Speaker 1: Well, can you trilliance? I'm Joe in America. Tunis Eric H.
Speaker 1: We have a good, great guest today, Jim Bianco of
Speaker 1: Bianco Research, and I have a few things that I
Speaker 1: want to talk to him about. What do you want
Speaker 1: to talk to him about? A couple of things. I mean,
Speaker 1: one of the words that we're hearing more and more
Speaker 1: is inflation. And we saw bond yields go up last week,
Speaker 1: and we saw how how big time equities reacted off
Speaker 1: of that, and you realize there's a fragility between bonds
Speaker 1: and stocks. You had both bonds and stocks going down.
Speaker 1: Inflations are inflation fears are getting stronger, and Jim tweets
Speaker 1: about this quite a bit. And so this dynamic of
Speaker 1: inflation and how it will affect people's portfolios is one thing.
Speaker 1: And the other thing I think is ARC, and ARC
Speaker 1: to me is probably the poster child of some of
Speaker 1: these stocks that are counting on low rates right um
Speaker 1: low rates there is good for these sort of high
Speaker 1: valuation stocks. And also the fears around ark and concentration risks.
Speaker 1: And I've seen him to be about this a lot
Speaker 1: as well. And so these are two major stories that
Speaker 1: are really dominating the past couple of weeks in my view,
Speaker 1: And and he's somebody who thinks about this stuff constantly.
Speaker 1: As long as we're gonna talk to him about inflation,
Speaker 1: we gotta, I think, also ask him about bitcoin, because
Speaker 1: that's the thing a lot of people think is a
Speaker 1: hedge to inflation, and there's all this chatter around bitcoin ETFs. Yeah,
Speaker 1: and I can tell you from from following him that
Speaker 1: he's thinking about that a lot. And what I like
Speaker 1: about Jim is he's, um not dismissive. You know, there's
Speaker 1: people who just dismiss bitcoin, They dismiss arc, they dismiss
Speaker 1: they're just very dismissive. Um, he's not. He kind of
Speaker 1: tries to figure it out, understand where it's coming from.
Speaker 1: And I think that that's an asset as an analyst
Speaker 1: this time on trillions, how to think about inflation, I mean,
Speaker 1: other things with Jim Bianco. Jim, welcome at Trilliance. Hey,
Speaker 1: thanks for having me. So Jim, I gonna ask you,
Speaker 1: what what what do you do? What's the you know,
Speaker 1: your your president of Bianco Research, obviously doing a lot
Speaker 1: of analysis, but like break it down for us, what's
Speaker 1: your job? Whatever? I wanted to be. Uh, That's why
Speaker 1: I like it. But seriously, I'm a macro researcher and
Speaker 1: I'm an independent person. So I tend to look at
Speaker 1: the macro space by saying, Okay, what isn't being emphasized enough?
Speaker 1: What do I think people have wrong that I should explain?
Speaker 1: What do I think they have right that I think
Speaker 1: needs to be amplified, And so in within the macro realm,
Speaker 1: I tend to kind of find those topics, uh and uh,
Speaker 1: you know, choose which one I want, and I can
Speaker 1: be very colectic, you know. In the fall, Uh, there
Speaker 1: was I was doing a lot with polls on the
Speaker 1: election and about how I thought that the election was
Speaker 1: going to be far closer than people thought it was
Speaker 1: going to be um you know, and my big whipping
Speaker 1: boy back then was Nate Silver, who was giving um
Speaker 1: Trump something like a nine percent chance of winning the election.
Speaker 1: I still thought it was gonna lose, but I thought
Speaker 1: it was more like a race than it was a
Speaker 1: nine race. Uh as as well too. I my Bailey
Speaker 1: Wick has always been the bond market, and it's all
Speaker 1: I always kind of start there because it's kind of
Speaker 1: the most natural market for a macro researcher because it
Speaker 1: brings in policy and it brings in economics, which I
Speaker 1: spend a lot of time doing as well too. What
Speaker 1: I don't do a lot of as a macro researcher
Speaker 1: is individual securities. So if you're looking for que SIPs
Speaker 1: or tickers, I might not be your guy. I've got some,
Speaker 1: but not really as as my big Bailey Wick And
Speaker 1: who are your clients? Institutional investors around the world. I
Speaker 1: am affiliated with a brokerage firm called Arbor Research and
Speaker 1: Trading out of Chicago here and they've got offices you know,
Speaker 1: in Chicago and New York and in London and salesman
Speaker 1: in Chicago, New York, in London, and so we have
Speaker 1: clients all over the all over the world. Uh. And
Speaker 1: we also sell our research as part of a research
Speaker 1: subscription basis if you don't want to subscribe to it
Speaker 1: as a or you don't want to do brokerage business
Speaker 1: as an institutional UM manager And so, Jim, I see
Speaker 1: you tweeting about et s now and then they seem
Speaker 1: to be worked into your workflow. Um, how are they
Speaker 1: related to you? Are you? Are they a natural investment
Speaker 1: tool for the people you're writing research for or are
Speaker 1: you more looking at them as ways to read sentiment
Speaker 1: and get intel from the market and investors both. I
Speaker 1: think that there's a number of institutional investors and we
Speaker 1: have a number of wealth managers. I like, I love
Speaker 1: to tell this story. We have a number of wealth
Speaker 1: managers as clients. And I was talking to a wealth
Speaker 1: manager on the West Coast. This is, you know, four
Speaker 1: or five years ago, and he was saying to me, uh, yeah,
Speaker 1: I like high yield and I've instructed my desk to
Speaker 1: buy high yield. I was like, really, you've got a desk.
Speaker 1: You're a wealth manager, got a desk. And he goes, well,
Speaker 1: it's kind of my wife on a PC and I
Speaker 1: told her to buy me some h y G you know.
Speaker 1: So that's kind of there's a lot of there's a
Speaker 1: lot of institutional managers that when they say that they're
Speaker 1: long a particular sector, short of particular sector, they're talking
Speaker 1: about the e T s that they've bought or sold
Speaker 1: as well too. And they provide a tremendous resource into
Speaker 1: sentiment by looking at the creation and deletion of shares
Speaker 1: and looking at the n A V premiums and discounts
Speaker 1: as well too, you can get a lot of glean
Speaker 1: a lot of information about the psyche of the market
Speaker 1: as well. So they work for me on both ends
Speaker 1: in that respect. So let's talk about ARC, which is
Speaker 1: the E t F topic of the moment. You've been
Speaker 1: following ARC. I have, we all have. I mean, you
Speaker 1: can't take your eyes off of it. When you see
Speaker 1: a company go from three billion to fifty billion in
Speaker 1: a year, it's a amenon. You know, are craze. We
Speaker 1: have many terms for it, but I just want to
Speaker 1: get your just first overall. Take I think right now
Speaker 1: the big debate is, Okay, this company has killed it,
Speaker 1: They've grown fast, and now you've got this sort of
Speaker 1: a bunch of warriors, not totally clear their motive, but
Speaker 1: people are talking about, oh, there's concentration risk. Some of
Speaker 1: the stocks that the funds own, they own, you know,
Speaker 1: more than twenty of the SHARE's outstanding, could be a
Speaker 1: dozen of those roughly, and so they're worried, well, what
Speaker 1: if there's outblows, there's gonna be a liquidity issue and potentially,
Speaker 1: and I heard one guy today was like, ARC is
Speaker 1: gonna is the new long term capital management, which so
Speaker 1: you're really seeing a lot of hyperbole as well. What's
Speaker 1: your take on it right now? Well, first of all,
Speaker 1: at the top, let me disclose that I own all
Speaker 1: five of the ARC funds, so I am a big
Speaker 1: fan of Cathy Wood and the structure of ARC. So
Speaker 1: keep in minding my comments come from an admirer of
Speaker 1: the fund. Now that I've said that, I think there's
Speaker 1: a lot of people that are very they're very jealous.
Speaker 1: They're jealous of the performance of of ARC. Might be
Speaker 1: jealous of of Cathy as well too. Um, I won't
Speaker 1: say that they're sexism, but I just did as well too.
Speaker 1: But but let me let me be, let me be
Speaker 1: a specific. Yeah, they've got an issue with with the concentration.
Speaker 1: So did Warren Buffett in the nineteen eighties. He was
Speaker 1: as concentrated as she was by having a you know,
Speaker 1: a handful of of companies that he owned that he
Speaker 1: was He sat on the board of most of them
Speaker 1: as well too, So we've not this is not new,
Speaker 1: And yes it does pose a risk, and no less
Speaker 1: than ARC and WOULD themselves are regularly putting out YouTube
Speaker 1: videos in research explaining that risk. And yes they do
Speaker 1: disclose every day what they're doing in their fun they
Speaker 1: have to buy law because they're an e t F
Speaker 1: and they go the extra mile by emailing out all
Speaker 1: of their trading every day as well too, So it's
Speaker 1: a very very transparent fund. Uh. As far as the
Speaker 1: idea that it's going to get so bad and that
Speaker 1: the outflows out of ARC are gonna get so bad,
Speaker 1: and that there's a bunch of people that are gonna
Speaker 1: say I told you so, I got news for you.
Speaker 1: If it gets that bad, it's gonna get that bad
Speaker 1: for you too. It's not. ARC is not gonna blow
Speaker 1: up and the SMP is gonna just sit there and
Speaker 1: go sideways while that's happening. If you're talking about ARC
Speaker 1: being in a long term capital type of problem, the
Speaker 1: SMP is gonna look a lot like last March as
Speaker 1: far as what it will be doing at the same time.
Speaker 1: So I I don't understand this this hatred. Yeah, you
Speaker 1: could make the case if you want, that this the
Speaker 1: sector that she's playing in, is overdone. There might be
Speaker 1: a stiff pullback there was last week as we are
Speaker 1: talking about, and there might be further downside. That's one story.
Speaker 1: But to say that they're going to come on glued
Speaker 1: is essentially in my mind saying the whole market's gonna
Speaker 1: come on glued because there is a strong correlation between
Speaker 1: those stocks and the rest of the market. They're not
Speaker 1: going to go down and fall apart while everything else
Speaker 1: you're just gonna sit there and do nothing. Yeah, Jim,
Speaker 1: I completely agree with you. I just want to had
Speaker 1: a couple of little tidbits here. One is that ARC
Speaker 1: also owns some pretty big names. They're able to sort
Speaker 1: of manage liquidity, and they've only seen a week of
Speaker 1: outflows and those outflows were one point five percent of
Speaker 1: the assets. And like you said, when if if she
Speaker 1: if her and her phone went down last week, well,
Speaker 1: a lot of things were down last week. And this
Speaker 1: reminds me of a lot of ETF issues where you
Speaker 1: can create these scenarios on paper and they really end
Speaker 1: up with you have to be able to you might
Speaker 1: have like a World War three scenario before that plays out. Uh.
Speaker 1: And I think people do try to isolate it instead
Speaker 1: of just sort of considering it is one thing in
Speaker 1: a bigger picture, because also fifty billion isn't that big um.
Speaker 1: But we have looked also at e t F s
Speaker 1: that have really risen up this quickly, and typically outflows
Speaker 1: do not come out as fast as they went in
Speaker 1: because there's people who are waiting to buy the dip.
Speaker 1: You know, she got a big core fan base, so
Speaker 1: there could be a tug of war, there could be
Speaker 1: a rebound, and there are also could people who just
Speaker 1: forget they bought it or are just in for the
Speaker 1: long term. So I think this scenario that all of
Speaker 1: a sudden, there's going to be a run on her
Speaker 1: e t F and the flows are gonna be so
Speaker 1: bad she gets stuck in a liquidity issue and you
Speaker 1: know the and somebody even said she's gonna have to
Speaker 1: be bailed out. I mean, this is getting pretty ridiculous.
Speaker 1: I think it's the worst case scenario. If everything's going
Speaker 1: to hell. It's possible she could have a little trouble
Speaker 1: with a couple of stocks and it could trade at
Speaker 1: it's like discount, if there's a pull on the e
Speaker 1: t F to get out, But I don't know, I
Speaker 1: just don't see anything worse than that. What it would
Speaker 1: be your worst case scenario, Jim, You know, looking at
Speaker 1: some of the e t f s in the in
Speaker 1: the credit space, especially h y G. Let's talk worse
Speaker 1: case you remember there's payment in kind. If things get
Speaker 1: bad enough, you could just hand that you just in redemption,
Speaker 1: you can just hand them the shares, is what you
Speaker 1: could do. You don't have to liquidate the shares and
Speaker 1: hand them and hand them cash. That's if you get
Speaker 1: into the worst case scenario. So there is not necessarily
Speaker 1: that case. We've seen that with UM, Like I said,
Speaker 1: in is a matter of fact. With h y G
Speaker 1: they high yield e t F. That's an actual strategy
Speaker 1: as far as uh UM. You know, payment and kind
Speaker 1: in for in terms of handing shares and receiving shares
Speaker 1: as part of the trading strategy of that fund as
Speaker 1: well too. So that would be you know, I think
Speaker 1: under the worst case scenario. But let's also remember I
Speaker 1: know she was much smaller, but one year ago, one
Speaker 1: year ago, her strategy was she was buying a lot
Speaker 1: of big liquid names, you know, the Microsoft's, the Apples
Speaker 1: of the World and stuff, and then in the sell
Speaker 1: off in March, liquidated those names to pick up a
Speaker 1: lot of the lesser liquid, higher flyer names as well too.
Speaker 1: And I've seen some of her research thing that's the
Speaker 1: strategy I want to employ in the next downturn. And
Speaker 1: then finally, I'll say one other thing too. In the
Speaker 1: last two weeks, she's come out repeatedly and said she
Speaker 1: expects a stiff correction in the market. So I think
Speaker 1: part of the thing about them getting in trouble is
Speaker 1: they're caught flat footed and something they don't anticipate. Well,
Speaker 1: she's been anticipating a correction in the market, so I
Speaker 1: have to believe that. You know, she's been strong positioned
Speaker 1: for it, been ready for it. It's not shocking her.
Speaker 1: She's not staring at the ceiling at night wondering what's
Speaker 1: going on because our funds are are are selling off.
Speaker 1: Is bad because it was literally two weeks ago she
Speaker 1: said she was ready for something like this. So, Jim,
Speaker 1: I want to actually take a moment and like talk
Speaker 1: about the fixed income world, since that's something that you're
Speaker 1: you're deeply rooted in as well. How existential of a
Speaker 1: moment is this for for fixed income and bonds. I
Speaker 1: think it is fairly existential because my view, and it's
Speaker 1: becoming more of a view in the mark it is
Speaker 1: we're about to turn tact here and start to see
Speaker 1: something we haven't seen in maybe thirty years and that
Speaker 1: is inflation. We're now really openly looking at that idea.
Speaker 1: Over the last twenty five or thirty years, we there,
Speaker 1: we've had bouts where people have talked about inflation, but
Speaker 1: it really hasn't materialized to any great degree. And in fairness,
Speaker 1: as of right now, it hasn't materialized. But I think
Speaker 1: the evidence is the strongest that's ever been that we're
Speaker 1: going to see inflation, and that is going to be
Speaker 1: a big game changer. I think in the fixed income
Speaker 1: space that a lot of people are not ready for it.
Speaker 1: For instance, inflation is historically not good for equities. I
Speaker 1: don't everybody says it is good for equities. They said
Speaker 1: that in the early seventies when we first got inflation
Speaker 1: to the best hedge for inflation was equities. By the
Speaker 1: late seventies, we realized it was one of the worst
Speaker 1: and hedges company can't raise prices as fast as their
Speaker 1: input costs, and their margins get squeezed. That's what typically
Speaker 1: happens in terms of inflation. And the other big one
Speaker 1: for inflation is the sixty forty portfolio, the bedrock of
Speaker 1: the wealth management business. And why you see these really,
Speaker 1: I believe why you see these relentless inflows into fixed
Speaker 1: income ETFs is based on the idea that you don't
Speaker 1: have inflation because they tend, stocks and bond prices tend
Speaker 1: to move opposite each other in the lack of inflation,
Speaker 1: you know, or yields and stocks moved together. I'm saying
Speaker 1: the same thing again, and we've we've even coined a
Speaker 1: phrase for risk on, risk off. Well, in an inflationary environment,
Speaker 1: you have not a sixty forty portfolio, but you have
Speaker 1: a hundred zero portfolio. Either both stocks and bonds are
Speaker 1: going up together or both of them are going down together.
Speaker 1: And we started to see the beginnings of that happening,
Speaker 1: especially last week. Both stocks and bonds went down together
Speaker 1: last week as well too. If this inflationary environment comes,
Speaker 1: then the whole basis of a lot of wealth management
Speaker 1: strategies has to be rethought because that forty leg stops
Speaker 1: working and then they're gonna have to figure it out.
Speaker 1: One last thing, I remember why a person goes to
Speaker 1: a wealth manager. If you're bullish, you just go buy
Speaker 1: ARC or you buy the SMP. You don't need to
Speaker 1: go see a wealth manager. You go see a wealth
Speaker 1: manager because you you want to participate in the market,
Speaker 1: but you're afraid, so they're they're ready made answer, and
Speaker 1: it's not been a wrong answer has been the sixty
Speaker 1: forty portfolio or some variation on that. Well, if that
Speaker 1: stops working, then all of these clients that wealth managers
Speaker 1: have are going to start asking questions, why is my
Speaker 1: portfolio falling as fast as the market if both stocks
Speaker 1: and bonds are falling. I thought that forty leg was
Speaker 1: supposed to protect me, because it certainly didn't help me
Speaker 1: when the market was going up. I always left behind
Speaker 1: the big rally in stocks. So I think that there
Speaker 1: there is going to potentially be an existential point with
Speaker 1: the bond market if we were to see this inflation
Speaker 1: materialized like I think we are. Let me be Devil's
Speaker 1: advocate here, and you know there's that You ever heard
Speaker 1: that Rolling Stone song? It's just your nineteeh nervous breakdown, sure,
Speaker 1: sort of making fun of, Oh, here's here you come
Speaker 1: again with another nervous breakdown. I feel like I've seen
Speaker 1: this movie nineteen times. Before rates start going up, how
Speaker 1: to prepare for rising rates, rising rates, rising rates, and
Speaker 1: then stocks start to go down a little bit. Everybody
Speaker 1: freaks out and the FED comes in and says something
Speaker 1: that just makes it all good. Rates decline, stocks go
Speaker 1: back up. We're partying again. And what what makes you
Speaker 1: think we're not going to go back to that again?
Speaker 1: And this is a new paradigm. You're right, this is
Speaker 1: this is a story that we've heard in the past. Now,
Speaker 1: in defense of me, I only became an inflation east
Speaker 1: last summer, so I'm fair lead new to this. I
Speaker 1: was a big bond bollum until last summer as well too.
Speaker 1: But what I think is changing now is the perception
Speaker 1: of inflation itself, modern monetary theory, universal basic income. We're
Speaker 1: mailing people money as well. We're talking about checks and
Speaker 1: an extra three hundred dollars of unemployment insurance going out.
Speaker 1: And by the way, I understand completely why we're doing it.
Speaker 1: But what I've often argued is if there is no
Speaker 1: consequence to us mailing out all of this money, that
Speaker 1: we pass the stimulus package and the poor get some help,
Speaker 1: and the unemployed get some assistance to their next job,
Speaker 1: and the rich to find the rich. As anybody owns
Speaker 1: equities or assets, if you want to even draw broader,
Speaker 1: see the value of their portfolio go up. Everybody wins,
Speaker 1: so let's do another one, and let's do another one.
Speaker 1: Why wouldn't you do another one. If you pass a
Speaker 1: big stimulus package and you mail checks and everybody wins,
Speaker 1: then do another one and you you you enter kind
Speaker 1: of a U B I m MT world. And that's
Speaker 1: where I think you get the stimulus for inflation. So
Speaker 1: that's been my argument. Now I've also argued you don't
Speaker 1: have inflation. Now, it is a bet that it's coming
Speaker 1: immediately ahead of us in the next sixty days. Is
Speaker 1: what economists called the base effect. In April and May
Speaker 1: of last year, when the shutdowns happened, the prices of
Speaker 1: everything plummeted because everything was closed, and then everybody had
Speaker 1: supply and there was no customers, so they were cutting
Speaker 1: prices to move inventory. That rolls off in the next
Speaker 1: one or two inflation reports. So the year over year
Speaker 1: change of inflation is going to jump dramatically. Everybody knows it.
Speaker 1: Chairman Paul has said it a million times. It's going
Speaker 1: to happen. Be don't be surprised. So you've got your
Speaker 1: ready made excuse for higher inflation over the next sixty days.
Speaker 1: My bet is that in the second half of the year,
Speaker 1: we're gonna start looking around and going, well, that base
Speaker 1: effect didn't go away, and maybe it didn't go away
Speaker 1: because we've got all of this stimulus that we've put
Speaker 1: into the economy. One last off for you. A lot
Speaker 1: of economis say you can't have inflation without wage inflation,
Speaker 1: and there isn't really much in the form of wage inflation.
Speaker 1: Well that's true for now, But what I've argued is
Speaker 1: you have personal income inflation. Astounding number is personal income
Speaker 1: is a total income you make. Wages is a big
Speaker 1: part of it. You know, unrealized gains on your securities
Speaker 1: is a big part of it. Twenty five of that
Speaker 1: number comes from government transfers. That is, stimulus checks, unemployment,
Speaker 1: social Security, disability, veterans benefits, whatever else the government mails.
Speaker 1: It's an astounding number. Used to be pre pandemic, around
Speaker 1: eight or nine percent a quarter of the income of
Speaker 1: the United States is mailed to them from the government
Speaker 1: right now, and the savings rate is tremendously high, well
Speaker 1: over right now. So that's given everybody a ton of money.
Speaker 1: So that as soon as they get their vaccine and
Speaker 1: as soon as they feel a little bit better, and
Speaker 1: everybody says we're gonna come roaring back. They've got money
Speaker 1: to burn, and I think it will show up in
Speaker 1: the form of inflation, and if it doesn't, then the
Speaker 1: argument will be, we'll send some more money out. It
Speaker 1: was all good. We sent them all money out, and
Speaker 1: only good things happen and no bad things happen. So
Speaker 1: we'll just keep going until we eventually get there. That's
Speaker 1: the basis of my inflation argument now. And you're right,
Speaker 1: there is various variations of this. There was a variation
Speaker 1: of this and O eight when we said with que
Speaker 1: there was a famous letter that was signed by about
Speaker 1: sixty people on Wall Street that Jeremy Bernaki, you're creating
Speaker 1: hyper inflation with all this qui and it never happened.
Speaker 1: And so I get it that there there is that
Speaker 1: skepticism and it could be wrong again too. Uh. So
Speaker 1: we'll see how this plays out for the second half
Speaker 1: of the year. When you think about um uh, this
Speaker 1: inflation talk, Jim, I mean, it's it's very easy to
Speaker 1: picture it as this boogeyman like like we had in
Speaker 1: the seventies, right, But it's also part of what you're
Speaker 1: saying here is like we we don't necessarily know how
Speaker 1: big of a boogeyman this could be too, right, Like,
Speaker 1: it could be a little bitty version of of that boogeyman.
Speaker 1: But because we haven't had it for so long and
Speaker 1: we have no sense of how this whole thing could
Speaker 1: get metered, we don't know how big this of a phenomenon,
Speaker 1: this inflation talk could turn into. You're exactly right. So one,
Speaker 1: when I say I'm an inflation east there's two thoughts
Speaker 1: that come through people's minds. If you're a little bit younger,
Speaker 1: you say, okay um Zimbabwe or Venezuela, so we're going
Speaker 1: to one million percent on inflation or something like that.
Speaker 1: Or if you're a little bit older, you think the seventies,
Speaker 1: we're going to double digit inflation. And I'll then turn
Speaker 1: around and say, no, I actually might target on inflation
Speaker 1: core PC. A FED favorite is two point six per cent.
Speaker 1: That's not inflation. That's what the FED wants. And I've
Speaker 1: said no, Wait, two point six percent is a twenty
Speaker 1: eight year high in the inflation rate. So let's start
Speaker 1: with a sustained two point six percent inflation rate. What
Speaker 1: I mean body sustained is you'll probably get there in
Speaker 1: the next two months off the base effects. But then
Speaker 1: will you stay at somewhere near that level after that
Speaker 1: as well? And if you do get to two six
Speaker 1: and the market starts to think, wow, this is kind
Speaker 1: of like the new new level for inflation, and we
Speaker 1: start getting positive real rates, you have a three percent
Speaker 1: thirty year three percent excise the tenure UH probably pushing
Speaker 1: a four percent thirty year in the bond market. With
Speaker 1: all the leverage that's in the bond market. That is
Speaker 1: a very painful move for the bond market. Look at
Speaker 1: the way that the market wobbled over the bond marketing
Speaker 1: one point five percent last week. You double that over
Speaker 1: the next several months or year or so, and I
Speaker 1: think that that could be very painful wall streets, Right,
Speaker 1: it's not the surprise. It's the surprise is not that
Speaker 1: rates are going up. It's the speed at which rates
Speaker 1: are going up. But that's what's got me worried, is
Speaker 1: that I think that the only way rates go up
Speaker 1: is with a quick speed, because it is a realization
Speaker 1: that we've got inflation coupled with a very lever bond market,
Speaker 1: and that will put the whole fixed income market, you know,
Speaker 1: in a bad place and If the bond markets in
Speaker 1: a bad place, all markets are in a bad place.
Speaker 1: So that's the risk that I see in the market
Speaker 1: right now. So what's an investor supposed to do? I've
Speaker 1: got that breakdown? What am I supposed to do with
Speaker 1: that forty? Call your call your wealthare manager and ask
Speaker 1: what you're supposed to what you're supposed to do with it?
Speaker 1: I guess what you need to what you need to
Speaker 1: do with the forty is start to ask yourself what
Speaker 1: is a natural hedge to the stock market? See, the
Speaker 1: great thing about the forty used to be the bond
Speaker 1: part is that bonding stock prices moved opposite each other,
Speaker 1: so yet SI equities And when it went up, you
Speaker 1: made some you know, you participated. You wind up, not
Speaker 1: as much as if you're a pent, but you wind up.
Speaker 1: But when the market fell apart, bonds were supposed to
Speaker 1: rally to cushion the downside. That hasn't happened. So what's
Speaker 1: the investors supposed to do? Here's the hard part. What's
Speaker 1: not corel what's negatively correlated to stocks? If we get inflation?
Speaker 1: And the answer is not much at all. In terms
Speaker 1: of where we are. You're in some kind of a
Speaker 1: hundred zero environment, you might think about, you know, reducing
Speaker 1: your risk, maybe running an eighty percent portfolio with twenty
Speaker 1: in cash. Um, you know, just running higher cash levels
Speaker 1: because you know you're mark you'll go up and down
Speaker 1: with the market, as opposed to a sixty forty with
Speaker 1: zero cash, sixties equities forty bonds. That might be one
Speaker 1: way to look at it, or another one is is
Speaker 1: maybe something that is negatively correlated will emerge, But right
Speaker 1: now everything is said in such a state of flux.
Speaker 1: I'm not sure that there is anything that is negatively
Speaker 1: correlated to equities like bonds and been for the last
Speaker 1: twenty years. So um. You know, this is where I
Speaker 1: think alts have a time to shine, because we have
Speaker 1: seen all e t f c s or e t
Speaker 1: f that do something market neutral where they have a
Speaker 1: short side to them. Those are have been completely ignored.
Speaker 1: And even in the hedge fund space, if you're like
Speaker 1: a true alt, you tend to not see any flows.
Speaker 1: Only the ones that lean towards stocks or beta tend
Speaker 1: to get flows. So there's this sort of beta vortex
Speaker 1: forming no matter what the strategy is. But the people
Speaker 1: who do the pure things like a deep value or
Speaker 1: an all E t F that have been totally ignored
Speaker 1: and live outside of the beta vortex. Does it make
Speaker 1: sense to think about those as a portfolio diversifier now
Speaker 1: before it starts raining, so to speak. Absolutely, And I'd
Speaker 1: also throw into that mixed the smart betas as well too.
Speaker 1: I'm a big fan of the smart beta concept as well.
Speaker 1: And I know it's gotten in a bad rap because
Speaker 1: the smart betas you know, they've they've lagged the market.
Speaker 1: But there are men has always been that over a
Speaker 1: complete cycle that they'll they'll do better for you. It
Speaker 1: smart beat. Again. It's still the same five hundred stocks
Speaker 1: in the SMP, but instead of waiting it by market
Speaker 1: cap or price, you waited by some fundamental measure like
Speaker 1: price to earnings ratio or price to book value or
Speaker 1: cash flow, so that the companies with the better valuations
Speaker 1: get bigger waitings. You just don't always have Apple as
Speaker 1: your biggest waiting because it's the largest company as well. Too.
Speaker 1: They're not doing as well in the up because all
Speaker 1: the racy stocks go up, but they do better in
Speaker 1: the down. So that's another one. But yeah, I think
Speaker 1: that those types of strategies might be better strategies for
Speaker 1: people that are worried about risk, are worried about corrections
Speaker 1: in the marketplace. If indeed, as we continue to move
Speaker 1: forward from here, the bond market does not exhibit that
Speaker 1: negative correlation that we all wanted to to make it
Speaker 1: the natural heads for the stock market. Now there was
Speaker 1: you had quote tweeted Cathy coming full circle here, and
Speaker 1: she had said something like, bonds are are pretty much
Speaker 1: over the new forty Is bitcoin or crypto? Um? You
Speaker 1: quote tweeted that, And I want to get your take
Speaker 1: on that position, because I think it seems to me
Speaker 1: and proved maybe I'm wrong. This is my gut instinct.
Speaker 1: Bitcoin is a plaything of a bull market, in other words,
Speaker 1: and we saw this last week when the candidate bitcoin
Speaker 1: ETF launched up there. It traded like crazy is seeing
Speaker 1: like two fifty million dollars of flows the first couple
Speaker 1: of days. Then Bitcoin got smacked and the equity market
Speaker 1: declined at the same time, and then it went down
Speaker 1: to volume. Because when when it starts raining, people they
Speaker 1: don't think about that stuff. They go to the core.
Speaker 1: They think of their equity and bond positions, and it
Speaker 1: almost seems like bitcoin will just go down with a
Speaker 1: risk off sell off and provide no hedge. Am I wrong? No,
Speaker 1: you're right. Um, the concept that Cathy said that maybe
Speaker 1: bitcoin is the forty I'm with her on that idea
Speaker 1: up but we're not there now. The problem is bitcoin
Speaker 1: is still positively correlated with equities. You know, so if
Speaker 1: you if you open a coin based account and buy
Speaker 1: some cryptos or bitcoin in particular, Uh, it's going to
Speaker 1: go down when the stock market goes down like last week,
Speaker 1: and it will rally back when the stock marker rallies back.
Speaker 1: So it's not providing that negative correlation that people think
Speaker 1: that it would provide, or you know, it does its
Speaker 1: own thing to help give you some kind of a diversification. Now,
Speaker 1: maybe over time, if it becomes more accepted as a
Speaker 1: legitimate asset class instead of a speculation that it would
Speaker 1: be an asset class, it could evolve into that. That's
Speaker 1: where I think then makes case. But I think it's
Speaker 1: too early right now to put it into that category. Uh,
Speaker 1: that it is a natural fit for a portfolio diversifier.
Speaker 1: It's a speculation. I own some cryptos. I don't own
Speaker 1: bitcoin at the moment, but I own some others and
Speaker 1: but very very tiny amounts that if I lost all
Speaker 1: my money, it wouldn't change anything UM for me. And
Speaker 1: I'm doing it to more learn about the space than
Speaker 1: anything else, and I understand what's going on in the space,
Speaker 1: but it's still too early to start thinking about that
Speaker 1: space as another asset class to compete with stocks and bonds.
Speaker 1: So it does seem like just of late, it's really
Speaker 1: turned a corner Bitcoin specifically in terms of just having
Speaker 1: a certain zeitgeist among institutional investors. And I'm I'm curious,
Speaker 1: ay what you what you hear from your clients regarding
Speaker 1: bitcoin and then sort of like what your what the
Speaker 1: your your long term view on where you think it
Speaker 1: could go? So um, You're right, it has seemed to
Speaker 1: turn a corner. And I've referred to this as the
Speaker 1: adoption rally because what you're starting to see not only
Speaker 1: with Tesla and micro strategies UH and the new um
Speaker 1: Pulsey tf in in Canada, but you're seeing companies now
Speaker 1: embrace a squares as square as another one as well
Speaker 1: too that is starting to embrace and starting to look
Speaker 1: at these as a potential UH corporate strategy to own
Speaker 1: some kind of a cryptocurrency as well. My clients, there's
Speaker 1: still somewhat mixed. Um, there's a fair number of them
Speaker 1: that screened tulips and that we've lost our mind and
Speaker 1: what are we doing trading a bunch of bits and
Speaker 1: bites that have no value in pretending that they do.
Speaker 1: And then there's others and I kind of put myself
Speaker 1: into this camp too. Oh No, this is the leading
Speaker 1: edge of a huge financial disruption. Now, this disruption is
Speaker 1: not happening this year, next year, but it's coming, and
Speaker 1: especially in the space of centralized financeer defy. I think
Speaker 1: that it is a big deal. What is coming down
Speaker 1: the line, and what we're seeing is version one point
Speaker 1: oh of that change. Yeah, it's the buggy version that
Speaker 1: has problems. But there will be a two hour and
Speaker 1: a three oh, and it will get better and it
Speaker 1: will get better and then it will come more into
Speaker 1: focus that it will compete with what the crypto space
Speaker 1: called ci FI centralized finance, which is what we have
Speaker 1: right now as well, that it will become a new
Speaker 1: era for us. So it's risky, and the biggest risk
Speaker 1: you have. I've I've said to people, I personally believe
Speaker 1: that this is going to be a big disruptor and
Speaker 1: game changer. But there's so many protocols and there's so
Speaker 1: many coins that are competing to be the winner in
Speaker 1: that space that I don't know which one will win.
Speaker 1: So I've said, it's like you've stumbled on a racetrack
Speaker 1: and you know there's a horse and there are a
Speaker 1: bunch of horses at that racetrack that can win you money,
Speaker 1: and quit talking about whether or not they're going to
Speaker 1: close the racetrack down and try and learn about what
Speaker 1: the horses are doing and try and figure out which
Speaker 1: horses are gonna win. And so that's kind of where
Speaker 1: my clients are. Some of them think we've got to
Speaker 1: close the race track down, and the other ones are saying, well,
Speaker 1: which horses do you think might might emerge? Is the
Speaker 1: winners out of this big race that we're having right
Speaker 1: now that speaking of horses and horse race, you know,
Speaker 1: one of the big debates in the e t F
Speaker 1: NERD community is whether they're going to approve a bitcoin
Speaker 1: ETF and I guess I want to get your take
Speaker 1: on the odds of that, whether it's a good thing,
Speaker 1: and then finally, what do you think the SEC should do?
Speaker 1: Because if they approve one, they just they're kingmakers. They're
Speaker 1: gonna make those people rich instantly. We now know there's
Speaker 1: probably gonna be about ten to fifteen billion in in
Speaker 1: like a couple of weeks into whatever one's out first,
Speaker 1: or should they approve you know, five six seven at
Speaker 1: once to give a level playing field. Well, the big
Speaker 1: game changer there is Gary Gensler. So Gary Gensler is
Speaker 1: the UH Biden administration's appointee to be SEC chairman. UH.
Speaker 1: He is a big crypto advocate. He was a professor
Speaker 1: in m I T and taught a class on blockchain
Speaker 1: in cryptocurrencies as well to the head of the crypto
Speaker 1: area of the SMP, the I can't remember name, but
Speaker 1: the woman who um you know investigates crypto and behalf
Speaker 1: of the SEP now will report directly to the chairman.
Speaker 1: So this has got the hype going that we got
Speaker 1: the guy in place that will approve it. If anybody's
Speaker 1: gonna give it its blessing, it's gonna be Gary Gensler.
Speaker 1: And he hasn't been approved yet, but he should be shortly,
Speaker 1: and once he is, then you know, start the countdown
Speaker 1: clock until we start to see some um, crypto et
Speaker 1: s and nine answers. Sure, why not. We've got we've
Speaker 1: got volatility e t f s, we've got inverse levity
Speaker 1: t ffs. As long it is it is disclosed as
Speaker 1: to what you own and what you don't own, I
Speaker 1: don't see a problem with with any of that, as
Speaker 1: long as you don't pull a tether. And what I
Speaker 1: mean by pull a tether, that's the cryptocurrency that's supposed
Speaker 1: to be a stable coin tied to the dollar, and
Speaker 1: they were supposed to have a trust. So for every
Speaker 1: uh cryptocurrency that was out there with one dollar, there
Speaker 1: was one dollar in a bank account. There was no
Speaker 1: money in a bank account. Uh. So as long as
Speaker 1: you don't pull something like that, yeah, I think it
Speaker 1: would be it would be perfectly fine, and that people
Speaker 1: will understand and um, you know, embrace what they're what
Speaker 1: they're gonna do. And you're right, there's there's all kinds
Speaker 1: of people on the runway that are ready to do it.
Speaker 1: And I understand why too, because you want to own
Speaker 1: it in a regulated account, because you've got some of
Speaker 1: the protections that people are comfortable with in the in
Speaker 1: the crypto space. I don't know if you guys have
Speaker 1: a crypto account, and if you've if you've got more
Speaker 1: than one crypto account, I've always loved this. If you've
Speaker 1: got one one crypto account and you try to transfer
Speaker 1: money between one account and the other, you've got to
Speaker 1: make sure you're on the right network, you've got the
Speaker 1: addresses right, and they give you literally quizzes and about
Speaker 1: eight warnings if you don't do this right and you mix,
Speaker 1: you know, mix or get the addresses wrong, or mix
Speaker 1: the networks you're sending from one to the other, that
Speaker 1: you can't do. As soon as you hit send, your
Speaker 1: money vaporizes. It's just gone, and don't call us up
Speaker 1: whining that you lost your money. And so that scares
Speaker 1: the hell out of a lot of people that they
Speaker 1: want to go into that space and deal with that
Speaker 1: potential mistake. As I once was joking with my wife
Speaker 1: when I was trying to transfer money. The cat jumped
Speaker 1: up on my desk, I says, she steps on the keyboard,
Speaker 1: my money disappears forever and stuff. So yeah, I'd like
Speaker 1: to keep it in my regulated securities account. So if
Speaker 1: the cat steps on the keyboard, my money doesn't disappear.
Speaker 1: So that's the allure of the bitcoin et F and
Speaker 1: why so many are so lined up and everybody wants
Speaker 1: to jump into him. I think that should be the commercial.
Speaker 1: That should be their commercial. The super Bowl ad is
Speaker 1: the cat jumping on the keyboard and it's all gone,
Speaker 1: and it just says like Bitcoin E t F the cat.
Speaker 1: My bitcoin is definitely going to be a meme. Speaking
Speaker 1: of means just lastly to have a little fun here
Speaker 1: and to talk about something that is wildly entertaining, but
Speaker 1: hard to see how much consequence the meme stocks right
Speaker 1: game stopped early this summer, and I also saw you
Speaker 1: were all over Dave Portnoy. He was able to sometimes
Speaker 1: move some of these smaller names like cruise ships and not.
Speaker 1: What's your take on this sort of populism, democratization, commission
Speaker 1: free trading movement where retail investors seemingly are able to
Speaker 1: unite a little bit, develop cult followings and push stock
Speaker 1: prices around. Um, do you think this is here to
Speaker 1: stay or just the pandemic phenomenon and a bullmarket phenomenon
Speaker 1: that will go away when people start getting out more
Speaker 1: or there's a correction. No, it's here to stay. It's
Speaker 1: definitely here to stay. Now you're right. Once once the
Speaker 1: weather warms up and we're allowed to go back out
Speaker 1: again and um, you know, commune with other people. There
Speaker 1: might be a little bit of that backing off, but
Speaker 1: it's not it's not going to go away. Means, you know,
Speaker 1: let's be honest. Memes kind of drive the world. Narratives
Speaker 1: drive the world right now, and the way that people
Speaker 1: live their lives and now they invest. And I think
Speaker 1: that a lot of other people in the traditional financial
Speaker 1: markets are also a little slow to understand the powerful
Speaker 1: network effects that things social media have. You know, Wall
Speaker 1: Street Bets is the top of the list now that
Speaker 1: everybody's looking at. Uh you know that. I've I've heard people,
Speaker 1: you know, traditional financial people say, yeah, well, there's a
Speaker 1: bunch of influencers to use a modern term for that
Speaker 1: what they were saying about them, that are suggesting on
Speaker 1: Wall Street Bets, we should do this or that, and
Speaker 1: then there's a bunch of sheep that just do what
Speaker 1: they say, maybe because they've had a hard hand. I
Speaker 1: was like, isn't that kind of what professionals do on
Speaker 1: Wall Street too. There's a couple of you know, well
Speaker 1: known hedge fund managers that come out or Warren Buffett,
Speaker 1: and they wagged their tongue that they like this or that,
Speaker 1: and then all of these highly paid professionals run into
Speaker 1: the same idea as well. Why is that any different
Speaker 1: than what we're seeing on social media? Oh but there's
Speaker 1: only these people only have five dollars in their account. Yeah,
Speaker 1: but multiplied by millions and throwing options trading, and the
Speaker 1: network effect is tremendously large on this, and the benefit,
Speaker 1: the economic benefits are there. They've got zero commissions, they've
Speaker 1: got fractional shares uh as well too, So they're no,
Speaker 1: there's no disadvantage to being small. There's no disadvantage, you know,
Speaker 1: don't worry. If if Amazon's you could buy a tenth
Speaker 1: of it for three bucks, and you could do it
Speaker 1: on zero commissions. And if you if you're really bullish
Speaker 1: on it, you could buy one option on it for
Speaker 1: zero commissions as well too. In this whole community is
Speaker 1: out there um to help you. So I think this
Speaker 1: is the new way. And we've got the internet so
Speaker 1: that you know, take your pick of your favorite most
Speaker 1: sophisticated hedge fund manager. He doesn't have any more information
Speaker 1: than you or I or anybody else, does he? Might
Speaker 1: have more knowledge and how to use that information, but
Speaker 1: we all have the same information um right now, so
Speaker 1: I think that this is transforming the way that investment
Speaker 1: is going. And then throw in one other thing too.
Speaker 1: These tend to be younger millennials or maybe even gen
Speaker 1: wise or maybe even thirteen year old kids for all
Speaker 1: we know that are doing a lot of this stuff.
Speaker 1: And what do they want to invest in? They to
Speaker 1: invest in what ARC is investing in. Um. You know,
Speaker 1: they call it Kathy Bay for a reason, Bay B, B,
Speaker 1: A E before anybody else, you know, is what the
Speaker 1: BAY stands for as well. So they want to invest
Speaker 1: in the next generation. Well, a stay in money manager
Speaker 1: who's got an office in Boston, he's not investing in
Speaker 1: a lot of those stocks if he's an active manager.
Speaker 1: SMP five hundred. What we just got Tesla into the
Speaker 1: index right now, A lot of these stocks aren't in
Speaker 1: the SMP five hundred. Oh maybe some of them are
Speaker 1: in the in the triple queues, but that's dominated by
Speaker 1: the big fang stocks anyway. So now they're saying, this
Speaker 1: is what I want to invest in, the next generation,
Speaker 1: the disruption. So, big Boston active manager, where's your disruption fund,
Speaker 1: and you know their disruption fund is, well, let's buy
Speaker 1: some Microsoft and Apple. And that's not what I'm looking for. Index.
Speaker 1: Do you own this stuff? No, not really. I could
Speaker 1: do it myself and I've got a community that i
Speaker 1: could communicate with. In terms of social media, it's not
Speaker 1: just read it. It's Twitter, it's stock twits, it's motley Full,
Speaker 1: it's Seeking Alpha. There's a lot of places that people
Speaker 1: can go to get this information. So you think it
Speaker 1: is a big change, it is. It's it's fascinating. And uh,
Speaker 1: I yeah, I just pretty much agree with everything you
Speaker 1: said today. I think, Joel, how about you high I'm
Speaker 1: not I'm not gonna I never tell a source you know,
Speaker 1: uh that I'm all in on everything that he said.
Speaker 1: But I do appreciate, um, your your assessments. Um, I
Speaker 1: think they're they're they're definitely some of them are provocative
Speaker 1: and and um a few of them are also grounded.
Speaker 1: And I think, um some reality that it does when
Speaker 1: you can do some attempts at analysis like you're paid
Speaker 1: to do on be half of your clients, like it
Speaker 1: all makes sort of rational sense. Jim. Also, the lack
Speaker 1: of dismissiveness of the new. I think that's really important.
Speaker 1: I think that's something that um, the old guard takes
Speaker 1: a long time for them to adjust to this kind
Speaker 1: of stuff. I can speak from experience. UM, but yeah,
Speaker 1: other analysts are adapting way faster and give it more credibility.
Speaker 1: There's a there's a meme that goes around, UM showing
Speaker 1: an old Homer Simpson and it says, you know, old
Speaker 1: man shakes fist at cloud. Uh, you know, because the
Speaker 1: world is passing him by, and he gets angry. And
Speaker 1: I like to say, look, we're all eventually gonna be
Speaker 1: that old guy shaking our fist at the crowd at
Speaker 1: the cloud. Let's just not get there right away. Let's
Speaker 1: not be in a hurry to get there right away.
Speaker 1: But you're right, this is this is as old as time.
Speaker 1: That change comes in. The old guard, especially in the
Speaker 1: financial sector, has evented vested interest in the status quo,
Speaker 1: and when you start talking about things, especially in the
Speaker 1: crypto space, that strikes right at their heart. Look, it's
Speaker 1: one thing to kind of make them the argument that
Speaker 1: Uber is going to disrupt the taxi industry in Manhattan.
Speaker 1: We'll find I'm not a taxi driver. I don't own taxis.
Speaker 1: It's interesting to watch. I'm find taking an uber. But
Speaker 1: when you say to them, oh, deef, I is going
Speaker 1: to change the basic structure of banking hold on time
Speaker 1: out a minute here, that affects me directly. And then
Speaker 1: they pushed back on that much harder as well too.
Speaker 1: So that's what you're fighting against with a lot of
Speaker 1: this change. Okay, Jim closing question, Uh, one that we
Speaker 1: ask a lot of people. Favorite E T F ticker?
Speaker 1: Oh probably UFO. I think that's just such a wonderful too.
Speaker 1: There was not even a pause. Yeah, yeah, not only
Speaker 1: not only UFO, but did you see what it did
Speaker 1: too right after ARC announced that they might get into
Speaker 1: space as well too? I mean what it became a
Speaker 1: UFO right after Yeah, it grew fourfold. It went from
Speaker 1: like forty million to a hundred and forty million just
Speaker 1: on a filing. I've never seen that. Yeah, if I
Speaker 1: had to pick, if I had to pick a silver
Speaker 1: medal as she you know, the one that with all
Speaker 1: women that Yeah, that's another that's another good one as
Speaker 1: well too. See. And he said he wasn't good with tickers.
Speaker 1: He knows his tickers, Yeah, I mean she is, uh,
Speaker 1: and that one hasn't been sort of on the front
Speaker 1: burner for about five years, so that's impressive. That's sort
Speaker 1: of like a deep cut on an album that was
Speaker 1: popular ten years ago. Yeah, very nice, jo all right,
Speaker 1: Jim Bianco, thanks for joining us on Trillions. Thank you.
Speaker 1: Thanks for listening to Trillions until next time. You can
Speaker 1: find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: and wherever else you like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,
Speaker 1: He's at Eric Baltunas, and you can find Jim at
Speaker 1: Bianco Research. This episode of Trillions was produced by Magnus Hendrickson.
Speaker 1: Francesca leap is the head of Bloomberg Podcast. Bye.