Lead-Lag Live

Navigating Rising Yields

• Michael A. Gayed, CFA

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The financial world stands at a critical juncture as Treasury yields approach 18-year highs and markets wrestle with conflicting economic signals. In this riveting conversation between macro strategists Jim Bianco and Jay Hatfield, hosted by Michael Gayed, we explore the counterintuitive relationship between Fed policy and market reactions that has left many investors scratching their heads.

When the Fed cut rates last September, yields went up. This paradox forms the backdrop for a fascinating debate about whether higher rates might actually be the cure for higher rates. Hatfield advances his "Hopfield Rule"—the observation that housing starts falling below 1.1 million units have preceded 11 of 12 post-WWII recessions—suggesting we may be closer to economic trouble than many realize. Meanwhile, a 20% drop in oil prices this year has created what Hatfield calls "stag-deflation" rather than the stagflation many fear.

The conversation takes a surprising turn when examining market influences. Bianco reveals that retail investors purchased $4.1 billion worth of stocks in just four hours following the Moody's downgrade, effectively stabilizing the market. This "do-it-yourself" investor revolution has fundamentally changed market dynamics, with retail traders wielding unprecedented influence despite focusing on just a handful of popular stocks and ETFs.

Both experts offer nuanced perspectives on tariffs, inflation expectations, and the global bond sell-off. While the immediate outlook suggests continued volatility, they highlight that today's fixed income market structure offers significantly more favorable characteristics than during the initial rate hiking cycle of 2022-2023.

Whether you're concerned about spiking Treasury yields, curious about the impact of retail traders, or trying to position your portfolio for what comes next, this discussion provides crucial insights from two of the sharpest minds in macro investing. Subscribe for more illuminating conversations that help you navigate these complex market conditions.

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Speaker 1:

Jim, let me start off with you on that. Should the Fed maybe hike rates, do the exact opposite of what the market thinks?

Speaker 2:

Well, when they cut rates in September, yields went up, and so that should tell us a lot right there. And what it tells us is so we sort of feel the opposite.

Speaker 3:

The best cure for higher rates is higher rates.

Speaker 1:

This will be a nice back and forth with Jay Hatfield, who is one of the great macro voices out there, alongside Mr Jim Bianco, also one of the greats in the industry. I've also had the pleasure of getting to actually meet Jim in person, like I met Jay in person, and Jim's a lot taller than you think. For those that are watching this across Instagram, linkedin, my name is Michael Guy, a publisher of the Lead Lag Report. This podcast, lead Lag Live, is sponsored by Infrastructure Capital, one of my clients. I want Jay to quickly introduce himself, and then, of course, mr Bianco, for those who don't know who the hell Jim is. They're living in Iraq. But, jay, go ahead.

Speaker 3:

Great. Thanks, michael, and thanks Jim for being on. That definitely makes it much more interesting, and so our firm. We have six ETFs. We have $2.6 billion under management, three fixed income funds, three equity income funds. All yield over 6%, up to about 10%, and you know, we think they're well-positioned. We'll get into it, but for the second half of the year when we expect a rally in both stocks and bonds.

Speaker 1:

And, of course, Mr Bianco, who also has a product, I believe.

Speaker 2:

Yes, I do, jim Bianco. I'm located in Chicago, two businesses I run Bianco Research, which is an institutional macro slash fixed income research shop probably more on the macro than the fixed income shop and we have an actively managed ETF that we run through our partners with WisdomTree. Wtbn is its ticker.

Speaker 1:

So I put out a post yesterday or the day before and I said in my usual dramatic way on X that the Fed has to do an emergency rate hike. And I said that given the way the 10-year yield has been behaving. And I know, jay, you've got a particular view on where yield should be by end of year. But I want to kind of go with this topic around what the Fed does in the context of what the bond market itself is doing outside of the short end of the curve. Jim, let me start off with you on that. Should the Fed maybe hike rates, do the exact opposite of what the market thinks?

Speaker 2:

Well, when they cut rates in September, yields went up, and so that should tell us a lot right there. And what it tells us is, I think is underlying this is inflation and the fear of inflation and the fear, specifically, of tariff driven inflation. Right now, jay Powell, I think has been pretty clear in making the statement that if you tell me we're going to have higher unemployment and weaker growth and you tell me that prices are going to go up because of tariffs or inflation in general, we're not going to cut rates. Good luck with your recession or good luck with your higher unemployment. And I think that you know to that end, if the market is concerned about inflation and it reacted negatively to easing last year it might react positively to a rate hike by seeing the 10-year yield go down. Now I could say that you might agree with that. Good luck trying to get President Trump to buy into that kind of argument right now.

Speaker 1:

Jay, I'm curious your thoughts on what Jim said.

Speaker 3:

So we have a differentiated view. We think the money supply matters, the Fed does not. Money supply is shrinking. So they've made comments ago. We're close to neutral. Complete lie in our models. Neutral is about 3%, maybe two and three quarters.

Speaker 3:

Housing market's slowing, construction's slowing, so we sort of feel the opposite. The best cure for higher rates is higher rates. So at a 450 10-year we're at 454 right now. The 30-year mortgage is at over $7. Could cause housing starts to go below $1.1 million.

Speaker 3:

We somewhat tongue-in-cheek called our recession rule the Hopfield rule. You might've heard the Psalm rule. So what people don't realize is it's free country so you can have a Bianco rule and a Guyad rule, but ours is that when housing starts to go below 1.1 million, that's precipitated 11 out of 12 post-World War II recessions. So we think the Fed's playing with fire. Our models show inflation is going to be continuing to decline. We would ignore a one or two month blip because of tariffs, because it's more sales tax which should be ignored. It's not going to recur. The Fed thinks it might. So that's what they may not cut. They're not going to cut until unemployment rises and or they see that there's only one or two months of higher CPI and then lower CPI because energy is plummeting. So we're far more bullish about inflation than almost anyone bullish about rate cuts and think it would be an unmitigated disaster to raise, because then you'd be shrinking the money supply faster and almost certainly precipitating a recession.

Speaker 3:

And I would also say that the real key driver of rates is not the last thing the Fed did. So they cut rates, but then they got super hawkish. So it's really the path of future cuts, expectations that drives the tenure, and right now they're dropping every day. I think we're down to like one to two cuts this year, so that's one of the key drivers of higher rates. There's also a lot of disinformation about the tax bill because people are using swamp math. So in other words, if you don't, if you let something, don't let something expire, then that's increasing the deficit by $4 trillion, when we all knew that they probably would extend these. So actually the tax bill is not great for the deficit, but it's kind of neutralish and it's probably positive when you take into consideration likely tariffs. So we think this bond pessimism is going to peak out, maybe not this quarter, but second quarter when it becomes more obvious the FUD's going to cut.

Speaker 1:

You had mentioned's housing weakness. You're starting to see some of those prices drop. I would expect the 10-year is going to drop and yet you're not seeing that right. There's seemingly some kind of pressure that's happening that's not allowing for demand being soft on the housing side to be reflected in mortgage rates.

Speaker 2:

Yeah, the problem with the housing market and I'll quote Redfin statistics because I like the Redfin stats, because they look at it on a per square foot basis, so it kind of adjusts for the size of the house is that on a per square foot basis, home prices are at an all time high and listing prices are consistently making new, all time highs. So one of the problems with housing is put it in parlance if you think $3,000 a month is too much for a mortgage and the Fed were to cut rates, well, homeowners are just going to raise the price of the house and you're still going to wind up paying $3,000. There's no getting around it. The only way that you wind up getting to pay less is if they cut rates into weakness and housing starts or, excuse me, housing sales dramatically slow down In this environment right now.

Speaker 2:

If J-PAL you know, if Donald Trump pulled out his little voodoo dial and started sticking pins in J-PAL and got him to cut rates this afternoon, yeah, mortgage rates would come down. But I think every homeowner would call their broker and say raise the price of my house and you're still going to be back to the same monthly payment. And until that, dynamic changes, I think that we need to understand that we are in a higher rate environment for right now. Now maybe Jay's right and that things dramatically slow down, and if they dramatically slow down and change that equation then fine, but right now I don't think they do.

Speaker 1:

Jay, from your perspective, I think we should also talk about how commodities and oil prices might throw things off. There was that CNN headline yesterday of a potential Israel attack on Iranian nuclear facilities. Oil had a bit of a move there on that. Oil is a big driver of inflation expectations, as we all know. How could commodities factor into whatever happens pathwise? Next for the Fed.

Speaker 3:

Well, keep in mind in the 70s that 80% of inflation came from the energy market, and so that's when you get. Stagflation is when you have skyrocketing energy prices and that's why we're calling it stag deflation, because we have 20% drop this year. And actually you know you're right about that, you know about that headline on attacking Iran. But just to show you like, we downgraded oil and we're pretty negative on oil. We have a, to be fair, we have a 60 to 80 target, so somebody will probably bottom fish in here. But to have that headline and now oil's down about 10 basis point, not a big deal. But if you can't rally on that kind of headline, then that's not a good market for oil.

Speaker 3:

And the reason is that the Trump administration has a great relationship with the Saudis, or you could even say they kind of own the Saudis because they give them weapons and they bomb the Houthis and oppose Iran on their behalf. And so OPEC? Well, really, the Saudis have about 3 million barrels of exit capacity, so they're going to keep a lid on prices and that's super bullish for inflation and nobody cares. I don't know why they don't care. They don't understand it. The Fed doesn't understand it. But core, so it's not just headline inflation either. Lower energy prices bleeds in the core because everybody, every business, uses energy. So that's why we have such a differentiated view on inflation is that our models weight energy much higher than like Fed models, which essentially ignore it.

Speaker 2:

One thing about energy I might throw out, jay, maybe even ask it to you as a question. You're right. The price of crude oil, you know, taking the May contract in WTI, was $75 back in January around inauguration day. It's about $62 now and it's been into the low mid-50s at various times in the last month or so. But the price of gasoline is higher than it was on inauguration day. The price of gasoline hasn't moved. In fact it's been rising over the last couple of weeks. So the lower energy price is not filtering in to the price of the pump. So it's not showing up there just yet. Do you have any thoughts on that as to why that might be? So it's not showing up there just yet. You got any thoughts on that as to why that might be?

Speaker 3:

Well, it's important to look at seasonality with oil. So we're going into summer driving season. So when you look at CPI, actually you're right that gasoline prices are higher, but they're normally higher. So it's actually detracting from reported inflation and CPI. And if you just look at normal spreads, there is a lag too, and so I'm just looking up where the wholesale is gasoline is right now. See if I can do that quickly, put on my glasses. The last time I checked there was about a 15 cent likely decline because you know oil has come down and also gasoline's come down but hasn't fed through to the value chain. Takes about three weeks. So, okay, our Bob's at 214. I think the national average is like 318. So maybe just a little bit more downside. But in terms of reported inflation, the seasonal adjustment is going to show declining prices. It's not going to be great politically as you would have thought for Trump, but after the summer you'll get plummeting prices and retail users will be more happy about where it stands.

Speaker 2:

How about inflation? There's two high-frequency measures of inflation that are very popular. One is Truflation and the other one is PriceStats. Pricestats is the old billion prices project. Both of them take Truflation Truflation since May 1st is now they do a measure where they calculate what they think your CPI is going to be it's up 60 basis points in the last three weeks and PriceStats so Berto Covello, harvard University, developed it.

Speaker 2:

Pricestats is owned by State weeks and price stats, so Berto Covello at Harvard University developed it. And the price stats is owned by State Street and they've actually broken it out by origin of product and they're saying that all products that originate out of China in the last five weeks are now 2% higher and continuing to rise. So what we're going to see within the statistics and you mentioned this before CPI is going to go up. Now it's going to go up because of tariffs. Then the next question is is it a step function higher? What should be the proper response to a step function higher, or does it continue to go from there or does it continue to go from there?

Speaker 3:

Well, so we, as you indicated, do acknowledge that there's going to be one or two months of increases, because the same thing kind of feeds slowly through the value chain, just like oil does natural oil and gasoline. But then the third month, say, let's say we have two more months of increases and I don't think they're going to be huge, they'll just be, you know, like you're indicating maybe 60 base points, then you're going to get pretty muted prints like 0.1, 0.2, 0.3, depending on volatile components. So the Fed, if they have alpha brain, which a lot of times they don't, will start to say okay, we saw the tariff impact, now it's out of the mark, out of the data, it's clearly one time, it's not going to happen again the following year and probably the employment market's softening and they'll cut. But what they think which I think is completely ridiculous, is that because you have a one-time time increase and a lot of people don't. So if you don't, I'm not trying to be too pejorative, but I don't believe in the expectations theory of inflation at all. It's been discredited. It was maybe true 20 years ago when you have unionization, and so the Fed fears that expectations will become unanchored or anchored, but we have it on our website.

Speaker 3:

There's many, many research papers that debunk the expectation theory of inflation. But that's why you get these divergent views is, the Fed is focused on that and, by the way, they repeat it every day. So I'm sure most people believe in it. But just when you really look at the data and think about the structure of the economy, there's no market power, so expectations don't matter. It's endogenous variables, the way we treat it, so, in other words, a dependent variable. So if inflation comes down, expectations go down. If inflation goes up, expectations go up, but they don't create their own inflation. So that's kind of a core differentiator between our view and the Fed. Is this expectations theory of inflation.

Speaker 2:

I agree with you on the expectations theory of inflation. I've never bought into that idea in the first place. I know that the Fed does buy into that idea.

Speaker 3:

They seem to live by it. It's like their second religion.

Speaker 2:

Well, yeah, I mean, now that they got rid of the Phillips curve as their first religion, they've moved on to their second religion. But let me, let me ask you about the other. So tariffs are going to lead to a one or two month rise in inflation and inflation flattens out. The concern is is that Trump comes out and says look, I found a magic bullet. And a magic bullet is called tariffs. We raise tariffs, the Chinese eat it. Maybe Walmart eats it. Trump tweeted over the weekend he wants Walmart to eat tariffs.

Speaker 2:

There was a story today that retailers might raise prices around the world to kind of cushion the rise in tariffs.

Speaker 2:

In other words, trump is going to say I found this magic bullet. We need more income into the United States to lower the deficit. We're not going to tax the rich in the United States. We're not going to tax the middle class, tax the middle class United States. We're going to tax foreigners and it's working because we've got all these tariffs coming in and we don't have inflation. So we're going to do more tariffs and we're going to do more tariffs after that and we're going to do more tariffs after that because they're not inflationary and we're going to get these. You know, like the old IBM when they used to give their you know one time charges to earnings and it happened to every quarter, we're going to get these one time increases of tariffs all the time, because Trump's going to keep going and going and going with tariffs unless we see a bad outcome that forces him to stop. And what forced him to stop in April was the sell-off in the stock market.

Speaker 1:

Well, I'd argue it was specifically the risk that week of delayed margin calls hitting left and right. I mean there was chatter around some real systemic risks there.

Speaker 2:

Right. If we didn't have any of that, do you think China would be at 30% tariffs right now, or they'd still be at 145%? I think they'd still be at 145 percent, I think they'd still be at 145. I would agree. Yeah, so my point is is that our tariffs are one time increase? Yes, Then Trump's going to say look at how brilliant I am. I raised tariffs. It didn't cause inflation. I'm going to raise them again and again and again until we get a bad reaction to make them stop.

Speaker 3:

What's your thought about that idea? Well, I think that they did. If you look, navarro has been sidelined yeah, thankfully. So I haven't seen him in like three weeks and happy about that. So I do think Besson's in charge, because a lot of my you know associates or friends, I guess acquaintances they're super negative about the market. Oh God, the administration's terrible.

Speaker 3:

Could do stupid things forever, but they don't recognize that Besant's kind of taken over and he's far more reasonable than Navarro and Trump himself. So I'm pretty optimistic. It's going to take way longer than expected, but we're going to get some trade agreements, we'll get it pushed forward. But it's definitely to take way longer than expected, but that we're going to get some trade agreements, we'll get it pushed forward. It's definitely a risk.

Speaker 3:

So if you don't believe our bull thesis that you know nabarro is out then, then that certainly is a risk, because that was that tariff introduction was flat-out, stupid, uh, unambiguously flat-out, stupid. No reason for it. You could have threatened it in private. So if that sort of behavior continues, it's definitely a risk for the market. And with high and high tariffs I mean it's nice to think that all of them will be absorbed. Some of it will, but it's very hard to have all of it absorbed unless the dollar is skyrocketing. So you're going to have less consumer spending, slowing economy, lower rates, fed rate cuts. So there will be a reaction. I think it's pretty unlikely increasing tariffs significantly over time is going to get fully absorbed.

Speaker 1:

Jim, I'm curious what are your thoughts on how? I mean? There's been a lot of chatter around deregulation in general and lowering leverage ratio requirements on several banks, that being sort of another force for liquidity for the system. Could we see that suddenly unlock even more inflationary potential just from banks now putting more capital out there?

Speaker 2:

Yeah, we're talking about the supplementary leverage ratio that they're going to wind up trying to rescind. That's a financial crisis era instrument where, if a bank buys a security, like a treasury security, they have to set aside a certain amount of capital for potential haircuts on that. So when you buy a billion dollars worth of treasuries, you have to put $40 million into your capital account to margin against those, and that has been a disincentive for banks to buy treasuries. So now that the Fed is talking about doing away with the supplementary leverage ratio, the idea behind that is to incentivize the banks to buy treasuries. I don't think it'll incentivize them to do more loans, because it's really meant to be about securities ownership.

Speaker 2:

But the problem there is and we've all seen the FDIC charts the banks are sitting on unrealized losses hundreds of billions of dollars of unrealized losses. We've already had a financial crisis because of unrealized losses in the banking system, and you know that was Silicon Valley Bank two years ago. So let me put it to you simply If somebody turned to you and said here's an investment, you've been getting the shit kicked out of you on this investment. You've been losing money. I'm going to make it easier for you to double down on it. And who's going to really want to double down on it? I don't think they're going to want to double down on it now, with yields at 5% in the 30-year and the like. But if they rescind that ratio later in life, if you get a bond rally, their attitude would change. But I don't think if they got rid of that ratio today, banks are going to say, gee, look at all these losses we have in treasuries, let's buy some more of them. They're not going to do that until we see some upside momentum.

Speaker 1:

Jay, any thoughts on that? To me it's like what I always go back to. The surprise would be that we throw everybody off. Suddenly you have a real pickup in the velocity of money. Everyone's always looking at the pure amount of money that's out there. The velocity has been downtrending for a long long time. Could banks maybe cause some kind of a counter trend there?

Speaker 3:

Well, I would say I don't disagree. I don't think there's just changing regulation that's going to create big demand for treasuries and that markets tend to overshoot, like actually, the stock market is melting down right now, I think, because of the treasury auction.

Speaker 2:

Yeah, the 20-year wasn't good.

Speaker 3:

Yeah, it was poorly received so that seemed to be the time the market melted down. So we are in a bit of a momentum sell-off that does normally occur in this May, june, more of the stock market, but it can also include the bond market time frame, so I wouldn't catch the falling knife here. On rates, our call is really second half, when all this data is shaking out of the tariff data but also real impacts on the economy and I do think we're going to get incremental slowing in housing because of this rate rise where we just moved up another three basis points or 4.58 on the 30-year. But it's not going to happen right away and I wouldn't catch the knife either on the stock market right now. We're kind of neutral in the stock market right now with the 5,500 to 6,000 target, nor on the bond market, Just to jump in on that very short term.

Speaker 2:

we had a 20-year auction. That was announced 25 minutes ago. The results it was the first coupon auction since the Moody's downgrade on Monday. Results it was the first coupon auction since the Moody's downgrade on Monday. It was not well received. It wasn't a disaster. It was below average is the way I would say it. And so it's right. We've shot the interest rates up to 508 on the 30-year, 458 on the 10-year. So that's going to get people chattering, that there's a general buyer strike in the treasury market between that and the trend lower in rates and a lot of other concerns that everybody has right now. But that's just short-term thinking. I mean that will probably continue for a while. But the question is you're right, in the long run the fundamentals will win out, but in the short run, you know the voting machine here could get themselves all worked up into a hissy fit about rates going higher.

Speaker 1:

In fairness, you're seeing that also, not just in the US. I mean that that's probably a good transition to Japan, which every single night in when I look on my X feed, I see a chart of Japan's GGB yields spiking up further and further Now very different dynamic, because we know the Bank of Japan basically owns all that with Japanese people. But is there any kind of spillover with what's going on with Japan's bond markets two hours? I mean, everyone knows I talk about the reverse carry trade all the time, but I'm curious to hear your thoughts on that, Jim.

Speaker 2:

Yeah, I was going to ask you to comment on the carry trade. You're the guy but you know. By the way, here's an interesting statistic for you For all of our career, the lowest interest rate in Asia has been Japan. It's no longer the case now. It's China. The 30-year in Japan is now a higher yield than China. The 10-year was within about 10 basis points of China and we always used to view that as why were the interest rates in Asia or Asian interest rates? I'm talking about Asia alone. Why are their interest rates in Japan so low relative to everybody else? Because they had the weakest economy. Okay, what does that tell us about China? Now that China's got the lowest or is about to get the lowest interest rates and I think it is that they've got the weakest economy.

Speaker 2:

But you're right as far as Japan goes, why are their rates shooting higher.

Speaker 2:

They're a highly controlled market that the central bank owns over half of the securities out there.

Speaker 2:

They have yield curve control or they still have some version of yield curve control out there that they're trying to hold yields in a certain range and they can't because, for the first time in a decade, what you're seeing is they're getting actually real positive growth and they've got about 2. Half percent inflation. Now, two and a half percent inflation to us doesn't sound like a lot, but if you've had been at zero for 30 years and you go to two, two and a half percent, that's a lot of inflation and I think what we're seeing is their bond market is adjusting to that. But because it's in a chaotic way that it's been adjusting to it, it's been shooting up higher in yields more and more, as we've seen. And, like I said, I think the signaling is the Japanese economy might be getting out, or close to getting out, of its deflation and maybe the Chinese economy is going to come, you know, replace it as the sick man of Asia because of its falling interest rates.

Speaker 1:

Jay. I mean, does that impact anything as far as anything that you're looking at, whether it's on the energy side for AMSA or the small cap side? I mean to the extent that there's any kind of spillover.

Speaker 3:

Well, definitely so. The other thing I'm looking at a screen on Bloomberg. Our rates are, our bonds are down and rates are up, but it's true across the board, every single country in the world. So what most investors miss is that the bond market's way more global than the stock market, because these bonds are much more fungible than you know. There's no fungible investment in NVIDIA in Europe, but European bonds and US bonds have similar default risks like, namely, zero, close to zero, and the differentials and yields. So when one market sells off, it drags the whole bond market down.

Speaker 3:

And what a lot of people miss too is, like you said, oh, rates are going higher, so I don't want to be in bonds or like our preferred stock fund, but the truth is it makes equities way less attractive, and you're seeing that today, where this bond auction has tanked the market pretty dramatically, like all over 100 S&P points. So it's a significant concern and, like I said, it's normal for markets to overshoot, particularly in May and June. So we wouldn't catch either knife. This I mean maybe at 5,500 or something lower. We've had a huge rally up until you know whatever. 30 minutes ago I would have said this is a remarkably resilient market. But in these type of markets big run up, seasonally terrible you get plunges like this. So it's time to be cautious for our next month or two.

Speaker 2:

So I agree with you, jay, that in this environment, one of the things I've been arguing to people that is being underappreciated is the move in yields and and that that has been also in the last two months, a problem. Because when we saw the stock market plunge in early April after Liberation Day and we were all focused on the idea that it was about tariffs, I was raising my hand, going Dave, you guys looked at what the 10-year was doing I'm talking about mid-April. It was going straight up, the yield was going straight up and that was not what everybody expected, and I think that that's the problem. Now we're very close. I'll throw this out at you right now we're very, very close. We're 509 on the 30-year.

Speaker 2:

If we close above 512 on the 30-year any day today, tomorrow, next week, that'll be a new 18-year closing high and that will be a big red headline that'll get everybody to start breathing in their paper bags again that we've got an 18-year high in 30-year rates. So we're very, very close to that right now. So the point I'm trying to bring up is you're right that in this environment right now, the center of the universe for stocks, for commodities, for gold, for a lot of these things. It might be even before Bitcoin, with it making its new all-time high is rates, and that rates are trending higher and that has been the thing that's got everybody's attention.

Speaker 1:

I will say it's like the best place to hide in a day like this is high yield, which is more of a duration thing, you'd argue, obviously, but you know the junk issues is obviously there's some widening, but nothing really that major. At what point do we get bullish on duration? I mean credit risk. Jay has been, has been has not been almost non-existent throughout this entire period.

Speaker 3:

Well, it did gap out. It does trade with the stock market, so it gaps out when the market's down. So we'd be bullish on spreads and treasuries in the second third quarter. Sorry, because these overreacts. It happens in oil as well.

Speaker 3:

Everybody forgets that there's elasticities of demand, and it's true in. Happens in oil as well. Everybody forgets that there's elasticity of the demand, and it's true in the treasury market as well. So everybody, when oil goes to 60, everybody predicts it's going to 30, but nobody does the math and says well, at 30, there's going to be a lot less production and way more consumption. And same thing with treasuries it's easy to sell. I'm like we don't have any positions in Treasury, but I'd rather be short them here than long. But then there's going to be the rally that blows everybody's head off, probably after. Either we get a weak employment report or we get a couple of CPIs that are a little bit higher, maybe because of tariffs, but not very much and then the third CPI is down, even Like, if you really look, the inflation data has been super bullish the last two months and nobody cares. So at some point the shorts will get their heads blown off and then we'll get the rally, but I wouldn't step in right here.

Speaker 1:

Let's talk about what else we should be looking at outside of inflation expectations and the bond market. Any signals, Jim, to you when you look at different asset classes that are maybe causing you to scratch your head a little bit? I've talked about gold a lot as a signal that maybe now has become more of a speculative momentum trade. A lot of people have been saying Bitcoin is starting to diverge from the Nasdaq correlation, which has been so strong for so many years. Anything that you're observing that's worth pointing out.

Speaker 2:

Yeah, all of that. I think that if we could pivot a little bit to the stock market, what is not being appreciated over the last couple of years is the dominant player in the stock market is now becoming a retail trader, and when I say that, people will throw back at me oh, but the statistics say retail doesn't buy stocks. You're right, they don't. They buy seven stocks. That's all they're interested in. And they buy ETFs, and they buy levered ETFs and they buy zero DTE options and that forces the associated person of the ETF to buy stocks in their proxy.

Speaker 2:

And so when you want to talk about the whales that are moving the market, let's talk about retail and the great example that was what JP Morgan said on Monday. Let's go back all the way two days ago. Monday, we had the Moody's downgrade. The stock market was down about one and a half percent, about as much as it is now, and it wound up finishing up the day slightly positive positive. What jp morgan pointed out was that in the first four hours of buying on monday, our first four hours of trading on monday, retail investors bought 4.1 billion dollars worth of stocks in three hours and took the market from minus one and a half percent to almost unchanged isn't that?

Speaker 1:

isn't that utterly wild, by the way, like I'm and I don't, but I don't, I don't understand where the money's coming from. I actually just did an interview with the president of Tasty Trade and asked him that very question. It's like you're buy the dip, buy the dip, okay, but you have to have cash to buy the dip with, so where is it coming from?

Speaker 2:

You know, to be honest with you, I'm kind of at the same point too, because I've rhetorically asked the question I'm all in, I'm all in, I'm all in. Okay, the market sold off, buy the dip With what You're already in. Where did you get this money to buy? But apparently there is a number. There is a big part of money that is sitting out there. Now the problem with retail is twofold. One, when you tell people that it's retail, everybody pooh-poohs it because they're so ingrained with it's Citadel. It everybody pooh-poohs it because they're so ingrained with it's Citadel. It's Bridgewater, it's all the big hedge funds, it's the state of California pension fund, because they're the big players in the market. Well, they are still big players, but they're not the buyer at the margin. And the other problem with retail is it's millions of people and it's hard to get your head around. How big is it? How much money do they have? What do they have in the sidelines? How bullish are they? We have certain measures of it AII, investors, intelligence, put call ratios, but they only measure small segments of the market. We really don't know where it is. But I think that what people are failing to recognize is to use a home improvement term is to use a home improvement term.

Speaker 2:

The do-it-yourselfers are now taking over, as I pointed out, 2025,. If you're a retail investor and you're sitting here listening to us, you probably have a brokerage account with zero commissions. You've got the vast majority of the internet to your disposal. What does the top equity portfolio manager Bridgewater have over you in investing? He's got maybe two things.

Speaker 2:

Maybe he's got experience and skill, because he's the top portfolio manager Bridgewater, and he's got some resources to acquire publicly available information faster. But you have all that information and you can trade at the same commission. He trades at zero and you are and you're not being encumbered by strategies. 20 years ago, the Bridgewater portfolio manager could engage in strategies like I want to buy all my stocks equal weighted, well, rsp, you can do it yourself now in one second. So that's really changed the game that there's a lot, especially in the younger cohorts, a lot of do-it-yourselfers that are playing in this game more than we ever thought. So, after we've written off retail investors that their job was to hand their money to a professional manager, they're now making a comeback and doing it to them for themselves, and that's why we've seen this mushrooming of ETF issuance to meet that need and I think that a lot of people are really having a hard time understanding it.

Speaker 1:

Yeah, I like this direction because the point about they buy seven stocks and then ETFs makes me immediately think. That goes back to my other theme, which is we're in a bit of a passive bubble, right, because if retail is driving so much of the flows at the margin and they're going to passive funds largely, then you would think that there are going to be more anomalies for active managers to take advantage of. What are your thoughts on that?

Speaker 3:

Well, I think there is. You know that short-term buy the dip. But the great thing about retail investors is I talked to them a lot of them over the last month or two. Most of them have figured out that you just need to stay invested. So they are a source of stability in the market. You know whether I share the sort of.

Speaker 3:

I mean it's hard to imagine exactly. I know how steve cohen's whipping around stocks and you know with puts and futures and stuff, but it is a little bit hard to imagine how they're actually stabilizing the market after a Moody's downgrade. But they're really stabilizing it more gradually, usually by not selling when we went to 5,000, maybe reinvesting dividends, doing an incremental. That's what we see in our funds is reinvestment of dividends, which is a good way to capture that down volatility. So I would be a little more constructive on retail that maybe it wasn't rational to buy that dip Although it really was because Moody's wasn't. There's no information content in the downgrade, but not a great time of year to do that. But they're probably of a year or two perspective, so they don't care. So it's probably why I mean we spiked down 100 handles or so Now we're spiking back up. Why are the markets so resilient? Because normally this time of year, with this bigger run, we would be like headed straight down to 5,500 in short order.

Speaker 2:

I'll say a quick comment about Steve Cohen. He's doing a better job trading starting pitchers than he is with the stock market lately he's actually retired, so he's not.

Speaker 1:

He follows me on X. Don't say that he might be watching this. I don't want to get in trouble with me.

Speaker 2:

Well, I just told him he's doing a good job with his starting pitchers.

Speaker 3:

He's in first place, that's good and he's not trading, so he's not the one whipping around all those futures and puts, but there's plenty of other hedge funds doing it. So, anyway, retail's not sure they're going to always stabilize the market like that, but they're going to be a source of stability.

Speaker 1:

That's a good question, which is a good direction actually to go to, also from DJ Distraction Jackson, which is a nice name, I love that name. Canada and the UK recently loaded up on treasuries and I saw that stat right, the UK is now the biggest hold, is bigger than China as far as holdings of treasuries. Do they believe then that yields will drop and they will appreciate, or are they just loading up to prepare to defend their currencies? Up to prepare to defend their currencies? Let's talk about the currency side, jim, for a bit, because it's been a recurring theme of mine as well that I think we're in a currency war and nobody's really framing it in that way, but treasuries are a component of that war.

Speaker 2:

Yeah, treasuries are cash. I mean, they're the reserve currency and they're cash. And just those numbers. Uk did surpass China as the number two largest holder of treasuries Foreign owner. Only Japan is is larger than them.

Speaker 1:

Oh.

Speaker 2:

Japan.

Speaker 2:

Again, that's what I'm saying, right, but now there's a big difference. There's a big difference. A lot of those treasuries that are held by the UK are actually held by American banks and investment banks in their UK arms. So it's really it's Jamie Dimon, you know, and it's Goldman Sachs, and it's all you know, and it's Millennial, the big hedge fund. It's.

Speaker 2:

Those players in London is who it is, whereas with the bank, with Japan, it's largely considered to be the bank of Japan. It's largely considered to be the bank of japan. It's not considered to be the bank of england. When it comes to the uk, um, canada is kind of the same way. It's not the bank of canada. That's the big buyer of those, like you would think it would be like the people's republic bank or people's bank of china, which is their central bank, but it's a lot of their hedge funds. It's a lot of their hedge funds. It's a lot of their insurance companies. It's their big four banks. It's those types of players that have been buying into those securities. Now, why they're doing it is still a mystery in Canada. I mean, you know they, they've been plowing into them and I haven't seen a compelling reason for why they're doing it. So, but you're right, there has been big buyers, big buyers out of those two countries.

Speaker 3:

Yeah, well, I was just going to point out the obvious to this group, I guess. But the, you know, the selling treasuries is the opposite side of the currency trade. You know, selling treasuries is the opposite side of the currency trade, right? Because, as Jim was pointing out, everybody thinks, oh, the reserve currency and everybody's sitting on trillions of actual US dollars. They're not. They're buying treasuries because they want to have income and they don't.

Speaker 3:

It's really difficult to get that much in actual reserves or currency for that matter, reserves or currency for that matter. So if you want to support your currency, then you need to make treasury transactions to do that. So we may not, it may not be so much. Oh, we love the, the, uh, you know us treasury here, just like we're trying to intervene in the, in the currency markets. And the other side of the trade is if you're like the Japanese bond or BOJ and they're trying to support the yen, so then you buy yen but you need to sell dollars, so you sell your treasuries and do the opposite side. So a lot of the times the currency manipulation is what's driving the purchase, is not necessarily some fundamental call that it's great down the long end of the curve.

Speaker 2:

I was just going to say, just for everybody listening. Keep in mind a simple question or a simple point to make Company X buys company Y for $10 billion. Okay, transaction closes. How do I get you for $10 billion? Okay, transaction closes. How do I get you the $10 billion? Are there pallets of $100 bills put in a bunch of Brinks trucks blocked along to send you $10 billion? No, I have $10 billion worth of treasuries and usually bills and treasuries are considered cash and I send them to you and that's how I finish off the transaction. So treasuries are a form of cash, is what they are.

Speaker 1:

I saw somebody almost seemed like a conspiratorial response, but it kind of makes sense arguing that this whole tariff you know back and forth is ultimately about Trump trying to get countries to buy more treasuries. That that's sort of the real agenda beneath the surface, and the more I think about it it's like there's probably some degree of truth to that. But you know what's Trump's response to all this? I mean, if yields do keep on rising and treasuries keep selling off, you want to act involuntarily like this on the long end, and it's not really as much in the Fed's control than the pressures on Trump to do something.

Speaker 2:

Yeah, send SEAL Team 6 into the Echols building and physically remove Jay Paul and put him in a cage in a basement somewhere for his punishment. You know it's all Jay Powell's fault. I'm joking, of course, but you know he'll say it's all Jay Powell's fault and he'll try and blame Powell. But to your, you're right. You know they, early on, said that their metric for success is the 10 year yield, not the stock market. I don't know if they if that still applies because this is Trump we're talking about, you know got to keep checking back every 10 minutes to make sure it still applies, but their metric has been the 10 year. What their ultimate goal, I think, was with the 10-year was they wanted to initially relieve the US of the burden of expenditures, and that's why, before tariffs, the big thing was when JD Vance went to the Munich Security Summit and gave that speech. I'll summarize it for you Since 1960, the US has spent $23 trillion in defense.

Speaker 2:

The total sum of NATO, and that's 15 or 17 countries, has spent seven and a half. We have been the leader in everything since the end of World War II, starting with the Korean War, all the way through, whether it's been a war, the war on terrorism, the war on communism, to defeat communism into the late 1980s, and we've paid a big price for it, a big monetary price for it. It's cost us a lot of money. Europe has spent less on it. That's why the Europeans are able to have national health care. Everybody goes to college for free, because they didn't have to raise major armies and fight these wars or fight these battles. We did.

Speaker 2:

Trump is trying to reverse that and, interestingly, europeans kind of agree that they want to.

Speaker 2:

They want to kind of reverse that and raise an army and stuff like that of agree that they want to kind of reverse that and raise an army and stuff like that. But that's part of what he's been trying to do is trying to get rid of the liability and the expenses for us. I don't know if he's really been trying to convince foreigners to buy our securities, because on the other side Stephen Murin and some of the others have been talking about they want a weaker dollar. You know, and you don't want to be owning US Treasuries if you're a foreigner, if you think the dollar is going to be going down. So you know. This has been the mystery of trying to figure out what it is that he wants? I understand what he wants is he wants lower expenditures. He wants Europe to pay for security. He wants Europe to plow trillions of dollars into defense. Additionally, what he wanted to do was pay us the trillions of dollars to defend them, but they seem to want to do it on their own.

Speaker 1:

Jay, maybe in the last few minutes here, since this is a sponsored conversation by Infrastructure Capital, just talk about firm the funds, any kind of final thoughts you have, and then I'll send it off to you, jim Well like I said at the outset and the market kind of proved.

Speaker 3:

My point is that this is going to be a little bit of a dicey market because of both treasuries and stock market and uncertainty around tariff policy and what you know. We launched BNDES and it was less true a little while ago, but now it's proving its value in that the volatility of bonds, or high yield bonds, is about half of preferreds and about a third of the stock market and that's playing out today. So the equity markets down, or at least the equal weighted is down 1.6%. S&p is only down 1% right now, but high yield is only down 0.5%. So it's not a bad place to hide out to get good yields At some point. This will all turn around. But if you want to put money to work, it's also fine if you have some cash to sit on it for a while. But these fixed income investments are pretty all-weather securities to get really high income that oftentimes can offset the volatility in the price.

Speaker 2:

If I could jump in and just make a quick comment on what Jay just said, a lot of people got soured by fixed income securities because of the experience of 20 to 23, when we went from zero to 5% rates. That was horrible. The total returns were terrible during that period. I understand that. But now we had to get rates off of zero and now that we've got them the 30 year five, they're a completely different instrument than they were three or four years ago. They now have, you know, in market parlance the convexity. They have less duration because they have a higher coupon. They have the coupon cushion. So now in the bond market if you buy bonds, even if you think yields are going to go up, bad year could be plus 1% or maybe zero, and it's not going to be minus 10 like it was in 22 when we had to get from zero to some higher yield. So the structure of the bond market is completely different right now and much more favorable for investors than it was just two or three years ago.

Speaker 1:

And Jim for those who want to get access to your research and maybe also learn about your funds. Since you're kind enough to spend the time here, might as well throw it in there.

Speaker 2:

Yeah, so BiancoResearchcom. We do institutional research on macro and fixed income. I'm also active on social media at Bianco Research, on TwitterX and on YouTube, and we do run an actively managed total return fixed income fund, wtbn.

Speaker 1:

And I will say, because I can say it, while they can't, it's worth considering blending the two. So, from Infrastructure Capital, from Jay and from Jim, appreciate everybody that's watched this. Thank you, jim for joining, thank you Jay, as always, and I'll see you all in the next episode. Cheers everybody.

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Michael A. Gayed, CFA

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