GOLD: Liquidity Crisis Triggers It All I Jim Bianco
Summary
Market Outlook: The Fed’s rate cut is deemed largely ceremonial as market-based short rates remain elevated, signaling persistent funding stress.
US Treasuries: Extensive discussion of repo market tightness, QT ending, possible QE/SRF interventions, and the growing strain from heavy Treasury issuance.
Higher Rates: Expectation for sideways-to-higher yields as appropriate valuation reasserts, challenging the equity market’s reliance on easy money.
Inflation Risk: Government deficit spending is highlighted as a primary inflation driver; more funding support could stoke inflation and widen economic dispersion.
Gold: Positive stance on gold as an uncertainty/problem hedge rather than purely an inflation hedge, benefiting when macro stress rises.
Equities: Warning that equities could decline if inflation accelerates, as the easy-money era appears to be ending for now.
Policy Dynamics: Emphasis on spending restraint or risk a bond-market-imposed reckoning; calls for more Fed dissent to reduce groupthink.
Tickers Mentioned: No specific stock pitches; a brief ETF mention (WTBN) lacked sufficient discussion to qualify as an investment idea.
Transcript
Special coverage from the New Orleans Investment Conference is brought to you [music] by First Majestic Silver Corp. There's no substitute for silver. Hello and welcome to Soore Financially. Welcome to New Orleans here from the New Orleans Investment Conference. My name is Kai Hoffen. I'm the Edj Mining guy over on X and of course your host of this channel and I'm looking forward to introducing you to Jim Biano of Bianco Research. Jim, it's a great pleasure to meet you in person. We've done a few virtual interviews, but we've never met in person. So, I'm excited to do this. >> I am too. It's much better when we do this in person. 100%. The energy is so different. I just love it. So, really appreciate you being here. Um Jim, let's dive right in. Uh the title of your presentation was, "Is the Fed cutting rates the right thing to do?" Um let's start right there. Was it the right thing to do last Wednesday? >> No, it wasn't. And uh thank you for inviting me. Yeah, it wasn't because I think what you're seeing is the market starting to reject that now. The Fed cuts the funds rate and it targets this thing called the funds rate which barely trades. So, it's kind of a ceremonial rate that they cut. And they have all these other tools to bring market-based rates, the reverse repo agreement, interest on reserves. These are the types of tools that they use to make sure that market-based short-term interest rates conform with what the Fed wants. They're not. They're trading at a significant premium above the Fed's target rate. So much so, we're recording about a week after the Fed cut rates. Those marketbased rates are at the same rate they were before the Fed cut rates. So the market has not seen a reduction in short-term interest rates. And so there's a signal there from the mark from the markets that something's a miss. Let's elaborate on that. When you're saying the market was is is not adapting to the new environment, but yet the market was calling for two cuts by the end of the year. Can you because I feel like we're looking at two different things. One is the market market meaning like the S&P 500 the S&P investors versus the the other end that you were just describing. >> I think we are looking at two things because when the Fed sets that ceremonial rate called the funds rate they're looking at pure economics how many jobs are we making? What's the level of inflation? Those types of things to make the decision as they call data dependency on whether or not rates should go up or down. and they're looking at the data. They've decided that lower interest rates are in order, but the market rates repurchase rem that is a pure supply and demand situation. And what they're trying to tell us there is that the supply of funds to finance treasury securities, that's the repo market, is too small. >> So what's happening is the rate, the cost of that money is going up. Why is it too small? Two things. The Fed's been doing quantitative tightening. So, it's been reducing the supply and this insatiable spending by the government has been growing and growing. So, effectively today, we're at a stage where the funding market is not big enough to to support the Treasury market. And so, when you have insufficient demand and too much supply, the cost goes up. And that's why those interest rates are rising. And that's why ultimately the Fed could say, "We want to lower these interest rates because we think job growth is weak." Okay, fine. But if the supply demand is out of balance, those market-based rates are not coming down. And really, what I've argued on the stage was the biggest thing that's driving that is the size of the debt, the size of the government. We've asked this question forever, right? When is all this debt and all this deficit spending, when's it going to start to matter? It's now starting to matter. It's mattering in that the funding markets are starting to start raising those short-term interest rates against what the Fed wants. I wouldn't call it a crisis. I would call it a concern, but it seems like every day, every week, it gets a little bit worse and it gets a little bit worse. And that's why I tried to emphasize that debt problem that we've always talked about. When's it going to start to come on the roof? We might be seeing the early signs of it right now. >> Elaborate a little bit for us on myself and the audience. Of course, like Jerome Paul said, "Well, we're done with QT. It was only $5 billion a month anyway, but uh what's sort of >> 40?" >> Yeah, it was 40. >> Okay. Thought it was five. Doesn't matter. Point is like they're ending QT, right? >> Like what what is sort of the next step? Like is Kiwi back on the table here? some version of it will be so QT quantitative tightening. So everybody understands the Fed has this portfolio of $6 trillion of securities about 120 to $150 billion a month matures. The way they do QT is they say okay every month we have a$1 150 I'll use that number matures. What are we going to do with that $150 billion? We're going to reinvest 110 of it. we're not going to reinvest 40 of it and we'll extinguish that and that's how the the balance sheet keeps coming down. So what QT has been doing is it's been removing the supply of liquidity out of the market at a time when the government has been growing. So the Fed has acknowledged that there's this funding problem in the market and so they said that they're going to stop doing QT in December on December 1st. that what I'm arguing is you didn't go far enough because the problem is getting worse even after you made the announcement of QT. Now, what could they do to fix it? They've got several tools. They could do quantitative easing. That would be that they invent money and buy more securities and expand their balance sheet to kind of put it in the vernacular. They could offer a more they could offer loans to the market which called the standing repo facility and they could be more aggressive in offering those. They could buy back treasury bills that's kind of not QE because it's got no d uh duration. They could change some of the regulatory requirements in this on the supplemental leverage ratio. They could do all of that. They could do some of that. But let me bottom line iter for you. What they would be doing if they did any of that is they would be saying this gigantic bond market and the funding market can't handle it. We're gonna pump up more money in the funding market to handle the bond market. And then you're going to send a signal to Washington. This giant bond market's okay. We can make it bigger and we can make it bigger and we can make it bigger. And what is the problem with making the bond market bigger is making the it's the deficit. When you make the deficit bigger and you add in more bonds, you wind up creating inflation. Because I believe, like a lot of other people, the number one driver of of inflation is government spending. And what you're doing by saying to make the bond market bigger is you're allowing more government spending. And let me put this let me put this in a in a perspective so everybody understands. The government spends about $7 trillion a year. That's about a quarter of our economy. Where do they get the seven trillion? Five of it they get from taxes. They borrow the other two. And if you're going to say we're going to take that repo market, make it bigger so it can handle that bond market. You're saying that $2 trillion deficit's okay. Those five trillion in taxes is okay. That 7 trillion in spending is okay. And let's do more of it. And you risk creating more inflation. >> I hope I explained that. No, you absolutely. It's great to follow. It's very educational. Actually, the question I have now, and I hope it's the right one to follow up with, are we looking at a liquidity crisis or a credit crisis? >> It sounds to me like we're lacking liquidity to fund it. While the rates and the debt might still not be of concern, maybe the interest rates will be going higher and the the the 10 years at 410 as we speak and things like that. So, is it a liquidity versus a credit crisis? I hope it's the right definition. >> No, it is. It is. It's it it is definitely a it's it's an evolving liquidity crisis is what we're having right now. And there the ultimate fix to this evolving liquidity crisis would be for somebody in Washington to say, you know what, we got to stop spending as much money, not let this this bond market continue to grow and grow and grow and then that would organically fix the problem. But that's not going to happen. >> Say, yeah, not happening. So the way that so the liquidity crisis leaves you with a bunch of bad choices. Bad choice one which as I was trying to explain before was print more money, buy more assets, change the rules, allow the $ 38 trillion bond market to get funded so we could take it to 40. So we could take it to 42. And the problem there is all that government spending produces inflation. That's not good. Problem two is don't do any of that. let the funding squeeze drive up, make short-term interest rates sore, and then you create a financial crisis. That's not good either. So, this is kind of the highwire act that we're trying to to to balance. But, I would argue the signaling in the market is that question that has always been asked. When is all this debt going to matter? It's beginning to start to matter right now. >> Yeah, it's it's massive. Like, but a lot of it is domestically health. We've had that. I think we talked about that as well. whether it's a sovereign funding crisis or a southern debt crisis as well but only I I think it was 27% you you probably know that way better that is externally held outside of the US in terms of debt is that correct are we starting to worry about that as well because the Chinese are not renewing their investments their their treasury portfolio is dwindling because they're not buying more US treasuries for example >> yes so you're right it's about 20 odd 25% is foreign owned but then about another 20% is owned by the the Federal Reserve in that $6 trillion portfolio so that's almost half right there between foreign owners and most of the foreign owners are central banks and and the Federal Reserve itself. So yeah, the the the the way we got into this problem, I would argue is to meet this insatiable demand for debt, we've had to create new buyers of debt. And we've created a new buyer in the last several years in the form of what was called the basis trade, the levered trader that they've been shorting treasury bond futures against underlying cash. That's well over a trillion dollars that's been doing in that trade. We're trying to create another buyer in in the form of stable coins. >> It's what exactly what I just wrote down. >> Yeah. Yeah. That you know that we're trying to create another buyer in the form of stable coins as well. So the problem that we're facing now is that that new buyer that levered trader who uses borrowed money in the form of this liquid these funding markets that is starting to get squeezed and so yeah I mean this is going to be a problem. So it's a liquidity problem. It's not necessarily a credit problem per se but a lot of times if liquidity problems get bad enough it's hard to tell the difference between the two. But we're not there yet. And I want to emphasize this. We're not at a crisis. We're at the beginning of seeing signs that this debt problem is mattering and it's going to and it's getting worse almost by the week and we could fix it short term by, you know, buying some Treasury bills or easing up on some of the rules. But longer term, we can't keep doing this because if we do, we're just going to keep expanding the debt, expanding the government. And I want to talk about the economic consequence of that. That's inflation. And if I could, the last half of my speech, I talked about the K-shaped economy. And I used the example that the stock market is going straight up. It's at all-time highs. That's the top 10% of the of the population by income. They're doing well. They spend their spending. They're they're saving in they're they're savings rates are high. They reinvested into the stock market. The stock market goes back up. Good time to be in the top 10%. the bottom 90% the bottom 50% if you look at the the University of Michigan consumer sentiment index it's near the lowest levels it's had in the 70 years they've done that survey lower than most of the recessions lower than anything we've seen it's even lower than it was during COVID today why is the public so pessimistic about the economy even though the stock market's at all time highs I would argue as I did on the stage it's inflation inflation is so ravaged them. The price of stuff is 25% higher than it was in 2020 and that it is taken it is really damaged their psyche. It's really damaged their pocketbooks quite a bit. So if you want to say look we got $38 trillion of debt and the funding markets are squeezed and interest rates are going up. Pump more money into the funding markets via QE or some version of that so that you could meet the need of this market. Washington's going to take that signal and say we could borrow more and more more and more and more more and that's going to create more inflation and that's going to widen decay and create even more stresses in the economy. How do you break out of that death spiral? It's a question I've asked a lot of guests sitting in this chair actually. Like how do you stop it? Like what be the Jim Biano game plan to maybe reverse what is going on besides the spending cuts? >> Yes. Well, two ways. The first way is there's some there's some wannabe Hamiltons and Jeffersons out there that we elect that understand the problem and that craft a solution where we where we reign in government spending. C >> can I interject real quick? Don't it doesn't seem like the US or some of the people in the US understand where the problem is right now. Looking at the election that's happening in New York today, >> right? >> Um and I don't know what the results are. We're recording this before the results come out. It doesn't seem like the public understands where this is all headed. like getting baited with free universal healthcare uh in New York is one of the headlines I saw. >> They do and they do they don't they do and they don't. And what I mean by this is that they understand that things are out of balance. They feel like they're getting a a bad deal. They might not be wrong on that part. They're searching for a solution. Now, maybe they picked the wrong solution, but what they are trying to tell you is the status quo is not acceptable anymore. that we need some kind of a change. Now they've kind of you know they're for various reasons they picked the wrong solution. We'll assume you know that the outcome of the election in New York and others are going to be like we expect. So I understand that. So that's the one thing is that we have these Hamiltons or Jeffersons. But the more common way that we fix a debt problem is what's known as the Liz trust moment that the bond market puts its foot down and says enough. If you want to keep borrowing, you're going to have to do it at higher and higher levels of interest rate. That's what we might be seeing the beginnings of happening with what's happening in the uh funding markets right now. >> I I love movie quotes when it comes to that. And one quote that came into my mind was uh you you crossed the line first, sir. You squeeze them, you hammered them to the point of desperation, and in their desperation, they turn to a man they don't fully understand. U it's from Batman um when the the last one the Dark Knight returns but where they turn to Bane. Absolutely. But it's sort of un it makes sense like if you look at it through that lens like we're desperate ex exactly what you said and now we're turning to somebody who we don't fully understand. >> Right. So let me let me put this into into perspective. If you're in the top 10% of income I think that's about $80,000 or higher in the United States right now you have especially if you're in the top 1% of income. I think that's around $200,000 a year. You have about a 30% savings rate. That means every year, every month, you save 30% of your uh your of your income. What does that mean? That means you handed it to a wealth manager, put it into the stock market, and it went up 20% on top of that. Life is good. Life is very very good. But if you're in the bottom half of the country, not even the bottom 90%. But if you're in the bottom 50% of the country, your savings rate is effectively zero. which means you're living paycheck to paycheck. You rent, you don't own and you're at the mercy of inflation and your boss is pay whether your boss gives you a raise. The inflation rate is if the inflation rate is cumulatively up 25% in the last 5 years, are you making 25% more money now than you did 5 years ago? And the answer for way too many people is no. So that means that their purchasing is much less than it was 5 years ago. So I'll give you I'll give you a uncomfortable example. If you're in the top 10%, you walk into the store, you see the prices are high, you have a choice four-letter word for why those prices are high, but you put it in your basket, you buy it, you move on with your life because you have savings, you have investments, and everything else. If you're in the bottom 50% of the country and you see those prices have went up and you have that same choice for four-letter word, you then have a choice to make. If I want to buy this product, I got to take this out of the basket to pay for it because I don't have enough money for both. That's when people get desperate. That's when you have your dark knight quote. When they turn to somebody who's claiming a solution, so they're desperate. I get it. Here comes a guy who says, "I'm gonna give you free buses and we're gonna have, you know, we're gonna have governmentr run grocery stores with lower prices." Is it going to work? No. I don't think it's going to work. But for the public, they're saying what we're doing now is not working. So we can't stick with the status quo, you know, and so there I I understand that this is part of the problem when you stress an economy is we'll turn to anybody that looks like they got got some kind of a solution and that's what we're we're seeing happen right now. >> Yeah, Trishi, Secretary Bent had some strong words this morning. I I caught the CNBC interview and he was calling it New York will turn into Caracus on the Hudson. I thought it was uh telling words. So I think the US government has some strong opinions on what is happening there. Um coming back to the Fed real quick. Um what I thought was interesting was the dissent or the dissident um within the Fed governor uh within the board. Uh you have Mirin who wants a 50 basis point cut, but you also now have three governors who said, "Well, we would we would have been happy with no cut at this point." Like where do you see this going for December now? >> Uh I the I I'll to answer the question for December, the market is putting about a 65% chance that the Fed cut rates in in December. We're a month away from that meeting at 65% that is really in coin toss territory and so it's unclear as to which way the Fed's going to go. >> Foggy. >> Yeah, foggy as he as he would say. I would argue that they shouldn't cut, but we'll have to see which way they wind up going with this right now. I want to make a quick comment about the dissents. I would argue that the biggest weakness that the Fed has is this dictatorial power that the chairman has over the committee that the chairman gets what the chairman wants. The chairman decides what they're going to do and everybody falls in line and votes with the chairman and they allow a couple people to descent here and there. This encourages a group think at the Fed that has led them down the road of many, many mistakes. Federal Reserve governors and Federal Reserve presidents are technically supposed to be representing the American people. And that's why Federal Reserve governors are confirmed by the Senate. They're not their boss. If you're a Federal Reserve government governor, your boss is not the chairman of the Federal Reserve. Your boss is the American people. And so you should be doing what you think is in the you're qualified because the Senate approved you. You're qualified to make independent judgments on what is the best thing to do. I hope we see more dissents. I hope we see more, you know, heterodox thinking out of the Fed. I hope because I think that this will then make it a better organization. So I'm all for these descents. I think it's a good thing that we're seeing this. I don't like everybody falling in line with whatever the chairman wants. 5 years ago he said inflation was transitory. Everybody fell in line and it was disastrous in terms of the outcome of that. And that's wouldn't have happened if we didn't have this group think at the Fed. >> No. No. That's an interesting comment like you wanted people to think independently a bit and at least be able to voice it as well, right? That's what we're here for. We're a Republican democracy. >> You know, we do this I use the analogy of the Supreme Court, right? >> If you're an associate justice on the Supreme Court, your boss is not Chief Justice Roberts. Your boss, American public, and you do what? And we expect, we understand 54 votes, 63 votes, dissents, you know, confirming opinions, dissenting opinions. We understand all that. And but if we ever found out that after oral arguments that they all walked into the cloak room and they all looked at the chair at Chief Justice Roberts and said, "How we gonna vote on this one and we'll all fall in line and we'll do what you say." We'd have a revolution in this country. That's effectively what we do at the Federal Reserve. >> So we need a change. >> We do. We absolutely need a change. And I hope that that this change would come. And last quick word about that. The the um the President Trump has been hammering J. Pal calls him too late and other terrible words and he and he puts all the blame on him. Well, he's not wrong because the chairman has all that power. But in a more independent board, independent voting, the chairman could turn to the Federal Reserve uh to the president and say, "I'm just one of 12 votes. I just organized a meeting, but I'm one of 12 votes." And the answer is, "You can fire me, but you only got rid of 12. You know, you only got rid of 8% of the votes here. you're not going to change the opinion of the other of 11 people. That would go wonders to getting Fed independence then at that point. >> Yeah, I think there some of those things were like maybe the descents were assigned or would you call it a signal towards a Fed independence like hey we're independent thinkers like Waller >> was actually more aligned with Mirror I thought voting no cut or saying hey we're staying flat and stepping it back. >> So that was more of a I I would have assumed that was more of that signal I would say. Um Jim maybe to sum up the conversation which has been absolutely brilliant. What was the one takeaway you want the the audience to take away from your speech? >> That you know that the bond market is looking at potentially sideways to higher interest rates. Two things about that. One, don't be afraid of higher interest rates. They should always trade at where they they are appropriately valued and they might be appropriate valued at this level if not higher. uh and the consequences that come from that. The stock market has been running on the on easy money. The stock market loves that the Fed has been providing it easy money, but the funding markets are telling you that maybe the era of easy money is at least temporarily done for a while right now. And to that end, I I was kind of giving them a warning about interest rates that the Fed might not be cutting them as much. And if they are cutting them, if I am wrong and they continue to cut them, the consequence could be inflation. And that could be far worse than just saying that interest rates will go sideways to up because in inflation interest rates will go dramatically up in other financial markets, you know, like equities would go down. Be positive for gold though. >> Absolutely. >> Gold, you know, gold is not necessarily an inflation hedge. It can be. I like to say gold is an uncertainty hedge. Gold is a problem hedge. And when you have problems, gold does well. It's $4,000 as we're talking is an example. >> Yeah, it's telling us something. Absolutely. Something is going on. Something is going wrong uh dramatically. Jim, what a wonderful conversation. Tremendously appreciate meeting you in person. Uh where can we send our audience to follow more of your work. >> Two things. Biancore Research is uh my company. You can follow me at Bonor Research on X Twitter. You could Biancore Research is my uh YouTube channel. Biancorresearch.com is our website. We run an ETF, a a total return fixed income ETF. We're fixed income investors. That's why I talk so much about the bond market. Um, you can find out more about our ETF at uh, Biancoadvisors.com or our partners at Wisdomree. The ticker symbol is WTBN Whiskey Tango Bravo Nancy for Wisdomree Biano. And and it's a total return fixed income plan. >> Fantastic. Awesome. Thank you so much for your time. Great to see you. Thanks so much. And to everybody else, thanks so much for tuning in. Hope you enjoyed this as much as I have. This was very educational, very informational. And uh please show us a whether you like this conversation by just hitting that like and subscribe button. Helps us out tremendously. We much appreciate it. Thanks so much for tuning in. We'll be back with more. Take care.
GOLD: Liquidity Crisis Triggers It All I Jim Bianco
Summary
Transcript
Special coverage from the New Orleans Investment Conference is brought to you [music] by First Majestic Silver Corp. There's no substitute for silver. Hello and welcome to Soore Financially. Welcome to New Orleans here from the New Orleans Investment Conference. My name is Kai Hoffen. I'm the Edj Mining guy over on X and of course your host of this channel and I'm looking forward to introducing you to Jim Biano of Bianco Research. Jim, it's a great pleasure to meet you in person. We've done a few virtual interviews, but we've never met in person. So, I'm excited to do this. >> I am too. It's much better when we do this in person. 100%. The energy is so different. I just love it. So, really appreciate you being here. Um Jim, let's dive right in. Uh the title of your presentation was, "Is the Fed cutting rates the right thing to do?" Um let's start right there. Was it the right thing to do last Wednesday? >> No, it wasn't. And uh thank you for inviting me. Yeah, it wasn't because I think what you're seeing is the market starting to reject that now. The Fed cuts the funds rate and it targets this thing called the funds rate which barely trades. So, it's kind of a ceremonial rate that they cut. And they have all these other tools to bring market-based rates, the reverse repo agreement, interest on reserves. These are the types of tools that they use to make sure that market-based short-term interest rates conform with what the Fed wants. They're not. They're trading at a significant premium above the Fed's target rate. So much so, we're recording about a week after the Fed cut rates. Those marketbased rates are at the same rate they were before the Fed cut rates. So the market has not seen a reduction in short-term interest rates. And so there's a signal there from the mark from the markets that something's a miss. Let's elaborate on that. When you're saying the market was is is not adapting to the new environment, but yet the market was calling for two cuts by the end of the year. Can you because I feel like we're looking at two different things. One is the market market meaning like the S&P 500 the S&P investors versus the the other end that you were just describing. >> I think we are looking at two things because when the Fed sets that ceremonial rate called the funds rate they're looking at pure economics how many jobs are we making? What's the level of inflation? Those types of things to make the decision as they call data dependency on whether or not rates should go up or down. and they're looking at the data. They've decided that lower interest rates are in order, but the market rates repurchase rem that is a pure supply and demand situation. And what they're trying to tell us there is that the supply of funds to finance treasury securities, that's the repo market, is too small. >> So what's happening is the rate, the cost of that money is going up. Why is it too small? Two things. The Fed's been doing quantitative tightening. So, it's been reducing the supply and this insatiable spending by the government has been growing and growing. So, effectively today, we're at a stage where the funding market is not big enough to to support the Treasury market. And so, when you have insufficient demand and too much supply, the cost goes up. And that's why those interest rates are rising. And that's why ultimately the Fed could say, "We want to lower these interest rates because we think job growth is weak." Okay, fine. But if the supply demand is out of balance, those market-based rates are not coming down. And really, what I've argued on the stage was the biggest thing that's driving that is the size of the debt, the size of the government. We've asked this question forever, right? When is all this debt and all this deficit spending, when's it going to start to matter? It's now starting to matter. It's mattering in that the funding markets are starting to start raising those short-term interest rates against what the Fed wants. I wouldn't call it a crisis. I would call it a concern, but it seems like every day, every week, it gets a little bit worse and it gets a little bit worse. And that's why I tried to emphasize that debt problem that we've always talked about. When's it going to start to come on the roof? We might be seeing the early signs of it right now. >> Elaborate a little bit for us on myself and the audience. Of course, like Jerome Paul said, "Well, we're done with QT. It was only $5 billion a month anyway, but uh what's sort of >> 40?" >> Yeah, it was 40. >> Okay. Thought it was five. Doesn't matter. Point is like they're ending QT, right? >> Like what what is sort of the next step? Like is Kiwi back on the table here? some version of it will be so QT quantitative tightening. So everybody understands the Fed has this portfolio of $6 trillion of securities about 120 to $150 billion a month matures. The way they do QT is they say okay every month we have a$1 150 I'll use that number matures. What are we going to do with that $150 billion? We're going to reinvest 110 of it. we're not going to reinvest 40 of it and we'll extinguish that and that's how the the balance sheet keeps coming down. So what QT has been doing is it's been removing the supply of liquidity out of the market at a time when the government has been growing. So the Fed has acknowledged that there's this funding problem in the market and so they said that they're going to stop doing QT in December on December 1st. that what I'm arguing is you didn't go far enough because the problem is getting worse even after you made the announcement of QT. Now, what could they do to fix it? They've got several tools. They could do quantitative easing. That would be that they invent money and buy more securities and expand their balance sheet to kind of put it in the vernacular. They could offer a more they could offer loans to the market which called the standing repo facility and they could be more aggressive in offering those. They could buy back treasury bills that's kind of not QE because it's got no d uh duration. They could change some of the regulatory requirements in this on the supplemental leverage ratio. They could do all of that. They could do some of that. But let me bottom line iter for you. What they would be doing if they did any of that is they would be saying this gigantic bond market and the funding market can't handle it. We're gonna pump up more money in the funding market to handle the bond market. And then you're going to send a signal to Washington. This giant bond market's okay. We can make it bigger and we can make it bigger and we can make it bigger. And what is the problem with making the bond market bigger is making the it's the deficit. When you make the deficit bigger and you add in more bonds, you wind up creating inflation. Because I believe, like a lot of other people, the number one driver of of inflation is government spending. And what you're doing by saying to make the bond market bigger is you're allowing more government spending. And let me put this let me put this in a in a perspective so everybody understands. The government spends about $7 trillion a year. That's about a quarter of our economy. Where do they get the seven trillion? Five of it they get from taxes. They borrow the other two. And if you're going to say we're going to take that repo market, make it bigger so it can handle that bond market. You're saying that $2 trillion deficit's okay. Those five trillion in taxes is okay. That 7 trillion in spending is okay. And let's do more of it. And you risk creating more inflation. >> I hope I explained that. No, you absolutely. It's great to follow. It's very educational. Actually, the question I have now, and I hope it's the right one to follow up with, are we looking at a liquidity crisis or a credit crisis? >> It sounds to me like we're lacking liquidity to fund it. While the rates and the debt might still not be of concern, maybe the interest rates will be going higher and the the the 10 years at 410 as we speak and things like that. So, is it a liquidity versus a credit crisis? I hope it's the right definition. >> No, it is. It is. It's it it is definitely a it's it's an evolving liquidity crisis is what we're having right now. And there the ultimate fix to this evolving liquidity crisis would be for somebody in Washington to say, you know what, we got to stop spending as much money, not let this this bond market continue to grow and grow and grow and then that would organically fix the problem. But that's not going to happen. >> Say, yeah, not happening. So the way that so the liquidity crisis leaves you with a bunch of bad choices. Bad choice one which as I was trying to explain before was print more money, buy more assets, change the rules, allow the $ 38 trillion bond market to get funded so we could take it to 40. So we could take it to 42. And the problem there is all that government spending produces inflation. That's not good. Problem two is don't do any of that. let the funding squeeze drive up, make short-term interest rates sore, and then you create a financial crisis. That's not good either. So, this is kind of the highwire act that we're trying to to to balance. But, I would argue the signaling in the market is that question that has always been asked. When is all this debt going to matter? It's beginning to start to matter right now. >> Yeah, it's it's massive. Like, but a lot of it is domestically health. We've had that. I think we talked about that as well. whether it's a sovereign funding crisis or a southern debt crisis as well but only I I think it was 27% you you probably know that way better that is externally held outside of the US in terms of debt is that correct are we starting to worry about that as well because the Chinese are not renewing their investments their their treasury portfolio is dwindling because they're not buying more US treasuries for example >> yes so you're right it's about 20 odd 25% is foreign owned but then about another 20% is owned by the the Federal Reserve in that $6 trillion portfolio so that's almost half right there between foreign owners and most of the foreign owners are central banks and and the Federal Reserve itself. So yeah, the the the the way we got into this problem, I would argue is to meet this insatiable demand for debt, we've had to create new buyers of debt. And we've created a new buyer in the last several years in the form of what was called the basis trade, the levered trader that they've been shorting treasury bond futures against underlying cash. That's well over a trillion dollars that's been doing in that trade. We're trying to create another buyer in in the form of stable coins. >> It's what exactly what I just wrote down. >> Yeah. Yeah. That you know that we're trying to create another buyer in the form of stable coins as well. So the problem that we're facing now is that that new buyer that levered trader who uses borrowed money in the form of this liquid these funding markets that is starting to get squeezed and so yeah I mean this is going to be a problem. So it's a liquidity problem. It's not necessarily a credit problem per se but a lot of times if liquidity problems get bad enough it's hard to tell the difference between the two. But we're not there yet. And I want to emphasize this. We're not at a crisis. We're at the beginning of seeing signs that this debt problem is mattering and it's going to and it's getting worse almost by the week and we could fix it short term by, you know, buying some Treasury bills or easing up on some of the rules. But longer term, we can't keep doing this because if we do, we're just going to keep expanding the debt, expanding the government. And I want to talk about the economic consequence of that. That's inflation. And if I could, the last half of my speech, I talked about the K-shaped economy. And I used the example that the stock market is going straight up. It's at all-time highs. That's the top 10% of the of the population by income. They're doing well. They spend their spending. They're they're saving in they're they're savings rates are high. They reinvested into the stock market. The stock market goes back up. Good time to be in the top 10%. the bottom 90% the bottom 50% if you look at the the University of Michigan consumer sentiment index it's near the lowest levels it's had in the 70 years they've done that survey lower than most of the recessions lower than anything we've seen it's even lower than it was during COVID today why is the public so pessimistic about the economy even though the stock market's at all time highs I would argue as I did on the stage it's inflation inflation is so ravaged them. The price of stuff is 25% higher than it was in 2020 and that it is taken it is really damaged their psyche. It's really damaged their pocketbooks quite a bit. So if you want to say look we got $38 trillion of debt and the funding markets are squeezed and interest rates are going up. Pump more money into the funding markets via QE or some version of that so that you could meet the need of this market. Washington's going to take that signal and say we could borrow more and more more and more and more more and that's going to create more inflation and that's going to widen decay and create even more stresses in the economy. How do you break out of that death spiral? It's a question I've asked a lot of guests sitting in this chair actually. Like how do you stop it? Like what be the Jim Biano game plan to maybe reverse what is going on besides the spending cuts? >> Yes. Well, two ways. The first way is there's some there's some wannabe Hamiltons and Jeffersons out there that we elect that understand the problem and that craft a solution where we where we reign in government spending. C >> can I interject real quick? Don't it doesn't seem like the US or some of the people in the US understand where the problem is right now. Looking at the election that's happening in New York today, >> right? >> Um and I don't know what the results are. We're recording this before the results come out. It doesn't seem like the public understands where this is all headed. like getting baited with free universal healthcare uh in New York is one of the headlines I saw. >> They do and they do they don't they do and they don't. And what I mean by this is that they understand that things are out of balance. They feel like they're getting a a bad deal. They might not be wrong on that part. They're searching for a solution. Now, maybe they picked the wrong solution, but what they are trying to tell you is the status quo is not acceptable anymore. that we need some kind of a change. Now they've kind of you know they're for various reasons they picked the wrong solution. We'll assume you know that the outcome of the election in New York and others are going to be like we expect. So I understand that. So that's the one thing is that we have these Hamiltons or Jeffersons. But the more common way that we fix a debt problem is what's known as the Liz trust moment that the bond market puts its foot down and says enough. If you want to keep borrowing, you're going to have to do it at higher and higher levels of interest rate. That's what we might be seeing the beginnings of happening with what's happening in the uh funding markets right now. >> I I love movie quotes when it comes to that. And one quote that came into my mind was uh you you crossed the line first, sir. You squeeze them, you hammered them to the point of desperation, and in their desperation, they turn to a man they don't fully understand. U it's from Batman um when the the last one the Dark Knight returns but where they turn to Bane. Absolutely. But it's sort of un it makes sense like if you look at it through that lens like we're desperate ex exactly what you said and now we're turning to somebody who we don't fully understand. >> Right. So let me let me put this into into perspective. If you're in the top 10% of income I think that's about $80,000 or higher in the United States right now you have especially if you're in the top 1% of income. I think that's around $200,000 a year. You have about a 30% savings rate. That means every year, every month, you save 30% of your uh your of your income. What does that mean? That means you handed it to a wealth manager, put it into the stock market, and it went up 20% on top of that. Life is good. Life is very very good. But if you're in the bottom half of the country, not even the bottom 90%. But if you're in the bottom 50% of the country, your savings rate is effectively zero. which means you're living paycheck to paycheck. You rent, you don't own and you're at the mercy of inflation and your boss is pay whether your boss gives you a raise. The inflation rate is if the inflation rate is cumulatively up 25% in the last 5 years, are you making 25% more money now than you did 5 years ago? And the answer for way too many people is no. So that means that their purchasing is much less than it was 5 years ago. So I'll give you I'll give you a uncomfortable example. If you're in the top 10%, you walk into the store, you see the prices are high, you have a choice four-letter word for why those prices are high, but you put it in your basket, you buy it, you move on with your life because you have savings, you have investments, and everything else. If you're in the bottom 50% of the country and you see those prices have went up and you have that same choice for four-letter word, you then have a choice to make. If I want to buy this product, I got to take this out of the basket to pay for it because I don't have enough money for both. That's when people get desperate. That's when you have your dark knight quote. When they turn to somebody who's claiming a solution, so they're desperate. I get it. Here comes a guy who says, "I'm gonna give you free buses and we're gonna have, you know, we're gonna have governmentr run grocery stores with lower prices." Is it going to work? No. I don't think it's going to work. But for the public, they're saying what we're doing now is not working. So we can't stick with the status quo, you know, and so there I I understand that this is part of the problem when you stress an economy is we'll turn to anybody that looks like they got got some kind of a solution and that's what we're we're seeing happen right now. >> Yeah, Trishi, Secretary Bent had some strong words this morning. I I caught the CNBC interview and he was calling it New York will turn into Caracus on the Hudson. I thought it was uh telling words. So I think the US government has some strong opinions on what is happening there. Um coming back to the Fed real quick. Um what I thought was interesting was the dissent or the dissident um within the Fed governor uh within the board. Uh you have Mirin who wants a 50 basis point cut, but you also now have three governors who said, "Well, we would we would have been happy with no cut at this point." Like where do you see this going for December now? >> Uh I the I I'll to answer the question for December, the market is putting about a 65% chance that the Fed cut rates in in December. We're a month away from that meeting at 65% that is really in coin toss territory and so it's unclear as to which way the Fed's going to go. >> Foggy. >> Yeah, foggy as he as he would say. I would argue that they shouldn't cut, but we'll have to see which way they wind up going with this right now. I want to make a quick comment about the dissents. I would argue that the biggest weakness that the Fed has is this dictatorial power that the chairman has over the committee that the chairman gets what the chairman wants. The chairman decides what they're going to do and everybody falls in line and votes with the chairman and they allow a couple people to descent here and there. This encourages a group think at the Fed that has led them down the road of many, many mistakes. Federal Reserve governors and Federal Reserve presidents are technically supposed to be representing the American people. And that's why Federal Reserve governors are confirmed by the Senate. They're not their boss. If you're a Federal Reserve government governor, your boss is not the chairman of the Federal Reserve. Your boss is the American people. And so you should be doing what you think is in the you're qualified because the Senate approved you. You're qualified to make independent judgments on what is the best thing to do. I hope we see more dissents. I hope we see more, you know, heterodox thinking out of the Fed. I hope because I think that this will then make it a better organization. So I'm all for these descents. I think it's a good thing that we're seeing this. I don't like everybody falling in line with whatever the chairman wants. 5 years ago he said inflation was transitory. Everybody fell in line and it was disastrous in terms of the outcome of that. And that's wouldn't have happened if we didn't have this group think at the Fed. >> No. No. That's an interesting comment like you wanted people to think independently a bit and at least be able to voice it as well, right? That's what we're here for. We're a Republican democracy. >> You know, we do this I use the analogy of the Supreme Court, right? >> If you're an associate justice on the Supreme Court, your boss is not Chief Justice Roberts. Your boss, American public, and you do what? And we expect, we understand 54 votes, 63 votes, dissents, you know, confirming opinions, dissenting opinions. We understand all that. And but if we ever found out that after oral arguments that they all walked into the cloak room and they all looked at the chair at Chief Justice Roberts and said, "How we gonna vote on this one and we'll all fall in line and we'll do what you say." We'd have a revolution in this country. That's effectively what we do at the Federal Reserve. >> So we need a change. >> We do. We absolutely need a change. And I hope that that this change would come. And last quick word about that. The the um the President Trump has been hammering J. Pal calls him too late and other terrible words and he and he puts all the blame on him. Well, he's not wrong because the chairman has all that power. But in a more independent board, independent voting, the chairman could turn to the Federal Reserve uh to the president and say, "I'm just one of 12 votes. I just organized a meeting, but I'm one of 12 votes." And the answer is, "You can fire me, but you only got rid of 12. You know, you only got rid of 8% of the votes here. you're not going to change the opinion of the other of 11 people. That would go wonders to getting Fed independence then at that point. >> Yeah, I think there some of those things were like maybe the descents were assigned or would you call it a signal towards a Fed independence like hey we're independent thinkers like Waller >> was actually more aligned with Mirror I thought voting no cut or saying hey we're staying flat and stepping it back. >> So that was more of a I I would have assumed that was more of that signal I would say. Um Jim maybe to sum up the conversation which has been absolutely brilliant. What was the one takeaway you want the the audience to take away from your speech? >> That you know that the bond market is looking at potentially sideways to higher interest rates. Two things about that. One, don't be afraid of higher interest rates. They should always trade at where they they are appropriately valued and they might be appropriate valued at this level if not higher. uh and the consequences that come from that. The stock market has been running on the on easy money. The stock market loves that the Fed has been providing it easy money, but the funding markets are telling you that maybe the era of easy money is at least temporarily done for a while right now. And to that end, I I was kind of giving them a warning about interest rates that the Fed might not be cutting them as much. And if they are cutting them, if I am wrong and they continue to cut them, the consequence could be inflation. And that could be far worse than just saying that interest rates will go sideways to up because in inflation interest rates will go dramatically up in other financial markets, you know, like equities would go down. Be positive for gold though. >> Absolutely. >> Gold, you know, gold is not necessarily an inflation hedge. It can be. I like to say gold is an uncertainty hedge. Gold is a problem hedge. And when you have problems, gold does well. It's $4,000 as we're talking is an example. >> Yeah, it's telling us something. Absolutely. Something is going on. Something is going wrong uh dramatically. Jim, what a wonderful conversation. Tremendously appreciate meeting you in person. Uh where can we send our audience to follow more of your work. >> Two things. Biancore Research is uh my company. You can follow me at Bonor Research on X Twitter. You could Biancore Research is my uh YouTube channel. Biancorresearch.com is our website. We run an ETF, a a total return fixed income ETF. We're fixed income investors. That's why I talk so much about the bond market. Um, you can find out more about our ETF at uh, Biancoadvisors.com or our partners at Wisdomree. The ticker symbol is WTBN Whiskey Tango Bravo Nancy for Wisdomree Biano. And and it's a total return fixed income plan. >> Fantastic. Awesome. Thank you so much for your time. Great to see you. Thanks so much. And to everybody else, thanks so much for tuning in. Hope you enjoyed this as much as I have. This was very educational, very informational. And uh please show us a whether you like this conversation by just hitting that like and subscribe button. Helps us out tremendously. We much appreciate it. Thanks so much for tuning in. We'll be back with more. Take care.