The following is a summary of our recent interview with Jim Bianco, which can be listened to on our site here or on iTunes here.
When we spoke to leading macro analyst Jim Bianco of Bianco Research months before the election, he thought the odds of a Trump win were much higher than most expected and that, like Brexit, it would probably end up being bullish, not bearish, for the US stock market.
Given that he was one of the few that got this call right, we caught up with Bianco again to get his thoughts on what has taken place since the Trump victory and where he thinks the markets are headed.
“What we’ve seen is what we’ve been referring to as the reflation trade,” Bianco said. “Stocks have been rallying, bonds have been rising in yield — actually, soaring might be a better word — and the dollar has been rallying.”
Here's a brief clip of what he had to say:
Everybody now seems to think there’s going to be an infrastructure trade. The way various sectors have been performing suggests they think this is the likely outcome.
“The financial sector has been on fire, to a degree we haven’t seen since 2009,” Bianco said.
The Trump transition team’s suggestion that his administration will scrap Dodd-Frank was music to the financial industry’s ears, Bianco stated.
Bond Market Selloff to Continue?
The thinking is, Trump will reflate the economy and nothing bad is otherwise being priced in, Bianco stated, and that’s causing rates to go up.
“I think that trade is a little bit overdone,” he said. “Beyond that, when it comes to the bond market … what has been the big driver over the last couple of years? It’s been central bank buying.”
Central banks have driven the price of bonds so high through quantitative easing that we now have negative interest rates in Japan and Europe.
“I’m a believer in the idea that all central bank stimulus is fungible,” Bianco said. “It doesn’t matter who’s doing it as long as it gets done.”
Though the Fed isn’t doing QE and is hinting at raising rates, others, including the Bank of Japan, the ECB and the Bank of England, are aggressively buying bonds. If we look at all of them collectively, the amount of bond buying right now is the greatest it’s been since 2009, Bianco stated.
The Market Is Leading the Fed by the Nose
“I have been a believer that the Fed has lost control of monetary policy,” Bianco said. “The market will tell the Fed what to do.”
The market now wants a rate hike because of the belief in the reflation trade. It thinks things are going to get better, and that’s one of the reasons why it’s allowing the Fed to signal for a rate increase in December, Bianco stated.
There are potential issues going forward, however. The big danger is in the currency markets right now, Bianco stated. There is a chance that Trump’s actions will trigger a trade war. The action in the recent Peso and Renminbi selloffs suggest this outcome is plausible and that markets are beginning to price this in.
Also, if the reflation trade does play out and gives way to higher inflation and stronger economies, that’s will call into question whether central banks are going to continue buying bonds.
“I understand why the bond market is getting shellacked here,” Bianco said. “It’s going to lose its biggest proponent. If the reflation trade happens … rates aren’t just going to go up. It’s going to be a sight to behold.”
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