Markets Will Get A Deficit President No Matter What | Jim Bianco & Jeremy Schwartz

Episode Summary

Executive Summary: Live from Maine, the hosts debated whether the U.S. economy is in a soft landing, no landing, or growth scare. Jim Bianco argued the economy is still at potential and that inflation could reaccelerate if the Fed cuts too aggressively, while Jack Farley emphasized the shift toward “bad news is bad news” for markets. Both saw a September Fed cut as likely, but disagreed on how far easing should go and which assets would outperform.

Main Topics: Latest U.S. economic data and market reaction (Priority: 5/5): The panel reviewed mixed August data: weaker payrolls at first, then improved claims, solid retail sales, and manageable producer-price inflation, which helped markets recover after early-month weakness. Labor market weakness vs. labor-supply effects (Priority: 5/5): Discussion centered on the rise in unemployment to 4.3% and whether it signals recession or reflects increased labor supply, including census adjustments and immigration-related workforce growth. Fed policy, September cuts, and Jackson Hole signaling (Priority: 5/5): The hosts debated whether the Fed should cut now and how Powell may use Jackson Hole to guide expectations, with consensus that a September 25 bp cut is likely. Inflation outlook and the risk of reacceleration (Priority: 5/5): Bianco argued inflation could stabilize above 2% and potentially move back toward 3.5%-4% if policy becomes too easy, warning against over-cutting in a still-resilient economy. Neutral rate and real interest rates (Priority: 4/5): A major theme was where neutral policy really sits. Bianco argued market and Fed estimates may be too low, implying current rates may not be as restrictive as many assume outside the QE era. Stocks vs. bonds over the next year and long term (Priority: 4/5): The speakers contrasted short-term and long-term asset performance: Bianco favored bonds over the next year if inflation rises and stocks pause, while Siegel-style logic favored stocks over longer horizons. Election implications for markets (Priority: 3/5): They discussed how taxes, spending, regulation, and deficits matter more than the election winner alone, and concluded markets see no obvious trade in stocks, bonds, or FX yet.

Key Arguments: Recent economic data improved after a weak start to August, supporting the idea that growth has not rolled over decisively. A rising unemployment rate does not automatically mean a weakening economy if labor supply is expanding faster than job creation. The Fed is likely to cut 25 bps in September, but the market may be too aggressive in pricing repeated cuts over the next year. If the Fed eases too quickly, inflation could reaccelerate from roughly 3% toward 3.5%-4%. Neutral rates may be higher than the Fed’s 2.5%-2.75% estimate, with market-implied neutral closer to 3.5%-4%. The current rate regime should be judged against a post-QE world; real rates near 2.8% may be historically normal rather than extremely restrictive. Stocks may pause after a strong two-year run, giving bonds a better chance to outperform over the next 12 months. Over longer horizons, equities remain favored because they are real assets that can grow earnings and dividends with inflation.

Data Points: U.S. unemployment rate: 4.3% - Used to argue the labor market is softening and to discuss the Sahm rule / recession risk. Unemployment rate prior month: 4.1% - Jack noted the one-month jump as notable, though not definitive. PCE inflation: about 2.6%-2.7% - Jim used this to estimate the real Fed funds rate. Fed funds rate: about 5.25% - Current policy rate referenced in the discussion of restrictiveness. Real Fed funds rate: about 2.8% - Calculated as nominal Fed funds minus PCE inflation. Inflation rate mentioned: 2.93% - Jim said inflation is near 3% and could rise if the Fed becomes too easy. Potential future inflation range: 3.5%-4% - Jim’s estimate of where inflation could move if the Fed cuts too aggressively. Market pricing for cuts: 8 cuts / 200 bps total - Jim said markets may be pricing too many rate cuts over the next year. Fed long-term neutral estimate: 2.75% - Referenced from the Fed’s dot plot / long-run estimate. Alternative neutral estimate from markets: 3.5% to 4% - Jim argued market measures suggest a higher neutral rate than the Fed’s estimate. Sahm rule trigger: 0.5 percentage point rise above prior-year low - Jack and Jim discussed the unemployment-based recession indicator. S&P 500 valuation: a little above 20x P/E - Jack used this to frame long-term equity returns. S&P 500 earnings yield: about 5% - Used as a proxy for long-term expected equity return. Stock market run since bottom: about 80% in a little less than two years - Jim argued equities have already had a huge rally since October 2022. Bonds’ recent coupon/starting yield: about 4%-5% - Jim noted higher yields now offer real carry, improving bond return prospects. Worst bond drawdown period: ending in 2023 / from 0% to 5% yields - Jim cited historical bond losses as a reason bonds now have better starting yields.

Pivotal Quotes: "bad economic news is now bad news for the stock market, and good economic news is now good news for the stock market" — Jack Farley: Jack described the regime shift in how markets interpret macro data. "I'm in the no landing camp that the economy is still growing at its potential" — Jim Bianco: Jim’s core macro thesis: the economy remains resilient despite some weakening indicators. "If the Fed is not too careful and they wind up saying we ought to cut rates aggressively... they could wind up with inflation higher than what we're seeing" — Jim Bianco: Jim warned that excessive easing could rekindle inflation.

Implications: Listeners should expect a likely September Fed cut, but the debate suggests policy may stay restrictive longer than markets hope. If inflation reaccelerates, bonds may outperform in the near term while stocks cool after a strong rally.