December 20, 2024 – The stock market sold off this week after the Fed cut rates by another 25 basis points. Why? Financial Sense Newshour speaks with Jim Bianco at Bianco Research about the important events happening in the bond market, particularly with long-term bond yields, which have risen due to inflation concerns. Bianco and Financial Sense's Jim Puplava discuss how the Federal Reserve has cut rates three times since September, but long-term bond yields have risen, an unusual phenomenon last seen in the 1960s and 1970s. According to Bianco, the bond market is rejecting rate cuts due to concerns that they may overstimulate the economy and fuel inflation, especially in an environment already experiencing inflationary pressures. Bianco and Puplava also discuss the implication of Trump's policies, the large difference between when Trump took office in 2017 vs. today, and current opportunities in the fixed income market as bond yields near 5%. If you're looking for greater insights into this week's sell-off in the stock market and some of the larger trends impacting the investment outlook moving forward, you'll definitely want to hear what Jim Bianco has to say.
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Transcript
Jim Puplava:
Well, the Fed met this week, and they cut interest rates as widely expected. But what was not expected is that they lowered the number of rate cuts next year. What does this mean? Well, the market didn't seem to like it very much. Joining us on the program is Jim Bianco from Bianco Research. Jim, let's begin with the Fed. This is the third time that they've cut rates since September. And it's interesting because in September, the 10-year Treasury was at 3.6%. Three rate cuts later, it's at 4.6%. What's going on here?
Jim Bianco:
Simply answer is that the market isn't liking the idea that the Fed is cutting rates. Now, why would that be? Well, I think really the idea here is that the economy, at the top line, is growing at its potential—the fastest it can grow without creating inflation. And I will emphasize at the top line. Yeah, underneath, there are some issues. But monetary policy—lowering interest rates—can't fix those.
And we've got the Trump administration coming in, and we're looking at potentially more inflation through tariffs, deregulation, and tax cuts. And that's all considered to be stimulative. So the bond market's saying, that's more than enough. We don't need the Fed to be cutting interest rates. If they're going to try and stimulate by cutting interest rates on top of that, all they're doing is producing higher levels of expected inflation.
And, you know, if you own a fixed-income investment and you think inflation's going to go up and your real purchasing power is going to be diminished by higher inflation, that's bad for bonds. So that's why we've seen something that hasn't happened in 40 years. The Fed has been cutting rates, and long-term yields have risen by a full percentage point. The last time we've seen anything like this, where the Fed cuts rates and long-term rates go up, was in the ’60s and ’70s when we were worried about inflation. And every time the Fed cut rates, it was met by a large "no" by the market and proceeded to see higher long-term yields.
Jim Puplava:
You know, the other thing, as I look at it, is that the market got very excited when Trump got elected. What do we have—a 1,500-point run in the Dow? We've given most of that back now. But Jim, the conditions that existed in 2016 are a lot different than 2024. The national debt was a little over—or close to—$20 trillion. Now it's over $36 trillion. Oil was around $40 a barrel. Today, it's closer to $70, and the budget deficits are much, much larger, even in a growing economy. So what's the likelihood that anything he's going to do is going to be inflationary? Because one of the issues in the campaign was inflation itself. But many of these policies could end up becoming inflationary.
Jim Bianco:
Yeah, I think you're right. You know, going back, bigger picture, I think that the cycle turned in 2020. Prior to 2020, we were in a 40-year bull market in bonds. We were in a low and stable inflation world. And coming out of that, we are in a much higher inflation world. I like to say we're in a 3 to 4% inflation world—not an 8–10% Zimbabwe inflation world—and a higher interest rate world.
So if we're already starting with that as our backdrop, then stimulating the economy could produce more inflation and higher interest rates. Now, let me say a quick word about that. There is a perception—and this goes back to the pre-2020 era—that the perfect interest rate is zero, and that any interest rate above zero, the higher you get above it, the worse it is.
That's not necessarily the case. The perfect interest rate for an economy should approximate its growth rate. So if you add in inflation and real growth—and in the U.S., we're talking about 5.5 or 6%—then you're looking at interest rates that might be normal at a five-handle, you know, somewhere between 5 and 6%. That's not necessarily a bad thing.
We saw that throughout the second half of ’23 and most of ’24. The Fed left the funds rate at 5.25 to 5.5. The stock market went up, the economy advanced, and so there was really no issue with interest rates being that high. Now, the problem is when you cut interest rates below their natural rate or where they should be, you then introduce the idea that you could be overstimulating and causing inflation—especially if we're in a new inflationary cycle in the post-2020 era. And so that has to be concerning.
Now, the biggest issue with Trump is, being a real estate developer from New York, he's going to look at every uptick in interest rates as a disaster and say that we have to get interest rates down. But like I said, we might be in a world—and anybody who's old enough to remember what the world was like pre-2008, you know, where 5, 6, 7% mortgages were kind of standard fare—that was the world we lived in. And we might be returning to that world.
And yet, all these people that are whining that they want 2 and 3% mortgages back—well, that was a different era. We're just in a different era now. And that era is because of the potential of higher inflation.
Jim Puplava:
I want to talk about something else. We had a repo crisis in 2019, and Jim, reserves are about to drop below the level they were at when the Federal Reserve initiated its balance sheet reduction policy. Let's talk about QT and where the repo market is now and what that might mean for stocks.
Jim Bianco:
So, in 2014, the Fed started this reverse repo facility, which is basically used by money market funds. You can essentially hand the New York Fed your money, and they will pay you an interest rate on it, known as the reverse repo rate. At its peak in 2022, it got to about $2.2 trillion, and roughly half of all the money in money market funds at the time was in this facility.
Today, this facility has dwindled down to around $120 billion from $2.2 trillion, and a lot of people think it might be on its way to zero—and that makes sense. Now, keep in mind what this means: when a money market fund gives its money to the New York Fed and gets an interest rate, it is one of the safest investments they can make, and it’s a competitive investment.
But from a liquidity standpoint, it means that it's removing money from the financial system. It's sitting at the Fed and not in the financial system where it could be borrowed against, lent against, or rehypothecated—all these fun words we like to use about how the funding system works.
As this system dwindles, it is adding money to the financial system—it’s adding liquidity because it’s no longer at the Fed. You’re buying Treasury bills, you’re buying commercial paper, and it’s going back into the financial system. So, you’re right: at $120 billion, there’s not a lot of potential liquidity left to shove back into the financial system.
Is this a concern? It is. But there is a new facility, new in the last couple of years, called the standing repo facility, and about 30-odd banks have signed up for it, and a bunch of them have tested it. What it is, is that if we were to get into a situation where there’s not enough liquidity in the financial system, these banks can go to the Federal Reserve and do a repo.
Remember that giving your money to the Fed was a reverse repo. This would be borrowing money from the Fed in a standing repo facility. That would help to alleviate any liquidity concerns.
Now, a quick word about liquidity concerns: in 2019, the plumbing of the financial system was so complicated that no one—including the Federal Reserve, the FDIC, Jamie Dimon, or even me—fully understood it. So, these liquidity problems can pop up without warning in the market.
That’s why we have the standing repo facility, and that’s why people are rightly concerned about it.
What does it mean for you or me as an investor? If there’s going to be a liquidity problem with the standing repo facility, I don’t think initially much. I wouldn’t lose sleep over it.
I would lose sleep over it if I were a bank manager, you know, the treasurer of J.P. Morgan, and I had to meet my quarterly earnings, and a liquidity squeeze could put a damper on it. I’d be worried about it if I were the treasurer of Goldman Sachs, and we’ve got a bunch of securities that we’re borrowing against, and if there’s a liquidity problem there, that could impact our earnings.
If I am an investor in a fund, or if I’m an investor in an ETF, or if I have my money with a wealth manager who has their money in investment-grade securities, it might wobble the markets a little bit, but I wouldn’t be worried that there would be a broader systemic problem at this point.
Now, could it get worse? Sure. But there are always risks in the world, and I would put that risk at very, very low.
Right now, the potential liquidity is about in the marketplace, and the concern is: if we have to get more liquidity, where’s it going to come from? Well, we’re going to borrow it from the Fed.
The problem with borrowing it from the Fed, if you’re J.P. Morgan or Goldman Sachs, is that it will come at a price. You can get it, but it will come at a price. So, if I own an ETF in bonds or if I own an ETF in stocks, I wouldn’t be that concerned about this right now.
Jim Puplava:
Let’s talk about the stock market itself. If you take a look at a chart of the Dow, it looks like it fell off a cliff. The S&P and the Nasdaq are holding up much better. But Jim, it seems like we’re back to the Fab Four and the Mag 7 again.
Jim Bianco:
Yeah, we are. As a matter of fact, those stocks are now approaching 34% of the S&P 500, which would put them—the top five or top seven—at the highest concentration ever. I mean ever, as in the S&P. Technically, the S&P was created in 1957, and we’ve never seen such a handful of stocks be such a big weighting on it.
And that divergence you’re talking about, you know, there’s market breadth—the number of stocks that go up and down—and that fell 13 days in a row, the longest streak ever. All that means is that more stocks declined on the day than advanced on the day.
But given the composition of the advancers, most of the time the S&P was either unchanged or up on the day. And the Dow fell 10 days in a row for the first time in almost 50 years.
So, there is a lot of churning in the market going on right now. I think that it’s one of two things. You’re right—it is part of the Mag 7 stocks, and it is interest rates. Interest rates really impact regular companies. And then there is the Mag 7.
Quick thought for you about the Mag 7: Goldman Sachs held an investment conference last week. Mark Rowan spoke at the investment conference—he of Apollo and one of the people Trump interviewed to be Treasury Secretary. And he said something that we’ve heard before, but hearing it from somebody like Mark Rowan is striking.
He said (and I’m paraphrasing), “If we are interested in the stock market, if we have investments in the stock market, the single most important person in 2025 for our returns is Jensen Huang, the CEO and founder of Nvidia.”
Even if you don’t own Nvidia, it is such a dominant stock, and it is in the dominant industry. It’s at the center of AI. It’s a dominant stock. It’s a $3 trillion stock. It’s the driver of the Mag 7.
So goes Nvidia, so goes every investor. And like I said, you might not even know how to spell Nvidia and don’t own it, but it will impact all of us. If that stock soars like it did in 2024, everything will go up. Or if it corrects hard in 2025, that will ripple through the markets.
But that’s the nature of the markets we’re in now. Even if you’re a global investor, I think that Nvidia is probably the most important company. And Jensen, the guy who founded the company over 30 years ago, is still the chairman and has enormous influence on it.
Jim Puplava:
What about some of these market caps? I mean, Apple is now approaching $4 trillion—almost the GDP of Germany. Microsoft is up in the $3 trillion range. Amazon is approaching $2 trillion. You talked about Nvidia—it’s at $3 trillion. I’ve never seen valuations this high on a few companies.
Jim Bianco:
Exactly. And really, what it is, is I want to say this is a legacy of 20 years ago. AI is coming. AI is here to some degree, you know, with large language models and ChatGPT and the like. And you can see the enormous potential of AI, and it could be bigger than the internet itself.
But now that I’ve said that, the problem with these enormous market caps in the Apples, Metas, Alphabets, Nvidias of the world—even Tesla as well—is that the market has priced in this AI revolution now. So, it’s not good enough to say there will be an AI revolution. It’s not good enough to say, "If you look at ChatGPT or Bard, or if you look at Microsoft Copilot and you see the potential of these products, boy, these could be world-beating."
It has to happen in 2025 or in the first half of 2026. There has to be a timeline on it. Otherwise, the market will grow very impatient.
I’ll give you an example. In December of 1999—so 25 years ago—Time magazine’s Person of the Year was Jeff Bezos. Why was it Jeff Bezos? They had a picture of him in an Amazon box, and the cover story was, "Here comes the online retailing revolution."
And that story, in December of 1999, was 100% correct. But what wasn’t mentioned in the story was that it was going to take 25 years. It wasn’t going to take three years. That was implied in the story because right after that came out, Amazon stock fell 95% between December of 1999 and November of 2001.
It didn’t get back to its December 1999 high until about 2011 or 2012—nearly 13 years later. So, if you bought into the idea that, “Boy, this internet thing is going to change the world—online retailing is going to change everything,” and you were sitting in 2024, you’d say, “See, I told you so. Amazon stock is up 200 times more than it was in December of 1999.”
Not only has online retailing arrived, but online retailing has changed the very nature of the way we live our lives because of things like Amazon.
However, what I didn’t say was, for the next 13 years, you would have made zero money. And you would have been questioning, “Where is this online retailing revolution coming from?” It took longer to unfold, but when it did, it was every bit as big as we thought.
If the AI revolution takes longer to unfold, it could be every bit as big as we think it will be. But given the valuations in these stocks, there’s going to be huge disappointment. Investors will grow very impatient waiting for it, and that’s why you could risk some turbulence in them.
Jim Puplava:
So, given where we are right now, we’ve talked about stretched valuations, money once again concentrating in the Mag 7. You’ve got a Fed that’s basically saying, “Well, maybe we might change course a little bit. We’re not going to be as aggressive on rate cuts as once planned.” We’ve got the bond market backing up. What happens, Jim, if we start getting bond yields back up over 5%?
Jim Bianco:
So, let me start with that second part. If we get bond yields over 5%, first of all, they’re not that far away. We’re at 4.75% on the 30-year and around 4.50% on the 10-year. So, they’re within sight of 5%.
I think what happened with the Fed meeting—just to put a bow on that 5% number—is we use this term “hawkish cut.” It’s a made-up term. I don’t know what it means, and I don’t know if anybody knows what it means. I think what it means is that the Fed made a mistake, but we’re not allowed to say that the Fed made a mistake, so we have to use some euphemism for it.
And what was the mistake the Fed made? If you read what the Fed said, if you looked at what the Fed’s forecast was, they were pretty hawkish. Their forecast raised the inflation rate for the next two years. Their forecast for real growth was fairly decent.
You would have concluded just from that, “Oh, so they raised rates on Wednesday?” No, they cut rates, and they said they’re going to cut rates more.
And that’s why I think the marketplace, as I said earlier, is thinking, “No, we don’t need this. This is too much.” And that’s why I think you saw that bad reaction and why interest rates went up.
I would argue to you: why isn’t the Fed talking about maybe being done cutting rates? Maybe, if inflation doesn’t start to behave better, we might have to raise rates.
But Donald Trump is going to be the president in about 30 days, and they’re afraid of his social media accounts—particularly Twitter. If the Fed starts talking about, “We’re done cutting, we might have to hike in 2025 because of this inflation problem,” Trump would be correct to point out, “Oh, so you were cutting rates when I was running for president to help my opponent, and then the minute I become president, you stop and threaten to raise rates to punish me.”
Now, maybe there are completely justifiable reasons to do this—and I think there are—but that’s not an inaccurate statement of the timeline we’d be looking at.
We already know that Donald Trump hates Jay Powell anyway, and he’s talking about firing him. So, I wonder if they’re trapped by the politics of it—that they can’t come out and say what they really think. Maybe we should be done cutting rates, and maybe we should be looking to hike rates if inflation doesn’t acquiesce.
But they’re not saying that, and I think the bond market’s reacting with, “If you’re not going to be serious about this inflation, we’re not going to be serious about owning bonds.”
Now that I’ve said that, let’s go back to the first half of your question: What does 5% yields mean?
Well, this is not 2019 or 2018. This is not TINA—There Is No Alternative. Back then, the bond market was yielding 2%, and the valuations in stocks were much, much lower and much more reasonable. That meant the future outlook for stocks was probably more like an 8% to 10% return. So, in a world of 2% bonds and given cheaper valuations, you were looking at an 8% to 10% stock market return.
From 2017 to 2019, you could say the word TINA. "Get out of bonds, get into stocks."
Well, 2024 is not that. 2024 is very high valuations in stocks, driven especially by the Mag 7 stocks, with much lower expected returns in the future. Dr. Jeremy Siegel from Penn Wharton School and Bob Shiller from Yale University have done some valuations and said, “Look, you could be looking at the next decade or so of 6%, maybe 7% returns in the stock market.”
That’s on average over the next decade. In a 3% inflation world, that’s a real return that will build wealth. It will be a little bit volatile.
Now, the reason I say that is because people will say, “What do you mean, 6% or 7%? We just had 29% this year. We had 25% last year. Isn’t it supposed to go up 20% every single year until the end of time?”
No, it’s because the valuations were much lower in the past.
But if you’re looking at a 6% or 7% return in the future, and then you gaze over and say, “Well, the bond market’s giving me about 5%, with a lot less volatility and a lot more stable return with a big fat coupon,” maybe that is just flat-out a competitive investment to stocks for the first time in many years.
So, as yields go up, not only do you look at those yields as saying, “That makes borrowing more expensive and could slow the economy” (the traditional answer), but the other answer is some people might look over there and go, “Isn’t that giving me, like, 70% or 80% of what the stock market is going to offer me—5% as opposed to 6% or 7%—with a lot less risk associated with it because it’s a stable cash flow income? I’ll take that, thank you very much.”
And so, it will provide real competition to things like the stock market, especially if yields get up to 5%.
Jim Puplava:
Well, let’s talk about the drama in Washington right now over the continuing budget resolution. One of the things that we’re seeing right now is deficits are averaging close to $2 trillion. We’re over $36 trillion in debt.
The expectations of Trump coming in—he’s going to bring inflation down, he’s going to bring the cost of energy down—but with budget deficits this large, I think, Jim, we’re paying what, over $1 trillion in interest on the national debt, which is growing. It’s larger than the defense budget. He’s not in the same situation he was in 2016.
What happens if a lot of these expectations don’t come to fruition?
Jim Bianco:
Well, then we’re going to have more inflation, and he’s also going to have the push-pull of being careful about what those expectations are.
So, Scott Besson is the incoming Treasury Secretary, and he’s got his 3-3-3 plan: maintain 3% growth in the economy (we’re already doing that), get the budget deficit down to 3% of GDP (it’s 6.5% now, so he’s talking about halving it), and drill an extra 3 million barrels of oil a day.
Now, engineering-wise, physically, we could do it. We could actually increase production by another 3 million barrels a day.
But here’s the problem: if you give permits, you cut regulations, and we drill and get an extra 3 million barrels a day, what happens to the price of oil? It falls. It falls a lot. It might fall down to $40 or $30 a barrel.
What happens to a lot of marginal producers? They become uneconomic, and they go out of business. So, if you get that extra supply in, then you’re going to drive some of the marginal producers out, and then that extra supply—the total production—goes back down again.
In order to keep an equilibrium in the market, you’d need that extra supply coming with more demand. The problem with demand is that oil demand has been waning lately—not because of the U.S., but because Germany might be in recession, Japan might be in recession, and China, with 1.3 billion people, is having the lowest growth in 40 years.
That’s who’s demanding less energy, and that’s why the price of oil right now is stuck at $65 to $70 a barrel.
If you produce 3 million more barrels out of the U.S. and you drive it to $40, it might not be as economic as you think. And then, like I said, you drive those producers out, and the price goes back up to $65, and then you don’t achieve that inflation reduction that you think.
So really, what you’d want to see happen is that we produce 3 million barrels a day more, and Europe recovers so they demand more oil, so that we have somewhere to put that oil instead of just driving the price down.
Look, I’m a car owner. You’re a car owner. We all want to see oil prices as low as possible. But also, if you drive every oil company or every marginal oil company out of business, that’s not going to get the price of oil down. It’s going to go right back up.
Jim Puplava:
Yeah, that was something I wanted to bring up because we’re close to, what, $70 oil. Why would an oil company want to spend a bunch of money, drill, and increase production to drive the price lower? Because we saw what happened to a lot of the early shale players. They produced a lot of oil, but they didn’t make any money for shareholders.
So, companies have been very circumspect on their investing. They’ve been returning capital, buying back stock, and increasing dividends rather than, let’s say, increasing production or exploration.
Jim Bianco:
Yeah, well, the argument would be they would do it because Trump would come along and say, “I’m going to cut the red tape. I’m going to give you cheap leases on federal lands or whatever so that I can make your production cost $30 a barrel.” And he might be able to do that.
But the problem with that is that it’s for the marginal barrel. We already produce 12 million barrels of oil a day in the U.S., and that has much higher production costs. And those production costs are fixed because those are existing fields that are producing.
If the government comes in and says, “Well, we’ll get rid of all these regulations,” well, you’re not going to really lower the production costs much for those existing fields. You might lower it marginally around the edges, but not a lot.
So, if they wind up saying, “Here’s a bunch of leases and less regulation—you could produce on these fields at $30 a barrel,” and they drive the price of oil down to $40, all right, those new fields still make money. But a lot of existing fields and a lot of existing production doesn’t.
And then those companies will shut it down. And then that extra 3 million barrels a day that you’re producing in those new fields gets counteracted by those other fields getting shut down.
So, that’s the balance you have to look at between the price and the production costs.
Jim Puplava:
Let’s bring up something else. We’re at a little over $36 trillion in national debt right now. The budget deficit is expected to be several trillion next year. It could be even larger, depending on what happens with legislation. At what point, Jim, do we have that "Liz Truss moment" where the bond vigilantes show up and say, "You know what? You guys are out of control," and all of a sudden rates really start to spike?
Jim Bianco:
Boy, that’s a good question. I think that what you said is 100% correct—that the only thing that’s going to stop the budget deficit is the bond market. I know the Doge Committee is out there, and they’re going to try to cut $2 trillion of red tape out of Washington.
And a quick word about that: Do I believe that Vivek Ramaswamy and Elon Musk, through the Doge Committee, could identify that here’s a $6 trillion budget that the government has, and they could do it with $4 trillion—or even $3.5 trillion—and deliver the same amount of government services that we have now, but save $2 or $2.5 trillion? Do I believe they can do that? Yes, I do.
Do I believe that the bureaucracy is going to agree to this? That the Defense Department is going to say, "You know, just like Twitter, Elon, we could get rid of 60% of the people in the Pentagon and still keep the country every bit as safe"? Could they do it? Probably.
Will they do it? Absolutely not. They will fight it tooth and nail like it’s the end of the world. And so, the bureaucracy—leviathan, if you will—will wind up agreeing to some cuts, but not nearly as much as they could.
So, the budget deficit is going to stay very large. The only thing that’s going to stop it, therefore, is going to be the bond market saying, "No, we’re not going to buy your bonds anymore—not at these interest rates. I need to be compensated more with a higher level of interest rate."
So, let’s drive those interest rates even higher. And once they do that, I think that is that "Liz Truss moment."
I don’t know where that is, but unfortunately, if you’re wondering how we resolve this budget situation, I think that’s the only way we resolve it. I just don’t see the Democrats and the Republicans getting together and saying, "Look, this is unsustainable. We need to fix it before it becomes a crisis."
They will do that only when the bond market drives them to their knees and forces them to do it. They’ll scream and kick at every moment, but they’ll have no choice.
And so, that’s the unfortunate thing. What I’m saying is that the "Liz Truss moment" means we’re probably destined for a bond market crisis somewhere in here.
I don’t know when—whether it is in the first half of ’25, or it’s in 15 years, or it’s somewhere in between—that’s the real open question. But unfortunately, I don’t see another way around this budget issue other than, at some point, the bond market runs out of patience, puts its foot down, drives up yields, and then forces a change.
Jim Puplava:
Yeah, because if you take a look at the latest budget—or at least the initial compromise—Congress was getting a raise, they were getting better medical benefits. You’ve got what, 90% of government workers in Washington working from home? I think they got a five-year contract that extends that. So, it’s like business as usual. A 1,500-page document that nobody’s read, and it’s full of pork.
Jim Bianco:
Yeah. And the Commanders are going to get a new stadium supposedly out of it as well. So, there’s all kinds of stuff in there.
Now, that budget got voted down. And then they slimmed it down to a 16-page budget, and that got voted down. And we’re recording on the 20th of December, and if they don’t pass this deal by midnight, the government shuts down at midnight.
So, as we’re recording, we’re literally 12 hours away from the shutdown.
Now, a quick word about this shutdown: this does not involve a default on the debt. That was always the fear in the past—sometimes these government shutdowns coincide with the debt ceiling. That if we don’t pass a deal, we’ll default on the debt.
That does not happen now. So, there’s not that immediate concern of a financial crisis because of a debt default.
The debt ceiling itself is still many months away. I know the debt ceiling expires January 1st, but the Treasury has what are called extraordinary measures they can take to keep funding the government even after the debt ceiling is hit—for several months after January 1st.
So, that’s not an immediate concern. The government will continue to fund essential services. Social Security checks will go out. The military will still get paid. The FBI will still be chasing bad guys.
But things like national parks and stuff like that might close.
Trump, literally right before we started talking, tweeted out, "If we’re going to have a government shutdown, let’s have it now while Biden is president." So, he’s kind of throwing down the gauntlet on that.
What does that mean for financial markets? If anything, that’s probably bond bullish, because it means it’s like a forced, drastic budget cut is what it is. You’re going to shut down everything but essential services.
From a political standpoint, it’ll be a disaster. I’m old enough to remember the 1995 Newt Gingrich government shutdown.
They showed a picture of a bunch of 12-year-old Boy Scouts who rode a rickety, old, hot yellow bus to Washington to walk to the top of the Washington Monument, only to find it was padlocked.
And they showed a bunch of crying 12-year-old boys who sold chocolate bars to fund the trip, and they got to Washington on this bus, but they couldn’t go to the top because of the government shutdown.
Congressmen couldn’t move fast enough to end that budget deficit and get the Washington Monument open so those kids could climb to the top of it.
That’s the kind of bad optics you’ll see from a political standpoint with a government shutdown.
But is the government shutdown going to have an impact on the financial markets? No, because there’s going to be no debt default.
If anything, you could argue, like I said, it’s a forced way to cut the budget. But ultimately, at the end of the day, it won’t be because they’ll send a bunch of government workers home. And when they finally get a deal, they’ll pay them back pay.
It’ll be an unplanned vacation for them right around Christmas, which is the perfect time to do it.
And you know, it’ll be a forced budget constraint, but probably not as big as we think.
Jim Puplava:
It’s more of a media event that over-dramatizes it.
Jim Bianco:
Oh yeah, they’re going to be looking for those 12-year-old Boy Scouts in Washington next week, saying, “We wanted to go to the Lincoln Memorial or something like that, and we couldn’t get there because there’s a big fence around it.”
Jim Puplava:
Well, I guess as we close, Jim, the good thing heading into the Christmas season is yields are back up, so at least savers have a place to go.
Jim Bianco:
You know, as my friend Jim Grant likes to say—who writes the newsletter Grant’s Interest Rate Observer—“It’s nice to have an interest rate to observe again.”
And for investors, especially conservative investors, we’re getting back to a period where, like I said, there is an alternative. This isn’t a zero-money-market-fund world or a 2% bond world where the only way to make money is to put it into stocks and hope they don’t go down by a third or a half like they did in 2020, or look like they were doing in 2022.
You can now put your money into fixed-income investments, and they can turn you a competitive return.
And when I say "competitive return," I mean this: I think we’re in a 3-ish percent inflation world. The Fed thinks it’s 2%, but the bond market is giving me 5%. So, I’m making real gains above the inflation rate in my investments with that kind of environment.
And I don’t need to risk being one of those people held hostage by Jensen Huang, hoping that even though I buy conservative stocks or a value fund, Nvidia doesn’t tank and bring the rest of the market down with it.
So yeah, it’s a good time to be an investor because there are choices.
And the last thing I’ll mention to people is this: remember that a bear market is as much about time as it is about price.
In other words, the market sells off, and people say, “Yeah, but it always comes back.” Sure, but it took 13 or 14 years after the 2000 tech bubble to come back. It took months in 2020—that was the fastest recovery ever. It took two years after 2022 to come back.
If you’re 68 years old and you’re wondering about your investments, and you’re told, “Maybe the stock market corrects in 2025 or 2026 by a third. Your net worth goes down by a third, but don’t worry—it’ll recover.”
But what if it takes 10 years? You don’t have all that time. If you’re 35, yeah, you’d love it for the market to go down 30% or 40%, waffle down there for a couple of years, and then dollar-cost average at lower prices for the next 20-year run—probably driven by the reality of AI and not the promise of AI like we’re seeing right now.
But the reality is, the 68-year-olds have all the money, not the 35-year-olds.
And so, the bond market, giving that yield, is offering them a very good alternative to just buying conservative stocks.
Jim Puplava:
Not a bad way to end the year, looking into 2025. Well, listen, Jim, as we close, tell our listeners about your website. And also, you manage a bond fund or an ETF that you’re consulting on, correct?
Jim Bianco:
Yes. My original day job is that I produce research for institutional investors at biancoresearch.com. It’s a high-end institutional product. If you’re an institution, I’d love to talk to you about it.
If you’re a retail investor, I am very active on social media: Bianco Research on YouTube, Bianco Research on Twitter, and under my name, Jim Bianco, on LinkedIn.
One year ago today—so it’s my one-year anniversary talking to you on this—we started our bond fund. Its ticker is WTBN. Our partner is WisdomTree, so it’s WisdomTree Bianco Nancy.
It’s a fixed-income, total-return bond fund. We’ve had a very good first year—at least according to our Morningstar rankings. We’re very happy with what we’ve seen. We’re in the top quartile of our universe.
If you’re looking for a fixed-income investment, I’ll just say this real quick as a plug for my fund, but also to address the larger issue of bond investing:
It’s well-known that most active managers in equities cannot beat the index. That’s why we have this burgeoning business of indexation—buy the S&P 500 ETF—because no active manager can beat it, or very few can.
But in bond funds, it’s much different. Active managers can beat the indexes about 50% of the time.
So, you want to go passively investing in certain types of index sectors in equities. But in fixed income, a better approach is an active approach—whether it’s WTBN or many others.
Actually, one of the largest sectors of bond ETFs that has been rolled out this year by Pimco, Vanguard, and BlackRock are actively managed bond ETFs for this exact reason.
How should I invest in bonds? Should I buy mortgages? Should I buy corporate bonds? Should I buy international bonds? Professional managers can do better than just saying, "I’ll just buy the index." And most of them actually do well.
Jim Puplava:
Super. Well, listen, Jim, I want to thank you for joining us on the program. Merry Christmas and Happy New Year to you. I look forward to talking to you once again next year.
Jim Bianco:
Enjoyed it. Merry Christmas and Happy New Year to you too.
