1 00:00:05,240 --> 00:00:10,280 Speaker 1: Beautiful God. 2 00:00:12,640 --> 00:00:15,480 Speaker 2: Over the past few years, it seems as if markets 3 00:00:15,520 --> 00:00:20,279 Speaker 2: have been obsessed with Federal Reserve action, first the rate 4 00:00:20,360 --> 00:00:25,520 Speaker 2: hiking cycle and now quote unquote the inevitable rate cuts. 5 00:00:25,520 --> 00:00:28,880 Speaker 2: Investors might find it useful to know when is the 6 00:00:28,920 --> 00:00:32,519 Speaker 2: FED going to start a new cycle of cutting rates. 7 00:00:32,960 --> 00:00:35,680 Speaker 2: As it turns out, there's specific data you should be 8 00:00:35,720 --> 00:00:39,680 Speaker 2: looking at to know when that cycle might begin. I'm 9 00:00:39,720 --> 00:00:42,880 Speaker 2: Barry Ridhelts, and on today's edition of At the Money, 10 00:00:43,320 --> 00:00:46,319 Speaker 2: we're going to discuss how you can tell when the 11 00:00:46,360 --> 00:00:49,879 Speaker 2: Fed is going to start cutting rates. To help us 12 00:00:49,920 --> 00:00:52,720 Speaker 2: unpack all of this and what it means for your portfolio, 13 00:00:53,240 --> 00:00:57,080 Speaker 2: let's bring in Jim Bianco, chief strategist at Bianco Research. 14 00:00:57,640 --> 00:01:02,600 Speaker 2: His firm has been providing objective, an unconventional research and 15 00:01:02,680 --> 00:01:07,280 Speaker 2: commentary to portfolio managers since nineteen ninety and it's top 16 00:01:07,360 --> 00:01:11,880 Speaker 2: rated amongst institutional traders. So Jim, let's just start with 17 00:01:11,959 --> 00:01:17,080 Speaker 2: the basics. How significant are rate cuts or hikes to 18 00:01:17,200 --> 00:01:18,639 Speaker 2: the typical market cycle? 19 00:01:18,680 --> 00:01:20,000 Speaker 3: How much do they really matter? 20 00:01:20,240 --> 00:01:22,360 Speaker 1: Thanks for having me, Berry, and the answer is they 21 00:01:22,360 --> 00:01:24,839 Speaker 1: matter more now than they have, say, over the last 22 00:01:24,840 --> 00:01:28,000 Speaker 1: fifteen years, for a very simple reason. There is a 23 00:01:28,120 --> 00:01:31,360 Speaker 1: yield again in the bond market. And as my friend 24 00:01:31,440 --> 00:01:34,840 Speaker 1: Jim Grant likes to say, who writes the newsletter, Grant's 25 00:01:34,880 --> 00:01:37,360 Speaker 1: Interest Rate Observer, it's nice to have an interest rate 26 00:01:37,400 --> 00:01:41,240 Speaker 1: to observe again, And because of that, we've got a 27 00:01:41,280 --> 00:01:46,800 Speaker 1: whole different dynamic. Well, in twenty nineteen, when your average 28 00:01:46,840 --> 00:01:49,080 Speaker 1: money market fund was yielding zero and your average bond 29 00:01:49,080 --> 00:01:52,240 Speaker 1: fund was yielding two percent, we used to scream, Tina, 30 00:01:52,320 --> 00:01:54,200 Speaker 1: there is no alternative. You can't sit there in a 31 00:01:54,320 --> 00:01:56,800 Speaker 1: zero money market fund. You got to move up the 32 00:01:56,880 --> 00:01:59,120 Speaker 1: risk curve to stocks, and you've got to, you know, 33 00:01:59,160 --> 00:02:01,760 Speaker 1: try and get some kind of reward from it. Well, 34 00:02:01,800 --> 00:02:04,800 Speaker 1: in twenty twenty four, now a money market fund is 35 00:02:04,840 --> 00:02:07,800 Speaker 1: yielding five point three percent and a bond fund is 36 00:02:07,880 --> 00:02:11,600 Speaker 1: yielding around four point eight to five percent. Well, that's 37 00:02:12,400 --> 00:02:14,880 Speaker 1: two thirds of what you can expect out of the 38 00:02:14,919 --> 00:02:17,720 Speaker 1: stock market. And especially if we wanted to stick with 39 00:02:17,760 --> 00:02:20,800 Speaker 1: a money market fund and virtually no market risk, because 40 00:02:20,800 --> 00:02:23,640 Speaker 1: it has an neev of one dollar every day, and 41 00:02:23,680 --> 00:02:26,520 Speaker 1: there's a fair number of people will say seventy percent, 42 00:02:26,600 --> 00:02:29,480 Speaker 1: two thirds of the stock market without any risk at 43 00:02:29,480 --> 00:02:31,919 Speaker 1: all market risk, that is sign me up for that. 44 00:02:32,440 --> 00:02:36,840 Speaker 2: So let's talk about raising and lowering rates. I have 45 00:02:36,919 --> 00:02:40,600 Speaker 2: to go back to twenty twenty two when the Fed 46 00:02:40,720 --> 00:02:44,399 Speaker 2: began their rate hiking cycle. It seems like a lot 47 00:02:44,440 --> 00:02:49,560 Speaker 2: of investors were blindsided by what was arguably the most 48 00:02:49,560 --> 00:02:54,720 Speaker 2: aggressive tightening cycle since since Paul Volker five hundred and 49 00:02:54,720 --> 00:02:58,800 Speaker 2: twenty five basis points in about eighteen months. Why, given 50 00:02:58,840 --> 00:03:03,880 Speaker 2: what had happened with CPI inflation spiking, why were investors 51 00:03:03,919 --> 00:03:05,200 Speaker 2: so blindsided by that. 52 00:03:05,600 --> 00:03:09,000 Speaker 1: They had gone forty years without seeing inflation and they 53 00:03:09,000 --> 00:03:12,440 Speaker 1: couldn't believe that inflation was going to return. And the 54 00:03:12,440 --> 00:03:17,000 Speaker 1: typical economist actually was arguing that there is no more 55 00:03:17,000 --> 00:03:20,400 Speaker 1: inflation again. And I might add to this day, the 56 00:03:20,440 --> 00:03:24,359 Speaker 1: typical economist still argues that we don't have inflation. 57 00:03:25,280 --> 00:03:25,480 Speaker 3: Now. 58 00:03:25,520 --> 00:03:28,120 Speaker 1: I'm fond of saying that the term two things could 59 00:03:28,120 --> 00:03:30,720 Speaker 1: be true at once. And what you saw in twenty 60 00:03:30,760 --> 00:03:33,840 Speaker 1: twenty two, twenty twenty one, and twenty two two is 61 00:03:34,320 --> 00:03:39,000 Speaker 1: transitory inflation that got us to nine percent on CPI. 62 00:03:39,600 --> 00:03:44,360 Speaker 1: But once that transitory element of nine percent is settled out, 63 00:03:45,120 --> 00:03:47,400 Speaker 1: what I believe we're starting to see more and more 64 00:03:47,440 --> 00:03:51,320 Speaker 1: of is there is a new underlying higher inflation level. 65 00:03:51,400 --> 00:03:54,160 Speaker 1: It is not two percent, It is more like three 66 00:03:54,200 --> 00:03:56,880 Speaker 1: to four percent inflation, not as I like to say, 67 00:03:56,920 --> 00:03:59,680 Speaker 1: it's not eight ten or Zimbabwe. It's three to four percent. 68 00:04:00,280 --> 00:04:03,880 Speaker 1: And that three to four percent is what's got the 69 00:04:03,960 --> 00:04:08,720 Speaker 1: Fed slow in cutting rates. It's got people debating whether 70 00:04:08,800 --> 00:04:11,080 Speaker 1: or not interest rates should come down more or go 71 00:04:11,320 --> 00:04:15,440 Speaker 1: up more. So, yes, we had transitory inflation because of 72 00:04:15,480 --> 00:04:18,920 Speaker 1: the lockdowns and the supply train constraints, and that has 73 00:04:18,960 --> 00:04:23,160 Speaker 1: gone away, but left in its wake is a higher 74 00:04:23,240 --> 00:04:25,960 Speaker 1: level of inflation, and that is the debate that we're 75 00:04:26,000 --> 00:04:28,440 Speaker 1: having right now. And if we have a higher level 76 00:04:28,440 --> 00:04:33,400 Speaker 1: of inflation, that is going to weigh heavily on monetary policy. 77 00:04:33,640 --> 00:04:35,039 Speaker 3: He hadn't done them any good. 78 00:04:35,320 --> 00:04:38,600 Speaker 2: So in the mid nineties, where were rates? How high 79 00:04:38,680 --> 00:04:41,599 Speaker 2: had they gone up? And then how much lower had 80 00:04:41,800 --> 00:04:42,800 Speaker 2: the Fed taken them? 81 00:04:43,240 --> 00:04:46,080 Speaker 1: So they were at six percent at their peak in 82 00:04:46,160 --> 00:04:49,560 Speaker 1: late nineteen ninety four, and the Fed started to cut 83 00:04:49,640 --> 00:04:53,240 Speaker 1: rates and then they eventually wound up a cutting them 84 00:04:53,240 --> 00:04:55,559 Speaker 1: all the way down to three percent. At that point, 85 00:04:55,600 --> 00:04:59,360 Speaker 1: we thought that three percent was a microscopically low interest rate. 86 00:05:00,080 --> 00:05:01,680 Speaker 1: We know what we were in star Forth over the 87 00:05:01,720 --> 00:05:05,960 Speaker 1: next twenty years, So those rates were not very different 88 00:05:06,120 --> 00:05:08,240 Speaker 1: than the rates that we're seeing today with the FED 89 00:05:08,279 --> 00:05:10,039 Speaker 1: being a five to five and a quarter and with 90 00:05:10,120 --> 00:05:12,360 Speaker 1: the bond with the yield and the ten year Treasury 91 00:05:12,400 --> 00:05:15,280 Speaker 1: at around four fifteen to four twenty, so we're kind 92 00:05:15,279 --> 00:05:17,640 Speaker 1: of in the same range that we've seen that. 93 00:05:18,320 --> 00:05:21,680 Speaker 2: So if I'm an investor and I want to know 94 00:05:22,760 --> 00:05:26,279 Speaker 2: the best data series to track and the levels to 95 00:05:26,320 --> 00:05:29,039 Speaker 2: pay attention to, that are going to give me a 96 00:05:29,120 --> 00:05:31,960 Speaker 2: heads up that, hey, the FED is really going to 97 00:05:32,040 --> 00:05:35,200 Speaker 2: start cutting rates. Now what should I be looking at 98 00:05:35,240 --> 00:05:39,120 Speaker 2: and what are the levels that suggest? Okay, now the 99 00:05:39,120 --> 00:05:42,200 Speaker 2: FED is going to be comfortable, maybe not cutting them 100 00:05:42,240 --> 00:05:44,280 Speaker 2: in half the way they did in the mid nineties, 101 00:05:44,720 --> 00:05:47,719 Speaker 2: but certainly taking rates from five to five and a 102 00:05:47,800 --> 00:05:50,640 Speaker 2: quarter down to four to four and a quarter four 103 00:05:50,640 --> 00:05:51,880 Speaker 2: and a half something like that. 104 00:05:52,360 --> 00:05:55,320 Speaker 1: So one forward looking measure and one kind of backward 105 00:05:55,400 --> 00:05:57,520 Speaker 1: looking measure that matters for the FED. The forward looking 106 00:05:57,520 --> 00:06:00,040 Speaker 1: measure is going to be probably the labor market. What 107 00:06:00,120 --> 00:06:02,920 Speaker 1: the FED is most concerned about is higher interest rates. 108 00:06:03,000 --> 00:06:06,920 Speaker 1: Are they going to weigh on business borrowing costs and 109 00:06:07,080 --> 00:06:11,040 Speaker 1: reduce their propensity or willingness to continue to hire workers. 110 00:06:11,560 --> 00:06:14,599 Speaker 1: So let's look at the initial claims for unemployment insurance. 111 00:06:14,600 --> 00:06:17,440 Speaker 1: It's a number that's put out every Thursday for the 112 00:06:17,480 --> 00:06:22,200 Speaker 1: previous week initial claims. Everybody has unemployment insurance. It's a 113 00:06:22,240 --> 00:06:26,240 Speaker 1: state program BUERAFU label. Statistic just aggregates to fifty states 114 00:06:26,240 --> 00:06:29,279 Speaker 1: and puts out that number on a seasonally adjusted basis. 115 00:06:29,360 --> 00:06:31,720 Speaker 1: It's in the low two hundred thousands right now. That 116 00:06:31,880 --> 00:06:34,800 Speaker 1: is over the last fifty years, an extraordinarily low number, 117 00:06:35,400 --> 00:06:37,680 Speaker 1: you start to and so if it goes up to 118 00:06:37,680 --> 00:06:40,560 Speaker 1: two twenty five or two forty, it's still a low number. 119 00:06:40,880 --> 00:06:43,159 Speaker 1: I think if you start seeing it, you know, start 120 00:06:43,200 --> 00:06:47,240 Speaker 1: pushing two seventy five or above three hundred thousand, are 121 00:06:47,680 --> 00:06:52,400 Speaker 1: that means new recipients for unemployment insurance that week? Then 122 00:06:52,440 --> 00:06:55,400 Speaker 1: I start thinking that, you know, there is a real 123 00:06:55,480 --> 00:06:57,720 Speaker 1: problem starting to brew in the labor market. The Fed 124 00:06:57,760 --> 00:07:00,279 Speaker 1: will see that too, and the propensity for them to 125 00:07:00,320 --> 00:07:03,360 Speaker 1: cut will grow. And I want to emphasize here two 126 00:07:03,440 --> 00:07:06,600 Speaker 1: hundred thousand on Wall Street tends to kind of get 127 00:07:06,640 --> 00:07:09,720 Speaker 1: themselves myopic. Here, Oh, it went from two hundred thousand 128 00:07:09,800 --> 00:07:12,080 Speaker 1: to two hundred and twenty five, two hundred and thirty thousand. 129 00:07:12,120 --> 00:07:13,880 Speaker 3: The labor market is weakening. 130 00:07:14,120 --> 00:07:16,520 Speaker 1: No, that's all noise down near the lowest numbers that 131 00:07:16,520 --> 00:07:18,680 Speaker 1: we've ever seen in fifty years. It's got to do 132 00:07:18,760 --> 00:07:20,360 Speaker 1: something more significant than that. 133 00:07:20,800 --> 00:07:23,880 Speaker 2: What's the best inflation data to track that? You know, 134 00:07:24,000 --> 00:07:25,640 Speaker 2: Jerome Powell is paying attention to. 135 00:07:26,400 --> 00:07:30,360 Speaker 1: So Pow likes this obtuse number. He likes it because 136 00:07:30,360 --> 00:07:35,720 Speaker 1: he made it up called cores supercore. So it's it's 137 00:07:35,760 --> 00:07:40,040 Speaker 1: it's inflation less house excuse me, less food, less energy, 138 00:07:40,240 --> 00:07:43,600 Speaker 1: and less housing services. Now before you roll your eyes 139 00:07:43,600 --> 00:07:47,080 Speaker 1: and go, so you're talking about inflation provided I don't eat, 140 00:07:47,280 --> 00:07:50,560 Speaker 1: I don't drive, and I don't live anywhere. Inflation ex 141 00:07:50,640 --> 00:07:54,840 Speaker 1: inflation right right, what's left over is driven by wages. 142 00:07:55,280 --> 00:07:57,720 Speaker 1: And why he looks at that is he's trying to say, 143 00:07:58,200 --> 00:08:00,600 Speaker 1: are we seeing a wage spiral? 144 00:08:00,720 --> 00:08:02,520 Speaker 3: Now? Why is a wage spiral important? 145 00:08:03,080 --> 00:08:06,120 Speaker 1: No one is against anybody getting a raise, But the 146 00:08:06,240 --> 00:08:09,960 Speaker 1: fact is, if everybody is getting a four percent raise, 147 00:08:10,760 --> 00:08:14,480 Speaker 1: you can afford three to four percent inflation. If everybody's 148 00:08:14,480 --> 00:08:17,840 Speaker 1: getting a five percent raise, you can afford four percent inflation. 149 00:08:18,240 --> 00:08:20,760 Speaker 1: And that's what they're most concerned about, is getting that 150 00:08:20,840 --> 00:08:24,640 Speaker 1: inflation spiral going with a wage spiral. So they look 151 00:08:24,680 --> 00:08:27,800 Speaker 1: at the super core number as a way to say, yes, 152 00:08:27,840 --> 00:08:30,600 Speaker 1: we understand that there's housing. We understand that there's driving, 153 00:08:30,840 --> 00:08:33,640 Speaker 1: we understand that there's eating, and there's inflation in those three. 154 00:08:33,840 --> 00:08:37,400 Speaker 1: But we also understand that there's way inflation in wages. 155 00:08:37,520 --> 00:08:39,920 Speaker 1: And that's what they're trying to do is look at wages, 156 00:08:40,200 --> 00:08:42,320 Speaker 1: and so that's probably the best measure to look at. 157 00:08:42,600 --> 00:08:45,360 Speaker 2: So I know what a data wonk and a market 158 00:08:45,400 --> 00:08:50,640 Speaker 2: historian you are, but I suspect a lot of investors, 159 00:08:50,679 --> 00:08:55,000 Speaker 2: a lot of listeners, may not know what happens to 160 00:08:55,120 --> 00:08:58,679 Speaker 2: the bond market and the equity market once the Fed 161 00:08:58,920 --> 00:09:02,920 Speaker 2: finally begins cutting rates. 162 00:09:02,720 --> 00:09:06,120 Speaker 1: It depends on why, because there's two scenarios in there. 163 00:09:07,160 --> 00:09:10,520 Speaker 1: If the Fed starts cutting rates like it did in 164 00:09:10,520 --> 00:09:13,160 Speaker 1: twenty twenty, or like it did in two thousand and eight, 165 00:09:14,320 --> 00:09:16,440 Speaker 1: or like it did even in two thousand and one, 166 00:09:17,280 --> 00:09:20,400 Speaker 1: and it's a panic, Oh my god, the economy is 167 00:09:20,440 --> 00:09:23,920 Speaker 1: falling apart. People are losing their jobs. We've got to 168 00:09:23,960 --> 00:09:27,839 Speaker 1: start to stimulate the economy. We have to stop a recession. 169 00:09:28,559 --> 00:09:32,760 Speaker 1: If they're cutting rates because of a panic, it doesn't work. 170 00:09:32,920 --> 00:09:35,640 Speaker 1: We had recessions every time they started doing that, last 171 00:09:35,640 --> 00:09:38,199 Speaker 1: one being twenty twenty when they saw what was happening 172 00:09:38,240 --> 00:09:43,080 Speaker 1: with COVID, and because it is projecting a recession, which 173 00:09:43,120 --> 00:09:48,600 Speaker 1: means less economic activity, lower earnings. It's usually a difficult 174 00:09:48,679 --> 00:09:51,600 Speaker 1: period for risk markets like the stock market or real 175 00:09:51,679 --> 00:09:54,760 Speaker 1: estate prices and the like. If the Fed is cutting 176 00:09:54,880 --> 00:09:58,160 Speaker 1: rates like they did in nineteen ninety five or like 177 00:09:58,200 --> 00:10:01,720 Speaker 1: they did in twenty nineteen, it's kind of a victory lap. 178 00:10:01,760 --> 00:10:02,160 Speaker 3: We did it. 179 00:10:02,280 --> 00:10:05,240 Speaker 1: We stopped the bad stuff from happening, our magic tool 180 00:10:05,280 --> 00:10:08,720 Speaker 1: of interest rates, accomplished everything that we need. Now we 181 00:10:08,800 --> 00:10:12,920 Speaker 1: don't need a restrictive rate anymore, and they back off 182 00:10:13,040 --> 00:10:16,440 Speaker 1: of that restrictive rate. Well ninety five and twenty nineteen, 183 00:10:17,440 --> 00:10:20,640 Speaker 1: risk markets took off. Now twenty nineteen was short lived 184 00:10:20,720 --> 00:10:23,479 Speaker 1: because then COVID gotten away, and that was an exogenous 185 00:10:23,520 --> 00:10:27,000 Speaker 1: event that was not financially related. But they were going 186 00:10:27,160 --> 00:10:31,360 Speaker 1: right up until the moment that COVID hit. So why 187 00:10:31,559 --> 00:10:35,200 Speaker 1: is the Fed cutting rates? It really matters more than 188 00:10:35,440 --> 00:10:39,599 Speaker 1: when will they cut rates? And right now what everybody's 189 00:10:39,679 --> 00:10:43,040 Speaker 1: hoping for is the why will be a victory lap. 190 00:10:43,400 --> 00:10:46,120 Speaker 1: We did it, We stopped that bad old inflation. It's 191 00:10:46,160 --> 00:10:48,840 Speaker 1: gotten back to our two percent target. We could go 192 00:10:48,960 --> 00:10:51,839 Speaker 1: back to the way we were pre pandemic. And then 193 00:10:52,040 --> 00:10:55,040 Speaker 1: once we're there. We could now start to back off 194 00:10:55,040 --> 00:10:59,280 Speaker 1: of this restrictive rate and everybody will celebrate that. Yay, 195 00:10:59,320 --> 00:11:02,600 Speaker 1: we're getting into straight relief without it being a signal 196 00:11:02,920 --> 00:11:04,240 Speaker 1: that the economy is falling. 197 00:11:04,640 --> 00:11:08,839 Speaker 2: So to wrap up, investors hoping for rate cuts should 198 00:11:08,880 --> 00:11:13,080 Speaker 2: be aware that sometimes there's a positive response when it's 199 00:11:13,120 --> 00:11:18,320 Speaker 2: a victory lap. Sometimes when it's revealing the economy is 200 00:11:18,320 --> 00:11:21,920 Speaker 2: softening or a recession is coming, tends not to be 201 00:11:21,960 --> 00:11:25,920 Speaker 2: good for stocks. Volatility tends to increase. It's a classic 202 00:11:26,000 --> 00:11:29,199 Speaker 2: case of be careful what you wish for. But if 203 00:11:29,240 --> 00:11:31,200 Speaker 2: you want to know what the Fed is going to do, 204 00:11:31,760 --> 00:11:35,360 Speaker 2: you should keep track of initial unemployment claims. When they 205 00:11:35,360 --> 00:11:38,520 Speaker 2: get up towards three hundred thousand per week, that's a 206 00:11:38,559 --> 00:11:44,160 Speaker 2: warning sign. And follow Chairman Pal's super core Inflation, where 207 00:11:44,160 --> 00:11:47,920 Speaker 2: he's looking at the rate of wage increases to determine 208 00:11:47,960 --> 00:11:52,720 Speaker 2: when the Fed begins its newest rate cutting cycle. I'm 209 00:11:52,800 --> 00:11:59,000 Speaker 2: Barry Retults and you've been listening to Bloomberg's at the Money, got. 210 00:12:01,440 --> 00:12:06,640 Speaker 3: Head. I know the first kind is the gems. 211 00:12:08,040 --> 00:12:11,720 Speaker 1: And it counts up bigger lucky, She's goose. 212 00:12:13,920 --> 00:12:17,480 Speaker 3: Then it comes laughing, she's worse.