interest rates. And if nothing needs it, the risk is if you give it to us, you wind up producing more inflation. So, so- which is an excellent point because the there's there that drum beat of cut rates, cut rates. Can we be guarantee that if they cut rates that actually has the effect of bringing interest rates down? Could we actually see the opposite happen? Not only can we see the opposite, we are seeing the opposite. We saw it last year when the Fed cut rates. I know Trump likes to say, "Our guy never cuts rates, but the Europeans cut 10 times." Well, he did. He cut rates four times last year and 10-year yields went up a 100 basis points. The Europeans have cut rates 10 times. The 10-year bond yield is higher today than it was before the first cut. The U um uh the UK has cut rates 175 basis points over the last year. Their UK 10-year guilt is up 70 basis points or almost threequarters of a percent since they started to cut interest rates. Why is this happening? Because a central bank, this is my take, a central bank could cut rates, raise rates, hold them steady, whatever they want to do, that doesn't mean that the broader market, long-term interest rates will follow unless the market thinks it's the right policy. So, if they're cutting rates in the in the ECB in Europe, if they're cutting rates in the UK, we cut rates last year, and long-term yields are going up, it's the market telling you that's the wrong policy. We don't need stimulus. all you're going to do is produce more inflation. And so that's really what we have to think about is if they do cut rates, if Paul signals a rate cut is coming at the end of the week, is it the right thing to do? Is it something that is needed in this economy? If the market decides the answer is no, then you could see interest rates in the long end of the yield curve go up. One last thought for you. The 30-year yield as we're recording right now is higher than it was two minutes before the payroll report came out on August 1st. In other words, all that talk, oh, the Fed's going to cut rates and here it comes. All the relief is coming. 30-year yields higher right now. The 10-year yields within three basis points or four basis points of where it was two minutes before that shockingly weak payroll report came out. there's no movement on the long end of the yield curve lower in yields because of this impending rate cut that's coming. So presumably, especially with Scott Besson as Treasury Secretary, someone has said that to President Trump as well has sort of laid out this scenario where listen, it could actually have the opposite reaction. If you force the Fed's hand, the market may punish you. Why? Why do you think they're still vocally so keen on seeing a rate cut? All right, so I'm gonna have to answer this question by being blunt in two ways. And one is Trump has said cut rates. And you know, if it doesn't work out, he said this a couple months ago. If it doesn't work out or inflation keeps up, you could, you know, go back the other way. And and he's suggesting a lot more volatile kind of policy. Cut rates. And if it doesn't work, raise rates. And if it doesn't work, cut rates. you know, but the Fed doesn't uh yo-yo around like that. Also, the blunt part about it is um he's Donnie from Queen's real estate developer. and Donnie from Queens Real Estate, like everybody in the real estate business, they are all the experts on interest rates and he knows more about interest rates than anybody else because he's a real estate guy and he thinks that rates should be low because all real estate guys think the appropriate real the appropriate interest rate is zero if not negative because they all think about mortgages on their buildings and they all think that the banks are charging them too much and they all want lower rates. And how do I say that? Why do I say it that way? Because look at his arguments that he has given for cutting rates. He is first given what's called the fiscal dominance argument. That is if you cut rates, you then lower interest costs and that helps the government finance itself. Well, everybody uses that argument. You know, I go to my bank and say, you know, if you cut my mortgage rate and lower my monthly payments, it would really help my family finances. But it doesn't work that way. you are a credit risk and you you are what whatever you are as far as going that and that gets to the second point Trump keeps saying he he wrote that handwritten note last month to Paul and he said look at all these countries that have zero and look at what we are for we're a better credit than those countries we should be at zero again he's thinking about his mortgage on Trump Tower is what he's thinking about it's the best building in Manhattan so it should have the lowest interest rate that's the way he thinks about it that argument is right for buildings in Manhattan, but that's not how you set sovereign yields. Sovereign yields are about growth, inflation expectations, and supply. They're not set because you're the best country. If you have too much growth, too much inflation, and you're issuing too many bonds because of supply, you're going to have high interest rates is what you're going to have. If you balance your budget, if you have lousy growth, and you have no inflation because you have lousy growth, you're going to have low interest rates. So on that list that Trump gave Paul and said, "Look at all these countries with low interest rates. They're all crappy countries. They're all in trouble. That's why they have low interest rates. The countries that had high interest rates are all strongly growing countries. That's why they have high interest rates." And that's the part that I think he misses. He's thinking the US is like the mortgage on Trump Tower, but it's not. It's a sovereign yield. It's a different animal alto together. Yeah, it's a good point. And we do bring our bi our you know our our bias based on the world we operate um to a lot of these decisions. So it it would make sense he's thinking about it from a real estate point of view. So you you mentioned that the US economy is not going into recession. Are we going to see enough growth to be able to satisfy some of the goals that the Trump administration has and to maintain some of this bullish sentiment and the earnings that we're seeing? Um it seems like the Trump administration has pivoted away from cutting um and is now thinking about growing their way out of the sort of deficit issue we have. Are they going to succeed? It's going to be tough. It's going to be difficult. But what we're going to get with lower population growth is uh lower population growth is we're going to get lower economic growth. The one one follows the other. If you make more people, you have more growth. If you have less people in this case in immigration, you have less growth. So growth should moderate some. So the whole bestin 33 I3 argument where we're going to have 3% growth and um you know 3% deficit that's going to be hard to reach if we're going to have slower growth um right now. Um and the other third was 3% more um 3 million barrels more of oil uh a day. That that one is independent of growth. So, it's going to be hard to get those kind of heady growth numbers with lower population numbers unless we get tremendous productivity increases. And that, you know, is the whole AI argument is that we're going to get tremendous productivity. I'll just say one thing about AI. I have two opinions about it. One, I'm in the camp that it might be a bigger deal than the internet itself. Mhm. And I'm also remember the famous line that Bill Gates said about technological advancements that over the next few years they're usually going to deliver less gains than you think, but over the next 10 years they're going to deliver more gains than what you think. So that this whole idea that we're going to have this massive productivity enhancement, yes, count me in for 2035, but necessarily get it in 2026 or 2027. I think you might be a little bit disappointed in how much we're going to see in the next couple of years, but over the next 10 or 15 years, watch how it's just going to remake everything. Yeah. And you can see, I mean, I think that's why everyone's, you know, in the earnings calls and some of the capex plans, you're certainly hearing that, but again, the timing based on some of the valuations we're seeing. So, let let's walk through some of the the implications for different asset markets based on the scenario you laid out. So, first of all, bonds, you you talking about 3% inflation and that bonds are sounds like you're saying kind of fairly priced where they are. Um, so do you think they continue to stay rangebound here on the yields or is there a chance we see a spike in bond yields again, especially if inflation starts to spin higher on the back of these tariffs? It's still a moving target, isn't it? We don't really know where these things settle. Yeah, I think you know I would say that the roughly you know the four to four and a quarter the four and a half on the funds rate and you know the high fours on the 10ear on the 30-year yield and mid-4s and the 10ear yield is about you know fair value meaning that they've got room to go one way or the other. I think the risks are, as you pointed out, higher inflation because of tariffs in the near term. And I would also put another risk, although it's not really a risk, is that this massive AI uh buildout and spend is going to push GDP higher. Now, there's been estimates they could push GDP as much as 2% higher because of the massive amount of money that is being poured into this stuff. The productivity gains will come later. So if you're talking about higher growth and higher inflation, the risk I think is these fair value on bonds move higher. They so yields move through 5% on the 10-year note. Yields move towards 5 a.5% on the uh 30-year bond. I think that that's the risk of where they go right now. Uh the what makes my argument wrong is if we were to see some kind of a a massive demand slowdown in the economy and you'd see that with falling in wages or higher unemployment because remember with all these weak payroll reports we're not seeing the unemployment rate go up meaning that the demand is is not really falling off for jobs. There's just not enough people to to fill a lot of these jobs. So I think that that's going to be the risk for where where yields are going to go. Bonds are kind of in a funky place right now because people are not fully used to it. If a four and a half or 5% yield, if I said that yields are going to go up, people hear, "Oh, that means that prices are going to go down, right? Why would I want to own bonds?" Because in that environment of having a higher coupon, you'll still wind up with a positive return in a year. You'll still wind up making money in the bond market over the next couple years. It'll be low single digits. But then that turns to the other issue too is what's the outlook for the stock market for the next few years. And the answer there is the extreme valuation in the stock market. Um stock evaluation has always been famously said it's not a timing tool. I get that you don't time because this the PE ratios are high so the market has to come down but it's an expectation tool. If you're going to be buying record pees, you're going to be buying record valuations. What should you expect the stock market to do over the next several years? low single digits. And that's what the bond market's going to do. I've referred to this as the four, five, six market where cash returns you four, maybe it's going to go down with the Fed cuts. Bonds will return you about five, and stocks will return you about six. And so cash and bonds are actually going to give you the majority of what the stock market will give you over the next several years with a lot less risk. Now, maybe over the next several months, stocks continue to do better because they've got the the bit in their teeth with momentum and they're just going because of the momentum. But over the next several years, I don't think that if you're going to buy this valuation, then you have to expect massive increases in earnings. And usually that doesn't happen. And that's why stocks struggle. That's such an interesting way to look at it, Jim, because I think what we hear and the fear that we're being fed on a daily basis if you're on any kind of, you know, financial social media is that there's a crash coming. There's a huge correction coming. This sort of level of the stock market is unsustainable. It doesn't sound like you you you think it's something that severe. It's just that that idea that the S&P is going to return 20%. These these amazing gains that we've seen over the last few years, it's going to moderate to something much much lower. Um, and that's how you have to you have to think about your allocation through that lens. Exactly. I think what that's exactly right is that a crash or a severe recur correction look what when does the market correct severely? It it needs a catalyst, right? We had the catalyst of the of liberation day in April. We had the catalyst of the Fed raising rates 17 times from 0 to 4% in 22 to get a 25% correction in the stock market in 2022. We shut down the global economy in 2020. Those are the last three crashes or really strong corrections in the stock market. Could one of those happen? Sure. But what you have to tell me is there's going to be a severe correction or a crash and then you have to say here is the catalyst for it. And that is not pees are high. That's not the catalyst for it. Pees are high is a rolling disappointment over the next several years. We need huge earnings. We're not getting huge earnings. We've overpaid for stocks. The other argument you would give about, well, we've got the momentum going at the stock market. If there's a big shift in the stock market in the last, you know, year or two or three, it's been the dominance of the retail investor that they have come in and not only are they dominating the market, but they're winning. April, if you were a professional investor, you sold after liberation day. If you were a retail investor, you bought the dip like nobody's business in April and you won. Well, now retail is really dominating this market. And you might say, "Well, that's not going to stop." Sure, but the S&P is now $64 trillion market cap. You know, we're going to need a lot of money to keep pouring into a market that is this size to keep going up. So, when people tell me, well, look at look at the flows into ETFs. It's been positive for 21 weeks in a row. Yeah, but they got to be like 4050 billion dollars a week with these kind of valuations that we have in this stock market right now in order to sustain this thing from going. And so they're working for a while, but I think over time to expect just that kind of money to just keep coming in to the market forever. There isn't that much money out there right now unless you make the case that money is going to come out of money market funds and come out of bonds. but they now have yields and they're getting money too because they have yields because of more risk averse investors. So that's where I think it just kind of slows down and the frustration is, you know, we're not getting a whole lot out of it. We're not getting killed. I mean, unless you tell me there's a big red headline on my screen that says, "Oh god, something just changed like Liberation Day." We're not going to see, I think, that stiff correction. We're just going to see it slow down to low single-digit returns. Yeah. just the buying dries up. If the buying dries up just just naturally on the retail side, what is your anticipation on the institutional side? Because we heard that really strong narrative in April that it's it's time for the rest of the world. They're going to outperform and you're going to see a generational pivot away from US assets which are overowned by everyone. um and you're going to see a redistribution elsewhere whether they repay trade at home or they put it to work um you know uh in just different parts of the world. Do you buy that or did that get muddied now when we saw this big rebound in US stocks? Sort of buy it. And I and the reason I sort of buy it is the the US has something that the rest of the world doesn't have and that's the Mag 7, the AI stocks um you know and the big technological leaders. Name me the big technological leaders that you have in Europe. You know, there's a couple of them in China, uh, but then they they've got a whole host of other risks. Name me the big technological leaders in Japan. There really isn't, you know, who's the hyperscalers in Europe right now. Um, and so that's what we've got. What Europe had was we had stocks at 20 22 pees away from the MAG 7. They had stocks at 10 or 12 pees. So the professional investors looking at the European stock market and going, "Man, it's cheap." Well, of course, it's cheap for a reason. Uh, but it's and that and what you've been seeing is this rotation by professional investors out of the more expensive market, the US, into the lower expensive market, um, Europe. It worked great, you know, during around liberation day and stuff, but that gap where Europe outperformed the US or the rest of the world outperformed the US closed a lot with the rebound of the uh technology stocks in the US. Remember, you know, um with with the technology stocks, I think Nvidia is larger than the German stock market alone right now, just to give you an idea of the unique type of stocks that we have in the United States. So yes, sort of I understand the relative argument. Let's get out of the more expensive market into the cheaper markets, but they don't have hyperscalers, AI companies, Mag 7 equivalents. So those investors are going to keep coming back to the US because that's where these stocks are. Yeah, I think that's that the size of Nvidia is what exactly what makes people nervous, I think, when they're thinking about this. But again, you know, when you're when you're trying to pick the winners, um, every uh, attempt to sort of diversify away from I7, they've just, you know, that they've been gravitydeying. Um, so can I make a quick comment about Nvidia and as far as uh really want to be worrisome about I was at a I was at a reception party a couple of weeks ago and I was talking to some people that said that they owned Nvidia and I said, "What's their biggest product? What what what do they make?" And the answer I got and they were dead serious was stock's over four trillion dollars market cap. In other words, their product is their stock price. You know that do they understand what Blackwell is or an H20 chip? No, they just understand that the stock is going up. Another stock that's kind of approaching that is Palanteer. You know, it's up 200 plus percent. Nobody can nobody can explain what they do except they could just tell you that the stock price is up. And so when these companies be their product becomes the stock price, that's kind of a real red flag as far as their outlook. Yeah. Yeah. You're you're absolutely right. And and again, this is very interesting when retail gets involved, right? Especially when they're when they're sort of chasing momentum. Um I want to ask you speaking of momentum let's round out with crypto uh we saw again this huge gains and not not just in in the cryptocurrencies but um the IPOs that have really taken off have been in that space huge uh enthusiasm around that what is your expectation and how does that fit into your portfolio thinking well I think that there's been a shift in the crypto market with the passage of the genius act I know the clarity act is a little bit stalled that's the one where it clarifies hence the name um the regulations in the crypto space and that shift has been more towards what we refer to as the altcoins and a little bit away from Bitcoin and you've seen it with ETH really soaring nearly back to its all-time high of 4700 which was set way back in 2021. Now why is that happening? Because what the Genius Act is doing is allowing the use of stable coins and potentially real world assets on blockchains. That is a winner for places like um ETH, Ethereum, the Ethereum blockchain. The Ethereum blockchain has a developed out decentralized finance. It has lending, staking, borrowing, um you know, and all of those other types of protocols that exist out there. The Bitcoin blockchain has tried to do that with the Lightning Network and it's tried to do that with Taproot and a couple of other things, but it's never really taken off. So, when you pass laws and you clarify decentralized finance and stable coins, they're not going to benefit Bitcoin per se, they're going to benefit the places like Salana, like ETH, like Tron where you can actually wind up doing a lot of that. you've seen that really showing up um in a lot of those type of networks and in a lot of the coins that are the native for those networks. So that's why you've seen I think that the movement has been more towards Ethereum and less towards and less towards Bitcoin. And if we get the Clarity Act passed that will clarify who regulates what, how it's supposed to work when it comes to regulations, you know, the adoption of real world assets. Do you go to the CFTC? Do you go to the SEC, DFDIC, the Fed? Where does all of this fit in? That that's stalled for now, but not dead. I think you're going to continue to see that movement away from being the Bitcoin world to being the crypto world. And that and that makes sense to me that that's where we should be going with this because if crypto is supposed to be the alternative finance, right? If if JP Morgan I know my friends at JP Morgan hate me for saying this JP Morgan is the yellow taxi crypto's Uber is what it's supposed to be but it's not just you know I it's not just Uber it's ride hailing so it's Lyft and it's sidecart it's all those other things all mixed into one that's what it's supposed to be it's supposed to be a different currency it's supposed to be an alternative way to borrow and lend and stake it's supposed to be a different way to have hold assets in an electronic wallet Um, all of that is what it's supposed to be, not just Bitcoin alone held at Coinbase. And so that's why I start you're starting to see it broaden out and it should start to broaden out. Yeah. Yeah. It's really fascinating to see. And so in the 4% 5% 6% return kind of scenario, which sounds like you should be diversified, but thinking about where especially if you're risk averse where there's less risk. Um, where where does sort of metals and hard assets fit in this? We mentioned earlier we're doing a deep dive at wealthy on uh at looking at silver. We know gold had quite a run when everyone was worried. How are how are you thinking about that area in terms of what what looks attractive or a way to sort of balance out as we as we head through the rest of 2025? Well, if if we're going to slow down the returns and again, I would also emphasize, you know, if the stock market's going to return you six and and if my forecast on inflation is right, it's three. the bond market returns you five and cash returns you four, that's not bad. It's just that people are like, "Anything less than 20% a year is a disaster. I'm owed a 20% gain." So, if you take that away that it's just not, you know, everything's supposed to double in four years. That's what you do with a 20% gain. Um, then you start to say, "Okay, the a lot of other options open up." Remember, we used to say, Tina, there is no alternative. Well, now there's plenty of alternatives. And then if you start to look at a world of uncertainty between trade wars, look, with all this talk of tariffs, a trade war could really spin out of control, war, everything else that's going on in the world. If you want to protect yourself, you've got two options. Option one we just talked about is crypto. If you, but then that's also a speculative option because it's also a bet on a different kind of world. Then option two is how do I get my money away from the financial system? Really can't. But the closest way you can is precious metals. And that's why precious metals have had a very good year and have have been doing very well for the last couple years and you've recently saw 3500 on gold because that now is in play. What really used to where gold used to suffer a year or two ago was why would I bother with anything but max seven stocks and triple Q because they all go up 20 or 30% a year and it's hard to make the case for anything else. Well, that era I think is ending and that's why you're seeing money go into money market funds into bond funds and into crypto I'm excuse me into precious metal and why you're seeing precious metals especially gold starting to make new all-time highs because now there's a place for it in a portfolio as a protection and a diversifier where it's not just all about greed and 20 and 30% gains and stocks that we don't know what their products are but we just know that they go up. Yeah. Um, a really fantastic point and I think a reminder to all of us to really think about diversification, true diversification, um, and take a look and see if we're overexposed um, to that world where we were expecting to sort of 10x it because I think that's what a lot of people, as you rightly point out, got used to. Um, so a reminder, if you want to take a fresh look at your investments, don't forget you can sign up for a free portfolio review with one of our investment partners at wealthy. just go to wealthy.comfree to get that. Um Jim, as always, you gave us so much to think about. Um and I know you've been making the argument that sort of things are changing and we're entering a new cycle and we have to kind of readjust our thinking to that. Yes, thank you. Enjoyed the uh conversation a lot. Appreciate it. Thanks for all the great insight and we'll see you again soon. Thanks everyone. [Music]