HOW BAD WILL INFLATION GET?? | Jim Bianco

Transcript

hey bankless nation welcome to another state of the nation we got a hot topic today it is definitely top of mind as all of the markets around the world tumble including crypto that topic is inflation david who's on and what are we about to get into jim bianco which every time we bring jim binyaku on i just feel like we're getting a little smarter and i definitely could feel like being a little bit smarter right now ryan because there is like we all know why the markets are tumbling the fed is raising interest rates but what happens next is just like a fog of war to me i do not know what happens next there are fallouts of what's going on across the world this is not just a crypto market phenomenon this is a global eco this is a u.s equities market phenomenon as well

but it's also going on in like all macro fiat currencies uh and we have like the the war in ukraine is still relevant the food shortage is relevant supply chain still broken so how how we get out of this pain i do not know uh and so i jim bianco like no one really knows what the future holds for us but jim bianco knows more than i do and so i think he's going to help shed some light on what feels like a very confusing and tumultuous time yeah you know we're hopeful jim can help explain some of this to us because we feel very comfortable in the crypto world but as we said before on bank list we're kind of learning a bit more about the old financial world by way of crypto and we just haven't gotten to that chapter yet of you know how does

inflation uh interact with the crypto assets you know uh crypto's never been present in an era as uh like like the era that that's happening right now so jim is going to service that bridge for us what i love about him is he knows macro very very well and can school us there and he also knows crypto and d5 so who can talk about that too so we're going to get into that episode with uh jim i want to give a shout out to our friends at metamask as well i know uh buying crypto is probably not on people's radar right now although when the market is down historically that is the time to buy metamask wanted us to let you know that they have a buy button

inside of their wallets if you're looking to buy some crypto to make a trade uh very quickly inside of your wallet get some gas gas fees top things up dollar cost average in you can hit that metamask buy button both on the mobile wallet and also in the extension so go ahead and check that out we'll include a link in the show notes david i'm going to ask you the question we ask at the beginning of every state of the nation which is what is the state of the nation today ryan the state of the nation is fearful and confused that goes without saying when markets are going down as rapidly as they are it feels like there is no bottom uh and everyone is just trying to get some information and get some

clarity as to why this is happening how bad is this gonna get uh why is uh and so like what are all the fallouts of this and what happens next uh so i think we have the agenda for the show cut out for us uh so yes ryan the state of the nation is uh fearful and confused all right well let's get right to it i uh i know that there's a lot to discuss in the macro side of things so i want to get jim on the uh on the podcast and we'll pick his brain for a little bit before we do we want to thank the sponsors that made this episode possible rocket pool is your friendly decentralized ethereum staking protocol you can stake your eth with rocket pool and get our eath in return allowing you to stake your east and use it in d5 at

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at ave.com that's aabe.com and also check out the ave protocol governance forums to see what more than a hundred thousand dow members are all robbing about at governance.ave.com hey guys we are back joined by jim bianco from bianco research jim is a macro guy friend of the podcast crypto investor investor in traditional markets as well and he's defy savvy jim how are you doing today these are trying time sir you hanging in there yeah i'm hanging in there i like that description so i'm losing money in about seven different ways aren't we all this is gonna be a cope episode a little bit but uh jim we wanna pick your brain on a few things i think the headline for this episode is really

inflation because it seems like that's the boogeyman that's causing all of this pain that we're in we want to dissect that and talk about why inflation is breaking everything or why it appears that way and then how do we fix it and then thirdly what happens next if you could try to prognosticate and see the different possible end solutions to all of this but let's start with uh the why is inflation breaking everything and i want to uh turn our attention to this tweet i think you you tweeted this out on the 12th um and this was uh what you said markets open sunday night and it is clear they are viewing friday's cpi as a watershed event the go down with some stats here nasdaq 100 futures dropped 2 s p down one point five percent yen is

weakening one slumps one point five percent you go through a whole bunch of other stats but what is happening in the markets and why was friday's cpi event that's the consumer price index higher than expected why is that a watershed moment can you explain this for us yeah so we've been we've the collective whole of the markets been struggling with this idea that inflation is transitory now let me give you a definition of transitory transitory i think currently means the federal reserve the federal government all of us we don't have to do anything it will naturally peak it will naturally go away on its own that's what the whole idea about transitory doesn't require

intervention now going into cpi's report i'd say 60 65 i mean there's actually surveys done by bank of america and some others that quantify this about 60 65 percent of wall street did not believe it was transitory but about 35 40 did believe it was transitory so when you got the cpi report on friday at one percent above the highest estimate 70 economists were asked by bloomberg their highest estimate was nine tenths of a percent it came in fully one percent way above the highest estimate i think those 35 said that's it i'm out of this idea that inflation is

transitory i now believe it's persistent and they started to restructure their portfolio now this is a fancy way of saying they were long stocks they were long bonds and they were hoping that the report would give them ammunition to say see the inflation stories peaked it's going to go away i'm right to belong these instruments and then it was a slap in the face it's not going away and that's what i think you saw was and i'll use a technical term here for you they vomited up their positions because they were when they were just tired of of waiting around for if inflation to go away and that's why you saw the marketplace start to also uh price in the idea of 75 basis points for the

fed to raise rates uh at the same time so it what the watershed event was we've talked about this we in the tradify markets oh yeah all the bad news is priced in no was it we found out on friday that there was a lot of people that were still cleaning hope that somehow inflation would naturally peak and go away on its own but now they started to realize the only way it's going to go away is with intervention we're going to need to have restrictive policy by the fed and or restrictive policy by the federal government and that involves some kind of pain and that's why you saw the market sell off maybe jim this is cope but what about the argument that

inflation is a lagging indicator as in inflation is actually transitory it's just waiting for it like the death of the markets both in the crypto markets the equities markets like we're down we're down big no matter what market you're in and therefore a lot of wealth has been destroyed therefore a lot of spending has been destroyed and we are just waiting for that to finally show up in the inflation numbers is there anything to this argument or am i just trying to cope no it's true inflation is a trend is a lagging indicator um the cpi ppi are are officially classified as lagging indicators but when you look at the forward indicators that might tell you where inflation is going to go

none of them are giving us any hope gas prices national average gas prices made a new all-time high again today 502 a gallon nationwide more like seven and a half dollars a gallon if you're in california um the uh university of michigan consumer confidence survey i think was equally as devastating for the markets on friday that came out friday that survey started in 1952 70 years ago and june 2022 the survey result friday was the lowest ever in 70 years it wasn't the kennedy assassination it wasn't the vietnam war 70's gas line 70's inflation 87 crash it wasn't the tech bubble it wasn't the great

financial crisis it wasn't covet it was this month that we made the 70-year low in consumer confidence people are scared shitless to use another technical term for you when it comes to inflation and that showed up in that survey as well too so yes inflation is a backward-looking indicator but all the forward-looking indicators are not giving us any hope that it's going to moderate and let me be specific on something here too there's two discussions going on same time when will it peak and when will it come down a lot and the one will peak argument i'm still in the camp that we might be very close to a peak in inflation you know whether

8.6 is it or maybe in the next month or two we might see it but i don't think that matters i think what matters is when is it going to come down a lot and that's the problem is that it looks like it's even though it might peak it's going to stick around at unacceptable levels i want to get to the answer of that question your thoughts on that question of when will it come down and what the fed's toolkit is for actually combating that and how effective uh it will be but before we we get there i actually read an article in the the economist earlier this week and uh the tldr of that article it's entitled does inflation matter economists in the public have very different views on the question the tldr of this article is

that like inflation and wages they kind of like you know um track each other and one might go higher than the other but they sort of attract each other and the the main thrust of the argument is that inflation is more of a psychological uh problem than it is an actual in-depth economy uh problem and i'm wondering what you make of this argument the question i have for you jim is is inflation really a big deal like what's wrong with eight percent inflation what's wrong with double digit inflation by the way bankless listeners i'm not myself making this argument i'm stating an argument that the economist made but what would you say about this jim first of all let's talk about what

inflation is it's a loss of purchasing power it means you need more money to buy the same thing you bought previously whether it was last year or last month you know a study came out earlier today that the uh average grocery average uh food item at a grocery store is up 14 in the last year so you need a dollar fourteen today to buy the same thing that cost you a dollar a year ago you're not getting any more value you're getting the same thing so that's the problem with inflation is that it reduces my standard of living the other problem with inflation which i think a lot of people are having a hard time getting their head around

is it affects 100.0 percent of the population inflation impacts elon musk it affects tesla effect spacex but he's got enough money to deal with it but it still affects them inflation affects somebody who's on public assistance inflation affects every single person in between whereas a recession only affects those and i'm not trying to diminish a recession but it only affects those that have lost their job and their immediate family or friends that's maybe five or ten percent of the public when you have a recession and yes that's not good but inflation affects everybody that's why it matters now to the other issue that was brought up in that economist story

there's two types of inflation there's goods inflation there's the type of inflation of what we buy there's wage inflation how much do i get in a increase in my salary and what we're finding with the inflation numbers is with 8.6 inflation but we only have about four and a half percent wage inflation so wages are going up four and a half percent that by itself is a pretty big number relative to history but you're falling behind when it comes to inflation so you are losing ground by four percent because eight four and a half to eight point six you're losing ground and that gap that minus four percent gap between wages and inflation that's the largest

gap ever and i think that's accounts for why you see so many people so negative like in the university of michigan survey they know that they have to buy less things because they just don't have the money because everything is more expensive they know that they're trying to make ends meet because it's getting more difficult right now a new thing you're starting to see is parents don't drop their kids off anymore at events they drop their kids off they turn off the car and they sit in the parking lot for an hour or two because it's too expensive to drive home and drive back so you're starting to see that kind of events or that that kind of behavior shift taking place and this is

why inflation matters it affects every single person usually with markets when i'm used to understanding markets as when there's somebody's a winner on a trade and somebody's a loser on a trade and so like the markets generally are balanced and in this country like what you're saying here is there are zero winners with inflation there are no one is is accessing like no one is taking the dub here everyone is collectively taking that little loss and so like when we see the mark is what you were saying with like the last like 30 to 40 percent of market participants hadn't yet priced in uh non-transitory inflation where are we we're just pricing in just a destruction of wealth

over the next like uh unknown amount of time as in just like the everyone's purchasing power is down our ability to purchase anything goes down our purchase our ability to afford housing is down so what are what is actually the the result of all of these market participants pricing in in inflation like does it what what is the net outcome of this uh are we going is this something that triggers a recession that's bigger than the great recession or are we going into like a capital d depression no i don't think it's going to be quite that bad that it's going to be something like the great recession at least i hope not and i don't see any indications of that so let me let me back up two weeks ago jay paul and janet yellen and president biden were at the white house and

president biden if you saw the the highlights of that or or the the statement they made he basically said inflation is the fed's job and jay you better do something about this and you better do something about this now it's not my job the president united states it's your job jay fix it and fix it now the fed's only got one tool that they can blunt the economy they can hurt the economy by raising interest rates now why will that fix inflation because you'll buy less things i'll buy less things people will buy less things so by raising rates the fed is hoping for what we're seeing in the stock market right now you break down asset prices you create a negative

wealth effect you create a gloom i'll buy a little bit less the demand for stuff will come off prices will moderate moderate they won't fall necessarily but they'll moderate and the year-over-year inflation will come down that's really threading a needle because the problem with that theory is you don't know how much you're supposed to raise rates you tend to overdo it you don't think that a soft landing winds up becoming a crash landing into a recession or something worse there's unintended consequences all over the place especially in a levered financial system like we have now that when you start monkeying around with markets bad stuff happens that you could have

never foreseen so there's a lot of risk associated with this another risk you might ask would be well doesn't that also create unemployment but what we're finding with the job market is go back to the may payroll report which was out the first friday of january just two weeks ago 390 000 people got a job in in may now pre-pandemic that's a monstrous number and there's another report that the government puts out which is called the job opportunity labor turnover report or jolts report and that's just the number of open jobs in the united states there's nearly 12 million open jobs in the united states and there's about six million unemployed people in the united

states so there's almost two jobs open for every unemployed person now of course not everybody is qualified for every open job sometimes you're just not geographically qualified because you don't live in the right place or you're not educationally qualified or experienced qualified or whatever the the reason is but yet the the market remains abundant so the fed looks at that and says oh i could need out some real pain to financial markets and not create unemployment that's how i'm going to get inflation down now why are they doing it that way because that's the only tool they have and that's the only thing they can and the president of the united states two weeks ago just said jay do something about this well he is he's

going to raise rates aggressively he wants to see markets go down he doesn't want them to crash he doesn't want you know chaos but he definitely wants people to be glum and upset because then you will spend less money and that will moderate prices that's such an interesting trade-off it's kind of like going to the doctor with a hurt ankle and the doctor's like okay we're going to take the entire leg off you know that's the thing i i don't have the precision to just fix your ankle so we'll just saw off the whole thing can we talk a little bit about the pain that this is causing or about the unintended consequences one of um your tweets recently uh you shared this this graphic and i'm interested to dig into kind of the bond market here because i

don't really understand what's going on uh in the in these graphics jim and i also you had some tweets recently about the bank of japan i want to dig into that quickly about but highlight some of the unintended consequences for us so you said how close are we to something really breaking breaking i think you're implying in the bond market here are some charts that we're looking at uh in bonds and what i'm seeing here is a blue line which is the 2022 chart which is the 2022 line and this is bloomberg us aggregate index and the number is going down all of the other lines i see on the screen you have to explain what we're looking at here but they're all going up except this one's going

down tell us why this line is going down and why this looks like it's you know different why is this one different than all the others and for the the listeners of the podcast you can't look at the graphic the blue dot the blue line which is going down is going down a lot and it's going down a lot more than all the other lines so there's one line going down and we wanted to know why jim what's this line what does this line mean yeah this is the 2022 story it's the number go down year right uh and uh what this is is this is every year in the bond market back to 1976 and it starts on january 1st and it ends on december 31st this is the total return if you own a bond you get a coupon interest payment and the price

change you know if you net those two together it shows the total return it is showing the bloomberg u.s aggregate index this is an index of 12 000 bonds with the 25 trillion dollar market capitalization in what the line is showing you is that collectively the us bond market has lost 12 percent or 1 8 of its value in the first six months of this year every other line is every other year back to 1976. nothing close to this has ever happened where the bond market has lost this much value this is the worst bond market that we've seen in fact there's some statistics deutsche bank has one that

looks at the treasury market back to literally the founding of the country in the late 17th century and this is still the worst year that we've ever seen so what it's showing is the losses in the the bond market feels like ethan 1100 is really what it is it's that bad in the in the bond market right now although the absolute losses are not nearly as much i like to say about this chart it's down 12 in six months if even a year ago i went to you know all of the the bond experts you know and i would have said what do you think about the bond market losing 12 percent of its the whole bond market going down 12 in value in six months

universally the answer would have been a year ago it doesn't do that so why are you asking well it did and it is right now and i've argued that this is not expected to see this level of loss in the bond market another way of saying that is surging interest rates and because of that almost all bond the big bond investors are banks our financial services firms our hedge funds and they buy this stuff on leverage and this kind of loss is creating enormous pain in the bond market but as we found even in the crypto market too the way that pain see you know among leveraged players tends to

show up is there's not a problem there's not a problem there's not a problem now there's a problem so if you ask me today is there a problem immediately in the bond market no not at this of this moment but if that blue line keeps going down any moment you could wind up seeing that we go too far with it and then we wind up having a lot of issues i can't tell you what the issues are going to be where it's going to show up first the market is too complicated but what i do look for is when you see outsized unexpected moves and the losses in the bond market because of surging interest rates you have to be worried that something is going to really break in the

traditional financial system now the federal reserve is going to raise rates tomorrow 75 basis points now how do i know they're going to raise rates 75 basis points because nick timaros he's the economics correspondent of the wall street journal wrote a story yesterday at 2 15 central 3 15 eastern and the story basically said federal reserve officials are considering hiking rates 75 basis points at wednesday's meeting and the market instantly repriced for a 75 basis point hike why because we all know how that works nick timaros's phone rang and there was somebody on the other

side of the of the phone from the fed and they whispered into the phone blue horseshoe love75 and he said i got it i'll go write the story and that's exactly what he wound up doing so the fed basically pre-announced through the wall street journal and other news media outlets they're going to raise rates 75 basis points and the market is now pricing in another 75 basis point rate hike at the july meeting is which is july 27th so interest rates are going to go up one and a half percent in the next six or seven weeks that blue line is going to keep going down and that pain is going to continue to get worse this is why there's so much glum in the market we see what's coming we know why it's happening

and we seem to be on a path that we can't get out of uh real quick what would get us off this path solid credible evidence that inflation is peaking and falling but we don't have any of that right now so this is why we've got the glum without it we seem to be stuck on this hamster wheel towards higher rates more pain and lower stock prices until something gives one way or the other that would suggest that inflation would fall jim i definitely want to get to back to the inflation conversation because it's one thing if inflation is caused by just a bunch of assets going up in price crypto assets equities assets all of a

sudden there's a lot of money people start spending like there's spending like his 20s right the joke of the 2021 was that it was the roaring 20s but also there's a war in ukraine there's broken broken supply chains there's oil that's at like five six dollars a gallon and those don't necessarily feel like inflation things those feel like commodity price increases so i want to pick your brain as to whether or not because interest rates can't end the war in ukraine so to some degree there's another part of this story that is completely irrelevant from inflation and i want to get there next but i don't feel totally up to speed with this blue line yet because i understand that when interest rates goes up asset prices go down because the cost of money goes up but i'm confused on this where i thought

bonds is like the antithesis to the stock market where bonds the yield on bonds are dollar denominated and so if you increase interest rates you increase the value of bonds and so i'm a little bit confused here where uh i always thought that as you force people into owning the dollar which is what increasing interest rates do you also incentivize people owning bonds where am i misunderstanding here and like how should i think about this so it's called fixed income for a reason that you get a fixed income so if you buy a bond with a two percent if you buy a bond and you pay par which is a hundred and bond and bond lingo a hundred is considered par

and you pay you buy it for a hundred and you have a coupon that pays you two percent a year your interest rate is two percent well how do you get your interest rate then to three percent the price falls the price falls to about 95 94. if i'm getting my math right on the fly then you go 2 divided by 94 you get a 3 interest rate so when interest rates go up the fix the inc the coupon the the the amount of interest you get is fixed it is the denominator that keeps falling that when you divide the two you get a higher interest rate so higher interest rates means falling bond prices and higher interest

rates means that bonds are being actively sold by the way yesterday in the bond market we saw something i haven't found an example for and let me get so the stock market the s p 500 was down four percent it was down nine percent over the previous three days yesterday the two-year treasury yield rose 33 basis points so anybody's in the bond market knows that's an extraordinary move it's the biggest one-day move in 13 years the two-day move was 55 basis points that's the biggest two-day move in the two-year note in 40 years and so you had yesterday both the bond market and the stock market getting crushed

on the same day normally when the stock market falls we use this phrase on wall street a risk off rally everybody piles into the safety of bonds and bond prices rally yesterday they were both getting smashed equally as bad and i've gone back to the 1950s looking at my data and i can't find another example where the stock market and the bond market got crushed as bad at the same time as we saw in the last two days on friday through monday so what it suggests is this whole idea about inflation and loss of purchasing power that applies for financial assets to all of them stock markets getting

crushed bond markets getting crushed crypto's got its own stories going on with liquidations and with celsius but this is also weighing on the market as well too everything seems to be getting crushed as i said inflation's this funny thing it affects 100 of everything and that's why it becomes such a bad thing because everybody gets affected by it there are no safe assets to flee to that's what's crazy about this right now well there is one there is one set of safe assets you can flee to and that would be inflation benefited ass uh inflate assets that benefit from more inflation in the tradfi world that would be gold commodities crude oil and the like but

the reality is is that the vowels on some of the volatility on a lot of the commodities is actually higher than bitcoin right now so you know um i know a lot of my no pointer friends like how can you buy a 70 volt asset well okay then buy a 90 volt asset it's called crude oil at this point it's actually higher than it is so yes you can hide in those and yes people have been hiding in commodities and yes they've done very well but just like in crypto you can buy it and the next the next trade it's gone down 15 a day and that's just the way that they work it's unbelievable the amount of volatility that you see in the commodities markets and by the way you know that volatility is not good for

anybody a lot of the commodity brokers the traditional commodity brokers especially the energy brokers they're basically they're they're they're in big trouble they've already the the european energy commodity broker energy association of um they've already asked the ecb for bailout it's gotten so bad for them as well so this high vol in the commodities markets is not necessarily making a traditional energy broker or grains broker happy as well too their life is very miserable so yeah you can hide in commodities and yes they've been going up but boy the volatility is just off the charts in some of that stuff let's talk about since we're on the

subject of oil let's go into the commodities markets because from what i've gathered energy is just such a huge part of inflation and really the costs on people's lives you already use that anecdote of parents driving their kids somewhere and not driving home to save on gas right when things get that desperate like you know things are really really breaking and the interest rates don't make gas cheaper like pumping more gas and adding more supply to gas makes gas cheaper and right now we have broken supply chains because they've been broken since covid and we have a war in eastern europe so that whole thing is disrupted and so like meanwhile we have the federal reserve it's just trying to fight inflation

but it's to some degree perhaps a significant degree the the costs in in people's daily living their living expenses their cost of food well food gets transported around the nation with energy with oil and so when when oil goes up everything goes up and oil's not going up because of inflation it's going up for external uh and exogenous factors and so jim like when we raise interest rates are aren't we just making we're just destroying wealth but are we actually also destroying inflation yeah well that's that's the thing a couple of things yes you're right a lot of people like to say you know the fed can't print ships as a reference to the supply chain the fed can't print oil

um and so what does interest rates rising so let me take those two at a time first of all with oil what's happening with oil is two things one what you've seen is a reduction in the amount of oil being pumped because of the sanctions on russia russia pumps about 10 million barrels a day of oil they use about five of it for themselves and then they export the other five and there's a lot of sanctions on russian oil so that oil is kind of getting out into the market the indians india will use it um china will use it but they don't they they don't have the infrastructure to get all 5 million

barrels a day out to just india and to russia and the west the problem with the west is an oil broker is afraid to to take cargos that's the phrase they use um from russia because if you if i send a tanker you fill up the tanker and i wanted to go to rotterdam and unload which is a big oil terminal in europe i'm afraid that on route the european union will announce that i've banned russian oil now i got this tanker floating around in the sea and i don't know what i'm supposed to do with it so that's why there's this fear about russian oil right now so that's reducing it but also post covid refining capacity remember we don't put crude oil in our cars we don't

heat our homes with crude oil we heat it with a refined product we turn it into heating oil gasoline aviation fuel kerosene the residual we turn into asphalt and we pave our roads with it so we use oil for a lot of different things so we need refiners in order to take crude oil and turn it into say gasoline well the amount of refining capacity let's go with the us has fallen since 2020 by the most ever we worried about 18 million barrels a day of refining capacity uh in the us we're now at about 16 million barrels a day of refining capacity now why is it falling there was coveted shutdowns that caused refiners to pull back but a lot of the green movement has put a lot of

burdens on dirty fossil fuels okay i'm just as favored as anybody else to clean the planet but now what's happened is we can produce about 16 million barrels a day of oil but we consume about 18 million barrels a day i'm sorry 60 million barrels a day of product but we consume more than that about 17 or 18 million so there's this chronic refining shortage as well so the result is the price has been rising now why does the price rise because we want people to consume less but oil gasoline is in economist terms an inelastic product that means you can't do without it you have to drive to work

you have to live your life if the price of gasoline goes up at the corner gas station you just pay more to continue to live your life that's why it's inelastic it has to go up a lot in order to get you to like those parents to sit in the parking lot for two hours while your kids at a play date or whatever they they happen to be doing as opposed to going home it has to go up a lot to get you to think maybe i don't even want to take my kids to that play date because it's just too expensive to drive the car so that's why the price has been rising in terms of crude oil and you're right energy is the dominant feature in everyday prices whether it's filling up your car the energy it takes to

transport things the energy it takes to make things factories run on energy as well too and a lot of that is fossil fuels as well but let me pivot now and let me answer the second half of your question so what's the fed going to do they're just going to punish everybody in order to try and get them to to spend less in some degree yes that's what they're going to do now why why are they doing that two reasons and the first reason is let's break down the american public forty percent this is comes from the federal reserve survey of consumer finances they do it every three years the last one was 2019 they're going to do another one this summer about 40 percent of the american public has less than a thousand dollars of

savings and they rent when the prices when prices go up they're to be blunt they just get killed they just have they don't they have the same amount of money and they can only buy less things and they have to make difficult choices about what they can and cannot do now the rest of us we own a home we have an investment portfolio it went up and down i'll i'll update myself it went up in value last year you know and so while inflation was a problem last year in the early parts of this year i looked at the price in my home i looked at the price of my investment portfolio and i said okay i'm i'm doing okay even though inflation's going up now that's reversing

by design so that they get us to also spend less money there's one other thing i'll throw out there too there's an organization in paris called the organization of economic cooperation and development or the oecd and the oecd puts together a bunch of statistics they call the harmonized statistics so they look at the inflation rate for every developed country in the world and they put them on the same scale so you can compare them the country with the highest inflation rate of this is just developed countries is the united states we're number one we've got the highest inflation rate in the world historically that is rare the us has always been because it's a giant country compare i mean a giant economy compared

to france or the uk or australia or japan it's a giant country so it's always somewhere in the middle it's never the most it's never the lowest it's never the highest we're the highest right now so why do we have the highest inflation rate in the world the san francisco fed answered this in a study they did about three weeks about three months ago we also stimulated more than any other country we mailed out more stimulus checks and ppp loans and and if deficit spending we just primed the pump and just sent money out the door like nobody else so we've got an excess demand problem as well that's why our inflation rate is so

much higher you point out there's a war in ukraine there's supply chain problems every single country has that but why do we have the highest inflation rate over all the other countries that have the same problem because we mailed more money to everybody we handed out more ppp loans that nobody paid back than anybody else we deficit spent like nobody else did so we gave everybody all this money last year a lot of that money wound up its way into the market you know the robin hood effect and it helped to really pump markets and maybe the crypto markets too last year as well well this year that money is is waning and that might be one of the reasons why markets

are struggling but the residual the echo of all that money has pushed prices up so another reason the fed is raising rates is they're trying to cool that excess demand it's fascinating jim and this is uh just such an education you are a wealth of knowledge my friend so glad we brought you on for this episode i definitely want to get into some of the other global markets their impact you had an interesting thread about the bank of japan and i'm wondering if that's the the ghost of christmas future uh for for the us also want to talk about what the fed can actually do as a result of this and how far can they push things before we get some political backlash as well so there's so much more to cover we're going to get to all of that but before

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[Music] hey guys we are back with jim bianco just a riveting episode getting uh schooled on inflation and its downstream impacts um we left things with uh with two areas that we want to cover more is you know in in our in our quest to go through kind of like what happened and why is everything breaking and what's going to happen next we're going to talk about what's going to happen next but just camping on that everything is breaking for one minute in global markets things seem to be breaking and i know jim you've been looking at the the bank of japan a little bit here's a tweet that i'm showing right now it's a tweet thread meanwhile on the other side of the planet another peg is breaking this one might matter more than

ust more than terra more than luna the bank of japan cannot seem to hold the 10-year jgb at 0.25 percent this despite their yield curve control policy of unlimited buying at 0.25 okay a uh tremor just ran up my spine thinking about an outcome of japan being somewhat similar to luna and the ust ecosystem what is happening here what do some of these terms mean like yield uh curve control how is this like the the terror collapse that we saw a month ago or more so the the japanese the bank of japan um has a a pro a policy that they call the

yield curve controller ycc which means they are going to fix the price of the 10-year japanese government bot that's what jgb means japanese government bond at zero percent interest rate now how do they do that they have a printing press so they will print as much money or mint or burn to use a a term from the crypto space okay as much as they need to peg the price at zero but is what this chart you're looking at for those of you not watching it has a gray band on it they say that they have a tolerance of plus or minus 25 basis points a quarter of a percent for the last two months or so the the 10-year jgb the 10-year japanese

government bond has been yielding exactly 0.25 the japanese have come out and said that the bank of japan that they have they will be an unlimited buyer unlimited infinite buyer at 0.25 percent so that it will never ever go above that price a couple of days or the yield excuse me will never go up and remember when yield goes up that means the price falls so the price would never ever fall the yield would always stay at at least 0.25 percent or lower well the other day it went to two days ago went to 257 and last night it went to 2.2 26.5

so it did go so the price did fall through their floor so at one point it almost seems inconceivable right i have an infinite amount that i'm going to buy at a certain level why would the price ever fall below it well the japanese have doubled down and they're tripling down and they won't let their yield go up now they have to to use a crypto analogy that's their stable coin their 10-year jgb they fixed the price they wanted pegged at 25 basis points their governance token to use that analogy is their currency the japanese yen that's where the pressure comes from trying to hold this

stable if you're holding if the japanese are holding their interest rate at 25 basis points and u.s rates and french rates and british rates and australian rates and every other interest rate around the world is going up but they won't let their interest rate follow all the other rates up the gap between their rate and the rest of the world's rates increases now when you buy japanese yen you just don't get a pallet of paper currencies you invest you do something with that yen i bought some yen what do i do with it i park it in japanese government bonds because they're safe they won't default uh and if i'm not getting a in-kind move up in interest rates with

everybody else that makes their currency less attractive so their currency has been declining what i mean by it's similar to ust and luna is your stable coin is under enormous pressure holding your peg your governance token in this case the yen is falling in price and quite a bit for the yen it's at a 24-year extreme that's how much the yen has fallen and it's putting the japanese economy under a lot of pressure is that what we're looking at on this chart the japanese yeah spot price translate yes yes japanese yes that's that would be like the equivalent of the government's talking

the japanese yen um a rising that is how many yen does it take to buy a dollar so as the number goes up in this case to 135 which is the highest it's been since 1998 takes 135 yen to buy a dollar that means the currency is weakening you need more of the currency to buy the same unit of of a us dollar and the reason it's been weakening is they're trying to hold their interest rates stable when every other interest rate in the world because of inflation is going up and it's making their currency on um more unattractive so it is being it is under attack in that their policy is the problem right now i

don't understand why they have this policy why they won't let their interest rates go up with the rest of the world but as long as they continue with this policy they risk their their pegged interest rate deep pegging and if it depends that would be a big credibility problem for the bank of japan look luna was a 40 or 50 billion dollar ecosystem that had all kinds of problems this is this by whichever measure you want to look at the second or third largest economy in the world which is five or six trillion dollar economy and if you wind up throwing the the five or six trillion dollar economy's bond market and

currency into chaos because you've been trying to hold up unsustainable peg on your interest rates you're going to wreak havoc on a country of 60 million people so this is a real problem right now across the world and what i meant was when markets get stressed every problem they have all appear at the same time so you've got the stock market falling you've got the bond market falling you've got the yield curve inverting you've got the fed getting more aggressive you've got the japanese currency yield curve control under stress and a lot of people would say boy all these black swans are all occurring at the same time no this is

what happens when markets get stressed everything goes bad at once crypto markets are stressed all the bad stuff starts to bubble up first it's terra ust then it's celsius and it just keeps you know it isn't that we just run a series of unconnected events that seem to happen right all at the same time they're all connected that they were weak parts of this ecosystem this would be the tradfight system or in the in the crypto system and when you stress it all the weak parts become a problem at the same time so this is just another one of these problems that's showing up so that what i'm hearing is that not only is our economy under stress uh the crypto economy is under stress the bank

of japan is under stress and like we aren't just talking about uh this particular part of the world just for to satisfy the japanese bankless listeners we are indicating that the whole world seems to be under stress at the moment and so if we zoom out and we aren't seeing like the coincidence of three different black swans in three different spots what we are seeing is perhaps one big meta black swan event like the every single part of the global financial system seems to be finding uh a way to get himself into trouble and so jim when we zoom out and we look at everything holistically what the hell is happening like what is going on like is this one big just like you we started this show calling this a watershed event but that

was mainly with regards to equities bonds and the local domestic interest rate market market globally what are we seeing here is it too is it too grandiose to call this just like the the start the popping of the fiat currency era of the last like 100 years of the global market financial system like what when zooming out how do we sum everything up well first of all real quick uh warren buffett has a great line for that when the tide goes out we're going to find out who's swimming naked right and what happened is the tide went out we found out we're in a nudist colony because there's a lot of naked people out there right now um so there's a lot of naked people out there that have been swimming and that's what we're finding

what is going on in in the in the in the holistic thing there's three letters that we would like to use when explaining the economy dgt demographics globalization and technology for the last 30 or 40 years inflation has been down inflation has been low and we say it's because of demographics aging uh the aging population it's because of globalization that you know you can find you could globally go to find your lowest cost producer and its technology the amazon effect that is causing inflation to squish down okay that's all true and i agree with that as well and then we went on to say

and therefore inflation will be a non-issue forever and we really believe that up until the finance up until covet that we were never going to ever see inflation a problem again well post covid inflation is becoming a problem and we've got it not only here we've got it in and all over the place in fact we haven't even brought up the word europe and i'll just say real quick it might be worse in europe than what we see right now and their their economy is in a much worse position than the us if there is going to be a global recession it's going to start in europe first because they're in a much worse uh they're much

more worse off than we are uh right now with high inflation and at least with weak growth as well we structured the entire economy the entire financial system on the assumption that we were never going to see inflation like we saw in the 1970s again so we were running the financial system with a lot of leverage we were running the economy with things like just-in-time inventory we were running the economy with um uh kind of stars labor markets that weren't very flexible because it was to the benefit of running it with low inflation now that we've got inflation we have to start wondering if everything

is going to change if the financial system cannot run the amount of leverage that it was running before because inflation breeds more volatility if that is that if that is the case then we're going to see lower asset prices we're going to see much more volatile asset prices are we also going to have to see just in case inventory come in as opposed to just in time are we going to have to see reshoring because i can't just go to china or to vietnam and say they can produce my widget cheaper but i can't trust that they're going to be able to export it to me so i better build a plant in columbus ohio or maybe in phoenix arizona which is what intel is

talking about doing to make semiconductor chips now you may say yes and that should be a boom for jobs in the united states it is but it's a lot more expensive and that means that everything that uses a semiconductor which is basically everything is going to get a lot more expensive because you can't go to indonesia or malaysia or vietnam and find the lowest cost producer you're going to have to produce it in politically stable places and and i haven't even brought up the idea of taiwan because the majority of chips in the world are made by taiwan semiconductor and if the chinese were to invade taiwan or blockade taiwan that you know semiconductors might be as important as oil to the economy and if

there's any disruption coming out of taiwan and semiconductors that's another problem that's another motivation for why intel is talking about building a fab plant in columbus ohio as opposed to another one in taiwan so all of a sudden all of the assumptions we built financial markets on the economy on are now under question because if we're going back to a higher more higher inflation environment more volatile environment it's not going to be like it was from 2010 to 2020. it's gonna be a very different environment and we're not prepared for that we've got to restructure the economy that's a nice way of saying that there's going to be big winners and big losers along the

way that the way we thought things worked it's not going to be the way we think things work going forward i don't know what the uh the the term for the opposite of transitory is maybe it's permanent but persistent persistent consistent so this is what we're dealing with it's going to require a great reorganization and i'm kind of struck by as we get to kind of the the last piece of this episode in this explanation of what's going to happen next and kind of how do we fix it everything that you just described like on you know reshoring a chip manufacturing and sort of a reorganization of the economy and like the energy markets these aren't tools in jay powell's tool belt okay the thing he can do is raise rates and do quantitative tightening and here's what

i don't quite understand yet jim is because there is an upper limit to what he can do regardless of what the politicians demand and biden calls powell into the principal's office he's like hey inflation's your problem come fix it right but there are some upper limits to what powell can actually do and the central bankers can do here's a tweet from luke grauman who says the amount of rate hikes or demand destruction needed to stop inflation will bankrupt most sovereigns and i saw somebody ask him this if they want to stop inflation and they can't add more supply then they got to destroy demands that was the case you were making destroying demand right and then luke says they just they destroy demand they destroy tax receipts and those are too low to start with that's

the first piece i want to have you maybe explain for us so let's say powell jacks up interest rates right the problem is not enough capital gains to tax maybe income goes down as well and so tax receipts go down now we have a whole nother problem from a federal government perspective of of increasing deficits uh what are the upper limits to what powell can actually do here given these types of constraints well that is the luke's 100 right that that is the problem and that's why the markets are so glum because they don't see a path towards what we refer to as the soft landing keep in mind too there's there's a political aspect of this that cannot be overlooked let me go back to my forty

percent because even 40 of the people make less than a thousand dollars and uh make in rent all right let me be blind about it right they probably work at the fast food place you or i went to in either earlier today or in the last couple of days are we supposed to turn to them and say look i have i'm a wealthy person with a substantial portfolio and you can't have me lose a lot of money in the stock market because i can't pay capital gains so i am sorry that you're on this minimum wage and it's not keeping pace with inflation but it's better off that i don't get wrecked is opposed to you getting wrecked that won't fly that'll tear the country apart so the point is

they're on a path that they've got no choice that they have to deal with this is why inflation is such a problem as i like to say to follow up with what luke said the mistake the federal reserve made was last year they should have jumped on the beginnings of inflation last year when it was on its way to three percent to three and a half percent and they should have started tightening and they should have started trying to slow things down not let the stock market go up 29 not let the um housing market go up 18 last year uh to to make people feel like this was just great we're going to spend

money like drunken sailors this year is the consequence of last year's mistake and so they've got really no choice like i said i've heard a lot of people say that well the fed can't wreck the stock market what are you going to tell the 40 percent that don't own stocks sorry we can't let elon musk's uh tesla stock fall it's already fallen 40 he's taken enough pain he can't let it fall 50 or 60 that's not gonna work and so this is why they've got no good choices the only tool they have is to try and slow demand and that's what they're trying to do right now with all of these aggressive rate hikes i agree there's a high likelihood that this ends

in tears um and that we wind up with a recession or we wind up with serious demand destruction of course and then the government doesn't have tax receipts it runs a big budget deficit there's a lot of political strife in the country because people are angry and upset that we had to go through this pain in the first place but unfortunately inflation is not transitory it is not going to peak and go away on its own it is going to take some kind of difficult intervention to change attitudes and behaviors to make it go away that's what paul volcker had to do in 1980 81 when he took interest rates he took the fed

funds rate to 21.5 in order to basically slow the economy we're at one percent right now i don't think we have to go to 21.5 percent but it is going to take something painful i don't like it any more than you do i'm just trying to be a realist that this is a problem that we're having and that there is no easy solution to this problem the last thought i give you on this a lot of this i do think is a post-pandemic event if you look through human history every time there's been a pandemic coming out of the pandemic there has been a big structural change in human activity

and we have a big structural change in human activity now we coming out of the pandemic i think the big structural change is work from home remote work i've been you know i tweet about this a lot too because i think it's a big deal about a third of the country now works from home of those that can't let me back up a second about half the country has a job you and me we have jobs where we can work from home above those about a third of them are either hybrid or fully remote um or about a third of the population or workforce is a hybrid or fully remote that is the majority of people that can work from home uh what does that mean what i consume changes i consume more stuff less services why did i consume

services because i was in an office from eight to five five days a week and i needed people to do things for me so i could stay in the office none of them home i buy things and i do it for myself we need to understand that and we need to fix the so why is the supply chain chronically short because we're not recognizing we live in a post-pandemic world the amount of stuff that we need and the composition of stuff we need has changed look at walmart and look at target their stock prices have gotten wrecked because they got this bloated inventory and they said we we target in walmart ordered a bunch of stuff and put it on our shelves that people aren't buying they're not recognizing the post-pandemic world they still think it's 2019. and so let's order the stuff

that everybody bought in 2019 but they're not recognizing that in 2022 we buy different things so instead of having this conversation what does the post pandemic world look like we instead say oh work from home is going to end everybody's going to go back we're going to return to 2019 we don't need to have these big existential questions about what is the new post to com post pandemic economy look like because we're going to return back to 2018 or 2019 just wait this is what is feeding the problems we're having we have to understand this economy is different now that doesn't mean it's bad i'm not suggesting it's dystopian it's this it's just different but we're not ready to say it is how and what do we do

about it that makes sense look i think we're definitely destined for a great reorganization you know and uh you know certainly capital holders will need to take a haircut but here's the piece i still don't understand can i can i throw in something really bullish for you right now because i've been yeah yeah johnny it's been it's been pretty glum so far so we're gonna have a cr we're having a crypto winter right now if the economy is needs to be restructured and things need to change that includes the banking system the payment system the definition of money the public is going to be ready for that why do i need to do this now because everything seems to be fine give them a

couple of years of gut-wrenching changes in that things need to be different and give them a couple of years of recognizing the weaknesses of the systems we had in 2019 and they'll be ready for it when we come out of the next winter that is that's that's the bullish stuff that i needed jim thank you we just got to get there we just got to get there i think there's going to be a lot of pain in between but it's like so here's the p the last piece i i just don't understand so like uh capital holders take a haircut right we have to reorganize it everything there's going to be a crypto winter we don't know how long it's going to be but you know we'll come out hopefully on the other side what i don't understand is how the world governments come out of this so you

mentioned volcker in the 1980s well we didn't have the debt to gdp that we have now right and so like u.s national debt at 30 trillion dollars every 1 interest rate uh rise in interest rate we get more interest payments right so like 1.5 trillion dollars in interest payments how does like luke mention the term bankrupt what does it mean to bankrupt a sovereign like how does how does the u.s government actually get out of this do we issue more money do we inflate our way out of this can you explain that last final piece for me yeah well first of all governments don't go bankrupt because they have a printing press uh so what they could do is they could just have reckless monetary policy to fix it

right well you can't pay your debt sure i can't print up some hundreds in the basement and there you go i can fix my uh problem so they're going to print their way out of it and that leads to more inflation as well or in this case it would be more of a currency devaluation which is a form of inflation um and is it just because all of the world governments are doing at the same time we're all like all the world governments are in a bad position so it's not all the world governments stand together they're all in a bad position because they all had the same assumption going into 2019 we were in a low volatility quiet inflation period and would remain that way forever so we could just like in the in the in the financial markets or in the crypto

markets we are in an uptrend i can lever myself i can do things that i didn't think i could normally do they did the same thing they wound up spending more money they wound up taking on more projects like the green movement and stuff which is which this is not that i'm against it it's just it's incredibly expensive is what they want and they wound up financing it through borrowed money they started to believe well see but inflation will never go up interest rates will never go up we'll be able to afford all of these problems uh or all of these uh solutions that we're trying to do that are very expensive now that we're starting to realize that we're in a different world they're going

to have real problems on their hands in terms of the debt that they've taken on the promises that they've made and yes when they they don't go bankrupt that they go to a bankrupt uh judge and they reorganize themselves like a company does they will just print more money in order to to resolve that problem now what's going to happen this gets back to the crypto winter and the other side is maybe the public will be looking for a different way to organize itself and there is a crypto idea around dowse and some other things about maybe these are different ways we should start thinking about organizing ourselves they're not ready for it now but give them a couple of more years of

inflation and they might be open to this idea of uh you know public goods being you know public goods under a dow they might be open to that idea in a few more years uh if we start continuing to go through this inflation problem as opposed to right now so what is uh what do you think like obviously the worst case scenario the people people have heard this kind of um fear uncertainty and doubt in the market of like you know a 1930s style depression so we've heard that i know you don't think that's the case what what do you think is like what's your expectation for this what's what do you think is going to happen as a result of this so we have the the fed meeting we increased interest rates then what happens next jim and how are you

playing this well so i still think that uh they're going to increase interest rates by 75 basis points tomorrow because they basically told us yesterday that that's what they're going to do and that they might very well increase interest rates by 75 basis points in july you know if i was to go very short term on you the cleveland fed has this now cast thing that they do on their website where they they have a model that they update every single day for inflation and they're projecting another one percent inflation number for june after the one percent number for may and so the fed's going to look at that if that's what happens with june's cpi report they're going to look at that and go we're going to raise rates another 75 basis points so markets are going to stay under pressure

let me give you a f no i was going to say fun statistic but it's not fun statistic a sobering statistic yesterday the s p 500 closed in official bear market territory down more than twenty percent from its january third high we looked at all of the twenty percent corrections back to nineteen twenty nine an interesting thing is eighty percent of the time the day that you corrected twenty percent you are already in recession as a matter of fact it is never actually predicted a recession a 20 correction because when it happens 80 of the time you're in a recession the other 20 of the time you never had a recession the last one was 1987 you had a 36 decline with no recession following it but so

it looks like we're going to have a recession if not already started right now that is going to probably lead to less economic activity eventually higher unemployment a lot of anger and angst will will will take it out in the democrats in 2022 in the midterm elections and then the republicans will be in charge and then we'll get pissed at them and we'll take it out on them in 24 and that's kind of the way that we'll we'll go back and forth with our politics and that's why i said after we've taken it out on both of those sides three or four times we'll be ready for this hey try this dow thing to run public goods okay i'm sick of this way let's try something different uh then at that point so i think you're going to see a period

of of difficult economic activity struggling markets from here oh yeah there'll be bear market rallies and the like but only when we get supply and demand back into balance and inflation starts to moderate and that starts with quit waiting for the supply chain to magically fix itself ask how do we fix it target what is it that you're doing to figure out what people want to buy in 2022 instead of just running out the same things in the same quantities of 2019 and then when we kind of get everything back in the balance inflation can moderate it may not go back to two percent but it won't stay at eight it'll come back down then we could start seeing the economy emerge from this but we're in this

post-pandemic period of upheaval that i think is going to last for a little while longer and believe me i'm really looking forward for the day that this ends but unfortunately that's the way i see it right now well jim i think there's perhaps only one person in the world who can compare bank of japan interest rates to the tara luna relationships who can understand dao's as public goods and talk about how these things are ultimately bullish for crypto and i think that's you jim so it's definitely why we enjoy bringing you on the show and giving us this clarity because there's so few people that can that can extrapolate so such like distant parts of the global markets to what we see here in the crypto world

just one last question before we wrap thing to wrap things up here where should we look for opportunity in all the asset classes they're like of course i'm bullish on crypto i always will be bullish on crypto uh but like what have you how have you repositioned yourself and either your actual portfolio or perhaps just your brain as to like where opportunity still remains in these markets and when there's such like doom and gloom everywhere like what are you up to these days um i'm hiding under a rock like everybody else um i've got a lot of money in um you know the trad five version of a stable coin that can hold its peg which is called money market fund uh you know waiting for opportunities yes i'm losing money on a um on an after inflation

basis because it's paying me one percent in an eight percent inflation world but it's better than losing 23 in the stock market or 16 or 12 or 16 in a bond market or whatever horrific number we've got going on in the crypto market 75 yeah uh i was thinking more like this year it's only fifty percent for uh for year to date yeah but i my point is i'm i'm seeing economic upheaval and i'm not looking at it in terms of asset classes except for i do play a little bit in the commodity markets i own some etfs that are tied to commodities i own some things that are tied to energy and i marvel at every day they move five to eight percent and every day the press

seems to be uninterested in a five or eight percent move in crude oil or energy related products when four or five months ago it was you know breathing through a paper bag hyperventilation oh my god look at what crude oil is doing it's moving five percent a day now it's just tuesday that it seems to be doing that as well so that's another way that i'm i'm trying to play this but i'm looking for signs that inflation is going to settle out at some lower level that we're getting back into balance and then i think at a lower level of all markets i want to pile back in so i'm out and i'm looking for a way to get back in it's this simple way to answer it except for some commodity plays

keeping that dry powder ready and of course i've got i've got a bunch of you know and then to be clear i've got a bunch of crypto plays that are worth a hell of a lot less now than they were last year like everybody else as well too absolutely uh but by and hold has got to be part of the strategy as well uh jeff this has been so much fun we really appreciate you explaining inflation and what's going on in this economy i think everyone has a much clearer understanding of your perspective and uh we're looking forward to having you back soon thank you bankless nation of course risks and disclaimers none of this has been financial advice but we are all signed up for tumultuous times doesn't matter what asset class you're in that is what is ahead of us of course in the crypto

world we know that bitcoin and eth are risky as is all of krypto and so's d5 you could definitely lose what you put in but we are headed west this is the frontier it's not for everyone but