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Speaker 1: We're going again.

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Speaker 2: Ever since the early two thousands, starting with the dot

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Speaker 2: Com crash and nine to eleven and then on to

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Speaker 2: the Great Financial Crisis, we have been in an ultra

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Speaker 2: low rate environment. Sure, rates have been steadily falling since

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Speaker 2: nineteen eighty two, but starting in the twenty tens they

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Speaker 2: were practically zero, and in Japan and Europe they were negative.

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Speaker 2: That era is over, regime change occurd, and now rates

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Speaker 2: are much higher than they've been since the nineteen nineties.

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Speaker 2: Investors should consider the possibility that rates remain high and

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Speaker 2: for much longer than they've been. The era of zero

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Speaker 2: interest rates and quantitative easing is dead. I'm Barry Retults

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Speaker 2: and on today edition of At the Money, we're going

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Speaker 2: to discuss how these changes are likely to affect your

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Speaker 2: portfolios and what you should do about it. To help

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Speaker 2: us unpack all of this and what it means for

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Speaker 2: your money, let's bring in Jim Bianco, chief strategist at

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Speaker 2: Bianco Research. His firm has been providing objective and unconventional

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Speaker 2: commentary to professional portfolio managers since nineteen nineties and remains

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Speaker 2: amongst the top rated firms amongst institutional traders. So let's

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Speaker 2: start with the prior cycle, rates were very low for

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Speaker 2: a very long time.

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Speaker 1: Tell us why coming out of the financial crisis in

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Speaker 1: two thousand and eight, DEFED was worried that the psyche

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Speaker 1: of investors was to stay away from risk cury assets

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Speaker 1: like home prices or equities. Remember, the stock market fell

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Speaker 1: almost fifty percent in two thousand and eight. Home prices

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Speaker 1: had their biggest crash according to the case Shiller measure,

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Speaker 1: and so they wanted to try and reinforce that these

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Speaker 1: assets were safe to own by doing that. One way

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Speaker 1: to do that was they took safe assets like bonds,

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Speaker 1: treasury bonds and their yield and tried to make them

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Speaker 1: very unattractive by lowering their interest rates all the way

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Speaker 1: down the zero. And they used a fancy term for it.

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Speaker 1: They called it the portfolio balance channel, which meant that

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Speaker 1: you were like, I have this internal clock in my head.

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Speaker 1: I need to make so much every year. These bond

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Speaker 1: yields will never get me there. So what do I

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Speaker 1: have to do to make my yield? I have to

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Speaker 1: start thinking about taking on a little bit more risk,

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Speaker 1: putting money in corporate bonds, putting money in equities, maybe

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Speaker 1: putting money more back into real estate again. So the

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Speaker 1: idea behind it was to try and push people into

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Speaker 1: risk your assets.

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Speaker 2: And we sore in the two thousands. It certainly was

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Speaker 2: a contributing factor to the financial crisis. When they took

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Speaker 2: yields as low as they did, did they sent bond

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Speaker 2: managers looking for higher and riskier yield And it obviously

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Speaker 2: raises a question in the twenty tens, why were they

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Speaker 2: on emergency footing long after the emergency ended? How much

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Speaker 2: of this is just a function of the FED tends

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Speaker 2: to be conservative and move slowly. Is this just the

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Speaker 2: nature of a large, ponderous conservative institution.

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Speaker 1: Oh yeah, I definitely think it is, and you're right.

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Speaker 1: I mean, the first example of emergency policy was after

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Speaker 1: nine to eleven when they cut rates down to the

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Speaker 1: unfathomable level back then of around one percent, and they

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Speaker 1: kept it there all the way to two thousand and four.

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Speaker 1: And the joke was in two thousand and three to

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Speaker 1: two thousand and four was an emergency rate when there

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Speaker 1: was no clear emergency. And by keeping that money cheap,

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Speaker 1: they encouraged speculative movements in markets, and the big one

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Speaker 1: that we all aware of was housing prices took off

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Speaker 1: like crazy, because everybody borrowed at low variable rates and

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Speaker 1: produced a big But you're right that the FED is

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Speaker 1: very very slow in starting to think. And part of

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Speaker 1: the problem I think with the FED is there's a

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Speaker 1: group think at the FAD that there's a consensus view

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Speaker 1: of the world and everybody is to purport to that view,

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Speaker 1: and they don't allow heterodox opinions.

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Speaker 2: I have a vivid recollection following eight oh nine of

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Speaker 2: you and I having a conversation. At the time, we

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Speaker 2: were both constructive, hell I could say bullish, and but

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Speaker 2: for very different reasons. I was looking at Hey, market's

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Speaker 2: cut in half, tend to do really well over the

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Speaker 2: next decade, down fifty seven percent. I'm a buyer. You

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Speaker 2: were the first analyst of everybody on Wall Street who

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Speaker 2: turned around and said zero interest rate policy and quantitative

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Speaker 2: easing is going to leave no alternative and all of

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Speaker 2: this cash is going to flow into the equity markets.

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Speaker 2: I recall exactly where we were where we had that conversation.

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Speaker 2: When you talk about change, is that the sort of

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Speaker 2: substantial change in government policy that impacts markets. Tell us

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Speaker 2: a little bit about that.

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Speaker 1: Yeah, I think it's even more fit basic than that.

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Speaker 1: It impacts psychology. One of the reasons that the FED

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Speaker 1: wanted to put rates at zero and push all that

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Speaker 1: money in the risk markets was the psyche coming out

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Speaker 1: of two thousand and eight was people were afraid. They

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Speaker 1: were afraid that their nest egg, their net worth, their

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Speaker 1: wealth was at risk, and that they could work their

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Speaker 1: whole life save some money and it just disappears. And

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Speaker 1: so the fear was that they were just going to

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Speaker 1: all pilot into tergery bills and they were never going

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Speaker 1: to move into risk assets. And without that, you know,

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Speaker 1: investment in the economy, we weren't going to get the

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Speaker 1: economy forward. So they cut rates to zero to force

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Speaker 1: that money in. But what did people do in twenty ten,

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Speaker 1: twenty eleven, and twenty twelve when they saw, wait a minute,

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Speaker 1: my house prices recovering, my stock portfolio is recovering, my

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Speaker 1: net worth is starting to go back up, they felt better.

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Speaker 1: Oh good, my nest egg is still there, it's still safe,

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Speaker 1: it's not going to fall apart. They didn't do anything

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Speaker 1: other than they felt better. They felt a comfort level

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Speaker 1: because that was happening. Twenty twenty comes we have a

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Speaker 1: big downturn. In twenty twenty, we have MASSI fiscal stimulus,

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Speaker 1: we have mass of spending the Cares Act that you

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Speaker 1: point out, And so because we're spending more money, we're

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Speaker 1: seeing higher levels of growth, We're seeing higher levels of inflation. Again,

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Speaker 1: like I said, three or four percent, not a ten

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Speaker 1: Zimbabwe and to higher levels of growth and higher levels

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Speaker 1: of spending means that the appropriate interest rate in this

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Speaker 1: environment is higher. It's probably in a four or five

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Speaker 1: percent range. If nominal growth is running a five or

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Speaker 1: six percent, you should have five or six percent interest rates.

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Speaker 2: Active managers have not distinguished themselves in an era of

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Speaker 2: rising indexing. At what point is there enough inefficiency and

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Speaker 2: price discovery that active managers can begin their keep.

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Speaker 1: Oh, I think that we might be seeing it, you know,

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Speaker 1: evolved now with the whole you know, And I'll answer

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Speaker 1: the question in two ways. In the whole area of

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Speaker 1: like artificial intelligence and everything else, we're starting to see

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Speaker 1: somewhat of you know. The fancy Wall Street term is

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Speaker 1: a dispersion of returns that certain stocks are returning much

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Speaker 1: different than other stocks. Look no further than what some

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Speaker 1: of the AI related stocks are doing. And if you

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Speaker 1: want to look on the other side, a big cap

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Speaker 1: stocks that are really struggling. To look at the banks,

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Speaker 1: they're really kind of, you know, retrenching in the other

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Speaker 1: direction because the banks are struggling with overvalued office real

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Speaker 1: estate and it's really starting to hurt them. Where AI

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Speaker 1: is the promise of some kind of you know, Internet

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Speaker 1: two point zero boom that's coming with technology, and people

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Speaker 1: could start looking at managers to try and differentiate about that.

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Speaker 1: This is not the twenty nine ten to twenty twenty

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Speaker 1: period where basically all you needed was and I'll use

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Speaker 1: the Vanguard example Voo, which is their S and P

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Speaker 1: five hundred fund, sixty percent in that, and then B

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Speaker 1: and D which is there, which is their Bloomberg aggregate

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Speaker 1: bond fund forty that there, I just need two instruments,

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Speaker 1: sixty in stocks, forty in bonds. Thank you. Let's see

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Speaker 1: how the decade plays out. I don't think that the

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Speaker 1: next decade is going to be quite like that. So

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Speaker 1: far as as far as active managers, I did want

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Speaker 1: to make this distinction and throw in a cheap commercial

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Speaker 1: here because I do manage an ETF and explain that

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Speaker 1: in the equity space, it is well established that active

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Speaker 1: managers have a hard time beating the index, and there's

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Speaker 1: several reasons for it. I'll give you one basic broad reason.

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Speaker 1: Your biggest weightings you're in videos, your Microsoft's of the

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Speaker 1: world are your all stars. And if you're not all

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Speaker 1: in on your all stars, it is very, very hard

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Speaker 1: to beat the indus. And so that's the challenge that

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Speaker 1: an active manager in equities has. In fixed income, the

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Speaker 1: index runs it around the fiftieth percentile. There's a lot. Now.

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Speaker 1: One of the big reasons is your biggest waitings in

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Speaker 1: fixed income in bonds are your over levered companies and

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Speaker 1: your countries that have borrowed too much money, and so

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Speaker 1: they're your problem children, and you could recognize them as

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Speaker 1: your problem children, and you avoid them. And that's why

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Speaker 1: so many active managers in fixed income can beat the index.

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Speaker 1: To put a sports metaphor on it, equities is like

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Speaker 1: playing golf. In golf, you play the course, but fixed

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Speaker 1: income is like playing tennis. In tennis, you play the opponent.

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Speaker 1: No one asks. In I shouldn't say no one asks.

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Speaker 1: You're more likely in fixed income to be asked a question,

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Speaker 1: not can you beat the Bloomberg Aggregate Index, but can

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Speaker 1: you beat Jeff Gunlock? Can you beat Pimco. Can you

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Speaker 1: beat Metropolitan West. That's the question. You'll be fixed income inequities.

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Speaker 1: They ask question is can you beat the s and

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Speaker 1: P five hundred? Can you beat the course?

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Speaker 2: So let's put some number. Let let's put a little

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Speaker 2: flesh on the on the active bones. You know, you

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Speaker 2: look at the active equity side and historically, once you

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Speaker 2: take into fees, taxes, costs, you know, after ten years,

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Speaker 2: active doesn't there's very very few winners. But on the

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Speaker 2: fixed income side, it seems like there are many many

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Speaker 2: more winners in the active bond management if nothing else,

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Speaker 2: As you mentioned, you screen out the highest risk players,

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Speaker 2: the bad companies, the over leveraged countries, and just dropping

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Speaker 2: the bottom pick a number, twenty thirty percent of the

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Speaker 2: worst participants, your way ahead of the index. Is that

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Speaker 2: a fair way to describe it?

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Speaker 1: Yes, And that's exactly right, because you know, it's a

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Speaker 1: very different type of game in fixed income where it

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Speaker 1: is you know, just avoiding the land mines is really

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Speaker 1: all you have to do, and you wind up doing better.

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Speaker 1: And remember by avoiding the land mines. The other thing

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Speaker 1: that's different about fixed income now relative the last fifteen years,

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Speaker 1: there's a yield as they said, there's a yield to observe.

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Speaker 1: So if you can avoid those land mines and continue.

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Speaker 1: You could start the year by saying, on a fixed

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Speaker 1: income portfolio, a broad based bond portfolio, it's going to

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Speaker 1: return four point eight percent. That's if every price is unchanged.

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Speaker 1: That's what the yield's going to be. Now, I've got

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Speaker 1: to try and avoid those land mines that keep taking

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Speaker 1: me down from four point eight percent, and you know,

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Speaker 1: trying to you know, protect that yield and hold as

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Speaker 1: much at that yield as I can.

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Speaker 2: So to wrap up, from the dot com crash to

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Speaker 2: the COVID nineteen pandemic that's twenty to twenty twenty, Monetary

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Speaker 2: policy was the chief driving force in markets. But since

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Speaker 2: the twenty twenty Cares Act, the pandemic, which led to

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Speaker 2: an infrastructure legislation, to the Semiconductor Bill, to the Inflation

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Speaker 2: Reduction Act, the shift has been to fiscal not monetary stimulus.

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Speaker 2: This tends to mean higher GDP, higher inflation, higher yields,

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Speaker 2: and perhaps lower market returns from the equity portion of

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Speaker 2: your portfolio. Investors should take this into account when they

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Speaker 2: think about alternatives to riskier stocks. I'm Barry Ridholts, And

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Speaker 2: this is Bloomberg's At the Money