Bianco & McCullough: Investing In a Fed-Fueled Speculative Mania

hi i'm keith mccullough welcome back to another real conversation with jim bianco one of the best pros in the business who made a call uh last month a call jim that i wanted to start with first uh welcome and and thanks for thanks for making the time but i wanted to uh just actually start with that because when people make a call on wall street they you know typically blow it up to just the headline and they don't actually go into the details of what you actually said so what i did was god forbid i actually read your note and uh i got into oh the risks part which again a month ago in this in in this day and age it's like it's like a dog's life but again everything's moving pretty quickly and fluid and i don't think you've you've ever made a call in your entire career where you wouldn't have risk management components or caveats but can maybe go back to a month ago where you said hey look you know i don't i don't even know if it was a capitulation or not in terms of you know relative to your reviews of the fed but maybe just you know start with that and then we'll go from there well let me start with what you mentioned about with risk risk components of it as well you know my job i'm um i'm a market forecaster i'm not a money manager so i talk to money managers all day long and so part of my job is to pontificate and part of my job is to help them perform and what i was trying to say in that call was look the fed is printing money it is working investors are co-investing with the fed it is pushing markets higher does that end badly yeah maybe someday does that create male investment in distortions absolutely but it's pushing markets higher so on the perform part of your job it's going up and if it's not going to go up it's going to be very supportive of the market at at least a minimum and that's what it has been for the last month as the covet cases have gotten worse the market is kind of held together which i think normally we would have thought it would have sold off so that's what i was trying to delineate was this idea that if you if the bed is going to continue to print money and push for a while it's going to work now ultimately i don't believe it's going to be good for the long term that's the pontificating part of it but the performance part of it is that it's going to go up i'll conclude with this idea that um there's this i i idea george soros is pushed that he wants to invest in a bubble he actively seeks out a bubble because when you push your money into a bubble that's how you make a lot of money real fast look at what would have happened if you've been in tesla the last two weeks through yesterday's how you would have been up 80 percent or so now of course getting out is a problem and maybe calling it bubble means maybe calling it a bubble means it's going to end badly i get that but that's the risk you have to take with it but the fact of the matter is if you're going to stand on the sidelines and pretend that it didn't go up 80 percent in two weeks you've missed an opportunity so that's part of the there's the pontificating part and there's a performance part of it maybe you want to call one long term or short term sure you could do that but that was kind of what i was trying to delineate last month in early may when i first started uh making those noises yeah and i want to definitely get into the bubble part because a bubble's not a bubble if it isn't a bubble i mean it's taken me a good 20 years to get used to that uh concept and again shorting bubbles on valuation is clearly idiotic from a performance perspective so you know i try to wrap a risk management process around that and not ignore that they exist because if they didn't exist we wouldn't call them what they are but but just back on like okay jim bianco's in the bear camp like i've tried to teach people particularly since covet hey it's not just about stocks you know it's not like this davey day trader thing you know there's a bear if you're making if you're in the bear camp for certain you know factor exposures in stocks for example in the last month um you know the financials are down six percent industrials are down six percent russell's you know on its ass uh down 19 and a half percent from february you know but if you're along the nasdaq you know it's up 27 if you're along tesla like you said it's up 80 in five days um so so when you there's that component of it it's not just the stock market there's sectors and factors but there's also the other part which is you know if if you're in the bear camp on growth well okay that's one thing you'd be long treasuries and gold i think you'd accept but i mean if you're bare if you're bullish on growth you'd be shorting gold in treasuries for example so maybe take kind of all that together because i try to get people you know not just in some kind of concentrated basket of tesla stocks obviously right i you know you're right on that i mean you know where are we keeping in mind that you have to kind of delineate the market from the economy the economy has definitely shown signs that the the recovery is stalling now i'm not saying that it's going back down but it was recovering nicely the recovery seems to flattened out quite a bit coincident with the uptick in the covet cases as well too interestingly we've been doing some work on looking at some of the mobility data the dallas federal reserve has an interesting index of mobility where they take everybody's mobility data and index it together as one and there's a high degree of correlation between that or the areas of mobility whether you're talking about state or city to its cova case count in other words the public seems to um uh you know kind of uh self-shut down themselves these governors can argue all they want about whether or not they should be rolling back to phase one or phase two or whatever this is but when the public sees that their city or their state has an increase or decrease in covet cases they seem to react accordingly and since we've got more covet cases coming up the economy seems to be flattening out so if you're in the growth camp yeah there's a problem that you're having with the uh the economy seeming to stall you're right that's showing up in things like the small cap stocks it's showing up in the value stocks it's showing up a little bit more in the banks that they have been struggling more but when you get to the raciness of the davy day traders and stuff and base tend to wanted to run in the technology space in the fang space in the nasdaq 100 space those stocks keep plowing higher they also have the benefit too those nasdaq 100 uh fang names of also being it lumped into the category called stay at home right as well so they've got that benefit going too so they're performing not only because they're all running into it but if you're going to buy a stay-at-home stock because you think that the recovery is flattening out well here's a facebook and here's a netflix and here's an amazon they happen to fit that category as well too so the economy what it's doing is is somewhat consistent with the market if you peel back you look at the struggliness of small cap stocks or value stocks but everything gets dominated by the headline of five or six big fang stocks and that seems to be driving the bus on everything right now yeah so if you take like and again i think if you go back to the i don't think anybody in rate of change space would say that from certainly from the march april lows which ostensibly now we have a full working force of wall street proctologists that called that bottom um i think you and i just talked about it in terms of okay what does a recession look like you know jobless or profit list recovery there are a lot of fundamental factors away from just the rate of change of corona or covid but kovit the the the case count had decelerated all the way up until and people's most importantly their perception of it i put up a chart on that yesterday i think it was from pew or one of the different uh independent research places that took their polls but you know that that's actually the first week of june is where people's optimism on the rate of change of case count and kova being a problem had had actually accelerated to its most optimistic point and that's where the the bankruptcy trading accelerated to its most optimistic point you know there have been two buckets that you would go buy if you're davey day trader you go buy hertz you know because it can go from one to two uh or you go buy pizza i guess that's another bucket or you go buy or you go buy you know one of the five stocks that equate to 40 of the nasdaq like to me that's what you have to separate right now which is that other piece yeah when growth's slowing i buy the growth that i can find the 40 of the nasdaq but you know in case count terms you they haven't been buying if you look at the return on the airline stocks since june the 8th it's been a disaster yeah the market is really it's really stalled at that point and it's been in my mind it's been somewhat surprising it's even held together as much as it has yesterday's high uh the uh the s p 500 was basically back to the june 8th peak and before it sold off at the last hour of the day so it's been holding together as this case count uh keeps uh falling and that's going to be i think the fits and starts that we're gonna have throughout the rest of the year uh because really this economy is really uh the economy worldwide is about one story it's about recovery okay we had a shutdown we had a big wave of cases now we're recovering does that get stalled out because there's a second wave or continuation in the first wave whatever you want to call it is there another wave in the fall or as well too because that's gonna be a problem because if you really cut through it i mean you know you could take and look at the case count you can look at it two ways you can be political about it and say oh it's republican governors it's protests it's uh trump or whatever you want to say or i think you could take a more scientific approach to it and say look what they all have in common the case counts is indoors in march and april when it was cold in the north everybody's inside and the case count rises in july when it's 120 degrees in arizona everybody's inside and the case count rises which suggests that when fall comes in the north we might see another uptick again that kind of mentality is going to really i think really hold the economy back and start getting people to start thinking about the way that they behave and invest and whether or not we have a recovery to the extent that we hope we will well because on that i mean i think people really love the idea of having jim bianco in the camp of like um hyman or somebody who just takes like i call the secant line and says well the bottom is here i never really called the top but i know it was the bottom because i call up markets all the time and then i just go at some point in time and i call that a v-shape recovery well what you just said at a bare minimum is a w uh at a maximum in my world it's multiple w's and they could happen weekly so you know right right like so so that's the that's the part of it too where like i sit here and i think about all the other risks because again we're really focused on one thing when the reality is that there's the profit cycle the job cycle the election cycle which i know you have thoughts on too um you know it markets can get quite risky when you're really zooming in on on one factor as you know and not considering you know the multi i look at it fractally right i mean there are multiple dimensions fractal dimensions and and durations and factors to be considering all at the same time yeah you know i'll take it one step further that you know evolving in my thinking here i'm getting close to the idea to thinking that that the also the other thing to keep in mind is the case count and the virus count for the economy might be close to the end of the line in terms of its impact on the economy and what i mean by that let me be clear what i mean by this is that you've shut down so much of the economy you've impaired so many people to whether paid their lease or pay their rent or to get their job back that even if you had the magic bullet that came through and the magic bullet would be a vaccine or cure that it might not help the economy on the margin if if my restaurant is months and arrears and i've been out have been closed for three or four months uh it's it's easy to say yeah we got a vaccine i'm not just going to call everybody up and get the band back together in a week and away we go like it never happened the damage has been done and you can't be undone by a vaccine and that might also start to become a story in addition everything else that we move forward too is that so many people have been so disruptive our lives have changed so much if we get a vaccine are we all going to get back on the long island railroad and start commuting back into manhattan or are we going to be saying no you know what i kind of like this work at home thing maybe not every day but maybe you know two or three days a week and then my employer might say oh okay well then i guess we only need half the office space that we need in new york city because we've got half of our employees working at home every day that's not going to be changed because of a vaccine and so there's going to be some permanent effects of this even if we do get beyond this covet thing and i think largely those permanent effects are going to be a drag on the economy as we start to transition to whatever we were in 2019 in early 20 to whatever the economy is going to be in 21 and 22 and 23 because it will change uh even if we get a vaccine and that change will initially mean a drag first but then it'll be an opportunity after that yeah vaccine to me like to me okay whatever i i don't know i mean that's like to me it's occam's razor it's going again finding a simple solution to a complex problem we can go off on that but it's also macro tourism at its core i mean people react viscerally to this market not empirically so when you um again if we just go back what you really need is a vaccine for jobs and profits i mean so how do you kind of go back to your um you know because again i think the one thing certainly a big thing we have in common is our view of the corporate leverage cycle relative to the corporate profits that or lack thereof that are underneath this thing like how does does that just go away because the fed bought a bunch of corporate bonds or etfs no it doesn't i mean you know the problem with this market is it's overvalued it really is by almost every measure it's overvalued the debts there's too much of it right now full stop that really is the problem but as long ago come back to what we talked about earlier as long as you've got the fed you know pumping and pumping and pumping at least for now it will hold the market together by the way what ends this you don't just kind of jump to the end game is there's one entity out there that's larger than all of the central banks and that is the collective of the market itself when the market itself has decided that what the central banks are doing is bad it ends it ends it almost immediately how does the market decide it's bad inflation if you get inflation if you get malinvestment that leads to inflation then the market will shut down these central banks will shut down the fed quickly now we don't have inflation right now uh i suspect it will be a story in 21 or 22. i don't think it'll be a story this year but i do think that it with less people working reducing the supply of stuff we make and all the stimulus that we're giving everybody whether we're sending you checks or 600 bucks a week or or propping up the market to holding together wealth effect stimulating demand that should push prices higher and we should see some level of inflation by the way i'll turn the question around real quick let's say i'm wrong we get no inflation between march and august the federal government and the central bank will either have borrowed or printed four years of tax receipts in five months and if they can do that and all they say all they produced was jobs higher markets no inflation all pleasure no pain then we're full-blown mmt you could cancel the irs we don't need to raise taxes anymore congress can send their bill to the fed they can print it up and away we go why would you know that's why i bought one of my big pushbacks is jay pal says yeah we're using these tools and then we're going to put them back on the shelf when the crisis passes well if these tools produce a bad outcome inflation you're going to put them on the shelf forever if these tools produce a positive event no inflation good things they're never going back on the shelf right this is going to be the way that it's going to work forever and i'll give you a nice antidote i tweeted out yesterday a takahashi kirikawa it's a name you've never heard he was the bank of japan governor in the 1920s and the ministry of finance had like our treasury secretary in the 1930s in japan and in his era what he did was he was a man ahead of his time he was pushing the idea of getting off the gold standard of cutting interest rates to zero of having the bank of japan finance the deficits of the government this was in the 20s and 30s helped to pull them out of the great recession using the same tools we're using today in 1935 he came to the idea late 35 that the crisis has passed and it was time to put this tools on the shelf and he proposed budget cuts and rolling all this stuff back in february of 1936 he was assassinated so keep in mind that putting these tools away is going to be a lot harder than people think that they're going to be it's very difficult to undo this stuff well it's it's i mean look i mean there's wall street and i like we were talking before this uh live conversation we're both at home or are clients people cios pms the people that make decisions you and i have the very uh obvious thing in common is that we're not running money but we're trying to help people run their money uh with with different things in mind and and the reality is that that's a very different world that we live in jim you know relatively speaking you said you have your kids from new york your older kids now adults at home it's like the the world that we live in relative to the world that what i'll just affectionately call the people and i mean that quite sincerely that's a very different thing i mean the pew survey yesterday said how do you feel in america 71 of people said that they're angry there it is actually i don't know if you can see that 71 percent said they're angry 66 that they're fearful and 17 of them admitted that they might have some pride i mean that's people are pissed and and here's another chart from this morning like you saw the cpi numbers you're being counter like me food and medical costs like they're up six percent in a straight line like if you don't have a job the only thing worse is having to pay more for your food and to protect the health of your family i mean that's why people are pissed off jim right so that's like this part of it with the fed like i i think it's shameful what obviously what what powell said or blindfully ignore or willfully blind uh on ignoring that or just talking plainly like i just did about it i know that pisses you off too but i mean this isn't a this isn't just like uh everything's gonna end and a bed of roses for everybody when everybody's pissed off is it no it's not and that's why i said you know there's the perform and then there's the pontificate yeah i think what the fed is doing let me pontificate now i think the bigger picture what the fed has been doing for the last 12 years has been the leading edge of exacerbating the wealth inequality right all the fed is capable of doing at this point is pushing asset prices higher that's my perform part look i recognize they're going to push them higher but what they're doing is you're taking the top 10 percent of the pop of the public which owns 90 of all the assets in this country and you're helping to help preserve their net worth is what you're doing right now the other 90 especially the bottom 40 percent uh we've given them some tools and some ideas 600 bucks a week extra in their unemployment a 1200 stimulus check that kind of stuff but what's congress talking about right now they're talking about doing away with that right okay i understand that that's fine i don't have a problem with that but i think what they should they should make the announcement is you want to do weight to 600 bucks a week uh in extra unemployment and i think that's not a bad idea i think maybe august 1st you should tell the fed that all your programs are done too as far as supporting the market you know let's kind of push it on both sides of the equation all at once don't keep prompting the prime and pushing the s p up and then tell everybody you've done this on stocks well you're off on your own because we don't want to have a disincentive to you going back to work but we're happy to give everybody a disincentive in investing by telling them that there's a floor on the market that it could never go down because we've got this printing press again what ends this is inflation or something bad when the market collectively says what you're doing is wrong it ends but right now what the market is saying thank you jay for making it easier for me to make money that's where the market is right now it won't be there forever but it is there now it has been now for almost four months and i think it's at least in the short term going to continue that way well you're i mean on inflation first of all at least i would consider it and i rarely will use this number but a hundred percent mathematical certainty that headline inflation bottom there's you can't get any lower than a negative oil price and by the way cpi today was already up to 0.65 percent by the time we lap the negative numbers it's going to be up a lot you know on the on the surface area of it all but it's underneath that pisses people off it's that chart that i just showed you i mean it's the guy like my dad swinging a hammer you know after his shift work trying to make a living so that i could you know play hockey or whatever incremental he wanted to do as a family you know he's paying lumber prices are up 38 in a month in a month like one month but he doesn't get to sell the house for a higher price all the time you know so it's like um the people are eating it in devalued dollars and i can't explain that in any other way this looks like not like 2011 when bernanke was outright lying about it i mean the dollar was he got the dollar to a 40 year low the crb commodity is indexed at all-time highs like there's no inflation you wouldn't even talk about the dollar but i could see it on twitter every single day that's what i love about it because there's normal people out there there's some abnormal people obviously as well but there's a lot of people that you know that understand the concept you work for dollars or you don't have a job and if you do work for dollars your dollar is being devalued and the cost of living is going up that's inflation it absolutely is inflation you're right because the inflation mix is definitely been pushed down to the things that people buy like you said food medical those types of things building materials like you've mentioned that you start to see inflation also what's also happened to kind of go bean counterish a little bit here they have these baskets of things they assume you buy x percent of this why percent of that you know z percentage of this but in the pandemic your purchasing basket has radically changed yeah you are buying you're not spending this much on certain things and you're you're buying a lot more of other things like eating at home you're buying a lot more from the grocery store uh and those prices are going up but they haven't changed those basket percentages now in fairness to them it's a little bit hard to do that because of the way that they've got that set up but this has also been going on as well too so the inflation story is definitely out there and the inflation story might be coming it might be coming back in in some way and don't forget the other big one too if you believe the uh stories right now there is a mentality among people in large urban areas that we have to now move to suburban or more rural areas and there's a bid for houses in suburban or more rural areas and so now if you're if you've decided we need a lifestyle change because of what's happened let's move a little further out where it's a little quieter and it's a little more spread out those house prices aren't coming down they're not coming down at all if the stories are are correct so it's you're feeling a little bit more trapped in your current situation because your house which might be more urban is not going to get garnered the bid that that that that more suburban house is going to get so that mobility that you're hoping for over the long term is going to get going as well too and this runs completely counter to what every economist has told us keith for our entire career right what kills what kills housing uh unemployment because if you don't have if you don't have a job you're not going to buy a house oh but the last thing we would have expected is at the moment we have the highest unemployment rate since the great depression that we actually have this giant bid for houses right now uh as well too so everything is so s i want to say screwed up because it's not the way that we would expect it to be uh it's been very difficult for people to get a handle on it as well too and that's not even getting into the concerns about you know health and safety because of pandemics and everything else so yeah it's been a very trying time well i know on housing i mean i think that's just on your point on inequality and it's very well taken i mean it's the mobility of capital rich people want to get the hell out of a big city and then go buy a house there's a boom town in in westport connecticut and as much as i'm sure there is right where you're sitting and it was like a 10-year basically no bid on homes and that's that that's one thing i think what and people this is what people have loved about you for a long time jimmy you actually and when i was on the buy side that's what i loved about your work is that you actually spoke english i mean so thanks for doing that i mean i don't need some phd wonk discussion at this point in the in the game i want to have a real conversation about what's really going on like what a guide slide 74 just to show a slide on what jim said because there's so many things that jim says that are actually they're empirical facts now if you could put a picture on it and you had to have other people that talk jim have a picture on it they would look a little off because what they're saying doesn't look like the chart so you know when you look at i'm just trying to call out side 74 guys that you know core or however you want to define inflation versus expectations of inflation on the right side you know that's consumer inflation expectations there there has never been a wider gap than that you know so again people aren't stupid they're not as stupid as the economists want us to believe that they are and and i think that that's um i think that's just what it is by the way slide 75 is the quad 3 stagflation on food and medical prices again jim these are like these are the charts that make people go bananas or at least get 71 percent of the people say that they're angry so that's i i i think i think we're on the same page on that point what do you think on the election like how does this what i'm saying like as you can see i'm kind of which i don't like to always do but i do because i'm a former passionate canadian hockey player i guess i just feel stuff when i talk about this stuff i think it's okay but do you think people are feeling something different about the election versus what people would have been buying stocks on six months ago yeah i think that you know on the election i'm gonna give you a preface that my my remarks are based on that i follow the the betting markets the predicted the london bookies quite a bit okay and as as a as a quick definition i view them as real-time polls they just aggregate all the information we know into one probability yeah they don't have any special knowledge so the bottom line is trump was doing well until about april and he has fallen off quite a bit that's part of the anger i think people are mad at him because what also didn't happen at the same time was biden didn't really surge it was trump fell yeah now you hear a lot about uh trump is eight to ten points behind biden in the national polls 100 percent true and the but the problem with this is we vote on an electoral college map we don't vote on a popular election trump biden is going to win california by 25 percent he's going to win new york by 25 he's almost assuredly going to win the popular vote even if he loses just like trump lost the popular vote four years ago so this comes down to about 10 states you know wisconsin michigan pennsylvania north carolina new hampshire um florida arizona uh and a couple of other states comes out about those ten states biden's lead in those ten states is three points not eight to ten right so it wouldn't take much for trump to bottom out and have a resurgence to really make this a horse race right now so yes biden is leading yes trump has been having a terrible six weeks but he's i don't think he's as far behind as everybody thinks he is biden appears to be a placeholder because even with trump falling off he can't get above 50 percent it's trump's numbers go down which will makes the gap open not that biden's numbers go up the good news for the trump administration is is that people are not gravitating towards biden they're just mad at you you if they're mad at you you can make them unmad at you if they think of you as this charismatic person like obama in a way it's impossible to overcome something like that but you can make them unmad at you now he could not execute on that that's always a real possibility that he won't be able to but it's within trump's ability to kind of come back on this race even though he's behind because remember this is really only about 10 states is what this is about yeah here in connecticut i'm in illinois our states are done we already know they're going to vote democrat there's nothing that's going to change that we know you know places like in the west from utah on dom you know kansas they're all going to vote republican a lot of the south is going to vote republican california is going to vote with democrat you don't have to spend a penny to pay um you know polling or you don't have to spend a penny uh campaigning in those states just have to focus on those 10 states and it's a lot closer than people are are making it out to be in those states so trump is behind but he could definitely come up and like i said if you would if i was to lead away if you were to look at your your your surveys your pew surveys of how people are getting angry and stuff if you were to track that it tracks trump's approval rating very closely right because the president is a proxy for that and that's what like i said people got mad at him uh but you know there's still four months to go and maybe he could find a way to make them unmad at him yeah a lot of and again this is why you're so valuable to me and my former seat or the people that you and i talk to every day because you're making me think about things that i don't i didn't think about i mean i i clearly don't think a lot about uh politics but i mean the rate if i just put what you said in rate of change speak the rate of change of anger for trump basically is peaking and the rate of change of his gap to biden um could could start to narrow that's all you need to know and you got you got time and space in between here and there and that changes the odds at least more so than a consensus might expect correct betty the betting markets are showing exactly that that uh trump bottomed out or bite and peaked out somewhere around late june so it's been about two or three weeks now and uh trump has been inching back you know he bottomed out around 38 chance of winning the election he's inched back to about a 42 percent chance of winning the election biden is around you know 59 60 or so to win the election and by the way quick on that one if biden was really eight to ten points ahead and he was really at like one of the record gaps to an incumbent president ever recorded he should be trading 85 to win the election right now he should not be trading 59 or 60 to win the election so the betting markets are showing the aggregate of the opinion is yeah you know biden's ahead trump's behind but it's not as far as you think and that there is still a chance at 42 or 40 to win the election you know you that's not stunning the universe to come back from that and win an election but you are below 50 and you are behind in this race he was trump was 55 to win the election back in february and march so he has stumbled so there is no doubt about that but uh you know the commentary i i hear uh charlie cook of the cook report basically has just announced the election's over trump has already lost it he should still lose it but it's far from being over right now yeah and that's you know for the market and the volatility of the market most importantly as it relates to my selfish concerns that's that's what i'm thinking here is that those odds changing on this topic too um do you and just reading his tweets i mean yesterday he quite literally i had to give him a canadian hockey chirp there when he when he quite literally you know tweeted about the market and all caps being great and jobs being great the the latter being alive but the the stock market i mean the nasdaq at that point when he tweeted it was quite literally yet it's an all-time high tesla was up 16 on the day it's kind of like those kind of contrarian intraday ooda loop fades that i look at but i mean but i mean isn't doesn't he just need that is is that it like does he think that that he needs a stock market to go up and if it goes up his probability um rises that he doesn't lose yeah you know his tweets about the market the fed support of the market all come down to a very specific thing and that's the wealth effect let me let me be specific on this you and i and a lot of people watching this podcast think that the market is supposed to reflect the economy the fundamentals that's why we hire analysts to tell me tell me the state of the economy tell me the state of this company and then i'll compare it to the price to see whether or not it's overvalued or undervalued that's the way we think it's supposed to work trump's tweets the way the fed has been reacting by supporting markets by buying corporate bonds buying etfs they're saying exactly the opposite right now what they're saying is that if you push the market up it will create jobs in gdp to support it so in other words the economy is supposed to support so reflect the market not the market reflect the economy so when trump gets all excited that the stock market's making new highs and that the fed is is is in there buying corporate bonds what he's trying to say is if you get the market up it will create jobs it will create gdp it will help my election chances now it's not supposed to work that way this is the problem it's but everybody thinks jay powell thinks it works that way well you remember our our buddy uh larry kudlow he used to say you know is as clear as the sun rising in the east it's a king dollar and the mother's milk of stocks which is corporate profits right well now you have neither it's definitely not those i mean i haven't heard larry mentioned either of those two things in a while to put it in it put it more spelunkly what they're saying is the market can never be overvalued ever ever because whatever level you you put the s p of 4 000 put it five thousand put it six what that'll do is it'll just create more jobs it will create more gdp to justify that level that seems to be why is the fed putting a floor on the market why is the fed trying to push it up why does trump get so excited because they think this will lead to a better economy it's supposed to reflect the economy it's not supposed to cause the economy so yeah trump is wrong in that thinking i think in terms of thinking about the you know in all caps of nasdaq's making a new high but to his defense everybody thinks that way right now and that that that's the way that they think a lot of a lot of wealthy people think that way yeah i'd like to take that vacation i just need the nasdaq to go up another thousand points and we can make you know buy that new car and we can take that vacation you know that that's that's kind of got this upside down but that's the whole mentality that's driving everybody right now yeah and it doesn't mean by the way there have been some very successful and grotesque human marketing programs where if you repeat the same lie over and over again people start to believe it's the truth so we get that um i don't want to get into that what i want to ask you a pointed question on this too and by the way if you have questions for jim pop them in the queue we have those being voted on right now uh one do you believe in the plunge protection team and two how coordinated uh do you think this is between not only the fed and the treasury or pump and mnuchin as i actually like to call them and and the fed uh i know you have thoughts on that piece but the buy side like i mean the things i'm watching at two in the morning i've never seen in my life yeah so so two parts of that do i believe in the plunge protection team um i'm going to define that is there a group in the in the government somewhere or at the fed or the treasury sitting around a bunch of bloombergs barking out uh futures orders at 2 30 in the morning or or 10 o'clock in the morning to try and support the market no i don't believe that that's the case at all um if anything all right i'll put my tinfoil hat on for you the way it's really supposed to work is a lot of central banks around the world do buy us equities the swiss national bank does the singapore national bank central bank does as well too maybe they call them and tell them to buy them maybe probably not but is there a plunge protection team that is interested in supporting markets it's the 11 programs that the fed has started between buying commercial paper and buying etfs and buying corporate bonds and buying fallen angels and buying ppp loans and municipal bonds yeah that's exactly what it's supposed to be uh as well too and in in being in conjunction with the treasury to do all of this if you want to define that as the plunge protection team then yeah you could definitely define it uh that way that there is a plunge protection team at a minimum there is an outward government interest in putting a floor on falling markets we saw that in late march and we saw what the results of that has been yeah you definitely see it like i mean it's clearly to me it's painting the tape pre-open i mean last night for example the the spoos moved 12 handles in 15 minutes on no volume it's like oh you go to bed the futures are down you get up they're up they're up and they're always up and then cnbc picks up on the narrative uh whatever story they need to tell themselves that day that that's that's why they're up i'd actually go with davey daytrader's explanation more so than them i mean because it's they're up cause they're up that's the answer um yeah i don't think you know my letters he likes to say yeah yeah uh i think he's there kind of a guy like i actually kind of like i mean i think that you and i wouldn't be accused of not being like um main street type people like as human beings you know yeah i've just set aside like the the hyperbole i i think it's that's it's more interesting to me than certain people on tv talking about stocks he's he's perfectly fine you know and his story is you know he keeps referring to the suits you know when he take off her jackets yeah exactly he's made this into a class argument as well too and basically at the heart of his messages you don't need an expensive underperforming active manager to invest your money you can do it yourself is really what is the heart of his message and i think that that is really what gets a wall streets higher up more than anything else no no no no you're supposed to put your money in my in my hyphy fund that's the you're not supposed to trade these stocks on your own for no commission yeah and that that might be more bothersome because i've always argued when people argue to well the davey day traders it's gonna end in tears for them okay it very well might it very well might but doesn't it end in tears for the active manager for the same reason you know it's not gonna be that the dave portnoy stocks and all the top 10 robin hood stocks are going to fall apart but somehow the xyz mutual fund is going to not be impacted by that the xyz mutual fund is going to fall apart with it just as well as everybody else is going to fall apart with it as well too and lastly i'll give you a fun statistic we've been tracking this now for a while since april 1st if you bought the s p on the new york stock exchange open and sold it on the close since april 1st it has collectively gone nowhere it's literally zero game if you bought the clothes and you bought if you bought the clothes of the day at the nicey and then bought the next days open in other words overnight yeah yes he's up 570 points overnight so this has not been a good day trader market to be in because the market doesn't do anything between 9 30 and 4 p.m it happens at 2 a.m is when all the action happens uh as well in this market and that's really unusual i've looked back 30 or 40 years in the data and we've not really seen a period like this as much where all of the action is occurring overnight as well i don't have a good explanation for you on that i've got some theories but what i do want to say is this has been a difficult day trading market because you know unless you're holding them unless you're holding them for multi-days which maybe a lot of people who call themselves day traders are actually doing but if you're a true day trader been a very difficult market to be a day trader in because the action doesn't occur during your time slot it occurs when you're in bed yeah or where you have a any sophistication or tools to execute in the pre-market anyway that's why the cash has traded like you said uh last thing i just want you just triggered something in my head once again you know doesn't it create and then we'll go to questions but doesn't it create an ironic i guess maybe not so ironic standoff between like if davey daytrader stands for the people and you got the old wall or affectionately and the fed and and your active managers with the fees on the other side doesn't it create this interesting and eventual inevitable collision between the two if this stuff if this stock market starts going down on the individual guy then then everybody's in bed at the same time together and they're all pissed off yeah exactly i think it it it does it does create that that tension uh between them so when my friend ron and sonic keeps saying that these these day traders it's going to end badly ron you might be 100 right but it's going to end badly for everybody is what it's going to end badly for it's not going to be anybody else and the other thing i find that's very interesting is when you listen to um a lot of um of the active managers bill miller was on a podcast recently the lake mason manager and he he he said that all of these robin hood traders and the davie day traders he said they're trivial in the market well a lot of these a lot of these robin hoods they they sell their order flow to these order execution firm citadel being one of the big ones citadel came out last week and said that retail orders now are somewhere between 20 and 25 percent of all of the trading in the new york stock exchange it's a quarter of the trading that's not that's not insignificant now maybe there's some institutional trading that's larger than that that makes up the other 75 percent but 25 is not insignificant in terms of what they're doing for these markets they matter they matter at the margin as well too so these people that keep wishing or hoping or jealous that they want this retail thing to end in tears it's first of all it's important it's important at the margin and second of all if it does it ends in tears for everybody and if if if partnoy's message is you can do it without the suit doing it for you it will create a lot of animosity it won't end in tears with the expectation of me as mr retail trader i will never do that again i should hand my money to some high fee fund it will i'll end with they screwed me and i'm going to get even with them yeah and that was what that's the fear that we have with with what's going on with this retail market they're not going to just stay conclude that they're out of their league they're going to conclude that somebody somebody did it to them and then we're going to have real problems on our hands then if that is what happens so this is somewhat dangerous what could be happening here in terms of these people wishing that this market would go down and wishing that they would that portnoy did his comeuppance because again it hits everybody if that's what happened well that's the grinder on the street that's the american capitalist portnoy and and i salute him for it i mean you know no offense to ron and sana but you know it ended in tears for him when he tried it on the buy side at sac and it you know there's a lot of people that have institutionally not been able to make money for a long time and guys slide 4 just just look at the flow of it all and showing hedge fund aum against against passive etfs etp's ets fully loaded you know the game has changed dramatically and the game if you're playing it like a hedge fund manager like i was in the early 2000s has changed big time that that's that back you used steve cohen back then you got big block trading going on you know people with big ideas and hedge funds pushing around stocks and it was all on fundamental research i mean that makes sense but that game is gonzo so if you say that prior to this which is interesting with your number you know prior to this eighty percent of daily trading as i'm sure you well know it's 90 on some days with a higher volatility with systematic trading quants again rules-based trading not individuals so so if you take a big clip out of that replace it with people that people are being talked down to is oh you don't know what you're doing i mean i'd equate like that to like playing in a men's league hockey game in the sixth division where people can't even skate like i could die because i don't know what they're going to do you know i don't know a guy could come up to me and chop out my teeth and then step on my neck with his skates and probably do by accident but guess what i'm dead and he's still playing you know so it's it's an interesting thing you know it's you gotta you gotta understand that it's dynamic and changing you know you know and keep in mind keep in mind you know going back to insana um uh portnoy got mad at him it's a great it's a great antidote portnoy got mad at him and he pulled out a scrabble bag one day and he shook up the letters and he pulled letters out to buy a stock and he happened to pull out rtx which is raytheon and he bought raytheon stock and i tweeted out at the time i said look if he limits himself to three letters or less he's going to be buying a new york stock exchange listed company that meets the qualifications for new york stock exchange listing so why is that any more irresponsible than buying spiders which just buys the 500 largest stocks on the s p you know you know it it isn't really that much different and i know that that's really upsetting to a lot of professional managers because it's true it's really different it's true you know you know and and and so and that has become the game that we've been that that he is exposing i i still think that the reason he has become so popular and is and this thing has got the ire of everybody is because it it it is showing them in a light that they don't want to be shown at and your last thought for you you're right that the game is over for a lot of these guys because in this world you've got zero commissions you can buy fractional shares if you look at the platforms like robinhood the teslas and the amazons are booming well there's a three thousand dollar stock in in amazon yeah but you can buy a tenth of a share at 300 dollars right and now there's now there's etfs with zero fees or one or two basis points of fees so if i've got 3 000 bucks or 5 000 bucks i can buy an etf that maybe charges one basis point or two basis points of fees for no commission and if i don't have enough money i can buy a fractional share of it as well so the old line high fee open-ended mutual fund and the old line high fee active manager they're in a secular decline they're they're not going to pull out the only way they can pull out of this is if somehow they could do something that they've never done in their history and that is actively show that they can beat the s p 500 which as a group they can't uh and so therefore it's he is exposing that and asking why wouldn't you do it this way why wouldn't you open an account buy a handful of stocks you own a couple of broad-based etfs for no fees no commissions fractional shares if you don't have enough money and just design it yourself and be done in five minutes on your phone as opposed to the old style way and it's the old-style way managers they keep saying this is gonna end badly this is gonna end like leon cooperman and stuff like that well yeah i i think this is a different era and he's just reflective of the era that we're in yeah a hundred percent i i i like i like davey daytrader i i have no ire for that guy i think he's awesome uh and again if you don't like the game go play a different game is the way i think about that let's just get you know one last thought for you too on this um every story i've read every um measure i've seen of all of these day traders is something else to keep in mind most of them are actively not everybody but most of them are actively betting with money that they can afford to lose they like gambling so you know what that means the prudent man rule is out the door if i if i've got money i can't lose i i it's like i'm it's like i'm in vegas right you just get drunk and just go crazy and you have a good time so this money is uber aggressive so why does hertz go from one to six why are the airlines booming that cruise ships are booming why did tesla go up 80 in two weeks with the robin hood crowd you know kind of plowing 40 000 new accounts a day into it and stuff like that because they're betting with money they can't lose and so therefore even if they're 20 25 of the trading in the market they're so aggressive with their turnover their influence might even be bigger than that as well too so i think one of the biggest mistakes professional managers make maybe because they want it to be this way is they say oh no this is trivial this is it might be happening but it's not very important it is important it's not the dominant factor but it is important and to dismiss it is to overlook an important aspect of the market today i think that's a very good point i wish more people made it maybe they will they tend to make your points after you make them jim i've seen that over the history of it all too this question is a question i get a lot and actually peter's saying that you know both you and i turned into bulls i mean to be clear i'm on gold treasury's tech um commodities that's not bullish on everything um bearish on financials and the russell but um you know jim do you think that do you think that fundamentals actually matter for asset pricing anymore are you convinced that liquidity is king uh fundamentals will matter in the long term uh and to con to quote bernard baruch the market could stay irrational longer than you could stay solvent so ultimately that's that pontificating versus performance argument as well too that yes over the long period of time the fundamentals will matter the growth of the economy will matter the level of inflation will matter the price to earnings ratio of whatever stock you're buying will matter but the liquidity is so abundant right now in the market and it is so powerful in the market right now that this will take center stage has for the last four months will over the next short term but like i said you know i don't want to play uh by standing on the sidelines screaming that that's bad that a stock went up 80 percent in two weeks i want to try and i want to try and play it is what is is what i want to try and do so yeah it does but uh don't expect that between now and august 1st or labor day to basically kick back in but ultimately over time it will matter okay good um jim you're one of the first to fear kovid 19 and and its effect worldwide and on markets and and you should you deserve a big hat to obviously for that i'd give you that too um what is your projection on its economic effects from now and the balance of 2020 is is the risk on yeah i think that you know the the thing about covet as we move forward from here i'll go back to what i said before if this is largely understood if we cut off if we cut out all the politics about masks and republican governors and protests this is an indoor disease and that basically whenever groups are inside whether it's hot in the summer or it's cold in the winter when you're inside is when you see the increases of the disease uh and uh in the longer we take to understand that this isn't going to go away anytime soon now the good news with this disease is that it's not as lethal as we think it is but it is serious just because it's not lethal doesn't mean that we we we need to dismiss it as being non-serious that is going to create a continual concern about the economy the inability to have large gatherings i look i'm dying for some sports here please start baseball again or something as well but that's going to be difficult to do in this environment and as i said before ultimately what i fear is as we go four months five months six months into this kind of semi shutdown period where everybody's affecting their behavior based on covet counts in their areas and these businesses struggle and struggle and struggle and fall further further in arrears and rent payments and lease payments and unemployed people that they haven't called back in two three four months or so it's going to be hard for these companies to just reboot even if there is a vaccine oh okay now there's a vaccine my restaurant's been closed since march call up everybody let's get back here and we'll be open by monday doesn't work that way it doesn't work that way uh and so that's going to be a real problem so yeah i definitely think this is an indoor disease it's going to continue to stay in the south and then you know in the fall move to the north unless we get some kind of silver bullet either through a cure a therapeutic or a vaccine i have no idea uh whether or not any of those will happen we'll see but as that continues it will continue to drag on the economy and what i fear in my fear we might be close to it we're going to reach a point where even if we get the vaccine it's not going to matter because these companies will have permanently been altered anyway and they're not going to be able to come back and then we're going to be talking about restructuring the economy even if we get a vaccine i know larry cuddle i love larry but larry i understand you want to say that there's going to be a vaccine and there might be and then we're going to snap our finger and it's going to be december of 2019 all over again uh where i don't think we're going back to december 2019 even if we get a vaccine we're going to go to some different kind of economy and i want to use the word different not bad but different there will be some sectors that will lose there'll be some sectors that will gain eventually over time but it won't be the same and i don't even think as a vaccine can fix that all right that's an interesting contrast to what kudlow's been saying that's for sure i don't think he's well known for his covid timing at this point but uh i said it you didn't so don't worry about that uh last question i think this is a good one to end on because um i know what my answer is to this or what uh one of my answers is to this question but i'm really curious this is yours this is from george in pennsylvania what would it take for the fed and treasury to lose control of this thing oh you know uh i think what would take it is inflation and what i mean by that is if you were to see a general rise in prices you know let's go to ed yard denny's famous you know bond march bond market vigilante argument when you get inflation and by the way we haven't had it nearly 30 years to any great degree we've had episodes of it where certain sectors have gone up but a general rise in prices then the the message is to all fixed income investors worldwide get out get out now and get out hard and that would overwhelm the fed that would overwhelm all of these policies that they have again i think that's a 21 maybe 22 story coming not so much this year as well and as they get out you see yields rise you see their inability to control the markets keep in mind the fed has a two percent inflation target on core inflation and why is that important because the minute we start to see inflation they're going to start you know taking bowels yes that's what we want this is good this is it this is what we plan for our policy is a success and then it'll keep going and going and going and then they'll try and stop and it'll be too late there's an analogy for this in 1989 the last day of 18 1989 the nick guy peaked at 39 000 the japanese stock market in the index peaked at 39 000. the ministry of finance and the bank of japan all said there was way too much speculation in the japanese stock market in late 1989 so they encouraged policies to reign in the speculation their stock market fell 10 15 in the first quarter of 1990 and they were all out there taking bows yes that's what we want we want to get rid of this speculation it's good it's healthy that the market's going down and stuff and then they've spent the last 30 years trying to make it stop going down is what's been happening so be very careful when you get that thing you want you might get more of it and harder of it than you ever believe they thought they only had a little bit of speculation in the japanese market if we take that out we'll be okay then they realize their whole market was built on speculation they had the emperor's palace worth more that there's three or what there's uh five acres of the emperor's palace was worth more than the entire state of california in 1989 well there's a lot of speculation in your market and when you start ringing that speculation out be very careful because you have a problem when you start getting inflation the initial response you'll hear out of the central banks is this is exactly what we need and well we haven't had it in 30 years and then they'll spend the next decade making it try to go away it'll be like the 70s all over again at that point if they're not careful but first we got to see whether or not it materializes and i'll give you my caveat one last time if i'm wrong there's going to be no inflation well if you can print up four years of tax receipts and just push power markets higher give everybody their job back and create no inflation then why do we need the irs let's just go full mmt and let's just you know just go all the way in on this so either way this policy the fed has is either going to profound consequences because it's going to produce a bad outcome in inflation or i think it has profound consequences that it produces a good outcome and then they can never put it back on the shelf and then they just keep going and going until they get that bad outcome i think is is is where this is going to go you can't stop this remember 12 years ago chairman bernanke said oh qe that's unconventional policy we're only gonna do it for a little while and then we're gonna put we're gonna put that to a way here we are 12 years later doing more of it than we've ever done before they've tried to stop it we had the taper tantrum we had to blow up in the fourth quarter of 18. they can't get out and i think this is what they've got with these policies the only way out is when the market rejects them and maybe that's coming next year well you know uh yeah i think we call spade a spade i think to bernanke you and i would be davey daytrader by the way there's an iron that this associated with that comment uh but i appreciate that you're not like a fed fanboy and you understand both sides of risks and that that was an awesome answer and thanks for uh i thought it was an excellent conversation as well so thanks for thanks for making the time thank you enjoyed it all right he's jim bianco he was on fire i love that conversation it was a real one that's why we have them if you want to tune in to the next one we will uh we'll be marketing it somewhere on twitter sometime soon thanks for joining us [Music]

Channel: Hedgeye

Views: 24,563

Rating: 4.8720002 out of 5

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day

Id: gW4tUpxtQGI

Length: 60min 27sec (3627 seconds)

Published: Tue Jul 28 2020