A Market Destined To Go Higher – Jim Bianco Joins Alpha Trader (Podcast Transcript) (NYSEARCA:SPY)

Editors’ note: This is a transcript version of the episode of Alpha Trader that we published earlier this week. We hope you enjoy.

Aaron Task: Welcome to Alpha Trader. Coming up on the show Jim Bianco, President of Bianco Research explains how he learned to stop worrying and love the Fed. More on that in a minute, but first, Steve and we’re talking here Monday morning before the open. And it looks like the bid in the equity markets continues the path of least resistance looks higher. Again, we’re talking before the open on Monday morning.

Things seem to be quieting down on the corporate front. We have gold this morning hitting its highest level since 2012 at $1,751. It kind of feels to me that the market is maybe settling into a little bit of a trading range here and we’re going to move away from some of the drama we had, certainly in March and then the comeback in May or early June. But what are you seeing out there this morning?

Stephen Alpher: Yeah, I’m seeing a market that continues to ignore a lot of dire macro-ish headlines. The news flow again over the weekend wasn’t great in regards to the Coronavirus, continuing rising cases and some areas where the economy’s reopened before other — in this country at least before other parts of the country. And rising cases around the globe, the WHO had a big warning, futures actually open down about 1% Sunday night after all those headlines but quickly bounced and as we sit here shortly before the open on Monday. They’re up nearly 1%, so there’s kind of that relentless move and the trend seems up.

AT: Right. And to your point about the news on COVID, U.S. 36,000 cases on Sunday, and highest number of new cases in Nevada, Florida, California and Arizona. Goldman Sachs’s David Kostin now with a note saying, “We expect the potential risk of a second wave. And the fast approaching U.S. Presidential Election will limit a significant increase in equity exposures, we expect the S&P 500 will trade in a range of 2750 to 3200 for the rest of 2020, our year-end target remains 3000.”

Now, again, to me, sort of a trading a range here would probably be the healthiest thing that the market could do, but return to some sort of normalcy. I think, personally, I would be happy with that because I think all of us are braced for either the bottom is going to fall out and we’re going back to the March lows, or some kind of crazy speculative blow off top and we’ll talk about that in our next segment with Jim Bianco.

But to me the market again, seems to be selling into something approaching normal or at least a little quieter than what we saw earlier this year. And that that is my hope. And in this case, even if it limits the upside I hope that’s the outcome.

SA: Yeah, and they know a lot more than I do. But the team of Goldman which I guess is led by David Kostin has been really caught wrong footed this entire year. They were as panicky as anybody at the March bottom. And now they’re kind of trying to play catch up. So they’ve been whipsawed quite a bit.

Yeah, I would just say, it might be time to get marked out back here. I’m hearing a lot that it’s sounding a lot like 2009, 2010, 2011, where everybody’s calling this a fake rally based solely upon the Fed’s actions and refusing to accept the fact that, maybe the worst is past us with this pandemic. Maybe the worst is past us with the economy and maybe that’s what the markets discount.

AT: Yeah. I’ve seen that sentiment as well that the some of the economic data we’ve seen the retail sales numbers last week show that, the real economy is catching up with what the stock market has done in its recovery. Certainly hope that continues.

We’re talking before the existing home sales numbers come out on Monday also coming up this week. We have earnings from Nike, obviously a huge company. It’d be a bellwether and a barometer for what’s happening in China.

And we’ll see what the e commerce business does. And we do have some upgrades this morning also for a couple of retailers, including Walmart, and The Gap. And on The Gap up big this morning on that news.

So obviously, if you’re a big company, if you’re with Goldman and David Kostin, you’ve been whipsawed by what’s happened the last couple months. It has been unprecedented, strange times, indeed, and again, my hope is for some normalcy, but that’s probably wishful thinking on my part.

All right, so when we come back, we’re going to take a break and then we’ll come back with Jim Bianco, President of Bianco Research. This is Alpha Trader.

Welcome to Alpha Trader. Our next guest made headlines and raised some eyebrows last week when he said, “This is a market that’s destined to go higher. It’s not out of the realm of possibility we could have new highs before the end of the year.” Jim Bianco is President of Bianco Research joining us again on Alpha Trader. Jim, welcome back to the podcast.

Jim Bianco: Thanks for having me.

SA: Welcome, Jim.

AT: Thanks for being here. And as I said, a lot of people that caught a lot of people’s attention because you had been pretty bearish on the market in regard the cash in March. So, what was the reason for the shift, the change of heart here?

JB: I had been struggling since the March low to understand the Fed’s actions and what they meant for the market. And to be clear, I understood that the Fed’s got an unlimited printing press and I thought that they would push the market higher. And early on, I was saying look, I think the primary trend is going to be down, I think the Fed is going to push it up, we could retrace half of the decline, maybe up near two thirds, as well.

So I wasn’t — I was bearish in that, I was expecting that this was going to be a bounce and a downtrend. And it came clear in the last 45 days or so, as I looked through the data that a new group has really emerged that we’re all talking about now and that is small retail.

Because when you look through the data and say, okay, well the Fed’s buying. But there’s really no flows going into ETFs and mutual funds as a group. There’s really — the institutional crowd is bearish. The BMA survey this week said that 78% of them thought the stock market is overvalued, and that’s the highest it’s ever been including 2000.

And so you look at that crowd you say, well, I don’t know who the Fed is inspiring. And then you see the day to day trader crowd out there. And they are the ones that are being expired. So I think this market is disconnecting from the underlying fundamentals. And it’s going to keep going up.

And the final thing was Chairman Powell at his press conference last week — well, Chairman Powell a couple of weeks ago in 60 minutes, basically said, I got a digital printing press with almost unlimited capability. We all knew that, but he said he’s willing to use it.

And then at his press conference last week, he was asked a couple times about the stock market being overvalued. And he didn’t really answer the question, but left you with the impression I think purposely that maybe it is but I’m not going to do anything about it. This policy we have and we’re just going forward with it.

AT: Yeah, it was intrigued. He definitely struggled. Yeah, he definitely struggled to answer the question about stocks in valuation. I don’t want to talk more about him and Fed, but I just want to go back to your basing a bullish call on the activity in the retail market and day trader David Portnoy, founder of Barstool Sports is out there. Now you’re talking about stocks only go up. And he represents this new type of — it’s kind of like an echo of the day traders in the 1990s.

But I’m surprised, frankly, that you would lend so much credence to that because a lot of people are looking at that as a contrarian indicator that that’s a sign of a top. So why do you feel otherwise?

JB: Well, it ultimately will be assigning the top as well too. But my argument has been not now. You’re right. This does have an echo of the day trading retail boom that we had in the 1990s, especially 1999. Now the reason I bring that up is because the market didn’t peak till March 2001 and went another 30% higher.

I’m not saying this market is going to go 30% higher, but it isn’t going to be all retail gets in they have three decent days and then it’s over. It’s all retail gets in. And I think that the run that they’ll have will be a little bit longer than we think, it will probably end badly because they always do.

But my job is half, where’s the market going to go and half moralizing about the policy. Now, on the other side, I don’t think this policy of Fed is a good idea. But that doesn’t mean that they can’t work in the short term and that the market keeps going higher.

So the day trader crowd, I think it’s just symptomatic of what the Fed has unleashed. Is they’ve unleashed this mentality in the marketplace that the markets can only win. And not only do you see it just in the retail crowd, let’s go to the institutional crowd and fixed income. Bond issuance right now, corporate bond issuance this week, if not now, this week, but definitely next week will surpass all of 2019.

And if you would ask most corporate bond managers, why is there a flood of corporate bond issuance and everybody can get there deals done. At the end of the day, what they’re really telling you is they’re co investing with the Fed and the Fed is in there, the Fed is buying even announced this week that they’re actually buying individual corporate bonds. And they’re really going with this.

So this is becoming more powerful than I thought. I mean, I didn’t think it was not powerful. I didn’t think it was going to have the capability of taking us all the way back to the highs without confirmation in the underlying economy. But more and more it looks like that’s what it might do.

SA: And Jim if I may, you’re sounding a little bit like George Soros who said it was his job not to identify bubbles and look to go the other way. But what he said he liked to identify bubbles and jump in with big size and that’s where he got his major returns from, you’re sounding a bit like that, which is good company.

JB: I actually tweeted that quote out a couple of days ago. If you look at the history of markets, the place you make the most money the fastest is in a bubble. And the problem with that is getting out. Now that’s a different conversation for later on down the line. Hopefully later on down the line isn’t this afternoon, but the market will keep going higher.

But I think we need to understand that maybe the Fed has unleashed a bunch of forces, both in the fixed income market with the issuance and among the retail crowd that has been truly more powerful than I even think the Fed thought it was going to be at this point in this market is going right now.

And let me just say, maybe I’ll lead you into the next set of questions. Notice what I’m not arguing is I’m not arguing earnings are going to come back, GDP is going to come back, employment is going to plummet or any of that stuff. I mean, they’re going to get better, there’s no doubt.

But clearly that 78% in the BofA study that said the market’s overvalued, by every metric almost it is. And we are actually having to invent new metrics like the two year forward price to earnings ratio, which wasn’t a thing 45 days ago to basically justify the valuations in the market.

And so this is what’s going on. This disconnect is going to continue I think as long as the Fed is going to maintain this position, and retail is going to believe that that market is a can’t lose proposition, it’s risk free, and they just keep piling in.

AT: Right, so we’ll get new valuation metric. But again, in reminiscent of 1999, we were talking about iBalls and Clicks and things like that…

JB: Yeah, page views and all that other stuff. Price to page view, I remember that one from 1999.

AT: Yeah. Remind me we’ve had a couple guests on here over the last 50 days or so. Mark Dow, Cullen Roche come to mind, particularly who talked about that the Fed’s statements, they were using the bully pulpit, and that was enough to trigger confidence and get liquidity flowing again in the market. And that’s they had done their job.

But it seems, this past weekend you made reference to it, it was Monday the 15th, the market was heading down, looks like another big down day, then the Fed comes out and says, hey, we’re going to start buying digital corporate bonds too and launch this new secondary facility.

It’s not just the sentiment that they’re actually putting real firepower to work. And that’s what’s really sparked maybe your realization that this is going to be even bigger than I thought, is that fair to assume? It really is that you can’t fight the Fed now because they’re just throwing so much money here.

JB: Right. They’ve gone beyond just trying to sell or satisfy a liquidity need in the market. Their announcement on 15th, about buying corporate bonds, just to back up a quick second, the original CARES Act gave the Fed — or instructed the Treasury to put $75 billion into a special purpose vehicle fund that the Fed could lever 10 to 1 to buy corporate bonds.

But then they put out a set of rules that these companies would have to come to the Fed and fill out a form to certify that they have more than 50% of their employees in the United States, and a bunch of other rules to get certified in order for the Fed to buy their bonds.

The Fed was probably rightly worried that the only companies that would come and ask for assistance are the broken ones that no healthy company would want to do that because of the signaling that you’re asking the Fed to buy your paper.

So the Fed invented a whole new set of rules. And basically what they said was, instead of the companies coming to us, we’ll go out and certify all of them and we’ll create an index of all the certified companies and we’ll become an index buyer.

Now you’re buying the whole market, you’re buying the whole market in mass. This is not going to be cherry picked bonds on a case by case basis. You have just stepped in like an ETF, which they’re already buying, and you’re buying everything and you’ve set a precedent for buying everything as well, too.

And there are some questions about its legality as to whether or not they could do, but no one’s going to challenge the Fed on this because everybody’s happy. So they sent an extra message that they’re going just beyond just trying to fix a liquidity problem.

They’re basically putting a floor on markets. So when you hear stocks can only go up and the market is only going to go up, there is a powerful force behind that to ensure that that happens. That is just not wishful thinking at this point.

SA: And I’m glad you brought that up. I think the Fed buying individual corporate bonds this week made a few headlines, but I don’t think nearly enough was kind of the fancy legal footwork the Fed had to go through to make that happen. And this is coming at a time when corporate rates or investment grade corporate rates are at record lows, spreads may not be at record lows, but rates are at record lows.

And I’m wondering if the Fed can do that. What’s to stop them from using their lawyers and whatnot to create some fancy warning and start buying stocks at some point?

JB: Nothing, as a matter of fact, Philadelphia Fed President Loretta Mester gave a speech earlier this week saying the Fed doesn’t have the legal authority to buy stocks. And I think the reaction in the marketplace was laughter. Well, you’ll find it when you need it. No problem.

You didn’t have the legal authority to buy corporate bonds, and you found a way to do that. And then when you were told to buy bonds on a case by case basis, you found a way to buy all of them as well, too. You didn’t have the legal authority to buy ETFs. And you found a way to buy them as well, too.

You had questionable legal authority to purchase municipal bonds, and you’ve set up a facility for that. And for some of these loans that you’re handing out that are tied to the PPP lending and the main street lending as well too. And you found a way to do that.

So there’s nothing to stop you from going into equities other than at 3100 on the S&P, there’s no need to go into equities. But if we were to have a sharp enough sell off, I think that that attitude would change or the market’s expectation is that that attitude would change. So you don’t need them now, but they are definitely a floor somewhere below this market, if necessary.

AT: So you wrote in your Bloomberg column, “This is the legacy of the bank bailouts, the fall of the financial crisis and a consequence of the all-in actions by the Fed in recent months, which is why in this monetary policy regime, no bet seems unwise, even buying the shares of bankrupt retail car companies after they’d already risen 1000% in a week.” Since that time, Hertz has pulled the stock offering, but the point is well made, and then continue the quote, but to keep the game going, the Fed will need to keep its policies in place in perpetuity. And forever’s a long time, right?

So you said before, part of your job is to talk about where the market’s going and talk about the moral suasion here. What is the endgame here? I mean, the Fed, they did so much after the financial crisis. And they were just trying, they wanted to unwind those policies if you believe them. But does the Fed have an exit plan at this point or is it too soon for them to start thinking about that?

JB: I don’t think they have an exit plan. And the reason I don’t think they have an exit plan is you’re right, if you remember, in 2008, 2009 QE was referred to as unconventional policy. And here we are in 2020. And QE might be the most conventional thing that they’re doing and it’s been around for 12 years, and it never stopped. And they’re doing it at record levels right now.

So they never stopped doing it during the entire 11 year expansion. The Fed seems to think that they’re going to stop doing these programs. But we’re going to have to ask a real difficult question and that is, how much do they support the markets. If you pull out through these markets start to stumble as well too.

So I don’t know, as far as the exit strategy goes, I don’t think they have one. But the market could definitely give them an exit strategy. What we haven’t discussed yet is what is the downside of all these programs? What bad stuff can come of it? And the answer is inflation.

I think that’s the main answer is a misallocation of resources leading to inflation. If you get that, there is one crowd that can basically overwhelm the Fed. And that is the collective of the bond market. The bond market vigilante as Ed Yardeni used to call them.

But the problem with the bond market now is they’re not of one mind, they are of many minds, some are going left, right up, down, forward, backward, bullish, bearish. But if you were to get inflation, and they were to — and the Fed has already said the minute they get inflation, they’re going to declare victory. Yes, we finally got inflation, something we’ve been pushing for many, many years.

But when you get it, if the bond market gets worried about it and starts to sell in mass and says that we don’t want to own fixed income securities in a period of higher inflation, they could produce higher interest rates, despite the Fed announcing yield curve control and doing all these other things to try and hold the interest rates down.

That could be your problem, at least that could force one way that this exits on them. Now that I said that, I don’t think inflation is going to be a problem in 2020. We’re still trying to recover. And actually we’re still contracting in the second quarter, at least…

AT: Right. Yeah, we’re still in the middle of this. Yeah.

JB: Right. But it could be a ‘21 or ‘22 story is what that could be, as we get on the other side of this. Stimulating demand with all of the money that they’ve printed with all the checks that we sent out, and less aggregate supply because if you look at the data, we have 13% unemployment but 3% have been misclassified, so an effective unemployment rate of 16%.

Well, that means we’re just making less stuff is what we’re doing. So less supply, stimulated demand, you could see the road for inflation returning next year. And if it does, that could be an exit strategy for the Fed. Now, if it doesn’t, if this whole policy goes total Larry Kudlow, and everything’s going to be great, and we’re going to be back to 2019 peaks, and everybody’s going to get their job back.

And we’re just going to look at that episode in 2020 go, look at that. It came and went, and it’s over. Then the — and then the Fed’s argument is and then we’ll exit these programs, why? They were so spectacularly successful.

They are between the Fed and the government borrowings between March and August. They are borrowing and printing the equivalent of four years of tax receipts. If you can do that and all you produce is jobs, GDP, a new high in the market and no inflation, then why do we even have the IRS?

Why don’t you just get rid of the IRS and let’s go full MMT then at that point where you just print up the money that we need every year. So even in a success, I think that these programs are going to have a profound effect because the call will be like QE from 12 years ago.

Why stop it? Why stop it if it’s not doing anything bad, and it’s only done good things, why would you end it?

AT: Yeah. Obviously, politically, it would be — that’ll be almost impossible. But just to go back to your point that the risk is higher inflation. What about the flip side of that that we are going down a similar path as Japan where their central bank was ahead of the curve in terms of doing quantitative easing and other, they’re purchasing Japanese bonds and GDPs and they’re in a deflationary spiral. Why is that not the more likely outcome?

JB: I think that there’s a bunch of fundamental differences between the Japanese economy and the US economy. And the big one I think, is that we are the reserve currency. And because we are the reserve currency I do think that that gives us a little bit more latitude to go on these programs much bigger than everybody else does. Japan is cumulated a much larger program. But lately we’ve gone much harder on the program as well, too.

And finally, we do have that big unemployment rate right now. And that I think is going to reduce supply. Let me sum it up this way. The basic question I think we have to ask ourselves is, we believe I know you guys, Steven, Aaron and me, we’ve been in the markets a long time and we believe that the markets are supposed to measure the economy.

The economy’s supposed to do something, and then that’s supposed to be reflected in the markets not precisely every day, but over time, it’s supposed to measure it. I think there’s an attitude now especially at the Fed, which used to be called the wealth effect, that they think that the economy measures the markets.

If we can ramp markets up hard enough and push them hard enough, they will create confidence, they will create GDP, they will create jobs. President of United States thinks that why do you think he gloats about every single high in the stock market? What is the inference there? It is creating wealth, it is making you want to spend more money, it is making you want to expand your business, it is creating jobs.

He in fact even tweets that out quite often, stock market at new highs, jobs, jobs, jobs. The stock market creates jobs? I thought it was jobs created a higher stock market. That seems to be the real question is which one measures which?

And right now, I feel that if we’re going to go down this road, then we think that ramping the stock market is going to produce jobs and GDP over the long term. I think we’re going to wind up with inflation and I’ll just end that thought with if you look at the expansion that just ended, it gets all the headlines was the longest ever 11 years.

But far as aggregate increase in GDP over those 11 years, it was in the bottom half. It wasn’t the magnitude of the game wasn’t that big. It was that it was very slow. Trump likes to say that our economy is a rocket ship. No, it’s actually more like a diesel truck with a giant load in its trailer going through its 18 gears to get up to 50 miles an hour, it starts really slow.

And but it never stops. It just keeps going and going and going. And that’s it. But then at the end of the day, you’re not really getting down the road in a hurry. But you’re getting there is where is what this economy seems to be more like, because that’s why I said it took 11 years to produce a below average return or increase in GDP.

So we’re going to find out what the stock market’s real relationship is with the economy. Does the stock market drive the economy or does the economy drive the stock market? Ultimately, I don’t think that wealth effect alone is enough to create jobs and GDP and that’s where I think we’ll run into problems later next year, but not now.

SA: And if you’re kind of a believer of the chance of return of inflation, and you also believe as I do that in the Fed’s ability to control the long end of the curve, at least somewhat, might you instead of shorting bonds, might you be interested in buying gold?

JB: I mean, gold has performed okay during this period, but I think that the problem with gold is — let me restate your question. Do we want to get our money out of the financial system if we believe that the financial system might be at risk?

And then we go okay, how does one do that get your money on the financial system? Gold isn’t way you can do it. Cryptos aren’t a way you can do it. And the problem with both of them is they’re so connected to the financial system.

When you say should we buy gold, if you say the most people yeah, I’ll go buy some GLD, The Big Gold ETF I was like, no, you’re still stuck in the financial system, you might as well just go buy Tesla at that point because you have not gotten yourself out of the financial system. If you really believe that there’s going to be problems, go buy some coins and bury them in your backyard.

And then most people look at me go, I don’t know how to do that. And like, see, that’s the problem with gold, I get it, gold has been doing well, it should probably do better. But as long as it’s been so financialized through futures and ETFs, I think that the fundamental problem with gold, which we saw in March, is that when the markets get dysfunctional, it fell, and then it rebounded after.

So it’s not the pure disconnect from the financial system that people want to think it is. So my point is, I’m kind of mildly bullish on gold. I think it’s going to hang in here and go higher, but I don’t think it’s going to be something that’s going to save you.

SA: Right and cryptos as well plunged right alongside the markets and bounced back right alongside the markets just like gold did.

JB: Same thing. I put my money in Bitcoin because I thought that the financial system was all messed up, okay, fine. And then, it went up and then what are you going to do with that Bitcoin, you got to exchange it, you got to call a coin, get to open a coin base account, you got to exchange it back, the IRS is going to tax you on it, and then you got to get right back into dollars in order to do something with that crypto value, because you can’t buy things with the cryptos.

So they’re limited in the way that they can allow you to get out of the financial system. And I think that that’s part of the problem there. So they’re still so connected to it, that they can’t be that pure, independent correlation that everybody wants them to be. They are to a degree, but not to the degree that I think most people hoped they would be.

AT: Alright, Jim. So before we wrap, so how are you positioned here, at least in the short to intermediate term if you think the markets are going back to all-time highs or what are you recommending that clients do?

JB: Two things, if this is about a disconnect with the economy, which I think it is and about money printing, then it’s just understand that this is a broad based rally. And that I don’t want to overthink it and pick sectors and groups and stuff like that.

Also, keep in mind one other thing too. If you think, oh no, the market is going to peak now and it’s going to sell off now 10%, 15%, 20%, retrace a good portion of the much advance. It has to do that in the face of the Fed running its printing presses at high speed. It has to overwhelm that.

You need such a level of selling in order to get this market to go down. That’s why I don’t want to overthink this. I just think that the trend — I used to think the trend was going to be down. But now I think the trend is going to be up.

But I’m cautioning that I don’t think that this is a multi-year bull market, because I want to see how this plays out with this disconnect to the economy and how all of this borrowing and money printing is going to impact economic growth.

I fear it’s not going to be a good story. But that’s a ‘21 story, I think, or ‘22 story. And if you’re in the game of performance, I have to show a ‘20 return. I can’t just moralize that the Fed’s doing awful things. And here’s your terrible performance. And I’m very sorry about that.

And so that’s why I wanted to try to say, we got almost disconnect and think about these things as two separate things. There’s what the economy is doing. And then there’s what’s driving the markets. And last time, you hear that. If you listen to a lot of people talk about the markets, even the bulls, Oh, I’m bullish on the market.

And then the second one, the first three sentences is going to be Fed policy. They’re not making the case. I don’t hear similar, but the majority are not making the case, earnings, GDP, everything’s going to come roaring back. Some of them might talk about a vaccine or something like that, but square center in that bullish policy is Fed.

And I think maybe I was a little bit slow in getting out, I mean, I understood it was there, but just didn’t realize it was going to be this big.

AT: Right. And you reminded me of another famous quote, Chuck Prince, when he was CEO of Citigroup said, as long as the music’s playing, you got to keep dancing. And the music is playing.

JB: Yeah, I mean to some extent, that’s why I said, part of the job is performance and part of the job is moralizing. There’s been many famous cases. Back in 2000, there was a bunch of cases, the George Vander Hayden and Gary Brinson, who were great value managers that were basically worried that we were creating a bubble and tried to avoid the market.

And they were essentially run out of the business before they both went into retirement in the case of Vander Hayden, March 1 of 2000, or February 28, and the market peaked 10 days later. If you would have just held them for another week, you might have made it. And that’s the problem with the way that money is managed.

I could moralize that what the Fed is doing, over the long term would be wrong. And I can wind up being run out of the business. I’m just saying that as a manager, long before, I’m proven right, so you got to kind of play both ends of this.

Understand the moral aspect of what the Fed is doing in the long term consequences and understand the immediate effects of what they’re doing and that could be higher prices. Yeah, it’s not easy, but whoever said that this game was supposed to be easy.

AT: David Portnoy, but that’s a whole other conversation, right. All right, our guest is Jim Bianco, President of Bianco Research. Jim, thanks again for being with us.

JB: Thank you.

SA: Thanks, Jim.

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