Jim Bianco at Bianco Research made a fantastic, educational presentation last week on where we are and where we are going.
The presentation is 1 hour and 8 minutes in length. Playing it will be one of the best 68 minutes you have ever spent.
I played it twice.
Here’s a link to a Free Trial subscription to Bianco Research.
What follows are my notes of Bianco’s opinions, followed by my own comments at the end.
Again, these are MY Notes on what Jim said. Apologies for any translation errors.
In two words “Massive Revaluation“.
We woke up in February and the market said “Oops, everything is at the wrong price and I will correct that immediately.”
Why Fixed Income Locked Up
When the panic selling started, the dealers bought, bought, and bought, but then hit the limits of what they could hold on their balance sheet. This is more important in fixed income because fixed income operates under a dealer system.
The Fed realized the dealers don’t have the capacity to make markets. The Fed offered them a repo facility. The Fed can wave its rules, but banks are also under BIS, Basel-3 capital requirements FDIC, OCC, etc., regulations.
The Fed said ignore the rules. The banks responded “You told me that in 2008, then you fined me $19 billion for buying WaMu after you told me to do it. So, I want a letter from the DOJ indemnifying me.”
When that did not happen, the bond market froze up.
Bond Market ETF to NAV
- The Fed, BOE, BOJ all doing the same thing over and over again and it isn’t working. Why? We still have the wrong prices!
- The bond ETFs have liquidity but the actual bond market doesn’t. The discount to NAV suggests the price is wrong.
- When prices get low enough bids and offers will emerge.
- Dealers don’t won’t to get there now because they do not want a 2008 type of loss in the first quarter.
- But look at the bank stock index. It is down 50%. Because mark-to-market rules have been suspended banks won’t record these losses, but they are real.
What’s Next? Twenty Things
- These scars will last a generation. A huge change in attitudes is underway.
- Credit ETFs are telling us lower. How will we know when prices are correct? When natural buyers come in, not when the Fed supports asset prices. As goes the credit market – so goes the stock market. Expect a massive wave of BBB downgrades.
- The jobs reports in April and May will be the worst in history.
- Earnings Negative For the Year. 1800-2000 Might be Fair Value on S&P 500.
- New Way of Business
- Crude will continue to glut until supply is taken out of the market. The Saudis want to burn Russia, Iran, and US frackers. Crude Trades Net of Storage and Transportation Costs. The lowest price crude is oil sands in Canada. Closed at $8 last Wednesday.
- China has Suffered Permanent Damage. The chinese economic miracle is done.
- Gold and Silver Struggle Until We Find the Equilibrium Level
- Huge Change in Risk Parity. The relationship between stocks and bonds broke. They are now likely to rise and fall together eliminating use of one or the other as a hedge. There is only one trade that works: Liquidation. Risk parity is done as an idea because the stock-bond relationship is no longer stable.
- Gargantuan deficits. The trillion dollar deficits of today will look like balanced budgets compared to what’s coming next.
- Even as an Austrian Libertarian, we need fiscal stimulus like we have never seen before, because if we don’t see it, we will rerun the Great Depression. We are in a world of least bad options. If there was a good option, the markets would not have fallen as far as they did, as fast as they did.
- Managing earnings ends. Corporate buybacks are gone. That’s why we won’t get back to the old highs.
- Less globalization. Less risk taking. This will depress earnings and market multiples.
- Higher interest rates and rates of inflation (after the crisis) and that will also depress stock market multiples.
- Whether or not we have a prolonged depression depends on the amount of corruption in Washington.
- Fed will not buy stocks. The same applies to Congress and SS funds. This would open up a huge can of worms that could potentially give the likes of AOC and radical liberals voting rights to all kinds of things including running the companies. Here’s the Green News Deal, abide by it.
- Fed will not position rates below zero. No run on banks. The Fed has a printing press.
- The Elon Musk theory is this will all go away and we go back to buying $120K cars. But the market does not see it that way and neither do I.
- People will not forget this. This is not 911. It is not 1987.
- National crypto currencies coming. The next reserve currency will be a global crypto. It will not be Bitcoin.
Mish Comments on Bianco’s Ideas
1: This is the second crisis in 12 years. The huge fear, and for the second time, is How Do I Pay the Bills? These scars will last.
3: The jobs estimates are too rosy still. Most of the estimates are for unemployment rates under 10%. The bare minimum I forsee is 12%. And that would be coupled with a U6 underemployment rate of close to 40%. For details and my calculations, please see 9% of the US Has Been Laid Off Due to the Coronavirus.
4: Earning estimates are going to dive. I commented Goldman Projects a Catastrophic GDP Decline Worse than Great Depression. Yet, despite these earnings forecasts, analysts expect the economy to be back near full strength by the 4th quarter. Toss that notion out the window. The recovery will be shallow and slow. Fair value might be 1800-2000 but markets tend to overshoot. The Fed short-circuited that process in 2009. Feelin’ lucky this time?
5: New way of doing business. Just-in-time production strategies with no inventories are toast. It costs to hold inventory. There will be more production in the US as well. Trump won’t like the result because the stock market won’t like the result. Globalization is not over, but the rush to globalize everything is. The US, Europe, and China will all be more inward looking than before.
7: China has Suffered Permanent Damage. The chinese economic miracle is done. Those who thought China would surpass the US are mistaken.
8: Gold and Silver Struggle Until We Find Equilibrium Level. Today’s $76 surge, a 5% rally suggests we may have found that level already.
9: Huge Change in Risk Parity. Risk parity strategies allowed massive amounts of leverage by hedge funds and pension plans. But that strategy is over. Pension plans are in a world of hurt.
11: Whether we want it or not, fiscal stimulus is coming. Yet, the debate in Congress postponed it again. Democrats and Republicans are fighting over who gets what. Both sides are undoubtedly wrong here. Congress bailed out the banks last time and look what happened: only the wealthy benefitted. But Democrats want 1100 pages of God knows what. Unfortunately, here we go again with “We have to pass the bill to see what’s in it.” This is not the time to be demanding a Green New Deal or crucifying small businesses with $15 minimum wages.
15: The Fed fears a collapse in credit. On that score, the Fed is correct. But once again, the Fed blew this bubble. If we save the banks and Boeing and the frackers, and throw the people under the bus, Bianco is correct: we have a prolonged depression. What’s the perfect solution? There is none or if there is, I do not know what it is. We screwed up in 2001 and 2008. Is there any reason to believe we won’t screw up again?
18: People won’t go back to routinely buying $120K cars. In fact, car buying of all kinds will take a prolonged hit. Then with a few years, the whole idea of owning cars outright will change as true self-driving hits the road. Millennials do not see ownership of cars and homes as their boomer parents. This is part of the attitude adjustment process in point number 1.
20: Congress is going to issue checks. This is genuine helicopter money. Fed loans and repos aren’t. It is going to take a while to process and send the checks. The Fed and Congress will present that delay as a national problem. The Fed will then push for and get a national cryptocurrency “for the people”. Unlike Jim, I am not sure this leads to a global reserve crypto. I do not see the Fed or Congress or the president wanting to give up currency control. Perhaps this does happen down the line, but first things first: countries including the US ban will ban cash transactions. They will tout the benefits: Instant cash, fighting money laundering, fighting fraud, protecting us from the likes of Bitcoin. They will not tell you that the real purpose is to track every dollar in the system. We will have a loss of freedom, independence, and privacy as a direct result.
In regards to the loss of freedom, indepence, and privacy, I also fear something Jim did not mention: A constitutional attack on Habeas Corpus, the right to a speedy trial.
Rolling Stone and Politico both had recent articles on suspension of Habeas Corpus.
Politico reports DOJ Seeks New Emergency Powers Amid Coronavirus Pandemic.
The Justice Department has quietly asked Congress for the ability to ask chief judges to detain people indefinitely without trial during emergencies — part of a push for new powers that comes as the novel coronavirus spreads throughout the United States.
Documents reviewed by POLITICO detail the department’s requests to lawmakers on a host of topics, including the statute of limitations, asylum and the way court hearings are conducted. POLITICO also reviewed and previously reported on documents seeking the authority to extend deadlines on merger reviews and prosecutions.
The move has tapped into a broader fear among civil liberties advocates and Donald Trump’s critics — that the president will use a moment of crisis to push for controversial policy changes.
There are 1100 pages in the emergency legislation. What’s in it?
It is highly doubtful Democrats would grant such powers to a Republican. But if Republicans were in control of the House, such legislation could pass. Moreover, the same applies if Democrats held executive office and both branches of Congress.
Even if these fears are unfounded for now, it is disturbing, to say the least, that such powers are even requested.
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