What’s Driving Fed Policy? With Jim Bianco

so this is probably going to be the worst marketing messages of all time that everything you're about to learn at the real Vision Festival of learning the AI Edition is going to be out of date really soon but you need to know anyway that's the crazy world of AI the speed of which it's developing is absolutely astonishing and so is the speed it's taken the public attention and Imagination the hype cycle and already jobs it's a very very big deal I think it's one of the most important things to happen to the global global economy in my lifetime and maybe longer but where is it all going and the honest answer is I don't know I don't think anybody knows but for two weeks we're gonna have a lot of fun trying to find out so starting from June 5th we're going to have the AI edition of the Festival of learning I hope you join with what's going to be an epic two weeks right before we launch real version 2.0 where we are started to plant the seeds towards our AI Journey too anyway hope to see you there it'll be a super interesting two weeks [Music] foreign [Music] policy hi everyone Welcome to the Real Vision Daily Briefing with me today is Jim Bianco founder of Bianca research hi Jim it's great to see you thanks for having me back love having you on a Fed day and boy there's this sort of lot to unpack in this one so we had the decision fed held raid steady for the first time I think it is 15 months but they certainly tried to sound as hawkish as possible at first we saw a stock sell off the two-year yield shot higher but then things sort of turned around after that as we made our way through the press conference so you know just just broadly what's your reaction to what you heard and what you saw in the market you know uh the meeting itself not moving the reaction is is that's pretty much what was expected there was an outlier chance they might do something in well like raise rates but that was a very low probability but higher than normal um the the I'd say that what they announced was super hawkish uh skip because what they did with the dot chart for 2023 is they raised it and so they're saying that there's going to be two more raid hikes this calendar year and there's only four meetings left so that's 50 basis points spread over four meetings all but two of the members of the FED said that they would raise rates at least one more time and the two that didn't said that they're just going to hold steady um in fact one member thinks they're going to raise weights four more times which would be 25 at every meeting um here on out and the probabilities for the July meeting are better than 50 they're at 60. so this is looking like the communication that the FED wanted us to believe was this was a real Skip and that July's meeting you have to pencil in right now a hike for July now maybe we pencil it out in the next couple weeks depending on the data or the FED talk but right now you got to say that they're not done they're going to keep going with interest rates hikes as we move forward yeah that was certainly the impression especially in that initial statement but you know that as they were talking through the press conference um Powell was asked specifically about July right and his answer was a little bit murky and he said well it's a live meeting and that's really the point where you saw the market start to turn around a little bit um thinking okay well if there are two more but they're not willing to say it's July how hawkish are they really and I Oliver just put in the chat do you think actions speak louder than words for the FED that that little yeah in the press conference seemed to give seemed to introduce some doubt in their in their conviction yeah I think so and I think you know my take on it is what came out in a press conference it I think this was a political move I know what I mean by a political move is I think Paul cut a deal with the rest of the fomc I think he had a couple of members on the fomc probably led by Austin Goolsby uh from the Chicago fed who's brand new at the FED right now maybe Mary Daly in the St Louis fed um that we're talking about dissenting if they were going to raise rates at this meeting and so I think the deal was we're all going to agree that we're going to pause or skip this meeting for now but that the rate hike cycle is not over and that wishy-washy came through in the press conference and I think the market interpreted that as they're not committed to continuing to raise rates uh I'll push back on that and say no I think they are committed to raising raids I think what one of the things that came out sort of indirectly in the press conferences you know oh you guys have raised rates 500 basis points and that's a lot yeah and there's very little evidence that that has hurt anything stock market's back at a 14-month high uh you know the economy I like to joke that the problem with the economy is there is no problem with the economy we're still churning out 300 000 jobs a month this economy can handle five percent uh if rates can handle probably six percent rates and I think that that's really maybe even higher and that's really what we've probably got in store for ourselves is that the uh so I think that the pause or the skip whatever we're going to call it uh today was really a political move he just didn't want to raise rates with a bunch of dissents and then have to go through that agreement because that's the way the FED I I disagree with it but that's the way the Fed works that they like to make sure that everything is a unanimous decision or as close to a unanimous decision as possible yeah certainly certainly lately Powell's been trying to do that and he's been very successful at it for the most part so this is this is where I think it gets really interesting and there's a lot of disagreement and there's a lot of disagreement by the way within the FED it looks like which which I want to dive into him into a minute so do you think if that's the conversation and there are a couple that wanted to dissent do you think that's right does it look like the economy is way more resilient than anyone thinks or or forecasts a short time ago it's sort of that that line that Larry Summers has been talking about in others is that the camp that you've Fallen Jim yeah I think that there's two there's two answers to this question and the first answer is as of June 14th today we're recording the economy has been very resilient it has beaten on the payroll report 14 consecutive months which tells you when everybody's always wrong in the same direction every month that they're missing something that there's underlying strength in the labor market that they're not quite getting their head around which is why we've got these consistent misses and that the economy is showing very few signs of the recession that everybody thought we would have by mid-year back in January remember back in January the consensus was by the middle of the year we'll see definite signs of recession well we're at the middle of the year and there are no signs of recession um right now so of course the recession forecast has been pushed off to Q4 q1 and they'll just keep perpetually pushing it off so yes the economy has been very strong will it stay that way as we move forward this gets back back to what I said before we've raised rates 500 basis points I think a lot of people are in the camp that that's going to hurt and Jay Paul kind of intimated that in a conference too we've done a lot of work we've got to wait and see what what kind of effect it has monetary policy works on long and variable lags and so that's really where they're really the the fault line is with the debate the only problem I have with it is we should have already seen some signs of real slowing in the economy because you could have argued they did 300 basis points of rate hikes as of eight months ago and how come we're not seeing those effects on the economy just yet so this is really where the debate is going to come in as we go through the rest of the summer if we don't see signs that the economy is really slowing down we're going to start talking about six or seven percent on the funds rate and that gets me the second point it also matters as to what is important is it the inflation rate or is it the real economy now a year ago we were having a debate because we had the first and second quarters of the of the uh year negative GDP was that a recession and a lot of people I was in the camp that it was and I still kind of think it was from a technical perspective but I understand the argument that it wasn't because we never had any negative payroll or anything else along those lines didn't slow the FED down they were hiking 75 basis points a clip during that period what's that tell me they only care about they only care about inflation so maybe the economy goes into recession or maybe it doesn't but if the inflation rate does not start to move towards two percent and boy did Jay make that clear I'm sorry for going in recession just deal with it we're hiking rates and that's kind of the that was the mentality last year and that that could return as a mentality as as we move forward so the real question might be the more important question might be uh what What's the next move for inflation exactly and you answered the question we started the show with which is what's driving the fed and they made it pretty clear that it is inflation that is the is the main focus right now so this is this is very interesting because if anyone's surfing around I know Christopher you caught um Jeffrey gunlock from double line was on uh talking after the FED meeting and very much taking the office side of the argument saying listen the economy is weak what are they talking about and rattled off I'm too deeply negative leading indicators are weak ISM new orders are in recessionary territory the yield curve is negative and he thinks that the FED is doing the same thing they did at the start of this with inflation and they are looking at lagging backward indicators they're looking in the rear view mirror and they're not focused on sort of more real-time high frequency data and they're going to go too far that's facing the fed or are we just not seeing more signs of recession that sort of gun lacks indicating well Jeff's right on everything he said about the real economy and I mean I'm not that far away from his thinking I'm saying that up until June 14th it's been okay but yes there are some indicators that it may slow down but it also comes down to priority so let's just assume he's completely correct if the inflation rate does not moderate to two percent so what they're going to hike rates but if the inflation rate does moderate moderate to two percent then they aren't going to high grades and uh and I I think what gets lost is Jay pal says the same words at every press conference for the last year and it's all the boilerplate at the beginning that we ignore and maybe we should they're committed to getting inflation to the two percent if we don't get inflation down it is going to the economy won't work for everybody we understand the hardships that inflation puts on everybody let me translate this that half the country lives paycheck to paycheck half the country has no savings if the inflation rate stays above wage growth they lose they buy less things every year at the store because the their paycheck cannot keep up with with uh Rising prices J J Powell understands that and he's saying I've got to get the inflation rate down below wage growth and all you rich people and let me Define rich people you're watching me on real Vision because you've got some kind of savings or interested in financial markets take one for the team that's that was the argument last year that argument May return as we move forward if the inflation rate doesn't come down and so that's really I agree with Jeff it's just more about the priority is the priority the FED inflation or is real growth and I think it's more about inflation and I think he he said as much at one point when he was talking about underlying economic growth and he was sort of saying because somebody asked him how you're upgrading your growth prospects and yet we're talking about higher rates he is and uh or you know talking about some of the other things that seemed inconsistent and he said stronger economic growth doesn't matter if you're seeing that eaten Away by inflation so that's why the concern about inflation so you're absolutely right Jim I mean it's one of his exact words but it was it was something to that effect that that that inflation is uh the the concern the worry that is going to hurt people especially at the lower end of the income let's dig into why we keep seeing this persistent inflation though and does does this have something to do with also this divide between people who are better off and those who are kind of living more paycheck to paycheck or let's call it like most of the country um right because it's it seems like if you're if you're Jeff and you're looking at the traditional ISM new orders all of these indicators which would track or forecast where inflation's going we haven't really seen that happen it seems like inflation is what is it the services area that's keeping it elevated where's the stickiness is it wages is it the labor market so there's a couple things about the inflation rate and I've argued this even on this platform here that you know the fancy word is we're in a post-pandemic economy we tend to Discount what an epic event it was to completely shut down the global economy and then restart it and then pump in massive amounts of stimulus to try and keep the everything afloat it is going to Define that event in 2020 is going to define the economy for the next generation and it is and one of the things I think it's done is it's changed a lot of things about the way the economy works the biggest one is and this is my hobby horse I talk about all the time work from home I do not think you can discount how epic that is on changing The Narrative of the economy and I'm careful here I'm using the word change I'm not using the word worse it's different it's an apple it's not an orange that doesn't mean that one's worth first and the other and it really shows up in two places one I've already mentioned and that is you know most of the labor forecasts on Wall Street are always wrong in the same direction that there is a different kind of labor market that we've than we've seen probably In Our Lifetime if not at least our career and we still have to get our head around that and it also showed up last year and I I'd like to remind everybody a year ago we were at the beginning of 22 we were stuck with that second lockdown or second slowdown because of omnicron I'm the crown faded then came the summer of 22. this is going to be the big reopening after Omicron all of the retailers were really ramping up for everybody's going to rush back to the store because everything's going to open what do we put on the Shelf same thing we put on the Shelf in 2019. what happened to the retailers they simultaneously had gluts and shortages at the same time because what did they learn peoples tastes people's basket of goods that they buy not only changed but probably permanently changed why because normally before the pandemic I was home you were home two days a week Saturday and Sunday now I'm home four days a week Saturday Sunday home two days in the office three that doubles the amount of time of home I'm at home guess what that does that's changed my lifestyle that's changed your lifestyle that's changed everybody's lifestyle there is a friction a stickiness the economy needs to be restructured it needs to be brought up to date for the post-pandemic economy now what's the problem the problem I'm going to lay the plane on a bunch of big banks in New York the because if there is an industry that does not believe in work from remote work hybrid work it is Big banks in Manhattan they want everybody back in the office you know 11 hours a day six days a week that's what remote work is for them uh you know like it was in 2019 and they think that that's the way that the rest of the country is going to go and so therefore they're leading the charge to tell everybody don't change anything just just wait it's all going to go back to the way it was and the longer we take to understand this the longer this friction this out of balanced economy now it doesn't mean out of bounds doesn't mean it's going to be slower a recession but there's this mismatch is going to manifest itself in higher prices I've used the analogy and others have used the analogy after World War II that we we the big difference was in 1946 and 1947 everybody knew everybody understood the economy just changed we no longer going to be making p-51s and Sherman tanks anymore we have to restructure to a consumer economy but in 2023 where only some of us have said you know what things have changed and we have to restructure the economy but there's a significant voice saying no it hasn't you just wait everybody's going back to the office 2019 is just around the corner and so it is showing up as sticky inflation core inflation if you look at the last six months of core inflation and J-pop brought this up it is averaging five percent over the last six months this year that is completely unacceptable for the fed the FED likes to say that the neutral rate of inflation is half a percent above the inflation rate well then that means 550 is neutral if that's where the core inflation rate is and he said that's what they follow core inflation that means that all these rate hikes we haven't yet get to neutral yet we have not been restrictive yet on this economy we're just afraid that we've raised rates so much and if we can the banks a few months ago that if we keep going it might be worse so we have to really get our head around this idea that the economy has changed inflation is a lot stickier than we think and that the when the FED does resume raising rates and they're giving every indication they are that they're going to keep going and unless you tell me that the economy gets so bad that it brings down the inflation rate that's not going to be enough to stop them so that that's such an interesting and I and I love that you're willing to say things are different because I do think we're it we're in this period where everyone's kind of trying to peer in and make a determination uh I want to ask you a question but I just realized I forgot to remind everybody that Wednesdays are now extended daily briefings as you know we've been telling you um and what a great day to have one on because I see your questions and we're going to get to them if we go past the half hour you need to be an RV member so I'm giving you some time here to scan and jump on a trial so you can do that with us join our community um so Jim if if that is true and things are changed I think this is a really really important point and probably something the FED is really trying to get their wrap their head around why is a structurally different a different economy a work from home economy more inflationary at least right now why would that be I mean at the time we heard maybe oh people are going to work from home they don't have to commute they can work anywhere including low low cost States maybe employers will pay them less I mean there was an argument maybe it would be disinflationary why is it inflationary are we not sure where it's going to settle it's just inflationary now I think it's it's a structural what I mean by structural thing is that we go to work and we churn Out product whether it's a Services product a Goods product and we expect that the economy is going to consume the products that we churn out at the rate it always has it's not we're simultaneously getting gluts and we're getting shortages right you know a year ago the shortage was in goods and the glut was in services and now that is flipped we've got a Glide goods and we've seemed to have a shortage in Services which is why we have such high Services inflation we're not in Balance now not not being in Balance doesn't mean that we're going to have a recession or a depression or anything we're out of balance and really what it's doing is it is skewing prices more to the upside than the downside once we've restructured the economy got it back into bounds so we make stuff in proportion to the way that we consume it then the inflation rate settles back down and goes back to something like it was pre-pandemic but first we have to restructure the economy that's a lot of money and that's a lot of time that is a a big change in the economy that's coming and we've also got you know this Prospect of AI and Technology coming down the pike as well that could very well lead some of that restructuring in the economy that will be like I said simultaneously it will be both a structural problem and then eventually a benefit so what I'm trying to say is I think the inflation rate is going to stay higher for longer now higher for longer is three or four four and a half it's not 10 or 12 or 15. and that the FED is going to look at this and they're going to say you know what five might be neutral seven might be restrictive and when the economy goes into recession we're going to cut the four or three there's no more zero left in this economy there's no more one percent or zero when we have a reset actually not enough funds rate or one percent when we have a recession in the funds rate it's we're going to go back to four or three or maybe two and a half and that we need to start to understand that that is the environment that we are in right now yeah move it back to equilibrium which by the way some people would say a return a return to more historically norms and even that sounds low if you look really look back I I really appreciate the way that you explain that Jim because it almost sounds like a type of supply chain problem but within our own economy where you're seeing things that are you know creating these choke points that are contributing to this which I think we can all understand and I certainly can think about different parts of my life where I've seen that um and then and then other parts where you see things loosening up but but it's it's kind of hard to get your head around because it doesn't seem to make sense so think of it this way there's been a shift in demand you and me and everybody else we are buying things we're still buying things in different proportions than we did in 2019 because there's been a fundamental change in our lifestyle the supply chains the economy needs to make more of some things make less of other things what we've learned is that the supply chains especially are so brittle it is very difficult to change them it is very difficult to go all the way through the supply chain and say you know what they want more of this and less of that so quick make a change make less of this and make more of that it's not so simple it it is it is not so simple at all you know a great example of this was from six months ago or four months ago when we had all of the the the the the Strife in in China around the zero covid and everybody was focusing on what happened with apple and whether or not Apple would leave China uh um and move their production of iPhone somewhere else and the Wall Street Journal and a bunch of others did investigations of the supply chain to make an iPhone and they really came to the conclusion that no one really understands it it is so big it is so vast it is so complicated that if Apple just said that's it we're out of here we're going to make all the iPhones in India and we're not going to rely on any more Chinese Parts it would take 15 years and they would be constantly discovering some other thing they didn't participate that is made in China the point is it's so brittle and so inflexible that it's really difficult to change but what the pandemic did was it made a change in our demand and in our tastes and in our desires and for the economy to catch up to that is going to have a period of elevated inflation as prices are out of whack yeah Peter and Christopher I see your question I just wanted you mentioned AI so I just want to sort of underscore that because this idea that there are these massive changes coming at us some of which are very hard to predict is something we've been talking about for the last two weeks you know those of you watching that we've been in the middle of a festival of learning AI Edition we wanted to zero in on this topic for this very reason Alvin Foo was part of that series uh this week talking about when web 3 and AI Collide um and really kind of Express the concern that even if the economy remains strong we are going to see layoffs in some areas but not others and trying to wrap our heads around that let's listen to a clip from that I think the job that is that that that that won't disappear a job that requires human touches human touches right something to do with uh nursing as an example right something that you need to provide care right right anything that needs you know creative in design right you know maybe you're hair stylist or whatever that maybe I think these jobs right they are very resistive because you still need that human touch right but but again as I said these are what these are repetitive in nature but you still need that human touch so any job that requires human touch I think you're safe and I think you are safe until they find you know they find robotic technology that can they can that can you know you can blend in with AGI maybe but even then I still think you know nothing beats a human touch that full interview from Alvin and what happens when web3 and AI meet is available on our website if you have not signed up for the Festival of learning or you're not a real Vision member just scan the QR code or click one of the links that Brian will put in the chats uh and hop on over they've been amazing conversations uh just today uh we did ask you this session about Ai and investing um and there's one coming up tomorrow about how to use AI to scale your business so uh you're not wanna you're not going to want to miss that um also remember in a couple minutes we're gonna we're gonna switch over for members only as well so come along with us um so Jim how are you thinking I mean we're gonna Circle back and get in some questions about the restructuring that you just identified now later on AI on top of that how are you thinking about technology I mean is labor is the labor market going to track the business cycle or do we have this sort of wave of AI that will have a bigger impact on jobs oh I think AI is going to have as big an impact on the economy as the creation of the internet itself it's going to be epic and of course two things can be true at the same time you can have an epic change in the economy because of an innovation wave or a technology wave and you can over hype the tech stocks and you could wind up seeing you know them get way ahead of their skis we saw that 99 and 2000 we over hyped online retailing we over hyped the internet and then throughout the 20 uh you know throughout the 2000s all the way to 2010 2011 post financial crisis you didn't make any money in those stocks but the internet online retailing fulfilled all of those promises I think what people fail to recognize um and Alvin's quote talking about the human touch is that one and new technology comes we make the same mistake over and over again who's going to lose their job and how are companies going to how are companies going to use this to increase their profit margins really you've got to say with AI is the following whose business model has now become irrelevant and what there's going to be 20 or 30 million jobs in whole industries that do not exist today that might exist in 15 or 20 years what industries are they going to be in and who's going to benefit from those Industries and whose jobs are going to be displaced now you're going to ask me who where how I'll just give you the example in 2007 when Steve Jobs held up the iPhone one I have the 13 now but when he held up the iPhone one raise your hand if you said that's the end of the taxi business within three years no one had any idea that that meant that that was the end of the taxi business but it what it did was it didn't create a payment mechanism to make the margins of the taxi business be more more efficient it completely rewrote their business model I've actually argued this year that the in that mobile banking apps have completely Rewritten the business model of deposit taking for banks it's not just made it cheaper because now you don't have to go to the branch and they don't need to have as many branches or as many employees if their business model has been completely Rewritten business models are going to be Rewritten up and down the line um if you want one example if you want me to give you one example I think the biggest loser loser in AI is going to be the law industry I think my understanding of lawyers is about 80 of them do stuff that artificial intelligence can do all we're really going to need is negotiators and litigators which is maybe 20 percent of the lawyers out out there but the rest of them that do real estate closings and write contracts and stuff like that that could be done by AI That's one example of of something that could be completely restructured now does that mean that the law schools are going to have to close no I think what it means is they're going to have to completely change their curriculums and find something new in order to make themselves relevant otherwise they will have to close so this restructuring AI is going to be is going to be big and the final thought I'd leave you with um I'm in Chicago and up in Northwestern a friend of mine is Robert Gordon he's a professor of economics and he's looked at the history of uh techno technological innovations hey what do you find is almost every technological innovation is a net creator of jobs not a reducer of jobs that whether it was busy calc inventing the spreadsheet or the automatic teller or Uber they all wind up creating more jobs than they destroy because they create whole new Industries is what they wind up doing yo busy calc got rid of the accounting clerk but created the financial analyst as one example so I think what you're going to see is you're going to see like I said 20 to 30 million jobs are going to be created in in industries that do not exist and some of those Industries may not have been thought of yet kind of like uber from 2007 after the invention of the iPhone one and that is going to then take entire businesses right now and it's going to tell them you know um Larry Frank was out today and he basically said he's my one of my favorite whipping boys you know basically AI is going to make us more profitable no it's going to change the business model of BlackRock and if you think all you're going to do with AI is buy a couple of uh Nvidia disks and have it run your customer service to reduce your mod to reduce your profits you're missing the point it's going to take the business model of BlackRock and turn it on its head now that doesn't mean that BlackRock can't evolve with that but they have to start thinking that way most businesses are not thinking that way um you know so we've gotta we've got a ways to go with this and this could be very disruptive and or exciting at the same time and I and I think both but that is a hugely there's a that whole that whole thought I think is hugely important and is a really good way to think about this and I like it because it's also kind of leaning into the opportunity but we're all going to have to adopt and we're all going to have to embrace change otherwise we're going to be become Obsolete and certainly the companies that we work for and that's a it's a really challenging time because change is not easy corporations don't always find change easy so this is going to be um this is back to by the way if you've been listening to the festival Peter diamandis on the first day talked about exponential companies and you either are one or you will die like a dinosaur I mean this was exactly his point that everyone has everything in this way he's written some fantastic books bold and abundance are two of his books I could highly recommend them he's a big fan of his work yeah and and exponential companies uh by the way now lives online 2.0 um with Selene Ismail is online because they don't want to publish it because things are moving so fast I mean that's you know you've heard me say that for those who've been listening over the two weeks but it's incredible okay we've come to the half hour we are not going to go we're just gonna start to answer the questions that are coming in Fast and Furious for Jim um and we have a bunch of them so if you are not a real Vision member even if you're a subscriber on YouTube if you are not an RV member um hit the code jump on a trial and join us because these are really important conversations and this is an important part a juncture in the market because it's very confusing even even to some professionals who disagree

Channel: Real Vision

Views: 19,288

Keywords: real vision finance, real vision tv, chinese, stocks, bitcoin, equity, equities, nasdaq, consumer sentiment, consumer prices, inflation, chinese tech, chinese tech stocks, china's tech crackdown, fed, federal reserve, the fed, taper, fed tapering, fed hikes, rate hikes, interest rates, bonds, treasuries, investing in bonds, raoul pal, 2023 markets, 2023 recession, 2023 inflation, realvision, ral pal, raoulpal, portfolio management, AMa Raoul Pal, Raoul Pal 2023, raul paul, raoul paul

Id: jw-gHydDRso

Length: 34min 33sec (2073 seconds)

Published: Wed Jun 14 2023