MacroVoices #445 Jim Bianco: Still No Landing, and Inflation is Not Transitory

Episode Summary

Executive Summary: Jim Bianco argues the Fed has become political but not partisan, and that an imminent rate-cut cycle is mostly priced in. He thinks the U.S. economy is still at/near trend, inflation remains structurally higher than the Fed’s target, and the bigger bond-market driver is China-led commodity disinflation plus global flows. Patrick’s chart work echoes a crowded duration trade, bullish gold, weak crude, and fragile breadth.

Main Topics: Fed politics, September cuts, and policy error risk (Priority: 5/5): Bianco says the Fed is likely to cut in September despite election-year sensitivities, making it appear political. He argues officials are not partisan but are concerned about reputation and are following cooling data. The risk is cutting too far without a clear destination for neutral rates. China slowdown and global bond/rate effects (Priority: 5/5): Bianco frames China as the major external force suppressing commodities and supporting lower global yields. He cites weak Chinese equities, low yields, and soft commodity demand as evidence that China, not the U.S., is a key driver of the recent move in rates. Yen carry trade and Bank of Japan spillovers (Priority: 4/5): He explains the August unwind of the yen carry trade as a reaction to an unexpected BOJ hike and hints of more tightening. He expects the trade may reassert itself once volatility fades, but acknowledges BOJ communication mistakes amplified the market shock. U.S. economy, labor-market measurement, and no-landing view (Priority: 5/5): Bianco remains in the no-landing camp, arguing the economy is growing at or near potential and that labor data may be distorted by migration-driven population growth and survey limitations. He doubts the recession signal embedded in labor indicators is reliable. Secular inflation and the level of neutral rates (Priority: 5/5): He argues the post-2020 regime is a secular inflation era, with inflation likely settling above 2%. Real rates now look closer to pre-QE norms, implying the Fed should not assume zero rates are the new normal. He warns rate cuts could overshoot neutral. Asset-market positioning: bonds, gold, crude, breadth (Priority: 4/5): The post-game review suggests bonds are crowded long and may not rally much further absent recession, crude is weak but oversold, gold remains in a strong uptrend on policy-error risk, and equity breadth is soft despite index resilience.

Key Arguments: The Fed is likely to cut in September, and that change in an election year makes it look political even if policymakers are not partisan. Markets have already priced in a large easing cycle; many rate cuts are already embedded in the 10-year and 2-year yields. China’s economic weakness is suppressing global commodity prices and energy demand, helping pull yields lower worldwide. The yen carry trade unwound because the BOJ surprised markets; it may resume once volatility normalizes and the BOJ becomes more predictable. The U.S. economy is not clearly in recession; growth and consumption remain solid, so labor-market weakness may partly reflect measurement problems caused by migration. Inflation is likely in a new secular regime around 3%-4%, not the Fed’s 2% target, making aggressive cuts potentially too stimulative. Gold is behaving like a policy-error hedge and could benefit if the Fed cuts too far and undermines credibility. Bond bulls are extremely crowded; if the Fed only delivers what’s already priced, longer-term yields may not fall much further and could even rise. Breadth remains weak, suggesting the equity rally is narrow and potentially topping even if indices stay near highs.

Data Points: SP 500 futures: up 56 bps to 5561 - Macro scoreboard at the close of Wednesday, Sept. 11, 2024 U.S. dollar index: up 44 bps to 101.72 - Macro scoreboard WTI crude oil (Oct.): down 273 bps to 67.31 - Macro scoreboard; later discussed as weak and near multi-year lows RBOB gasoline (Oct.): down 306 bps to 190 - Macro scoreboard following oil lower Gold (Dec.): up 63 bps to 2542 - Macro scoreboard; consolidating near highs Copper: up 147 bps to 414 - Macro scoreboard after summer selling Uranium: up 88 bps to 8005 - Macro scoreboard and later post-game commentary U.S. 10-year Treasury yield: 3.68% - Macro scoreboard; new lows in yields year to date Probability of September Fed cut: over 100% - Bianco’s shorthand meaning markets debate 25 vs 50 bps, not whether cuts happen China 2-year/10-year bond yield context: 10-year around 2.1% - Bianco says Chinese rates are at all-time/20+ year lows China stock market performance: down over 25% over two years - Used as evidence of deep Chinese economic stress S&P 500 vs China stocks: U.S. market up about 45% over two years - Contrast with weak China performance China Q2 GDP growth: 5% - Bianco says that is weak for China’s historical growth profile Chinese holdings of U.S. Treasuries peak: about $1.2 trillion in 2012 - Bianco notes Chinese Treasury holdings have declined since then U.S. population growth: about 1.1% to 1.2% in 2024 - Bianco cites migration-driven acceleration as a labor-market measurement issue U.S. population growth pre-2020: about 0.2% annually - Shows how unusual current demographic growth is Payroll revision: down 818,000 jobs - Bianco discusses as potentially distorted by under-the-table employment and population assumptions U.S. unemployment rate: 4.2% - Mentioned as part of the labor-market debate U.S. unemployment peak discussed: 4.3% - Referenced in the context of Sahm-rule concerns Inflation peak: 9% in June 2022 - Supports the secular inflation argument Current CPI: about 2.9% - At the time of the interview, before expected August CPI Expected August CPI: about 2.5% YoY - Expected base-effect dip due to prior-year oil prices Real rates during QE era: average minus 1% from 2009-2022 - Bianco contrasts QE-era real rates with current conditions Real rates pre-QE: average 2.6% from 1982-2009 - Used to argue current real rates are not unusually high Current real rates: about 2.8% - Bianco says these are close to pre-QE norms Neutral funds rate estimate: 3.5% to 4.0% - Bianco’s view of where policy may need to stop, versus the Fed’s traditional 2.5%

Pivotal Quotes: "The Fed has definitely become political." — Jim Bianco: Opening discussion on the September rate-cut decision and election-year optics "I’m in the no-landing camp." — Jim Bianco: His view that the U.S. economy is still growing near potential rather than sliding into recession "We could be in the second half of 25 and go, whoa, we went way, way too far in the other direction here." — Jim Bianco: Warning that aggressive cuts could create a renewed inflation problem next year

Implications: Listeners should expect a highly crowded dovish trade: much of the easing and bond rally may already be priced in. If Bianco is right, the bigger surprise could be higher long rates, a policy-error-driven gold bid, and inflation reaccelerating into 2025.