Economic ‘Murder’ Alert: Is The Next Big Crisis Here? | Jim Bianco
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I mean, you don't know that I'm going to even do it. You You don't know. I may do it. I may not do it. I mean, nobody knows what I'm going to do. I can tell you this that uh Iran's got a lot of trouble. I'm pleased to welcome back to the show Jim Biano. He is the president of Biano Research and the founder of the uh Wisdom Tree Biano total return fund. WTBN is the tiger. And we'll be talking about uh what happened this week with the FOMC meeting as well as what's happening with the markets in response to the ongoing war between Israel and Iran. Welcome back to the show, Jim. Good to see you. Thanks for having me. Your reaction first and foremost the uh FOMC media and then we'll talk about uh whether or not markets are pricing in a war in the Middle East. So um rates unchanged. However, Powell made strong remarks. Chair Powell made strong remarks about his expectations for inflation. He said that the reason that uh he doesn't want to cut rates now is that he expects inflation to come. And uh and let me just let me just play for you um a clip uh later, but I want to get your reaction to that statement first. Is inflation coming? Is the Fed right? I actually think they are right and I actually do think inflation is coming. Uh and I'm talking about over the next few months because of tariffs. You're starting to see the in the beginnings of that inflation show up and some of the higher frequency, you know, internet scraping things like true flation and price stats. They measure online millions of online prices and aggregate them into like an inflation index and they've been moving up for the last five or six weeks. Now, it didn't show up in the May report, but the June and July report, I think you they could very well see those numbers show up in those reports and start to see inflation move higher. So, I think uh Paul is right that inflation could be on the march up and the Fed it wouldn't be appropriate for them to be cutting rates with inflation going higher. Well, somebody asked Powell uh when the tariffs data is going to show up in the actual economic data where not tariffs data but in ter inflation from tariffs. So, take a listen to uh Powell's response here during the press conference. Smith of the New York Times. Uh to what extent has the more limited impact from tariffs at this stage on inflation changed your view on what the ultimate economic fallout will be from these policies and the timing of when um they will materialize in the data. So um uh we've had three months of of u favorable inflation readings since the high readings of January and February. And that's of course highly welcome news. Uh part of that just is that uh services core services uh both housing services and non-housing services have really been grinding down toward levels that are that are consistent with 2% inflation. So that's the good news. We've had um uh goods inflation just moving up a bit and of course we expect as you as you point out we we do expect to see more of that over the course of the summer. Um it takes some time for tariffs to work their way through the chain of distribution to the end consumer. A good example of that would be uh goods being sold at retailers today may have been imported several months ago before tariffs were imposed. So we're beginning to see some effects and we do expect to see more of them over coming months. Are the effects of tariffs on prices transitory, Jim? That's a tough one to answer at this point. Um, you could look at, you know, the Wall Street consensus that this is a one-time rise because of tariffs and then everything would settle down after that. And there's a reasonable argument to be made for that. Uh, but that assumes that we're done raising tariffs and that we don't see more rounds of tariff increases, you know, later this year or next year. And also later on in the press conference, uh, Paul talked about unanchored inflation. And this is where I'll diverge with him a little bit. The I think there's some evidence, and the Cleveland Fed has laid this out a little bit, um, that when companies are given the opportunity to raise prices because of tariffs, they raise all prices. And that's what unencored inflation is. You know, give them an opening and all the prices go up. And that's what I think we got to be very careful of in watching over the next few months. Which prices are going up? Are they just the narrowly ones that are just because of tariffs or are we going to see prices across the board start moving higher because companies think that they could get away with it? If they do and we get on anchored inflation per the Fed, that would not be desirable and that they would have to, you know, start to combat that thinking. Well, should we make a bet on this? Should we make a bet on inflation expectations? Not not past CPI, but the the mere fact that this the Fed is signaling inflation expectations. Should we should we short bonds then? Are yields going up? Well, that that's a that's a good one. I think over time yields are going to go up. uh and whether or not they're going to go up in the, you know, in the next month or two dri driven by tariffs and higher inflation remains to be seen because the way I'm looking at the bond market right now is it's broadly at its fair value levels. I disagree with the Fed. I think that around 4ish% on the funds rate is neutral and they are around 4ish% on the funds rate. I think that neutral on the 10ear and the 30-year just to go to the other end of the curve is around four and a half to five. and that's exactly where they're at. So the market is not undervalued. It's it's where it should be. So if you wanted to short bonds, you're saying that the fair value of bonds will move higher. You're not shorting them because they're rich. Um you know that they're overpriced at some point. But I do think the fair value will move higher. It's just that the the caveat or the the warning I'll give is it might take a little more time than people think. Uh you're talking about the long end of the curve, right? Yes. Correct. The 10 year and 30-year, I think they'll punch through 5%. That's my expectation, but not maybe by the end of the summer. You know, I I wouldn't be shocked if they did, but I don't want to narrow myself down on both, you know, a level and a time. I'll go with the level and say it's going to get there. Maybe it'll take a little bit longer, maybe it'll take shorter, but I don't think you should be looking at the idea that the bond market's going to sell off right away based on um tariffs going up. will because I think the economy is going to be better and I think inflation is going to be broadly higher but not immediately. That's my next question. The economy is going to be better. Is it going to be better? Typically, when the yield curve steepens, which is to say the long end of the curve goes up and the short end of the curve either stays flat or goes perhaps even goes down the two-year, uh that may signal economic growth. Is that the case this time? Yeah, I think so. you know, the economy I I would say that the economy is I'm gonna sound a lot like Paul here because I'm kind of aligned with him for the moment. You know, it's broadly okay. Um there are some issues especially in housing. Um there, you know, there aren't really any cracks that I see in the labor market. I know people like to say that and then there there's a multitude of labor market statistics and they'll point to one or two of them like continuing claims and say there's your sign of cracks in the market. But there's always one or two labor market statistics that say that always. So you'd need more than that. You'd need more of that. We don't have it. So I think the economy is in an okay place. And if we do get drifting higher inflation and that nominal growth in the US continues up, I think what you'll see is you'll see interest rates go. Now, can that change? Sure. The Iran, the Iran Israel war can change it, you know, or some other type of thing could come up, spike oil prices or anything else. I'll give you there was an economist in the 1970s named Rudy Dorne Borch at MIT and he coined a famous line. Economic expansions do not die of old age. They're murdered. Now what that means is that don't look for the economy to roll over. Don't look for the economy to pop. It doesn't do that. What causes a recession is some event like a COVID shutdown scares everybody. They stop doing things and then the economy contracts. We're in an environment where that's very possible to happen. But don't ask an a market strategist like me or an economist whether or not that's going to be the case. You're better off asking a geopolitical strategist or a political scientist or something like that to say, "Is this likely to happen?" Your personal information is probably online right now. Your full name, home address, and phone number sitting on data broker websites that anybody can access or buy. It's uncomfortable, but also avoidable. That's why I use today's sponsor, Delete Me. They remove your private information from hundreds of data broker sites, so it's not just floating out there for anyone to grab. Getting started is simple. Submit your info, and within a week, you'll get a privacy report showing exactly where your data was found and what was removed. Delete Me doesn't stop there, and it continues scanning and deleting your data throughout the year. I trust this tool. It's helped me keep control of something that's easy to lose track of, my personal information. Go to joindeleteme.com/davalin link down below or scan the QR code here and use the promo code davidin at checkout. Get 20% off of all US plans today. Join delete me and take back control of your privacy now. Yeah, that that that has been the case in the last 20, 30 years. A shock has pretended a recession. Well, let's talk about a potential shock coming up in the next two weeks. You tweeted this actually uh this week. I'll just share my screen. This is a tweet you made. Trump is giving Iran an ultimatum. Cut a deal now where he will provide Israel with bunker buster bombs. The story has deflated the betting that the US will enter the war. Just yesterday on Wednesday, Trump said at the White House that uh at a press conference of the White House that he may or may not bomb is bomb Iran. He said he may or may not. He said he's not going to tell people what he's going to do, but he may or may not. All right. What does the market think he's going to do? Well, I think the market thinks he's going to do it because that the that that prediction market that you showed that's on Poly Market is now up to 63% right now. I just looked over my screen. It's at 63%. That there will be US military action in Iran before July. We're recording on the 19th. That means in the next 11 days, it's giving better than a 50% chance that there will be US military action in Iran. So, I think you're starting to see, you know, that reality kind of come into the market. We're recording on the 19th. The markets are closed for Junth, so there's no stock and bond trading, but but futures are trading in Europe, and this the the S&P futures are down almost a percent. Crude oil futures are up about 3%, they're at a new high for the last couple of months, so even higher than they were last week when we had that big spike. Um, you know, Bitcoin is 100 104,000 right now, um, as we talk. So, the markets are bracing themselves. I hate that word, but I can't think of a better one. Bracing themselves that something is going to happen one way or the other here right now. Why is the I mean, oil, I get, but why is the S&P down? I mean, what impact does a war between Israel and Iran have on the US uh markets and ultimately US companies? It spikes oil, spikes gasoline prices, and that's your retrenchment that if you wanted to talk about what causes people to, you know, stop economic activity, eyepopping pump prices. Now, we don't have that. We're at $78 on crude oil prices. We're not at 120 or 150. Uh, and if we stay at $78, we probably won't have that. But when bombs are flying and we're talking about the US getting involved in in attacking a country of 92 million people, which has become a thing now, the population of Iran, uh, you know, anything is possible. So that's why I think that these markets are getting very nervous and worried right now. Isn't that Trump's kind of deterrent against bombing Iran? Not so much Iran's retaliation, although that's certainly on the radar, but the fact that oil prices are going to go up. He said on his campaign trail, he's made it a objective. Scott Bent is one of his, you know, three threes. Oil prices have to come down, right? So, he's not Go ahead. I was just going to say, yeah. Yeah, it is. That is a deterrent, but there's two things to think about with that deterrent. As it's been unfolding now, the price of oil is up about 15 or so percent since the war or the escalation started, but it's not up 50. And the reason is is because what Israel has been avoiding is really damaging a lot of en energy infrastructure. If the US gets involved, they might also avoid or probably will avoid damaging energy infrastructure. Now, there's an argument to be made that the one card that the Iranians could play if they want to suck the US in is destroy their own energy infrastructure. So, we try to go in and stop them from doing it. Uh, so that is a concern right now. We don't know what they're going to do, but I don't think that, you know, Trump or the Israelis are going to greenlight, you know, bombing pipelines or oil terminals in Iran that would have implications for the long-term price of crude oil. I think what they're what the Broncos is pricing in is the risk that something could happen, not that the reality has actually come forward. Beyond crude oil, do you see any other spillover effects, supply chain disruptions, any credit market disruptions? Um any uh any spikes in the bond market that we should be aware of? Yeah, I mean beyond crude oil what you could also see is you know closing the straight of Hormuz adding into that this you know the the Red Sea and the Suez Canal and you you what you'll see there is shipping has become a difficult more difficult business a more expensive business a riskier business that's going to show up in all the prices because everything that we buy the things we buy most likely come from another country now I know Trump wants to change that with tariffs but it ain't changing tomorrow and so those prices are going to have to start to reflect the price of the cost of transportation and the cost of transportation is definitely going to go higher after that. Then the next question is where does the US you asked about any spikes in the bond market or anything. The the big question in the bond market away from the traditional what's the Fed going to do what's inflation going to do is what's the appetite for from foreign investors for US securities. The dollar has been falling. Our interest rates have been rising and it hasn't been dragging people in. But interestingly the data is not showing that foreign investors are abandoning our markets. We just got the Treasury International Capital report for April. The foreigners were buying at least through the month of April. Um, we've seen a whole slew of auctions in the month of June. We had a bad auction in the month of May, the 20-year auction, where people thought that was a signal that foreign investors were abandoning the bond market. But since then, we've had a whole slew of very good auctions where we've seen very good um, you know, foreign demand for those auctions. So, it's not yet, but there is still that concern with the falling dollar that foreigners will start to abandon the US and I think that that is also going to be weighing on the bond market as we go forward. Uh any possibility of a failed Treasury auction following what's happening right now? No, I don't think there would be a a failed Treasury auction at this point. Um the uh there isn't anything we've seen in the data that suggest it. Let's understand what a failed Treasury auction. First of all, I don't think there will ever be a a failed Treasury auction. What do I mean by ever? Um the there's an old adage in the bond market that there are no bad bonds, there's only bad prices. So, what is it? If if no one shows up for the bond market, then they'll just lower the price, raise the yield, and they'll keep doing it until they suck money in from other markets if they have to. Well, I own crypto. I would never buy treasuries. Okay, don't say that because you have no idea how high yields can go. That could absolutely wreck everything else because the bond market appetite has to be fed. So, I don't know if we would ever see a failed auction. I'm defining a failed auction if they were selling $20 billion worth of bonds. They don't get $20 billion worth of bids. They will always get that $20 billion worth of bids. You just won't like the price. That's really where the where the issue comes. And that's why the bond market's important because I often said, you know, I've often heard from people, oh, I don't like the bond market because I think yields are going to go up and I don't think it represents value. Okay, you might be right, but it's going, you're right, and the bond market will sell off and the loser will be the stock market because then it will have to contend with higher interest rates and those kind of discounts for in it will look more and more overvalued as interest rates go up. That's why the bond market is central to basically all financial markets and all asset valuations. Do you think this war in Iran is going to be a uh or Israel and Iran is going to be uh let's say a counterargument to your uh take your at 5% thesis? Because put it this way uh wouldn't a flight to safety be US treasuries pushing yields down? Yes and no. Um yes, there would be a flight to safety if it is necessary. One of the things I I actually tweeted about this too a couple of days ago. One of the things that you I think is happening in the market because people said the day that Israel started its its military action, there was no real rally in the dollar. And then they concluded that's because no one views the dollar as a safe haven. And I pushed back on that and said no, it's because they didn't think they needed a safe haven. And so we're at that point now where I don't think that the Israeli Iran war is screaming safe haven. So if it isn't then what the bond market is going to respond to is energy prices potentially going higher and more inflation which would be negative for it. If it got bad enough that we would be looking at safe haven status for bonds and that everybody would rush into them and the yields would fall then yeah we would probably ignore that. But it would have to get a lot worse than it is right now. And it isn't. It doesn't seem to be there. Now, that doesn't mean that in the next days or weeks, it can change. Sure, it can change, but as we're talking right now, we're not there right now. Any other uh capital rotation uh trends you see happening in the next month? Suppose the betting markets are right, we get a war. Uh where should investors be rotating to? Well, I think you know, ironically, I think that the bond market is going to have a place for it. I've been arguing that when you say the word investors, let's talk about the longer term, right? Not just what's going to happen in the next week or two. We don't know. I don't think President Bush knows or BB Netanyahu knows. They've got plans, but we all know, you know, plans very very rarely survive contact with the enemy. And so, we'll have to see where it goes. But let's look bigger picture. I've been terming these the four, five, six markets that over the next several years, cash will return you 4%, bonds will return you around five, and stocks because of their high valuation will return you around six. So cash and bonds uh will be competitive investments to stocks. Even though yields will go up in bonds, there's a bigger coupon on them right now. And that's why I think that they're in that mix. Why is stocks only going to return you six? They've returned 20 for the last couple of years. It's because of valuation. The stock market is at a very high valuation, well over 20 on the forward PE ratio. Is that mean overvalued markets have to fall? No, I don't think they have to fall. When you buy an overvalued market like the US equity market, what you're betting on is lots of things going right. Well, when you're having a war, when you're having all tariffs and the uncertainty about tariffs and what that means in the economy, the potential for inflation and higher interest rates, it's almost impossible to get lots of things to go right. That's why I've argued, why are people rotating into Europe? Because European stocks have so badly underperformed US stocks for many, many years. They've got very good relative valuations. When you buy cheap stocks, you only need a few things to go right for them to go up. Now, the problem with cheap stocks is they're cheap for a reason, and those few things almost never recur. But right now, I think people are saying, "I'd rather take my chance with Germany because it's such a cheap market because it hasn't done anything for years or France than to take my chances with the US or the NASDAQ, which has been powerhouse performers." That's why I think you've seen those rotations. So looking past the noise that we've seen and hopefully you know there is a soon and peaceful revol revol resolution to this. I think that when you look at these markets you're going to find cash, bonds and stocks are all going to be fairly competitive with each other because of the the rich valuations. Nothing wrong with buying a rich market, but you're what you're doing is you're you're betting that everything is going to go right. And with war and tariffs and everything else, but that's a very long shot. I think that everything will go right. What about gold and Bitcoin? Are those safe haven plays? Gold is definitely a safe haven play. It's the more traditional safe haven play and that's what I think we've seen from gold is, you know, even with its Asian central bank buying that is helping uh pushing it higher. Bitcoin is a little bit of a a of a hedge scratcher. It is it it kind of acts like both a speculative play and a safe haven play. What I mean by that is the price at 104,000 is not that far from its all-time high. Well, neither is the stock market. You know, stock market's still about 3 or 4% from its all-time high. So is Bitcoin. Uh and Bitcoin seems to go up and down with the stock market or the NASDAQ. And it makes, you know, so there's a correlation there, making it look like it's a speculative animal. You know, you know, why do you buy Bitcoin? Because the stock market's going to go up. It's going to go up more. When do you sell Bitcoin? When the stock market is going to go down because it goes down more. That's not a safe haven play. But if you make the argument for why Bitcoin, you are making a safe haven argument, which makes perfect sense. It's just it doesn't trade that way, at least right now. Um, but you know, I still think at some point in the future, maybe it's years from now, it will break this pattern of acting like a speculative vehicle and act more like a safe haven vehicle. It's not there yet. So, if you're owning Bitcoin, you're kind of betting on the S&P going up. Um, and as I was saying before, I think that's you're betting on lots of things going right. Uh, and that's not really in the cards for the moment. Okay. Uh Jim, the the the the prospect of higher oil prices, um does that have any other impact on the commodities landscape? Uh do you think copper or base metals will follow because of higher uh oil? Uh or do you think they're just completely different markets here? No, they'll all follow in to some degree because copper, base metals, pretty much everything else, commodities are a an input process. They're not really an asset class. I I push back on that. So if you're going to say what is the price of copper? Well, part of the price of copper is the energy required to get it out of the ground. And if energy prices are going up, so will copper prices. So will corn prices because the price of running your tractor in the field is going to go up. So it energy has an impact on all of those. But will we see price of copper or lumber or c corn or something like that go up on its own because of excess demand? Probably not. Uh because I don't know if higher energy prices will produce excess demand. Now I'm talking about $80, $90 oil. I'm not talking about $150 oil. $150 oil is a different story altogether. That's a crisis area. Okay, Jim, your uh your preferred asset class for the remainder of the year. Well, first of all, has this war kind of uh tripped you in in your in your forecast before in the sense that you've updated some of your outlooks, but uh generally speaking, what what do you think is going to outperform uh given what's happening now? Oh, I think that, you know, for the end of the year, for the next 6 months, I think that all the safe plays are going to be probably the play to go with. It's going to be energy, it's going to be gold, it's going to be, you know, defensive plays like um money market funds. Why do I say money market fun? you're going to go up 2%. You're going to go up 2% by the end of the year. You've gone through a three thrill rides to get a 1% gain in the stock market so far this for for the first six months of this year. So, I think that those types of defensive plays are where I am right now. Now, if there is an allcle signal or something else that comes, I'll get more aggressive. But right now, as I look at it, there isn't a lot of concern in the market right now. There isn't a lot of reasons to be concerned for the moment for the moment. But there is reason to think that that could change quickly for the worst. And that's why I'd rather be defensive in this environment. I'd rather go with gold. I'd rather go with energy plays. I'd rather go with the safe haven plays of like short-term duration like in a money market fund. And if I see more evidence that things are getting better, then I could get more aggressive. Okay. Uh Jim, what do you like the least? Oh boy, that's a that's an interesting one. I think at the least right now are probably the most overvalued companies and I'm going to point towards the Mag Seven right now. You've got, you know, the Mag Seven have got to see lots of things going right and that means that customers are going to say the hell with all this other news. Throw money at AI, throw money at AGI. Now, they've been doing that, but there what there might be some kind of a pullback in that. And again, it's all about the valuation. When you're buying a lot of these highly valued mag seven stocks, you're betting you're betting everything's going to work and everything's going to work on a tight time scale tail scale. And if it doesn't, then you're going to run into trouble. Now, everything might work eventually, but it might not work immediately. And I'll give you one really quick example. Amazon. Oh, I should have bought Amazon in 1999. Boy, I would have made 50x on my money or 100x on my money, depending on when you bought it. And that's true. However, 1999 when everybody was saying by Amazon, this thing called online retailing is coming and it's and they're going to be a leader in it. They were 100% right in 1999. But in 2013, 2013, the price was at the same level. So, you bought Amazon, we're going to have this online revolution, you made zero in 14 years, and then it went up 100x. And that's what you have to be careful of with a lot of these technology plays because what happened? We had a recession. We had a financial crisis and that kind of got in the way. But once we cleared from those, then the flourishing of online retailing really took off. Are we going to have AI? Absolutely. We're going to have a AGI? Absolutely. And is it going to be transformational? Yes. But is it going to be transformational in 26 and 27 or 2040? Because if it's 2040, you could buy these stocks now and wind up a decade later with no money. If it's going to be 26 or 28, you could buy these stocks now and wind up with a lot of money. I'll make the play that it's going to take longer than people think it's going to be, but we'll eventually we will get there. Jim, let's wrap up here. Excellent talk. Thank you very much. Where can we find out more about you and your work? Two places. Biancorresearch.com is our website for our institutional research offerings if you want to take a look at that. I'm active on social media under Bianco Research on Twitter X and on uh YouTube under Jim Bianco on LinkedIn. And also biancadvisors.com is our fixed income total return ETF WTBN if you want to take a look at that one too. Yeah. And I just like to close this thought. Uh we talked about how the economy may be improving uh but you're recommending staying defensive. Um one might think that's kind of a juosition but uh I mean you've explained your position quite well. I mean do you think that there's room to be risk on at least for the foreseeable future given how things are recovering just on the macro? Yeah. I mean that it it requires it requires one's risk tolerances. I guess what I'm explaining. Sure. Look, I'm a bond guy. I'm a I'm a bond guy at heart and bond guys at heart are always looking around going, "What can go wrong?" And I see things that can go wrong and I, you know, and I'm a little bit more defensive right now until I get more of a clearer signal. Otherwise, you know, you could say, "No, I think this is going to work out okay, and I think that the, you know, that we're not going to see $150 crude oil, and we're not going to see any of that other stuff." Now, the market's not expecting it now, but we don't know what it's going to be expecting in two weeks or a month. And so, yeah, if you wanted to be a little bit more uh risk on in that kind of environment and go for it, you you know, that could very well work out. And I'm not going to say it won't work out. It's just it depends on the type of risk appetite one has. Okay. Excellent. Thank you very much. We'll put the links down below so you can follow Jim there. Appreciate your time. We'll speak again soon, Jim. Take care for now. Thank you. Thank you for watching. Don't forget to like and subscribe.
Economic ‘Murder’ Alert: Is The Next Big Crisis Here? | Jim Bianco
Summary
Remove your personal information from the web at https://joindeleteme.com/DAVIDLIN, use code DAVIDLIN for 20% off Jim …Transcript
I mean, you don't know that I'm going to even do it. You You don't know. I may do it. I may not do it. I mean, nobody knows what I'm going to do. I can tell you this that uh Iran's got a lot of trouble. I'm pleased to welcome back to the show Jim Biano. He is the president of Biano Research and the founder of the uh Wisdom Tree Biano total return fund. WTBN is the tiger. And we'll be talking about uh what happened this week with the FOMC meeting as well as what's happening with the markets in response to the ongoing war between Israel and Iran. Welcome back to the show, Jim. Good to see you. Thanks for having me. Your reaction first and foremost the uh FOMC media and then we'll talk about uh whether or not markets are pricing in a war in the Middle East. So um rates unchanged. However, Powell made strong remarks. Chair Powell made strong remarks about his expectations for inflation. He said that the reason that uh he doesn't want to cut rates now is that he expects inflation to come. And uh and let me just let me just play for you um a clip uh later, but I want to get your reaction to that statement first. Is inflation coming? Is the Fed right? I actually think they are right and I actually do think inflation is coming. Uh and I'm talking about over the next few months because of tariffs. You're starting to see the in the beginnings of that inflation show up and some of the higher frequency, you know, internet scraping things like true flation and price stats. They measure online millions of online prices and aggregate them into like an inflation index and they've been moving up for the last five or six weeks. Now, it didn't show up in the May report, but the June and July report, I think you they could very well see those numbers show up in those reports and start to see inflation move higher. So, I think uh Paul is right that inflation could be on the march up and the Fed it wouldn't be appropriate for them to be cutting rates with inflation going higher. Well, somebody asked Powell uh when the tariffs data is going to show up in the actual economic data where not tariffs data but in ter inflation from tariffs. So, take a listen to uh Powell's response here during the press conference. Smith of the New York Times. Uh to what extent has the more limited impact from tariffs at this stage on inflation changed your view on what the ultimate economic fallout will be from these policies and the timing of when um they will materialize in the data. So um uh we've had three months of of u favorable inflation readings since the high readings of January and February. And that's of course highly welcome news. Uh part of that just is that uh services core services uh both housing services and non-housing services have really been grinding down toward levels that are that are consistent with 2% inflation. So that's the good news. We've had um uh goods inflation just moving up a bit and of course we expect as you as you point out we we do expect to see more of that over the course of the summer. Um it takes some time for tariffs to work their way through the chain of distribution to the end consumer. A good example of that would be uh goods being sold at retailers today may have been imported several months ago before tariffs were imposed. So we're beginning to see some effects and we do expect to see more of them over coming months. Are the effects of tariffs on prices transitory, Jim? That's a tough one to answer at this point. Um, you could look at, you know, the Wall Street consensus that this is a one-time rise because of tariffs and then everything would settle down after that. And there's a reasonable argument to be made for that. Uh, but that assumes that we're done raising tariffs and that we don't see more rounds of tariff increases, you know, later this year or next year. And also later on in the press conference, uh, Paul talked about unanchored inflation. And this is where I'll diverge with him a little bit. The I think there's some evidence, and the Cleveland Fed has laid this out a little bit, um, that when companies are given the opportunity to raise prices because of tariffs, they raise all prices. And that's what unencored inflation is. You know, give them an opening and all the prices go up. And that's what I think we got to be very careful of in watching over the next few months. Which prices are going up? Are they just the narrowly ones that are just because of tariffs or are we going to see prices across the board start moving higher because companies think that they could get away with it? If they do and we get on anchored inflation per the Fed, that would not be desirable and that they would have to, you know, start to combat that thinking. Well, should we make a bet on this? Should we make a bet on inflation expectations? Not not past CPI, but the the mere fact that this the Fed is signaling inflation expectations. Should we should we short bonds then? Are yields going up? Well, that that's a that's a good one. I think over time yields are going to go up. uh and whether or not they're going to go up in the, you know, in the next month or two dri driven by tariffs and higher inflation remains to be seen because the way I'm looking at the bond market right now is it's broadly at its fair value levels. I disagree with the Fed. I think that around 4ish% on the funds rate is neutral and they are around 4ish% on the funds rate. I think that neutral on the 10ear and the 30-year just to go to the other end of the curve is around four and a half to five. and that's exactly where they're at. So the market is not undervalued. It's it's where it should be. So if you wanted to short bonds, you're saying that the fair value of bonds will move higher. You're not shorting them because they're rich. Um you know that they're overpriced at some point. But I do think the fair value will move higher. It's just that the the caveat or the the warning I'll give is it might take a little more time than people think. Uh you're talking about the long end of the curve, right? Yes. Correct. The 10 year and 30-year, I think they'll punch through 5%. That's my expectation, but not maybe by the end of the summer. You know, I I wouldn't be shocked if they did, but I don't want to narrow myself down on both, you know, a level and a time. I'll go with the level and say it's going to get there. Maybe it'll take a little bit longer, maybe it'll take shorter, but I don't think you should be looking at the idea that the bond market's going to sell off right away based on um tariffs going up. will because I think the economy is going to be better and I think inflation is going to be broadly higher but not immediately. That's my next question. The economy is going to be better. Is it going to be better? Typically, when the yield curve steepens, which is to say the long end of the curve goes up and the short end of the curve either stays flat or goes perhaps even goes down the two-year, uh that may signal economic growth. Is that the case this time? Yeah, I think so. you know, the economy I I would say that the economy is I'm gonna sound a lot like Paul here because I'm kind of aligned with him for the moment. You know, it's broadly okay. Um there are some issues especially in housing. Um there, you know, there aren't really any cracks that I see in the labor market. I know people like to say that and then there there's a multitude of labor market statistics and they'll point to one or two of them like continuing claims and say there's your sign of cracks in the market. But there's always one or two labor market statistics that say that always. So you'd need more than that. You'd need more of that. We don't have it. So I think the economy is in an okay place. And if we do get drifting higher inflation and that nominal growth in the US continues up, I think what you'll see is you'll see interest rates go. Now, can that change? Sure. The Iran, the Iran Israel war can change it, you know, or some other type of thing could come up, spike oil prices or anything else. I'll give you there was an economist in the 1970s named Rudy Dorne Borch at MIT and he coined a famous line. Economic expansions do not die of old age. They're murdered. Now what that means is that don't look for the economy to roll over. Don't look for the economy to pop. It doesn't do that. What causes a recession is some event like a COVID shutdown scares everybody. They stop doing things and then the economy contracts. We're in an environment where that's very possible to happen. But don't ask an a market strategist like me or an economist whether or not that's going to be the case. 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Go to joindeleteme.com/davalin link down below or scan the QR code here and use the promo code davidin at checkout. Get 20% off of all US plans today. Join delete me and take back control of your privacy now. Yeah, that that that has been the case in the last 20, 30 years. A shock has pretended a recession. Well, let's talk about a potential shock coming up in the next two weeks. You tweeted this actually uh this week. I'll just share my screen. This is a tweet you made. Trump is giving Iran an ultimatum. Cut a deal now where he will provide Israel with bunker buster bombs. The story has deflated the betting that the US will enter the war. Just yesterday on Wednesday, Trump said at the White House that uh at a press conference of the White House that he may or may not bomb is bomb Iran. He said he may or may not. He said he's not going to tell people what he's going to do, but he may or may not. All right. What does the market think he's going to do? Well, I think the market thinks he's going to do it because that the that that prediction market that you showed that's on Poly Market is now up to 63% right now. I just looked over my screen. It's at 63%. That there will be US military action in Iran before July. We're recording on the 19th. That means in the next 11 days, it's giving better than a 50% chance that there will be US military action in Iran. So, I think you're starting to see, you know, that reality kind of come into the market. We're recording on the 19th. The markets are closed for Junth, so there's no stock and bond trading, but but futures are trading in Europe, and this the the S&P futures are down almost a percent. Crude oil futures are up about 3%, they're at a new high for the last couple of months, so even higher than they were last week when we had that big spike. Um, you know, Bitcoin is 100 104,000 right now, um, as we talk. So, the markets are bracing themselves. I hate that word, but I can't think of a better one. Bracing themselves that something is going to happen one way or the other here right now. Why is the I mean, oil, I get, but why is the S&P down? I mean, what impact does a war between Israel and Iran have on the US uh markets and ultimately US companies? It spikes oil, spikes gasoline prices, and that's your retrenchment that if you wanted to talk about what causes people to, you know, stop economic activity, eyepopping pump prices. Now, we don't have that. We're at $78 on crude oil prices. We're not at 120 or 150. Uh, and if we stay at $78, we probably won't have that. But when bombs are flying and we're talking about the US getting involved in in attacking a country of 92 million people, which has become a thing now, the population of Iran, uh, you know, anything is possible. So that's why I think that these markets are getting very nervous and worried right now. Isn't that Trump's kind of deterrent against bombing Iran? Not so much Iran's retaliation, although that's certainly on the radar, but the fact that oil prices are going to go up. He said on his campaign trail, he's made it a objective. Scott Bent is one of his, you know, three threes. Oil prices have to come down, right? So, he's not Go ahead. I was just going to say, yeah. Yeah, it is. That is a deterrent, but there's two things to think about with that deterrent. As it's been unfolding now, the price of oil is up about 15 or so percent since the war or the escalation started, but it's not up 50. And the reason is is because what Israel has been avoiding is really damaging a lot of en energy infrastructure. If the US gets involved, they might also avoid or probably will avoid damaging energy infrastructure. Now, there's an argument to be made that the one card that the Iranians could play if they want to suck the US in is destroy their own energy infrastructure. So, we try to go in and stop them from doing it. Uh, so that is a concern right now. We don't know what they're going to do, but I don't think that, you know, Trump or the Israelis are going to greenlight, you know, bombing pipelines or oil terminals in Iran that would have implications for the long-term price of crude oil. I think what they're what the Broncos is pricing in is the risk that something could happen, not that the reality has actually come forward. Beyond crude oil, do you see any other spillover effects, supply chain disruptions, any credit market disruptions? Um any uh any spikes in the bond market that we should be aware of? Yeah, I mean beyond crude oil what you could also see is you know closing the straight of Hormuz adding into that this you know the the Red Sea and the Suez Canal and you you what you'll see there is shipping has become a difficult more difficult business a more expensive business a riskier business that's going to show up in all the prices because everything that we buy the things we buy most likely come from another country now I know Trump wants to change that with tariffs but it ain't changing tomorrow and so those prices are going to have to start to reflect the price of the cost of transportation and the cost of transportation is definitely going to go higher after that. Then the next question is where does the US you asked about any spikes in the bond market or anything. The the big question in the bond market away from the traditional what's the Fed going to do what's inflation going to do is what's the appetite for from foreign investors for US securities. The dollar has been falling. Our interest rates have been rising and it hasn't been dragging people in. But interestingly the data is not showing that foreign investors are abandoning our markets. We just got the Treasury International Capital report for April. The foreigners were buying at least through the month of April. Um, we've seen a whole slew of auctions in the month of June. We had a bad auction in the month of May, the 20-year auction, where people thought that was a signal that foreign investors were abandoning the bond market. But since then, we've had a whole slew of very good auctions where we've seen very good um, you know, foreign demand for those auctions. So, it's not yet, but there is still that concern with the falling dollar that foreigners will start to abandon the US and I think that that is also going to be weighing on the bond market as we go forward. Uh any possibility of a failed Treasury auction following what's happening right now? No, I don't think there would be a a failed Treasury auction at this point. Um the uh there isn't anything we've seen in the data that suggest it. Let's understand what a failed Treasury auction. First of all, I don't think there will ever be a a failed Treasury auction. What do I mean by ever? Um the there's an old adage in the bond market that there are no bad bonds, there's only bad prices. So, what is it? If if no one shows up for the bond market, then they'll just lower the price, raise the yield, and they'll keep doing it until they suck money in from other markets if they have to. Well, I own crypto. I would never buy treasuries. Okay, don't say that because you have no idea how high yields can go. That could absolutely wreck everything else because the bond market appetite has to be fed. So, I don't know if we would ever see a failed auction. I'm defining a failed auction if they were selling $20 billion worth of bonds. They don't get $20 billion worth of bids. They will always get that $20 billion worth of bids. You just won't like the price. That's really where the where the issue comes. And that's why the bond market's important because I often said, you know, I've often heard from people, oh, I don't like the bond market because I think yields are going to go up and I don't think it represents value. Okay, you might be right, but it's going, you're right, and the bond market will sell off and the loser will be the stock market because then it will have to contend with higher interest rates and those kind of discounts for in it will look more and more overvalued as interest rates go up. That's why the bond market is central to basically all financial markets and all asset valuations. Do you think this war in Iran is going to be a uh or Israel and Iran is going to be uh let's say a counterargument to your uh take your at 5% thesis? Because put it this way uh wouldn't a flight to safety be US treasuries pushing yields down? Yes and no. Um yes, there would be a flight to safety if it is necessary. One of the things I I actually tweeted about this too a couple of days ago. One of the things that you I think is happening in the market because people said the day that Israel started its its military action, there was no real rally in the dollar. And then they concluded that's because no one views the dollar as a safe haven. And I pushed back on that and said no, it's because they didn't think they needed a safe haven. And so we're at that point now where I don't think that the Israeli Iran war is screaming safe haven. So if it isn't then what the bond market is going to respond to is energy prices potentially going higher and more inflation which would be negative for it. If it got bad enough that we would be looking at safe haven status for bonds and that everybody would rush into them and the yields would fall then yeah we would probably ignore that. But it would have to get a lot worse than it is right now. And it isn't. It doesn't seem to be there. Now, that doesn't mean that in the next days or weeks, it can change. Sure, it can change, but as we're talking right now, we're not there right now. Any other uh capital rotation uh trends you see happening in the next month? Suppose the betting markets are right, we get a war. Uh where should investors be rotating to? Well, I think you know, ironically, I think that the bond market is going to have a place for it. I've been arguing that when you say the word investors, let's talk about the longer term, right? Not just what's going to happen in the next week or two. We don't know. I don't think President Bush knows or BB Netanyahu knows. They've got plans, but we all know, you know, plans very very rarely survive contact with the enemy. And so, we'll have to see where it goes. But let's look bigger picture. I've been terming these the four, five, six markets that over the next several years, cash will return you 4%, bonds will return you around five, and stocks because of their high valuation will return you around six. So cash and bonds uh will be competitive investments to stocks. Even though yields will go up in bonds, there's a bigger coupon on them right now. And that's why I think that they're in that mix. Why is stocks only going to return you six? They've returned 20 for the last couple of years. It's because of valuation. The stock market is at a very high valuation, well over 20 on the forward PE ratio. Is that mean overvalued markets have to fall? No, I don't think they have to fall. When you buy an overvalued market like the US equity market, what you're betting on is lots of things going right. Well, when you're having a war, when you're having all tariffs and the uncertainty about tariffs and what that means in the economy, the potential for inflation and higher interest rates, it's almost impossible to get lots of things to go right. That's why I've argued, why are people rotating into Europe? Because European stocks have so badly underperformed US stocks for many, many years. They've got very good relative valuations. When you buy cheap stocks, you only need a few things to go right for them to go up. Now, the problem with cheap stocks is they're cheap for a reason, and those few things almost never recur. But right now, I think people are saying, "I'd rather take my chance with Germany because it's such a cheap market because it hasn't done anything for years or France than to take my chances with the US or the NASDAQ, which has been powerhouse performers." That's why I think you've seen those rotations. So looking past the noise that we've seen and hopefully you know there is a soon and peaceful revol revol resolution to this. I think that when you look at these markets you're going to find cash, bonds and stocks are all going to be fairly competitive with each other because of the the rich valuations. Nothing wrong with buying a rich market, but you're what you're doing is you're you're betting that everything is going to go right. And with war and tariffs and everything else, but that's a very long shot. I think that everything will go right. What about gold and Bitcoin? Are those safe haven plays? Gold is definitely a safe haven play. It's the more traditional safe haven play and that's what I think we've seen from gold is, you know, even with its Asian central bank buying that is helping uh pushing it higher. Bitcoin is a little bit of a a of a hedge scratcher. It is it it kind of acts like both a speculative play and a safe haven play. What I mean by that is the price at 104,000 is not that far from its all-time high. Well, neither is the stock market. You know, stock market's still about 3 or 4% from its all-time high. So is Bitcoin. Uh and Bitcoin seems to go up and down with the stock market or the NASDAQ. And it makes, you know, so there's a correlation there, making it look like it's a speculative animal. You know, you know, why do you buy Bitcoin? Because the stock market's going to go up. It's going to go up more. When do you sell Bitcoin? When the stock market is going to go down because it goes down more. That's not a safe haven play. But if you make the argument for why Bitcoin, you are making a safe haven argument, which makes perfect sense. It's just it doesn't trade that way, at least right now. Um, but you know, I still think at some point in the future, maybe it's years from now, it will break this pattern of acting like a speculative vehicle and act more like a safe haven vehicle. It's not there yet. So, if you're owning Bitcoin, you're kind of betting on the S&P going up. Um, and as I was saying before, I think that's you're betting on lots of things going right. Uh, and that's not really in the cards for the moment. Okay. Uh Jim, the the the the prospect of higher oil prices, um does that have any other impact on the commodities landscape? Uh do you think copper or base metals will follow because of higher uh oil? Uh or do you think they're just completely different markets here? No, they'll all follow in to some degree because copper, base metals, pretty much everything else, commodities are a an input process. They're not really an asset class. I I push back on that. So if you're going to say what is the price of copper? Well, part of the price of copper is the energy required to get it out of the ground. And if energy prices are going up, so will copper prices. So will corn prices because the price of running your tractor in the field is going to go up. So it energy has an impact on all of those. But will we see price of copper or lumber or c corn or something like that go up on its own because of excess demand? Probably not. Uh because I don't know if higher energy prices will produce excess demand. Now I'm talking about $80, $90 oil. I'm not talking about $150 oil. $150 oil is a different story altogether. That's a crisis area. Okay, Jim, your uh your preferred asset class for the remainder of the year. Well, first of all, has this war kind of uh tripped you in in your in your forecast before in the sense that you've updated some of your outlooks, but uh generally speaking, what what do you think is going to outperform uh given what's happening now? Oh, I think that, you know, for the end of the year, for the next 6 months, I think that all the safe plays are going to be probably the play to go with. It's going to be energy, it's going to be gold, it's going to be, you know, defensive plays like um money market funds. Why do I say money market fun? you're going to go up 2%. You're going to go up 2% by the end of the year. You've gone through a three thrill rides to get a 1% gain in the stock market so far this for for the first six months of this year. So, I think that those types of defensive plays are where I am right now. Now, if there is an allcle signal or something else that comes, I'll get more aggressive. But right now, as I look at it, there isn't a lot of concern in the market right now. There isn't a lot of reasons to be concerned for the moment for the moment. But there is reason to think that that could change quickly for the worst. And that's why I'd rather be defensive in this environment. I'd rather go with gold. I'd rather go with energy plays. I'd rather go with the safe haven plays of like short-term duration like in a money market fund. And if I see more evidence that things are getting better, then I could get more aggressive. Okay. Uh Jim, what do you like the least? Oh boy, that's a that's an interesting one. I think at the least right now are probably the most overvalued companies and I'm going to point towards the Mag Seven right now. You've got, you know, the Mag Seven have got to see lots of things going right and that means that customers are going to say the hell with all this other news. Throw money at AI, throw money at AGI. Now, they've been doing that, but there what there might be some kind of a pullback in that. And again, it's all about the valuation. When you're buying a lot of these highly valued mag seven stocks, you're betting you're betting everything's going to work and everything's going to work on a tight time scale tail scale. And if it doesn't, then you're going to run into trouble. Now, everything might work eventually, but it might not work immediately. And I'll give you one really quick example. Amazon. Oh, I should have bought Amazon in 1999. Boy, I would have made 50x on my money or 100x on my money, depending on when you bought it. And that's true. However, 1999 when everybody was saying by Amazon, this thing called online retailing is coming and it's and they're going to be a leader in it. They were 100% right in 1999. But in 2013, 2013, the price was at the same level. So, you bought Amazon, we're going to have this online revolution, you made zero in 14 years, and then it went up 100x. And that's what you have to be careful of with a lot of these technology plays because what happened? We had a recession. We had a financial crisis and that kind of got in the way. But once we cleared from those, then the flourishing of online retailing really took off. Are we going to have AI? Absolutely. We're going to have a AGI? Absolutely. And is it going to be transformational? Yes. But is it going to be transformational in 26 and 27 or 2040? Because if it's 2040, you could buy these stocks now and wind up a decade later with no money. If it's going to be 26 or 28, you could buy these stocks now and wind up with a lot of money. I'll make the play that it's going to take longer than people think it's going to be, but we'll eventually we will get there. Jim, let's wrap up here. Excellent talk. Thank you very much. Where can we find out more about you and your work? Two places. Biancorresearch.com is our website for our institutional research offerings if you want to take a look at that. I'm active on social media under Bianco Research on Twitter X and on uh YouTube under Jim Bianco on LinkedIn. And also biancadvisors.com is our fixed income total return ETF WTBN if you want to take a look at that one too. Yeah. And I just like to close this thought. Uh we talked about how the economy may be improving uh but you're recommending staying defensive. Um one might think that's kind of a juosition but uh I mean you've explained your position quite well. I mean do you think that there's room to be risk on at least for the foreseeable future given how things are recovering just on the macro? Yeah. I mean that it it requires it requires one's risk tolerances. I guess what I'm explaining. Sure. Look, I'm a bond guy. I'm a I'm a bond guy at heart and bond guys at heart are always looking around going, "What can go wrong?" And I see things that can go wrong and I, you know, and I'm a little bit more defensive right now until I get more of a clearer signal. Otherwise, you know, you could say, "No, I think this is going to work out okay, and I think that the, you know, that we're not going to see $150 crude oil, and we're not going to see any of that other stuff." Now, the market's not expecting it now, but we don't know what it's going to be expecting in two weeks or a month. And so, yeah, if you wanted to be a little bit more uh risk on in that kind of environment and go for it, you you know, that could very well work out. And I'm not going to say it won't work out. It's just it depends on the type of risk appetite one has. Okay. Excellent. Thank you very much. We'll put the links down below so you can follow Jim there. Appreciate your time. We'll speak again soon, Jim. Take care for now. Thank you. Thank you for watching. Don't forget to like and subscribe.