Jim Bianco: Inflation Up Across the Board, US Spending in Panic Mode

April 12, 2024 – Following this week's wrap-up, Financial Sense Newshour engages in an insightful conversation with Jim Bianco regarding US spending, his longer-term view on inflation, interest rates moving higher, and more. Jim highlights that the US government's current expenditure amounts to approximately 6.5% of GDP annually, a level typically associated with a significant recession or financial crisis. While this expenditure aids in averting an economic slowdown, it also presents inflationary risks and significantly influences consumer psychology regarding savings and consumption patterns, which is sowing the seeds for a separate type of crisis. Listen in to hear what Jim Bianco has to say about today's markets and where he thinks things are heading.

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Wrap-up with Ryan Puplava: Stocks experienced a turbulent week with the volatility index surging to levels not observed since October by the end of Friday. Three significant events defined this week's volatility. First, expectations were lowered from three rate cuts to two prompted by high inflation data from the consumer price index which showed a year-over-year increase in the headline CPI for the second consecutive month.

The following day saw the producer price index reporting below expectations, sparking a stock rally. However, on Friday earnings disclosures from banks, a weak data point from China, and a warning of a potential Iranian attack triggered a sharp stock market downturn. Losses were widespread with the S and P 500 sectors down between 0.6% and 3.8%. Down the least was the technology, consumer discretionary, and consumer staples sectors. Financials followed by materials and health care were down the most.

The inflation battle continues for Americans with gas prices, mortgages, and rent rising more than expected in March. The year-over-year rate of inflation rose to 3.5% in March from 3.2% in the prior month in the latest consumer price index report Wednesday. As a result of the news, the 10-year Treasury yield climbed 19 basis points from the prior day to 4.56%. Expectations for a rate cut in June fell from a probability of 57.4% to 17% according to the CME fed watch Tool that tracks fed futures.

The following day, the producer price index was released, showing a month-over-month increase of 0.2%, below expectations. However, the year-over-year rate for total PPI rose to 2.1% from 1.6% in February. Treasuries didn’t respond much to the news with the 10 year Treasury yield rising two basis points to 4.58%. There were three bond offerings this week with a $58 billion 3 year note auction on Tuesday, a 39 billion 10 year note auction on Wednesday and a 22 billion 30 year bond auction on Thursday so the weakness due to inflation data didn’t help those auctions.

Friday brought together three significant events: first, the anticipation of an Iranian attack on Israel; second, underwhelming banking earnings announcements; and third, a disappointing exports report from China revealing a 7.5% year-on-year decline that raised concerns about global growth. There have been warnings all week of an imminent attack on Israel by Iran, but Friday’s drop in stock prices was blamed on those concerns. Oil rose on concerns about supply disruptions and the dollar was trading at elevated levels due to inflation and as a safe haven bid on the warnings for the imminent attack from Iran.

The earnings season kicked off this Friday on a sour note. Big bank and regional bank stocks were down even as the banks beat estimates. JP Morgan, Wells Fargo, and BlackRock beat earnings and revenue estimates. JP Morgan’s CEO, Jamie Dimon, made some cautious sounding macro comments on the call that seemed to assist with the selling pressure Friday. He said that the economy is ok now but that doesn’t mean it will still be ok down the road. He told shareholders in his annual letter this week that the bank is prepared for a range for interest rates from 2 to 8% or more with the bank leaving its net interest income guidance for 2024 unchanged from its prior view.

Fact set reported today that the S and P 500 is estimated to show earnings growth of 0.9% for the quarter. Typically, companies beat these estimates so it is expected we’ll see a higher growth rate by the end of the earnings season, and likely will mark the third-straight quarter of year-over-year growth. Fact set anticipates we may see earnings growth of more than 7% for the first quarter because companies typically beat the low bar they set through lower guidance during the previous quarter.

Stock prices have been elevated for some time with the S and P 500 up a little over 7% for the year on expectations for a soft or no-landing scenario and peak restrictive monetary policy. We started the year with six rate cuts that quickly changed to three in January. This week, those expectations fell again from three to two on the inflation data. It’s tough to just pinpoint one reason for the weakness this week as there was a confluence of issues ranging from persistent inflation, conflict in the middle east, and our first earnings calls of the season, none of which reassured investors.

Jim Bianco interview:

Jim Puplava:
Well, on the day we're doing this interview, the market's got a bit of a shock. The inflation numbers came in much larger than expected, and it looks like we may be seeing a return of inflation. What does this mean for interest rates, the markets in general, and future fed rate cuts? Well, let's find out. Joining us on the program is Jim Bianco from Bianco Research. Jim, let's begin with the inflation numbers. They came out hotter than expected, and that seems to be a developing trend here. Let's get your take on this.

Jim Bianco:
Yeah, it's becoming the inflation data today, the day we're recording, as the day came out, came out on the monthly level, the big number was rounded to 0.4 on core inflation. That was a big problem for the market, largely because when you dig into the data wasn't any one factor that caused it to go up. It was, everything went up a little bit. And that's worrisome because that suggests more of an underlying trend than a special one off circumstance. And this is now the third month in a row that the inflation data has really beaten expectations, and it's got people very concerned that we might be what I've always thought we might be in a three to 4% inflation world year over year.

CPI is at 3.4%, and that is going to be problematic for the Federal Reserve, and that's going to be problematic, I think, for a lot of people, especially at the lower end of the economy, that live paycheck to paycheck if inflation is not on its way to 2%. So, as I like to say, we don't need to do a forensic analysis of this to say, was it used cars, was it airline tickets, was it gasoline, was it shelter, or was it something else? Was it goods? All the above is really what the answer is, nothing spectacular, but all the above contributed to it. And it's, like I said, that's almost more concerning than if you were to say it was just a couple of items that moved it higher.

Jim Puplava:
Well, let's take a look at the implications for that. We began this year, everybody thought, and going back to last quarter of last year, energy was coming down, bond yields were coming down, and the talk at the beginning of the year is six rate cuts. Then it got cut to three with some of the new inflation numbers that began at the beginning of the year. Now they're talking about one or maybe none. What do you think happens?

Jim Bianco:
Yeah, I mean, you're right that the market is now down to maybe one rate cut for the year. You know, the fed fund futures, you can calculate the probabilities. It's now has better than a 50% chance of a cut in September, but it's only at around 64%. And that's, you know, there's a lot of data between now and then, and that's very unsure about 64%. Only when you get past the election do you actually see the rate cuts getting priced in.

Now, there's two things about that. One, that doesn't mean, oh, we're going to get the rate cuts later this year is, I think the answer is we're going to get the rate cuts whenever the data warrants that we should have a rate cut. The problem right now is the only reason we're talking about rate cuts is because Chairman Powell has repeatedly said he thinks they're going to cut rates. If you remove that from the equation and just ask your typical economist, here's the inflation data, here's the economic data, here's what the financial markets are doing. Should the Fed cut rates?

The answer would be an emphatic no. There's no reason to cut rates. Like I said, the only reason we're talking about is because Chairman Powell said it. But he's also been putting that qualifier that he needs the data to give him confidence. That was the word that he used, and he's not getting that.

So it doesn't mean that the rate cuts are later this year. It's, they're later this year depending on if we see slowing data. We haven't for several months. I mean, eventually the data will slow, but I see no reason why to think that this is some kind of a peak that we're at and that we're going to start to see slowing data as we move forward.

Jim Puplava:
Well, let's talk about what this means for interest rates. If you take a look at where interest rates, we've got the two year almost near 5%. We've got some of the, was it, the 30 year is over on its way to 4.6, the ten years over 4.5. What might this mean for, let's say, the treasury and going forward in terms of what's going to happen with interest rates if it keeps up?

Jim Bianco:
Yeah, I think interest rates will continue to go higher. Let's remember that last October, the two year yield, which you're right, is almost dead on 5% as we're recording, got as high as 520 last October, and that the ten year yield, which just went over 450, as you mentioned, did get slightly over 5% last October. So we're not quite back at the highs that we saw of this cycle about six months ago, but it looks like we're headed back that way. And I think we are headed back that way and maybe even slightly higher if we are in a 3% inflation world. I'm going to put this in the terms that the Fed likes to explain it.

The Fed thinks that the neutral funds rate is two and a half percent or 2.6%. How do they arrive at that? They think that the long run inflation rate is 2%. That means that's the normal inflation rate that we should expect everything to settle out at and then put a half a percent, which they refer to as our star, on top of that. So they get 2526 is the neutral funds rate.

So when they look at a five to quarter, five and a half funds rate, that's why Jeremy Paul talks so much about the Fed being tight is because they think they're 300 basis points restrictive. But if instead the inflation rate is three to three and a half, and if it is up at that level, that our star, that uncertainty might not be 50 basis points, might be closer to 100 basis points. You can make the case that the neutral funds rate is not two and a half, 2.6, but its maybe like four to four and a half now five and a quarter to five and a half. Where the funds rate is targeted now is still restrictive, but its not nearly as restrictive as the Fed thinks. And a couple of rate cuts will get you back to neutral.

And so given that, you could make the case that this economy can handle this level of restrictiveness in interest rates, that's why we see GDP moving forward, inflation staying sticky. Other than the day we're recording, the stock market has been flirting with all time highs and speculative fever. If you measure by crypto is back in full force. So higher interest rates is going to be what it needs to restrict the economy. And if we're in a three and three and a half percent inflation world, the Fed will say that that is unacceptable and that they were going to probably start thinking about why we're going to have to slow things down.

Now, maybe the market does the work for the Fed and that is that market base rates, the two year and the ten year go up above five or above their October highs, and the Fed doesn't have to raise rates anymore. I don't think they need to. And I think that that's ultimately what they might wind up doing. Otherwise, I would not be surprised if we continue to get data like this that over several months we could start shifting the narrative towards potentially more rate hikes. Now, let me be clear. Not now. And it's predicated on the idea that we continue to get more data like we've seen in the last few months going forward. But, yes, all things are pointing towards higher interest rates.

Jim Puplava:
Let's talk about why. I think the economy has been resilient. I can't think of anybody that if you had a mortgage, you locked in on a 3% mortgage. If you were a corporation, you locked in on lower corporate debt. So it hasn't impacted immediately as it has in the past.

So let's talk about what the treasury is doing, because I'm starting to see something, and ID like to get your take on what's going on here. Typically, the Fed was issuing long term debt. Well, we know with inflation going up, if you're issuing long term debt as a bond investor, I'm going to start demanding a higher yield to compensate me for that risk. But what the treasury has done is shifted over to short term t bill funding. Normally, you don't see that unless you're in a crisis. What's going on here?

Jim Bianco:
I think that part of it is that they're somewhat trying to manipulate the interest rates lower. This was a decision that they made last November to shift their buying or their issuance pattern shorter term, because they wanted longer term interest rates to come down. And they thought, well, if we restrict the supply of long term interest rates, that will help them come down. And it worked. If you remember, there was a big rally in bonds in November and December.

But that was all it was really able to do because at the end of the day, really what's going to drive the issuance is going to be the deficit, and the deficit is huge and it's going to get bigger. And so at the end, they can't just issue only bills. They're going to have to continue to issue more notes and more bonds. And I think that that's coming as well, too. In the beginning, I think it was a conscious effort.

You know, way back in the day, we used to call it operation twist, or various forms of that, meaning that they were trying to manipulate the yield curve. They were thinking that they needed to get long term interest rates down and that they had more room to issue short term bills, take off the heat on long term interest rates. But like I said, debt manipulation will work for a while, and it did for about four, six weeks. But it's not going to be a permanent fix unless you bring the deficit in. And we're doing the opposite of that.

We've got a huge budget deficit of about $1.8 trillion, or about 6.5% of GDP. And there's no signs that either presidential candidate has got any interest in reining in that level of spending. So the budget deficit is going to stay big, and that's got to be financed, and that means that there's going to be more bills, notes and bonds that are coming, and there's only so much you can do with supply to try and change that. Ed.

Jim Puplava:
Well, let's talk about what this might mean for the economy, because as we mentioned, I think the economy has been showing stronger signs, and we've been talking, Jim, as far as I know, for the last couple of years about a recession that has never arrived. And it doesn't look like it's on the horizon anytime soon, other than maybe I'm seeing some discrepancies on the job numbers. I'll get to. But what about this recession? What did we just pass? $1.2 trillion supplemental spending bill? I just can't see as both parties want to spend money that the economy would weaken.

Jim Bianco:
Yeah, exactly. So one of the things about this economy, and you're right, just to take the bigger picture, this economy now for about seven quarters in a row has been economists. Let me back up. Economists have a term called potential or trend growth. What, what if you're not trying to stimulate or slow down the economy?

What will be its natural growth rate? Now, that's an estimate, and most of the people will estimate this between two and 2.5% per year growth. We've been growing at two to 2.5, at least that level now for seven quarters in a row. So the economy has been growing at trend or at potential for almost two years now. That alone, you know, should really dissuade anybody from thinking about a soft landing or recession.

One of the big drivers of that has been spending in two forms of spending, government spending, as you've mentioned, and I mentioned to the $1.8 trillion deficit, the $1.2 trillion supplemental spending bill that you talked about, that's, that is a deficit of 6.5%. So in other words, the government is spending more than its taxes to the tune of 6.5% of GDP, and they have to borrow that money in order to make up that difference. Put that in perspective. Other than 2009, at the worst point of any recession, before 2009, we didn't even spend 6.5% of GDP. And that's usually when the government is panicking that the economy's in a deep, dark hole today this is like the normal run rate for the economy to be having deficits being that big.

And I'd like to say you can almost stop there and just say given a six and a half percent deficit, given that means six and a half percent of GDP, the government is borrowing it. What are they doing with that money? They're spending it on services and on goods, redistributing that back into the economy, creating economic activity, creating gross domestic production, which is GDP. You could stop right there. There will be no recession, there will be no soft landing, just full on because of the government spending.

There will be inflation because of it, but there won't be a slowdown. The other side of the equation is personal spending. If we look at the savings rate in 2010 to 2020, during the recovery, after the great Recession, the personal savings rate in the United States averaged 6%, meaning you spent 94% of your income and you saved 6% of it coming since coming out of COVID shutdown restart for the last two years, the savings rate has been 4%, not 6%. That extra 2% is showing up because the economy used to see GDP was made up of personal consumption. Your spending, my spending, everybody's spending was 67% of the economy.

Now it's 69% of the economy. That's a big difference. That is extra spending. That's not spending because of inflation. That is, we're buying more units, we're buying more services, and that also is going to keep the economy very strong, which is why we've had seven plus quarters of growth.

Like I said, what's the downside to all of that strong growth is inflation because we're buying things, we're purchasing services, and you're doing it and I'm doing it and everybody else is doing it. And there's only a finite set of services and things, and their prices start to rise to meet the demand, otherwise known as inflation. So that's why I think we're not seeing all of these ideas about a slowdown or we are not seeing the ideas about a recession that never seems to materialize. Last thought for you on this. I've been fond recently of saying that every financial crisis and every recession produces a change of behavior.

So you go into the recession, it happens. Coming out of it, your behavior changes. In 2009, the behavior change was the increased savings rate, which I talked about. People thought that they didn't need to save. We were running 2% savings rates before the financial crisis because my house price was going up faster than I could save money so I could spend all my paycheck.

Then home prices crashed and there was a rethink, nope, I better save more. And that's what we did coming out of the great Recession. And the economy struggled to come out of it in 2010 to twelve because of the high savings rate. Well, coming out of 2020, maybe it's yolo, you only live once, or maybe it's the effect or the psyche that the government mailed everybody thousands of dollars. We're spending more, we're savings less, we don't feel a need to save.

And because of that, the economy is staying very strong and inflation staying very high. So coming out of the recession, we changed behavior. The COVID recession start, shutdown, restart, we change behavior, we're spending more. How long will that last? This entire cycle.

Whenever the next recession occurs, whether it's later this year or ten years or anywhere in between, then the savings rate and then the spending patterns will change. How will they change? Well, they'll go down in the recession. But if the government instead of mails everybody $3,000, they mail everybody $10,000, maybe in the next one coming out of it, the savings rate will be zero and we'll be spending every dollar we have, or maybe we don't send anybody money. And coming back, the savings rate is more like 6% again.

But for right now, this cycle is going to be more about spending and it's going to be more about government spending, deficit spending, and it's going to be about a push to acquire, you know, spend on services and goods that is going to keep inflation sticky, sticky high.

Jim Puplava:
And so let's take that back to a comment you made earlier and the impact it has on, let's say somebody of lower income, lower middle class, because the Wall Street Journal did an article, I think it was, this week, talking about what $100 buys at the grocery store. They had things going up 50, 60, 70% over the last five years. You've got bacon going up over 8% a year, you've got eggs going up over 7%, milk going over 6%. If I'm living paycheck to paycheck that eight, seven and 6% increase. And then also now we're seeing gasoline prices, especially here in California. What impact will that have?

Jim Bianco:
A devastating impact. You're right, because this is the underlying problem with inflation. If you look at the Fed survey of Consumer Finances, which breaks down how people spend their money and save their money based on income, it's always been like what I'm about to describe, and that is the top 50% of income in the United States has 94% of the assets in the United States, virtually all of them. The top 10% has half the assets in the United States. The bottom 50% has 6% of the assets and has over 50% of the debt.

So the bottom 50% doesnt own a stock portfolio, probably doesnt own a home. They rent and they have a lot of debt. Theyve borrowed a lot of money. The top half of the, especially the top 10%, dont have much debt. They dont need it.

They own a lot of assets. They own homes. They have stock portfolios, they own businesses and the like. Thats always been the case. But for the last 30 odd years going into 2020, weve always had very low inflation under 2%, and the average wage increase that the bottom 50% would get would be a little bit more than 2%.

So they always kind of, you know, to use the tennis metaphor, they always held serve. They never really got better, but they never got worse. They can always improve their lot in life by getting promoted to a higher income level as opposed to waiting for their income level to go up. And so the status quo kind of help. Now you get to 21, 22, and you get 9% inflation coming down to three.

Well, the top half of the top half and especially the top 10%, they notice egg prices, too, and they notice what's happening at the grocery store, and they just pay it and they move on with their life because they can. But the bottom 50% has to make real choices. If I want to buy more of this, I have to buy less of that. And as a matter of fact, there was a story yesterday. That dollar tree is now thinking about putting items in their store up to $7.

And the people that shop there are very upset that they're carrying expensive items. Now, for people in the top 50% or in the top 10%, $7, it's not an expensive item, but it is for the bottom 50%. And so that's the problem that inflation brings, is that it really hurts them, because all they can rely upon is that their wages go up, at least with inflation. And for the bulk of the last four years, it hasn't. And the last thing to keep in mind, too, you mentioned rent, gasoline, grocery store.

For the top 10%, that's about 35 or 40% of their total budget they spent on housing, transportation, and food. But for the bottom 50%, that's like two thirds of their budget, not a third of, a little more than a third of their budget. That's all they really spend their money on is, is those three items. So when the, when items at the grocery store go up, yeah. People in the top 10% notice they could substitute or do something or did just pay it, move on.

But tough choices have to be made, and that's why the inflation needs to be addressed, and it needs to be addressed with, I believe, some urgency. And that urgency is not for the Fed to say, oh, let's just change the target to 3% instead of 2%. That may be fine for the top half, but it's not fine for the bottom half. And that's why, getting back to what I said earlier, if this inflation stays sticky at three and it doesn't seem to be arresting and the fed finds that unacceptable, the only tool they got to try and slow that down is to restrict the economy, and that's higher interest rates. Which gets me back to, like I said, no, I don't think that rate hikes are on the table now.

But you see more data, like what we've been seeing the last few months, over the next several months, I would not be surprised if we do shift and start talking about rate hikes throughout the balance of the year because we continue to see stronger data. Trey.

Jim Puplava:
Well, speaking of rate hikes, lets talk about something that I guess is positive for investors, Jim, and that is probably the first time that ive seen in almost a couple of decades. You've got bond yields either on treasuries or corporates that are very competitive with the stock market. Cash is no longer trash and bond yields are offering a return that's almost two thirds what you would expect from stocks longer term.

Jim Bianco:
Yes. My friend Jim Grant, who writes the newsletter grants interest rate observer, has a great line for it, saying that it's nice to have an interest rate to observe again. And that's what we've got right now. As you mentioned about the two thirds number, Doctor Jeremy Siegel and Jeremy Schwartz, the co CIO of Wisdom Tree and his assistant, wrote an update, new addition to his great book, stocks for the long run. In the book he says, what should you reasonably expect to get from the stock market?

Buy a basket of stocks, the S and P 500 or some other basket of stocks. Hold it for many, many years. Do the buffet thing, price it once a year, 8% a year. That is what you should reasonably expect. Some years you'll get more, some years you'll get less, but you'll average 8%.

Where our bond yields right now, no, as we mentioned, let's use one metric, the two year yields at 5%. The ten year yield is at, you know, a little over 450. And treasury bills are at about 5.3% right now. That's about two thirds of what you could get out of the stock market, especially if you're in a money market fund. With a money market fund having a net asset value of $1 every day, no market risk, it has the same price every single day, owns the safest asset you can own.

Treasury bills is what it owns. And so for a lot of people, they're saying I could get over half, maybe two thirds of what the stock market offers over the long term without any market risk. Good enough. Sign me up. They'll take that.

And that's why you've been seeing a rush of money into money market funds. They're at six and a half trillion dollars. Almost a trillion and a half dollars has come in the last year and a half. Uh, and it's really starting to change the whole psyche of what bond investing has been about back up to 2019. When you were a bond investor, you were buying something to hope you would get capital appreciation.

I bought some bonds. I would hope interest rates would go down and the price would go up and it would give me some kind of a return. But I wasn't concerned about the coupon because it wasn't much of a coupon. There was a coupon, but it was very, very low. And in terms of money market funds, it was practically zero, or was effectively zero for money market funds.

But in 2024, that 5% coupon, and thats just treasuries. Now, if you want to take a little risk with corporate bonds or something else, you can get up into the sixes, maybe even approaching seven with some mortgages and the like, you take some interest rate risk with mortgages. That is now changing the game that bond investors are saying, I like that yield, I want that yield. And a bond managers job is to protect that yield. And that protecting that yield is to try to avoid or insulate yourself against the sell off as best you can so that the price doesn't go down.

Maybe trying to expose yourself to the price going up. But the primary driver of why you own the bonds is no longer the capital appreciation. It is now that income stream from those higher interest rates and cheap commercial. I might add that we do run an ETF. WTBN wisdom tree Bianco, Nancy, WTBN.

It is a fully invested fixed income ETF that invests in a broad based measure of bonds. And I just explained to you exactly how we do it because that's the environment we're in. If you're interested, Bianco Advisors.com is its website.

Jim Puplava:
I want to talk about something that is seems to be an anomaly. And I want to talk about what's going on with the dollar, interest rates and gold. Because normally gold doesn't pay any dividends or interest. When you see interest rates rise and the dollar go up, gold goes down. We now have a situation. Rising interest rates, rising dollar, and record gold prices. How do you explain that?

Jim Bianco:
I was going to ask you. You could explain it to me, but you're right that that is definitely what's going on. I think that it's the best answer I could give you is rising interest rates is what we've been talking about, a very strong economy, and that is keeping interest rates up, and that's keeping inflation sticky at 3%. Okay, so that's interest rates. That very strong economy, because of our spending, both government spending and personal spending, stands at odds to the rest of the developed world.

Let's talk about the developed world. Europe, Japan, Australia, New Zealand, the developed world, Canada, in there as well, too. Our economy is head and shoulders stronger than the rest of the world. Why? Because our consumption patterns, our personal spending is much higher than the rest of the world.

They never got that. Yolo, the government's going to mail me money. Let's just spend more money. That's unique to the US. It's not happening everywhere else.

So given that our interest rates are higher than everybody else's, our economy is stronger than everybody else's. All things being equal, that should make the dollar appreciate in value with interest rates. So that's consistent, I think, between what you're seeing with interest rates in the dollar, gold is kind of the anomaly. You wouldn't expect gold to be going up in that environment either, because when you have a higher interest rates that is competitive with, you know, which is a competition of gold, I could buy a treasury bill as opposed to gold. And you've got a strong economy.

That's not the best world for gold. Furthermore, if you look deeper into the gold data, there are ETF's like GLD and IAU which invest in gold. They have been getting consistent outflows for. Since 21, since 2021, meaning that the investor flow out of gold has not been that good. But where gold's demand is booming off the roof is Asia.

It is coming big time from China, India, the Middle east. They are just acquiring gold to no abandon. Now why are they doing that? There's a number of reasons why but I do think it just comes down to uncertainty, uncertainty about the chinese economy. It is a very shaky economy.

It's got a bunch of issues. And gold is a place that chinese investors have for thousands of years have hid their wealth, and they're doing it again. The Middle east and the rest of the wealthy parts of that section of the world are seeing nothing but war and instability. And gold seems to be a place for them to hide, too. So we look at what's happening with gold, and let's remember that when we're comparing the stock market and the bond market, the gold market is like 5% the size.

Or to restate it, stocks and bonds are like 20 times larger than the gold market. So we look at it and go, well, American investors, European investors, are not necessarily getting interested in gold except for the last couple of weeks because the price has launched well over $2,100. But before that, they were never interested in it. And so where was all the buying coming from? And I think the buying was coming from Asia in the Middle east. And there's enough evidence to kind of suggest that that's been indeed the case.

Jim Puplava:
So as you look at this environment, if you were looking forward, Jim, if there was anything you would want to be on the alert for, that either might give you a clue as to where we're heading economically, interest rate wise, fed or something that would alarm you that, hey, we got trouble ahead. What would those things be?

Jim Bianco:
I would probably go with some of the more traditional indicators. The thing that I watch the most on that side is the labor market. And to see if there's any weakening in the labor market. And initial unemployment claims and continuing claims are a number that is put out by the Bureau of Labor Statistics every Thursday morning. Usually initial unemployment claims have been running at around 200 to 220,000.

And it's been. That number historically is very, very low. That historically says it's a very strong labor market. If that number starts moving up, that would be a sign to me that there is an issue, and I would define moving up as 275 to 300,000. Not that it goes from $220,000 to 227,000.

That's still more in the noise range. That has not been happening for the last couple of years. But that would be a sign to me that we were seeing real weakening, I think in the labor market. As far as other things that I've been really paying attention to quite closely has been the price of oil. WTI oil is around $86.

It's up about $20 from its lows back in December as it continues to go higher. It is at this point both a demand side indicator that the economy is staying strong and people are driving and demanding oil, demanding energy for production, and that that will keep it up. And it can also serve as an indicator, too, of geopolitical risk. With the uncertainty in the Middle east, with what Iran has been doing lately or been making claims about, should we worry about that? There could be an oil squeeze. Yeah, we should be worried about it. Well, how do we know? What should we be looking at? The price of oil? The very simple, straightforward thing.

Now, these are kind of the same indicators that probably would have said before 2020 that I would always be focused on. But I think that in this environment, those are indicators that I would continue to watch and be worry if either one of them were to start up, if oil was to start really moving higher and it's not being tied to a supply problem, that's inflation and that's a problem. If it's tied to a supply problem, then we've got to really worry. There's an economist at the New York Fed, Rudy Dornbush, and he famously said a line that economic expansions do not die of old age. They're murdered.

What he means by that is the natural state of an economy is to expand. So they usually something comes along and exogenously shocks the economy into recession. Oil prices have been tops of the list. So if you see oil prices shooting up because of supply constraints, there's instability in the Middle east. There's worry about supply and oil that could be very recessionary.

And then as far as the state of the labor market, yes, you can look at the unemployment rate. Yes, you can look at the payroll report. Yes, you can look at all those other types of indicators, but they're monthly. But a good high frequency weekly indicator to watch would be the initial unemployment claims.

Jim Puplava:
Trey, final question, if I may. We get the monthly numbers that are reported. The market pays a lot of attention, but one thing that we have been watching, then the following month, they lower those estimates and then the difference between the household survey and the monthly unemployment report. Any thoughts there?

Jim Bianco:
Yeah, a couple. The problem that the unemployment rate, or, excuse me, the problem that the payroll report in the household survey have is that that last word, survey, they're surveys. And what we're learning about surveys, even on the government side for economics, is there like political surveys done by Gallup. Everybody hangs up on surveyors. They don't answer their questions.

I used to joke that the reason is, is because 20 years ago, when Gallup would call you, you'd get all excited because somebody wants to know your opinion. Today, you could go on social media and you can vomit your opinion all over the place. And when somebody calls you at dinnertime and says, I'd like to ask you some questions about the presidential race, I'll go look at my twitter feed. I gotta go eat dinner. That's why we don't answer them anymore.

But that's a problem for the government, too, because the number of people that are answering the government's survey is falling to multi decade lows. And so the Bureau of Labor Statistics guesses at those missing people that didn't answer the survey. They follow up in the next couple of months to get them to answer the survey. They finally, eventually get it up to about 90% response. And it's those guesses that they're making, which is why we're seeing all of these revisions in the survey.

That's why we're seeing the revisions keep coming down because they're guessing too high. Now, in the last two or three months, the revisions have really tailed off quite a bit. They're very small in the last payroll report. Maybe the BLS has changed some of their methodologies and they're getting a better handle on those missing people in the survey. But I think.

But, you know, this is not just, you know, like I said, it's not just Gallup trying to figure out who the president is. Anything that has to do with the survey. I'll even throw you another one for you. We also look at the Institute of Supply Management's purchasing manager report. That's a survey of purchasing managers.

They're having the same problem, too. Purchasing managers don't want to answer surveys any more than you. I want to answer Gallup. The university of Michigan's consumer confidence survey, same problem there. They're having a problem getting people not to answer their surveys as well.

The whole concept of surveys is really becoming quite a problem. And it's not just for political pollsters, but it's also for economists, because so much of how we measure the economy is a survey. And if people stop answering the surveys, or worse, self selected types of people answer surveys, so we get consistent biases, then it's going to be harder to read the economy as we go forward.

Jim Puplava:
All right, well, listen, Jim, as we close, tell our listeners about the fund that you mentioned with wisdom tree and then also your website, if you would.

Jim Bianco:
All right, I'll start off old school and say that my original business is that I am in the research business. It is macro oriented, but mainly with a heavy bent towards fixed income. I've been involved in the bond market for well over 30 years, and that's biancoresearch.com dot. And you can follow me on social media under Bianco research or on LinkedIn under Jim Bianco or Bianco Research on YouTube. We did start a mutual fund, excuse me, we did start an ETF, excuse me, with wisdom tree WTBN.

Its website is bianco advisors.com. It's long only fixed income. You can go educate yourself about it on our website or look up some of the information associated with WTBN. So, or you could drop me a note if you've got any questions about that. You can request a free trial on our research[at]biancoresearch[dot]com. Or just follow me on social media. I try to stay active with some of my thoughts there whenever I have the time.

Jim Puplava:
All right, Jim, as always, pleasure speaking with you. Stay well and hope to talk to you again.

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