Bankless - How Bad will Inflation Get? | Jim Bianco

Starting point is 00:00:07 Hey, Bankless Nation, welcome to another state of the nation. We got a hot topic today. It is definitely top of mind as all of the markets around the world tumble, including crypto. That topic is inflation. David, who's on and what are we about to get into? Jim Bianco, which every time we bring Jim Bianco on, I just feel like we're getting a little smarter. And I definitely could feel like being a little bit smarter right now, Ryan, because there is like, we all know why the markets are tumbling. The Fed is raising interest rates. But what happens next? is just like a fog of war to me. I do not know what happens next.

Starting point is 00:00:41 There are fallouts of what's going on across the world. This is not just a crypto market phenomenon. This is a U.S. equities market phenomenon as well. But it's also going on in like all macro-fiat currencies. And we have like the war in Ukraine is still relevant. The food shortage is relevant. Supply chain is still broken. So how we get out of this pain?

Starting point is 00:01:03 I do not know. And so Jim Bianco, like no one really. knows what the future holds for us, but Jim Bianco knows more than I do. And so I think he's going to help shed some light on what feels like a very confusing and tumultuous time. Yeah, you know, we're hopeful Jim can help explain some of this to us because we feel very comfortable in the crypto world. But as we said before in bankless, we're kind of learning a bit more about the old financial world by way of crypto. And we just haven't gotten to that chapter yet of, you know, how does inflation interact with the crypto assets? You know,

Starting point is 00:01:35 crypto has never been present in an era as like the era that's happening right now. So Jim is going to serve as that bridge for us. What I love about him is he knows macro very, very well and can school us there. And he also knows crypto and defy so we can talk about that too. So we're going to get into that episode with Jim. I want to give a shout out to our friends at Metamask as well. I know buying crypto is probably not on people's radar right now, although when the market is down historically, that is the time to buy. Metamask wanted us to let you know that they

Starting point is 00:02:12 have a buy button inside of their wallets. If you're looking to buy some crypto to make a trade very quickly inside of your wallet, get some gas fees, top things up, dollar cost average in. You can hit that Metamask buy button both on the mobile wallet and also in the extension. So go ahead and check that out. We'll include a link in the show notes. David, I'm going to ask you question we ask at the beginning of every state of the nation which is what is the state of the nation today right the state of the nation is fearful and confused uh that goes without saying uh when markets are going down as rapidly as they are it feels like there is no bottom uh and everyone is just trying to get some information and get some clarity as to why this is happening how bad is this

Starting point is 00:02:58 going to get why is uh and so like what are all the fallouts of this and and what happens next uh so i think we have the agenda for the show cut out for us. So yes, Ryan, the state of the nation is fearful and confused. All right, well, let's get right to it. I know that there's a lot to discuss in the macro side of things. So I want to get Jim on the podcast and we'll pick his brain for a little bit. Before we do, we want to thank the sponsors that made this episode possible. Rocket Pool is your friendly, decentralized Ethereum staking protocol.

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Starting point is 00:05:51 Jim is a macro guy, friend of the podcast, crypto investor, investor in traditional markets as well, and he's defy savvy. Jim, how are you doing today? These are trying times, sir. Are you hanging in there? Yeah, I'm hanging in there. I like that description, so I'm losing money in about seven different ways. Aren't we all?

Starting point is 00:06:10 This is going to be a cope episode a little bit. But, Jim, we want to pick your brain on a few things. I think the headline for this episode is really inflation, because it seems like that's the boogeyman that's causing all of this pain that we're in. We want to dissect that and talk about why inflation is breaking everything or why it appears that way. And then how do we fix it? And then thirdly, what happens next if you could try to prognosticate and see the different possible end solutions to all of this? But let's start with the wise inflation breaking everything.

Starting point is 00:06:40 And I want to turn our attention to this tweet. I think you tweeted this out on the 12th. And this was what you said. Markets opened Sunday night and it is clear they're viewing Friday's CPI as a watershed event. then you go down with some stats here. Nasdaq 100 futures drop 2%. S&P down 1.5%. Yen is weakening. Juan slumps 1.5%. You go through a whole bunch of other stats. But what is happening in the markets? And why was Friday's CPI event that's the consumer price index higher than expected? Why is that a watershed moment? Can you explain this for us? Yeah. So we've been, we've the collective whole of the market's been,

Starting point is 00:07:25 struggling with this idea that inflation is transitory. Now, let me give you a definition of transitory. Transitory, I think, currently means the Federal Reserve, the federal government, all of us, we don't have to do anything. It will naturally peak. It will naturally go away on its own. That's what the whole idea about transitory doesn't require intervention. Now, going into CPI's report, I'd say 60, 65 percent. I mean, there's actually surveys done by Make of America and some others that quantify this, about 60, 65% of Wall Street did not believe it was transitory, but about 35%, 40% did believe it was transitory. So when you got the CPI report on Friday at 1% above the highest estimate, 70 economists were asked by Bloomberg,

Starting point is 00:08:19 their highest estimate was 9-10% percent. It came in a fully 1% way above the highest estimate. I think those 35% said, that's it. I'm out of this idea that inflation is transitory. I now believe it's persistent. And they started to restructure their portfolio. Now, this is a fancy way of saying they were long stocks, they were long bonds. And they were hoping that the report would give them ammunition to say, see, the inflation story's peaked, it's going to go away.

Starting point is 00:08:48 I'm right to be long these instruments. And then it was a slap in the face. it's not going away. And that's what I think you saw was, and I'll use a technical term here for you, they vomited up their positions because they were just tired of waiting around for inflation to go away. And that's why you saw the marketplace start to also price in the idea of 75 basis points for the Fed to raise rates at the same time.

Starting point is 00:09:18 So the watershed event was, we've talked about this. we in the tradfine markets. Oh, yeah, all the bad news is priced in. No, was it? We found out on Friday that there was a lot of people that were still clinging hope that somehow inflation would naturally peek and go away on its own, but now they started to realize the only way it's going to go away is with intervention. We're going to need to have restrictive policy by the Fed and or restrictive policy by the federal government, and that involves some kind of pain. And that's why you saw the market sell off. Maybe, Jim, Jim, this is cope, but what about the argument that inflation is a lagging indicator? As in inflation

Starting point is 00:09:59 is actually transitory. It's just waiting for the death of the markets, both in the crypto markets, the equities markets, like we're down big no matter what market you're in. And therefore a lot of wealth has been destroyed, therefore a lot of spending has been destroyed, and we are just waiting for that to finally show up in the inflation numbers. Is there anything to this argument, or am I just trying to cope? No, it's true. Inflation is a lagging indicator. The CPI, PPI are officially classified as lagging indicators.

Starting point is 00:10:32 But when you look at the forward indicators that might tell you where inflation is going to go, none of them are giving us any hope. Gas prices, national average of gas price made a new all-time high again today, $5.02 a gallon nationwide, more like $7.5 a gallon if you're in California. The University of Michigan Consumer Confidence Survey, I think, was equally as devastating for the markets on Friday. That came out Friday. That survey started in 1952, 70 years ago. And June 2020, the survey result Friday was the lowest ever in 70 years.

Starting point is 00:11:12 It wasn't the Kennedy assassination. It wasn't the Vietnam War. 70s gas line. 70s inflation, 87 crash. It wasn't the tech bubble. It wasn't the great financial crisis. It wasn't COVID. It was this month that we made the 70-year low in consumer confidence. People are scared shitless to use another technical term for you when it comes to inflation. And that showed up in that survey as well, too. So yes, inflation is a backward-looking indicator. But all the forward-looking indicators are not giving us any hope that it's going to moderate. And let me be specific on something here, too. There's two. discussions going on at the same time. When will it peak and when will it come down a lot? And the when will a peak argument, I'm still in the camp that we might be very close to a peak in inflation.

Starting point is 00:12:05 You know, whether 8.6 is it or maybe in the next month or two, we might see it. But I don't think that matters. I think what matters is when is it going to come down a lot? And that's the problem is that it looks like it's, even though it might peak, it's going to stick around an unacceptable levels. I want to get to the answer of that question or thoughts on that question of when will it come down and what the Fed's toolkit is for actually combating that and how effective it will be. But before we get there, I actually read an article in the economist earlier this week. And the TLDR of that article, it's entitled, Does Inflation Matter? Economists in the public have very different views on the question.

Starting point is 00:12:47 The TLDR of this article is that like inflation and wage. They kind of like, you know, track each other and one might go higher than the other, but they sort of attract each other. And the main thrust of the argument is that inflation is more of a psychological problem than it is an actual in-depth economy problem. And I'm wondering what you make of this argument. The question I have for you, Jim, is, is inflation really a big deal? Like, what's wrong with 8% inflation? What's wrong with double-digit inflation? By the way, bankless listeners, I'm not myself making this argument. I'm stating an argument that the economist made. But what would you say about this, Jim?

Starting point is 00:13:30 First of all, let's talk about what inflation is. It's a loss of purchasing power. It means you need more money to buy the same thing you bought previously, whether it was last year or last month. The study came out earlier today that the average food item, at grocery store is up 14% in the last year. So you need $1.14 today to buy the same thing that cost you a dollar a year ago. You're not getting any more value. You're getting the same thing. So that's the problem with inflation is that it reduces my standard of living. The other problem with inflation, which I think a lot of people are having a hard time getting their head around, is it affects 100.0% of the population.

Starting point is 00:14:18 Inflation impacts Elon Musk. It affects Tesla, it affects SpaceX, but he's got enough money to deal with it, but it still affects them. Inflation affects somebody who's on public assistance. Inflation affects every single person in between. Whereas a recession only affects those, and I'm not trying to diminish a recession, but it only affects those that have lost their job and their immediate family or friends. that's maybe five or 10% of the public when you have a recession. And yes, that's not good. But inflation affects everybody. That's why it matters. Now, to the other issue that was brought up in

Starting point is 00:14:54 that economist story, there's two types of inflation. There's goods inflation. There's the type of inflation of what we buy. There's wage inflation. How much do I get in a increase in my salary? And what we're finding with the inflation numbers is we have 8.6% inflation. but we only have about four and a half percent wage inflation. So wages are going up four and a half percent. That by itself is a pretty big number relative to history, but you're falling behind when it comes to inflation. So you are losing ground by four percent because four and a half to eight point six.

Starting point is 00:15:31 You're losing ground. And that gap, that minus four percent gap between wages and inflation, that's the largest gap ever. And I think that accounts for why you see so many people so negative, like in the University of Michigan survey, they know that they have to buy less things because they just don't have the money because everything is more expensive. They know that they're trying to make men meet because it's getting more difficult right now. A new thing you're starting to see is parents don't drop their kids off anymore at events. They drop their kids off. They turn off the car and they sit in the parking lot for an hour or two because it's too expensive to drive home and drive back.

Starting point is 00:16:15 So you're starting to see that kind of events or that kind of behavior shift taking place. And this is why inflation matters. It affects every single person. Usually with markets, when I'm used to understanding Marcus as when there's somebody's a winner on a trade and somebody's a loser on a trade. And so like the markets generally are balanced. And in this, like, what you're saying here is there are zero winners with inflation. There are, no one is accessing, like, no one is taking the dub here. Everyone is collectively taking the loss. And so, like, when we see the market is what you were saying with, like, the last, like, 30 to 40% of market participants hadn't yet priced in non-transentory inflation,

Starting point is 00:16:59 where are we, we're just pricing in just destruction of wealth over the next, like, unknown amount of time as in just like the everyone's purchasing power is down our ability to purchase anything goes down our purchase our ability to afford housing is down so what are what is actually the the result of all of these market participants pricing in inflation like does it what what is the net outcome of this are we going is this is something that triggers a recession per that's bigger than the great recession or are we going into like a capital d depression no i don't think it's going to be quite that bad that it's going to be something like the Great Recession. At least I hope not, and I don't see any indications of that. So let me back up. Two weeks ago, Jay Paul and Janet

Starting point is 00:17:45 Yellen and President Biden were at the White House. And President Biden, if you saw the highlights of that or the statement that he made, he basically said inflation is the Fed's job. And Jay, you better do something about this and you better do something about this now. It's not my job, the President of the States. It's your job, Jay. Fix it and fix it now. The Fed's only got one tool that they can blunt the economy. They can hurt the economy by raising interest rates. Now, why will that fix inflation? Because you'll buy less things. I'll buy less things. People will buy less things. So by raising rates, the Fed is hoping for what we're seeing in the stock market right now. You break down asset prices. You create a negative wealth effect. You create a gloom. I'll buy a little bit less. The demand for stuff will come off. Prices will moderate. They won't fall necessarily, but they'll moderate and the year-over-year inflation will come down. That's really threading a needle. Because the problem with that theory is you don't know how much you're supposed to raise rates. You tend to overdo it. You don't think that a soft landing winds up becoming a crash landing in

Starting point is 00:18:59 into a recession or something worse. There's unintended consequences all over the place, especially in a levered financial system like we have now, that when you start munking around with markets, bad stuff happens that you could have never foreseen. So there's a lot of risk associated with this. Another risk you might ask would be, well, doesn't that also create unemployment? But what we're finding with the job market is, go back. back to the May payroll report, which was out the first Friday of January, just two weeks ago, 390,000 people got a job in May. Now, pre-pandemic, that's a monstrous number. And there's another report that the government puts out, which is called the Job Opportunity Labor Turnover

Starting point is 00:19:46 Report or Joltz Report. And that's just the number of open jobs in the United States. There's nearly 12 million open jobs in the United States, and there's about 6 million unemployed people in United States. So there's almost two jobs open for every unemployed person. Now, of course, not everybody is qualified for every open job. Sometimes you're just not geographically qualified because you don't live in the right place or you're not educationally qualified or experience qualified or whatever the reason is. But yet, the job market remains abundant. So the Fed looks at that and says, oh, I could meet out some real pain to financial markets and not create unemployment, that's how I'm going to get inflation down. Now, why are they doing it that way?

Starting point is 00:20:31 Because that's the only tool they have. And that's the only thing they can. And the president in the United States two weeks ago just said, Jay, do something about this. Well, he is. He's going to raise rates aggressively. He wants to see markets go down. He doesn't want them to crash. He doesn't want, you know, chaos. But he definitely wants people to be glum and upset because then you will spend less money and that will moderate prices. Such an interesting trade-off. It's kind of like going to the doctor with a hurt ankle and the doctor's like, okay, we're going to take the entire leg off.

Starting point is 00:21:06 You know, that's the thing. I don't have the precision to just fix your ankle, so we'll just saw off the whole thing. Can we talk a little bit about the pain that this is causing or about the unintended consequences? One of your tweets recently, you shared this graphic. And I'm interested to dig into kind of the bond market here, because I I don't really understand what's going on in these graphics, Jim.

Starting point is 00:21:30 And I also, you had some tweets recently about the Bank of Japan. I want to dig into that quickly, but highlight some of the unintended consequences for us. So you said, how close are we to something really breaking? Breaking, I think you're implying in the bond market. Here's some charts that we're looking at in bonds. And what I'm seeing here is a blue line, which is the 2022 chart, which is the 2022 line. And this is Bloomberg US Aggregate Index and the number is going down. All of the other lines I see on the screen, you have to explain what we're looking at here.

Starting point is 00:22:05 But they're all going up, except this one's going down. Tell us why this line is going down and why this looks like it's, you know, why is this one different than all the others? And for the listeners of the podcast, you can't look at the graphic. The blue line, which is going down, is going down a lot. And it's going down a lot more than all the other line. So there's one line going down. and we want to know why. Jim, what's this line? What does this line mean? Yeah, this is the 22 story. It's the

Starting point is 00:22:31 number go down here, right? And what this is, is this is every year in the bond market back to 1976. And it starts on January 1st and it ends on December 31st. This is the total return. If you own a bond, you get a coupon interest payment and the price change. You know, if you net those two together, it shows the total return. It is showing the Bloomberg U.S. aggregate index. This is an index of 12,000 bonds with the $25 trillion market capitalization. In what the line is showing you is that collectively the U.S. bond market has lost 12 percent or one-eighth of its value in the first six months of this year. Every other line is every other year back to 1976, nothing close to this has ever happened where the bond market has lost this much value.

Starting point is 00:23:29 This is the worst bond market that we've seen. In fact, there's some statistics, Deutsche Bank has one that looks at the treasury market back to literally the founding of the country in the late 17th century. And this is still the worst year that we've ever seen. So what it's showing is the losses in the, the bond market feels like Ethan 1100 is really what it is. It's that bad in the bond market right now, although the absolute losses are not nearly as much. I like to say about this chart, it's down 12% in six months. If even a year ago, I went to, you know, all of the bond experts do you know, and I would have said, what do you think about the bond

Starting point is 00:24:12 market losing 12% of the whole bond market going down 12% in value in six months? Universally, the answer would have been a year ago. It doesn't do. do that. So why are you asking? Well, it did, and it is right now. And I've argued that this is not expected to see this level of loss in the bond market. Another way of saying that is surging interest rates. And because of that, almost all bond, the big bond investors are banks, our financial services firms, our hedge funds, and they buy this stuff on leverage. And this kind of loss is creating enormous pain in the bond market. But as we found, even in the crypto market, too,

Starting point is 00:24:58 the way that pain, you know, among leverage players tends to show up is there's not a problem. There's not a problem. There's not a problem. Now there's a problem. So if you ask me today, is there a problem immediately in the bond market? No, not as of this moment. But if that blue line keeps going down, any moment, you could wind up seeing that we go too far with it, and then we wind up having a lot of issues. I can't tell you what the issues are

Starting point is 00:25:26 going to be or where it's going to show up first. The market is too complicated, but what I do look for is when you see outsized, unexpected moves and the losses in the bond market, because of surging interest rates, you have to be worried that something is going to really break in the traditional financial system. Now, the Federal Reserve is going to raise rates tomorrow, 75 basis points. Now, how do I know they're going to raise rates 75 basis points? Because Nick Timrose, he's the economics correspondent of the Wall Street Journal, wrote a story yesterday at 215 Central, 315 Eastern, and the story basically said, Federal Reserve officials are considering hiking rates 75 basis points at Wednesday's meeting. And the market instantly repriced for a 75 basis point hype.

Starting point is 00:26:22 Why? Because we all know how that works. Nick Timrose's phone rang and there was somebody on the other side of the phone from the Fed. And they whispered into the phone, Blue Horseshoe loves 75. And he said, I got it. I'll go write the story. And that's exactly what he wound up doing. So the Fed basically pre-announced through the Wall Street Journal and other news media outlets. They're going to raise rate 75 basis points. And the market is now pricing in another 75 basis point rate hike at the July meeting, which is July 27. So interest rates are going to go up 1.5% in the next six or seven weeks. That blue line is going to keep going down. And that pain is going to continue to get worse. This is why there's so much glum in the market. We see what's coming. We know why it's happening.

Starting point is 00:27:10 and we seem to be on a path that we can't get out of. Real quick, what would get us off this path? Solid credible evidence that inflation is peaking and falling. We don't have any of that right now. So this is why we've got the glum. Without it, we seem to be stuck on this hamster wheel towards higher rates, more pain, and lower stock prices until something gives one way or the other that would, suggest that inflation would fall. Jim, I definitely want to get to the back to the inflation

Starting point is 00:27:45 conversation because it's one thing if inflation is caused by just a bunch of assets going up in price, crypto assets, equity's assets, all of a sudden there's a lot of money. People start spending like there's spending like his 20s, right? The joke of the 2021 was that it was the roaring 20s. But also there's a war in Ukraine. There's broken supply chains. There's oil that's like five, six dollars a gallon. And those don't necessarily feel like inflation things, those feel like commodity price increases. So I want to pick your brain as to whether or not, because interest rates can't end the war in Ukraine. So to some degree, there's another part of this story that is completely irrelevant from inflation. And I want to get there next. But I don't feel

Starting point is 00:28:23 totally up to speed with this blue line yet, because I understand that when interest rates goes up, asset prices go down because the cost of money goes up. But I'm confused on this, where I thought bonds is like the antithesis to the stock market, where the yield on bonds are dollar denominated. And so if you increase interest rates, you increase the value of bonds. And so I'm a little bit confused here where I always thought that as you force people into owning the dollar, which is what increasing interest rates do, you also incentivize people owning bonds. Where am I misunderstanding here? And like, how should I think about this? So it's called fixed

Starting point is 00:29:04 income for a reason that you get a fixed income. So if you buy a bond with a two percent, if you buy a bond and you pay par, which is 100 in bond lingo, a hundred is considered par. And you pay, you buy it for a hundred and you have a coupon that pays you two percent a year. Your interest rate is two percent. Well, how do you get your interest rate then to 3%? The price falls. The price falls to about 95, 94. I'm getting my math right on the fly. Then you go 2 divided by 94. You get a 3% interest rate. So when interest rates go up, the fixed, the coupon, the amount of interest you get is fixed. It is the denominator that keeps falling that when you divide the two, you get a higher interest rate. So higher interest rates means falling bond prices. And higher interest rates means that bonds are being actively sold. By the way, yesterday in the bond market, we saw something I haven't found an example for. And let me get.

Starting point is 00:30:10 So the stock market, the S&P 500 was down 4%. It was down 9% over the previous three days. Yesterday, the two-year treasury yield rose 33 basis points. So anybody who's in the bond market knows, that's an extraordinary move. It's the biggest one-day move in 13 years. The two-day move was 55 basis points. That's the biggest two-day move in the two-year note in 40 years. And so you had yesterday both the bond market and the stock market getting crushed on the same day.

Starting point is 00:30:45 Normally when the stock market falls, we use this phrase on Wall Street, a risk-off rally. Everybody piles into the safety of bonds and bond prices. rally. Yesterday, they were both getting smashed equally as bad. And I've gone back to the 1950s looking at my data. And I can't find another example where the stock market and the bond market got crushed as bad at the same time as we saw in the last two days on Friday through Monday. So what it suggests is this whole idea about inflation and loss of purchasing power, that applies for financial assets to all of them. Stock market. is getting crushed, bond markets getting crushed. Crypto's got its own stories going on with

Starting point is 00:31:30 liquidations and with Celsius, but this is also weighing on the market as well, too. Everything seems to be getting crushed. As I said, inflation is a funny thing. It affects 100% of everything. And that's why it becomes such a bad thing because everybody gets affected by it. There are no safe assets to flee to. That's what's crazy about this right now. Well, there is one set of safe assets you can flee to, and that would be inflation benefits assets that benefit from more inflation. In the Tradfai world, that would be gold, commodities, crude oil, and the like. But the reality is, is that the vols on some of the volatility on a lot of the commodities

Starting point is 00:32:15 is actually higher than Bitcoin right now. So, you know, I know a lot of my no-coiner friends say, how can you buy a 70-vall asset? Well, okay, then buy a 90-vall asset. It's called crude oil at this point. It's actually higher than it is. So, yes, you can hide in those. And yes, people have been hiding in commodities. And yes, they've done very well.

Starting point is 00:32:36 But just like in crypto, you can buy it in the next trade. It's gone down 15% in a day. And that's just the way that they work. It's unbelievable the amount of volatility that you see in the commodities markets. And by the way, you know, that volatility is not good for anybody. a lot of the commodity brokers, their traditional commodity brokers, especially the energy brokers, they're basically, they're in big trouble. They've already, the European energy commodity broker energy association of, they've already

Starting point is 00:33:08 asked the ECB for a bailout. It's gotten so bad for them as well. So this high vol in the commodities markets is not necessarily making a traditional energy broker or grains broker happy as well, too. their life is very miserable. So yeah, you can hide in commodities. And yes, they've been going up. But boy, the volatility is just off the charts in some of that stuff. Let's talk about, since we're on the subject of oil, let's go into the commodities markets. Because from what I've gathered, energy is just such a huge part of inflation and really the cost on people's lives.

Starting point is 00:33:46 You already use that anecdote of parents driving their kids somewhere and not driving home to save on gas. When things get that desperate, like you know things are really, really breaking. And the interest rates don't make gas cheaper. Like pumping more gas and adding more supply to gas makes gas cheaper. And right now we have broken supply chains because they've been broken since COVID. And we have a war in Eastern Europe. And so that whole thing is disrupted. And so like meanwhile, we have the Federal Reserve,

Starting point is 00:34:14 which is trying to fight inflation. But it's to some degree, perhaps a significant degree, the costs in people's daily living, their living expenses, their cost of food, well, food gets transported around the nation with energy, with oil. And so when oil goes up, everything goes up. And oil's not going up because of inflation. It's going up for external and exogenous factors. And so, Jim, like when we raise interest rates, aren't we just making, we're just destroying wealth, but are we actually also destroying inflation? Yeah, well, that's the thing. A couple of things. Yes, you're right. A lot of people like to say, you know, the Fed can't print ships as a reference to the supply chain, the Fed can't print oil. And so what does interest rates rising? So let me take those two at a time. First of all, with oil. What's happening with oil is two things. One, what you've seen is a reduction in the amount of oil being pumped because of the sanctions on Russia. Russia pumps about 10 million barrels a day of oil. oil. They use about five of it for themselves, and then they export the other five. And there's a lot of sanctions on Russian oil. So that oil is kind of getting out into the market. The Indians, India will

Starting point is 00:35:35 use it. China will use it. But they don't have the infrastructure to get all five million barrels a day out to just India and to Russia. And the West, the problem with the West is an oil broker is afraid to to take cargoes. That's the phrase they use from Russia, because if I send a tanker, you fill up the tanker and I wanted to go to Rotterdam and unload, which is a big oil terminal in Europe, I'm afraid that on route, the European Union will announce that I've banned Russian oil. Now I got this tanker floating around in the sea, and I don't know what I'm supposed to do with it. So that's why there's this fear about Russian oil right now. So that's reducing it. But also, Post-COVID refining capacity. Remember, we don't put crude oil in our cars. We don't heat our homes

Starting point is 00:36:25 with crude oil. We heat it with a refined product. We turn it into heating oil, gasoline, aviation, fuel, kerosene, the residual, we turn into asphalt and we pave our roads with it. So we use oil for a lot of different things. So we need refiners in order to take crude oil and turn it into, say, gasoline. Well, the amount of refining capacity, let's go with the U.S., has fallen since 2020 by the most ever. We were at about 18 million barrels a day of refining capacity in the U.S. We're now at about 16 million barrels a day of refining capacity. Now, why is it fallen? There was COVID shutdowns that caused refiners to pull back. But a lot of the green movement has put a lot of burdens on dirty fossil fuels. Okay, I'm just as favor of it as anybody else

Starting point is 00:37:14 to clean the planet. But now what's happened is we can produce. about 16 million barrels a day of oil, but we consume about 18 million barrels a day. I'm sorry, 16 million barrels a day of product, but we consume more than that, about 17 or 18 million. So there's this chronic refining shortage as well. So the result is the price has been rising. Now, why does the price rise? Because we want people to consume less. But oil, gasoline is, in economist terms, an inelastic product. That means you can't do without it. You have to drive to work. You have to live your life. If the price of gasoline goes up at the corner gas station, you just pay more to continue to live your life. That's why it's inelastic. It has to go up a lot

Starting point is 00:38:04 in order to get you, like those parents, to sit in a parking lot for two hours where your kids at a play date or whatever they happen to be doing as opposed to going home. It has to go up a to get you to think, maybe I don't even want to take my kids to that play date because it's just too expensive to drive the car. So that's why the price has been rising in terms of crude oil. And you're right. Energy is the dominant feature in everyday prices, whether it's filling up your car, the energy it takes to transport things, the energy it takes to make things. Factories run on energy as well, too, and a lot of that is fossil fuels as well. But let me pivot now. answer the second half of your question. So what's the Fed going to do? They're just going to punish everybody

Starting point is 00:38:49 in order to try and get them to spend less. In some degree, yes, that's what they're going to do. Now, why? Why are they doing that? Two reasons. The first reason is, let's break down the American public. 40 percent, this comes from the Federal Reserve Survey of Consumer Finances. They do it every three years. The last one was 2019. They're going to do another one this summer. About 40 percent of the American public, has less than $1,000 of savings, and they rent. When prices go up, they're, to be blunt about it. They just get killed. They just have, they don't, they have the same amount of money, and they can only buy less

Starting point is 00:39:29 things, and they have to make difficult choices about what they can and cannot do. Now, the rest of us, we own a home. We have an investment portfolio. It went up and, I'll update myself, it went up in value last year. And so while inflation was a problem last year in the early parts of this year, I looked at the price of my home. I looked at the price of my investment portfolio. And I said, okay, I'm doing okay, even though inflation's going up. Now, that's reversing by design so that they get us to also spend less money. There's one other thing I'll throw out there too. There's an organization in Paris called the Organization of Economic Cooperation and Development or the OECD. In the OECD, B-CD puts together a bunch of statistics, they call it harmonized statistics, so they look at the inflation rate for every developed country in the world. And they put them on the same scale so you can compare them. The country with the highest inflation rate of this is just developed countries

Starting point is 00:40:29 is the United States. We're number one. We've got the highest inflation rate in the world. Historically, that is rare. The U.S. has always been, because it's a giant country, I mean, a giant economy compared to France or the UK or Australia or Japan. it's a giant country. So it's always somewhere in the middle. It's never the most. It's never the lowest. It's never the highest. We're the highest right now. So why do we have the highest inflation rate in the world? San Francisco Fed answered this in a study they did about three weeks, about three months ago. We also stimulated more than any other country. We mailed out more stimulus checks and PPP loans and and deficit spending, we just prime the pump and just sent money out the door like nobody else.

Starting point is 00:41:17 So we've got an excess demand problem as well. That's why our inflation rate is so much higher. You point out there's a war in Ukraine. There's supply chain problems. Every single country has that. But why do we have the highest inflation rate over all the other countries that have the same problem? Because we mailed more money to everybody. We handed out more people. PPP loans that nobody paid back than anybody else. We deficit spent like nobody else did. So we gave everybody all this money. Last year, a lot of that money wound up its way into the market, you know, the Robin Hood effect. And it helped to really pump markets. And maybe the crypto markets too last year as well. Well, this year that money is is waning. And that might be one of the

Starting point is 00:42:04 reasons why markets are struggling, but the residual, the echo of all that money has pushed prices up. So another reason the Fed is raising rates is they're trying to cool that excess demand. It's fascinating, Jim, and this is just such an education. You are a wealth of knowledge, my friend. I'm so glad we brought you on for this episode. I definitely want to get into some of the other global markets, their impact. You had an interesting thread about the Bank of Japan, and I'm wondering if that's the ghost of Christmas future for the U.S. I also want to talk about what the Fed can actually do as a result of this, and how far can they push things before we get some political backlash as well?

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Starting point is 00:45:09 and most resilient Dow in existence. Hey guys, we are back with Jim Bianco, just a riveting episode, getting schooled on inflation and its downstream impacts. We left things with two areas that we want to cover more in our quest to go through,

Starting point is 00:45:25 kind of like what happened and why is everything breaking and what's going to happen next. We're going to talk about what's going to happen next. But just camping on that everything is breaking for one minute. In global markets, things seem to be breaking. And I know, Jim, you've been looking at the Bank of Japan a little bit. Here's a tweet that I'm showing right now. It's a tweet thread. Meanwhile, on the other side of the planet, another peg is breaking.

Starting point is 00:45:50 This one might matter more than UST, more than Terra, more than Lerner, more than Luna, the Bank of Japan cannot seem to hold the 10-year JGB at 0.25%. This despite their yield curve control policy of unlimited buying at 0.25%. Okay. A tremor just ran up my spine thinking about an outcome of Japan being somewhat similar to Luna and the UST ecosystem. What is happening here? What do some of these terms mean like yield curve control? How is it? is this like the Terra collapse that we saw a month ago or more? So the Japanese, the Bank of Japan has a policy that they call the yield curve control or YCC,

Starting point is 00:46:37 which means they are going to fix the price of the 10-year Japanese government bond. That's what JGB means Japanese government bond at zero percent interest rate. Now, how do they do that? They have a printing press. So they will print as much money. or mint or burn to use a term from the crypto space, as much as they need to peg the price at zero. But is what this chart you're looking at, and for those of you're not watching, it has a gray band on it. They say that they have a tolerance of plus or minus 25 basis points,

Starting point is 00:47:13 a quarter of a percent. For the last two months or so, the 10-year JGB, the 10-year Japanese government bond has been yielding exactly 0.25%. The Japanese have come out and said the Bank of Japan that they have, they will be an unlimited buyer, unlimited, infinite buyer at 0.25 percent so that it will never, ever go above that price. Well, a couple of days, the yield, excuse me, will never go up. And remember, when yield goes up, that means the price falls. So the price would never, ever fall, the yield would always stay at at least 0.25% or lower. Well, the other day, it went to, two days ago, went to 257. And last night it went to 2.26.5%.

Starting point is 00:48:04 So it did go. So the price did fall through their floor. So at one point, it almost seems inconceivable, right? I have an infinite amount that I'm going to buy at a certain level. Why would the price ever fall below it? Well, the Japanese have doubled down and they're tripling down and they won't let their yield go up. Now, to use a crypto analogy, that's their stable coin. Their 10-year JGB, they fixed the price.

Starting point is 00:48:33 They want it pegged at 25 basis points. Their governance token, to use that analogy, is their currency, the Japanese yen. That's where the pressure comes from trying to hold this stable. If you're holding, if the Japanese are holding their interest rate at 25 basis points, in U.S. rates, in French rates, and British rates, and Australian rates, and every other interest rate around the world is going up. But they won't let their interest rate follow all the other rates up. The gap between their rate and the rest of the world's rates increases.

Starting point is 00:49:11 Now, when you buy Japanese yen, you just don't get a palette of paper currencies. You invest, you do something with that yen. I bought some yen. What do I do with it? I park it in Japanese government bonds because they're safe. They won't default. And if I'm not getting a in-kind move up and interest rates with everybody else, that makes their currency less attractive.

Starting point is 00:49:36 So their currency has been declining. What I mean by it's similar to UST and Luna is your stable coin is under enormous pressure holding your peg, your governance token, in this case the yen, is falling in price and quite a bit for the yen. It's at a 24-year extreme. That's how much the yen is fallen. And it's putting the Japanese economy under a lot of pressure. Is that what we're looking at on this chart, the Japanese spot price? Translate this for us. Yes, that is the Japanese. Yes, that would be like the equivalent of the governance token. The Japanese yen arising, that is how many yen does it take to buy a dollar. So as the number goes up, in this case, to 135, which is the highest

Starting point is 00:50:23 it's been since 1998, takes 135 yen to buy a dollar. That means the currency is weakening. You need more of the currency to buy the same unit of a U.S. dollar. And the reason it's been weakening is they're trying to hold their interest rate stable when every other interest rate in the world, because of inflation, is going up. And it's making their currency un- more unattractive. So it is being, it is under attack in that their policy is the problem right now. I don't understand why they have this policy, why they won't let their interest rates go up with the rest of the world. But as long as they continue with this policy, they risk their their pegged interest rate deep hegging. And if it deep pegs, that would be a big credibility problem for the bank of Japan. Look,

Starting point is 00:51:18 Luna was a $40 or $50 billion ecosystem that had all kind of problems. This is by whichever measure you want to look at, the second or third largest economy in the world, which is $5 or $6 trillion economy. And if you wind up throwing a $5 or $6 trillion economy's bond market and currency into chaos, because you've been trying to hold up unsustainable peg on your interest rates, you're going to wreak havoc on a country of 60 million people. So this is a real problem right now across the world. And what I meant was when markets get stressed, every problem they have all appear at the same time. So you've got the stock market falling.

Starting point is 00:52:04 You've got the bond market falling. You've got the yield curve inverting. You've got the Fed getting more aggressive. You've got the Japanese currencies, eulkerf control under stress. And a lot of people would say, boy, all these black swans are all occurring at the same time. No, this is what happens when markets get stressed. Everything goes bad at once. Crypto markets are stressed.

Starting point is 00:52:27 All the bad stuff starts to bubble up. First, it's Terra, UST, then it's Celsius. And it just keeps, you know, it isn't that we just run a series of unconnected events that seem to happen right all at the same time. They're all connected that they were weak parts of this ecosystem. This would be the trad-fai system or in the crypto system. And when you stress it, all the weak parts become a problem at the same time. So this is just another one of these problems that's showing up. So what I'm hearing is that not only is our economy under stress, the crypto economy is under stress, the Bank of Japan is under stress.

Starting point is 00:53:07 And like we aren't just talking about this particular part of the world just for to satisfy the Japanese bankless listeners. We are indicating that the whole world seems to be under stress at the moment. And so if we zoom out and we aren't seeing like the coincidence of three different black swans in three different spots, what we are seeing is perhaps one big meta black swan event. Like every single part of the global financial system seems to be finding a way to get itself into trouble. And so, Jim, when we zoom out and we look at everything holistically, what the hell is happening? Like, what is going on? Like, is this one big, just like, we started this show calling this a watershed event.

Starting point is 00:53:48 But that was mainly with regards to equities, bonds, and the local domestic interest rate market. Globally, what are we seeing here? Is it too grandiose to call this just like the, the popping of the fiat currency era of the last, like 100 years of the global market financial system. Like what, zooming out, how do we sum everything up? Well,

Starting point is 00:54:13 first of all, real quick, Warren Buffett has a great line for that. When the tide goes out, we're going to find out who's swimming naked. Right. And what happened is the tide went out. We found out we're in a nudist colony

Starting point is 00:54:22 because there's a lot of naked people out there right now. So there's a lot of naked people out there that have been swimming. And that's what we're finding. What is going on in the, in the, in the holistic thing? There's three letters that we would like to use when explaining the economy, DGT, demographics, globalization, and technology.

Starting point is 00:54:44 For the last 30 or 40 years, inflation has been down, inflation has been low, and we say it's because of demographics, the aging population, it's because of globalization that, you know, you can find, you could globally go to find your lowest cost producer, and it's technology, the Amazon effect that is causing inflation to squish down. Okay, that's all true, and I agree with that as well. And then we went on to say, and therefore, inflation will be a non-issue forever. And we really believe that up until the financial, up until COVID, that we were never going to ever see inflation a problem again. Well, post-COVID, inflation is becoming a problem.

Starting point is 00:55:32 And we've got it. Not only here, we've got it in all over the place. In fact, we haven't even brought up the word Europe. And I'll just say real quick, it might be worse in Europe than what we see right now. And their economy is in a much worse position than the U.S. If there is going to be a global recession, it's going to start in Europe first because they're in a much worse. They're much worse off than we are right now with high inflation and at least with weak growth as well. we structured the entire economy, the entire financial system on the assumption that we were never going to see inflation like we saw in the 1970s again.

Starting point is 00:56:13 So we were running the financial system with a lot of leverage. We were running the economy with things like just in time inventory. We were running the economy with kind of labor markets that weren't very flexible because it was to the benefit of, of running it with low inflation. Now that we've got inflation, we have to start wondering if everything is going to change, if the financial system cannot run the amount of leverage that it was running before, because inflation breeds more volatility.

Starting point is 00:56:47 If that is the case, then we're gonna see lower asset prices. We're gonna see much more volatile asset prices. Are we also gonna have to see just in case inventory come in as opposed to just in time? Are we going to have to see reshoring because I can't just go to China or to Vietnam and say they can produce my widget cheaper? But I can't trust that they're going to be able to export it to me. So I better build a plant in Columbus, Ohio, or maybe in Phoenix, Arizona, which is what Intel is talking about doing to make semiconductor chips. Now, you may say yes, and that should be a boom for jobs in the United States.

Starting point is 00:57:27 It is. But it's a lot more expensive. and that means that everything that uses a semiconductor, which is basically everything, is going to get a lot more expensive because you can't go to Indonesia or Malaysia or Vietnam and find the lowest cost producer. You're going to have to produce it in politically stable places. And I haven't even brought up the idea of Taiwan because the majority of chips in the world are made by Taiwan semiconductor. And if the Chinese were to invade Taiwan or blockade Taiwan, that, you know, semiconductors might be as important as oil to the economy. And if there's any disruption coming out of Taiwan as semiconductors, that's another problem. That's another motivation for why Intel is talking about building a fab plant

Starting point is 00:58:13 in Columbus, Ohio, as opposed to another one in Taiwan. So all of a sudden, all of the assumptions we built financial markets on, the economy on are now under question. Because if we're going back to a higher, higher inflation environment, more volatile environment, it's not going to be like it was from 2010 to 2020. It's going to be a very different environment. And we're not prepared for that. We've got to restructure the economy. That's a nice way of saying that there's going to be big winners and big losers along the way,

Starting point is 00:58:46 that the way we thought things worked, it's not going to be the way we think things work going forward. I don't know what the term for the opposite of transitory is. Maybe it's permanent, but persistent. Persistent. Persistent. So this is what we're dealing with. It's going to require a great reorganization. And I'm kind of struck by as we get to kind of the last piece of this episode and this explanation of what's going to happen next and kind of how do we fix it, everything that you just described, like on, you know, reshoring chip manufacturing and sort of a reorganization of the economy and like the energy markets. These aren't tools in Jay Powell's tool belt.

Starting point is 00:59:23 Okay, the thing he can do is raise rates and do quantitative tightening. And here's what I don't quite understand yet, Jim, is because there is an upper limit to what he can do, regardless of what the politicians demand and Biden calls Powell into the principal's office and he's like, hey, inflation is your problem. Come fix it, right? But there are some upper limits to what Powell can actually do and the central bankers can do. Here's a tweet from Luke Gromman who says, the amount of rate hikes or demand destruction needed to stop inflation will bankrupt most sovereigns.

Starting point is 00:59:53 And I saw somebody ask him this, if they want to stop inflation and they can't add more supply, then they got to destroy demands. That was the case you were making destroying demand, right? And then Luke says, they destroy demand, they destroy tax receipts, and those are too low to start with. That's the first piece I want to have you maybe explain for us. So let's say Powell jacks up interest rates, right? The problem is not enough capital gains to tax. Maybe income goes down as well. And so tax receipts go down. Now we have a whole other problem from a federal government perspective of increasing deficits. What are the upper limits to what Powell can actually do here, given these types of constraints? Oh, that is, Luke's 100% right, that that is the problem. And that's why the markets are so glum because they don't see a path towards what we refer to as the soft landing. Keep in mind, too, there's a political aspect of this that cannot be overlooked. Let me go back to my 40% of the people make less than $1,000 and rent.

Starting point is 01:00:59 All right, let me be blunt about it, right? They probably work at the fast food place you or I went to either earlier today or in the last couple of days. Are we supposed to turn to them and say, look, I am a wealthy person with a substantial portfolio, and you can't have me lose a lot of money in the stock market because I can't pay capital gains. So I am sorry that you're on this minimum wage and it's not keeping pace with inflation, but it's better off that I don't get wrecked, as opposed to you getting wrecked. That won't fly. That'll tear the country apart. So the point is they're on a path that they've got

Starting point is 01:01:36 no choice that they have to deal with. This is why inflation is such a problem. As I like to say, to follow up with what Luke said. The mistake the Federal Reserve made was last year. They should have jumped on the beginnings of inflation last year. When it was on, it's way to 3% to 3.5%. And they should have started tightening, and they should have started trying to slow things down, not let the stock market go up 29%,

Starting point is 01:02:06 not let the housing market go up 18% last year to make people feel like this was just great and we're going to spend money like drunken sailors. This year is the consequence of last year's mistake. And so they've got really no choice. Like I said, I've heard a lot of people say that. Well, the Fed can't wreck the stock market. What are you going to tell the 40% that don't own stocks? Sorry, we can't let Elon Musk's Tesla stock fall. It's already falling 40%. He's taking enough pain. He can't let it fall 50 or 60%. that's not going to work. And so this is why they've got no good choices. The only tool they have is to try and slow demand. And that's what they're trying to do right now with all of these aggressive rate hikes. I agree there's a high likelihood that this ends in tears and that we wind up with a recession or we wind up with serious demand destruction, of course. And then the government doesn't have tax receipts. It runs a big budget. I said there's a lot of political strife in the country because people are angry and upset that we had to go through

Starting point is 01:03:17 this pain in the first place. But unfortunately, inflation is not transitory. It is not going to peak and go away on its own. It is going to take some kind of difficult intervention to change attitudes and behaviors to make it go away. That's what Paul Volcker had to do in 1980, 81, when he took interest rates, you took the Fed funds rate to 21.5% in order to basically slow the economy. We're at 1% right now. I don't think we have to go to 21.5%. But it is going to take something painful. I don't like it any more than you do. I'm just trying to be a realist that this is a problem that we're having and that there is no easy solution to this problem. The last thought I give you on this, a lot of this I do think is a post-past, pandemic event. If you look through human history, every time there's been a pandemic, coming out of

Starting point is 01:04:16 the pandemic, there has been a big structural change in human activity. And we have a big structural change in human activity now. We coming out of the pandemic, I think the big structural change is work from home, remote work. I've been, you know, I tweet about this a lot too because I think it's a big deal. About a third of the country now works from home of those that can. Let me back up a second. About half the country has a job, you and me, we have jobs where we can work from home. Of those, about a third of them are either hybrid or fully remote. Or about a third of the population, our workforces are hybrid or fully remote. That is the majority of people that can work from home.

Starting point is 01:04:57 What does that mean? What I consume changes. I consume more stuff, less services. Why did I consume services? Because I was in an office from eight to five, five days a week. and I needed people to do things for me so I could stay in the office. Not that I'm home. I buy things and I do it for myself.

Starting point is 01:05:15 We need to understand that. And we need to fix the, why is the supply chain chronically short? Because we're not recognizing. We live in a post-pandemic world. The amount of stuff that we need and the composition of stuff we need is changed. Look at Walmart and look at Target. Their stock prices have gotten wrecked because they've got this bloated inventory. and they've said, we, we target in Walmart ordered a bunch of stuff and put it on our shelves

Starting point is 01:05:42 that people aren't buying. They're not recognizing the post-pandemic world. They still think it's 2019. And so let's order the stuff that everybody bought in 2019, but they're not recognizing that in 2022, we buy different things. So instead of having this conversation, what does the post-pandemic world look like? We instead say, oh, work from home is going to end. Everybody's going to go back. We're going to return to 2019. We don't need to have. have these big existential questions about what does the new post-pandemic economy look like, because we're going to return back to 2018 or 2019. Just wait. This is what is feeding the problems we're having. We have to understand this economy's different. Now, that doesn't mean

Starting point is 01:06:24 it's bad. I'm not suggesting it's dystopian. It's just different, but we're not ready to say it is how and what do we do about it. That makes sense. Look, I think we're definitely destined for a great reorganization, you know, and, you know, certainly capital holders will need to take a haircut. But here's the piece I still don't understand. Can I throw in something really bullish for you right now? Because I've been just a giant rink. It's been, it's been pretty glum so far. So we're going to have a, we're having a crypto winter right now. If the economy needs to be restructured and things need to change, that includes the banking system, the payment system, the definition of money, the public is going to be ready for that. Why do I need to do this now?

Starting point is 01:07:13 Because everything seems to be fine. Give them a couple of years of gut-wrenching changes in that things need to be different and give them a couple of years of recognizing the weaknesses of the systems we had in 2019 and they'll be ready for it when we come out of the next winter. That is the, that's the bullish stuff that I needed, Jim. Thank you. I'm going to take that in run with it. We just got to get there. just got to get there is what we have to do. I think there's going to be a lot of pain in between. But it's like, so here's the piece, the last piece. I just don't understand. So like capital holders take a haircut, right? We have to reorganize it everything. There's going to be a crypto winter.

Starting point is 01:07:49 We don't know how long it's going to be, but, you know, we'll come out hopefully on the other side. What I don't understand is how the world governments come out of this. So you mentioned Volker in the 1980s. Well, we didn't have the debt to GDP that we have now, right? And so like U.S. national debt at $30 trillion, every 1% interest rate rise in interest rate, we get more interest payments, right? So like $1.5 trillion in interest payments. How does, like, Luke mentioned the term bankrupt. What does it mean to bankrupt a sovereign? Like, how does the U.S. government actually get out of this? Do we issue more money? Do we inflate our way out of this? Can you explain that last final piece for me? Yeah, well, first of all, governments don't go bankrupt.

Starting point is 01:08:33 because they have a printing press. So what they could do is they could just have reckless monetary policy to fix it, right? Well, you can't pay your debt? Sure, I can print up some hundreds in the basement. And there you go. I can fix my problem. So they're going to print their way out of it. And that leads to more inflation as well.

Starting point is 01:08:50 Or in this case, it would be more of a currency devaluation, which is a form of inflation. And is it just because all of the world governments are doing at the same time. Like, all of the world governments are in a bad position. So it's not bad bad. government, they're all in a bad position because they all had the same assumption going into 2019. We were in a low volatility, quiet inflation period and would remain that way forever. So we could, just like in the financial markets or in the crypto markets, we are in an uptrend. I can lever myself.

Starting point is 01:09:25 I can do things that I didn't think I could normally do. They did the same thing. They wound up spending more money. they wound up taking on more projects like the green movement and stuff, which is, which this is not that I'm against it. It's just it's incredibly expensive is what they want. And they wound up financing it through borrowed money. They started to believe, well, see, but inflation will never go up. Interest rates will never go up. We'll be able to afford all of these problems or all of these solutions that we're trying to do that are very expensive. Now that we're starting to realize that

Starting point is 01:10:01 we're in a different world, they're going to have real problems on their hands in terms of the debt that they've taken on, the promises that they've made. And yes, when they don't go bankrupt, that they go to a bankrupt judge and they reorganize themselves like a company does, they will just print more money in order to resolve that problem. Now, what's going to happen? This gets back to the crypto winter and the other side is maybe the public will be looking for a different way to organize itself. And there is a crypto idea around Dow's and some other things about maybe these are different ways we should start thinking about organizing ourselves. They're not ready for it now, but give them a couple of more years of inflation. And they might be open to

Starting point is 01:10:46 this idea of, you know, public goods being, you know, public goods under a Dow, they might be open to that idea in a few more years. If we start continuing to go through this inflation problem, as opposed to right now. So what is, what do you think? Like, obviously the worst case scenario, people have heard this kind of fear and certainty and doubt in the market of like, you know, a 1930s style depression. So we've heard that.

Starting point is 01:11:12 I know you don't think that's the case. What do you think is, like, what's your expectation for this? What's, what are you thinking is going to happen as a result of this? So we have the Fed meeting. We increased interest rates. Then what happens next, Jim? And how are you playing this?

Starting point is 01:11:27 Well, so I still think. that they're going to increase interest rates by 75 basis points tomorrow because they basically told us yesterday that that's what they're going to do and that they might very well increase interest rates by 75 basis points in July. If I was to go very short term on you, the Cleveland Fed has this now casting that they do on their website where they have a model that they update every single day for inflation. And they're projecting another 1% inflation number for June after the 1% number for May. And so the Fed's going to look at that. If that's what happens with June's CPI report, they're going to look at that and go,

Starting point is 01:12:03 we've got to raise rates another 75 basis point. So markets are going to stay under pressure. Let me give you a, no, I was going to say fund statistic, but it's not fun statistic, a sobering statistic. Yesterday, the S&P 500 closed in official bear market territory, down more than 20% from its January 3rd high. We looked at all of the 20% corrections back to 1929. And an interesting thing is 80% of the time, the day that you corrected 20%, you are already in recession. As a matter of fact, it is never actually predicted a recession at 20% correction.

Starting point is 01:12:39 Because when it happens, 80% of the time, you're in a recession. The other 20% of the time you never had a recession. The last one was 1987. You had a 36% decline with no recession following it. So it looks like we're going to have a recession, if not already started right now. Now, that is going to probably lead to less economic activity, eventually higher unemployment, a lot of anger and angst. We'll take it out on the Democrats in 2020 in the midterm elections, and then the Republicans

Starting point is 01:13:13 will be in charge, and then we'll get pissed at them, and we'll take it out on them in 24. And that's kind of the way that we'll go back and forth with our politics. And that's why I said, after we've taken it out on both of those sides, three or four times, we'll be ready for this. hey, try this Dow thing to run public goods. Okay, I'm sick of this way. Let's try something different than at that point. So I think you're going to see a period of difficult economic activity struggling markets from here. Oh, yeah, there'll be bear market rallies and the like, but only when we get supply and demand back into balance and inflation starts to moderate,

Starting point is 01:13:49 and that starts with quit waiting for the supply chain to magically fix itself, ask How do we fix it? Target. What is it that you're doing to figure out what people want to buy in 2022 instead of just running out the same things in the same quantities of 2019? And then when we got to get everything back in the balance, inflation can moderate. It may not go back to 2%, but it won't stay at 8. It'll come back down. Then we could start seeing the economy emerge from this. But we're in this post-pandemic period of upheaval that I think is going to last for a little while longer. And believe me, I'm really looking forward for the. the day that this ends. But unfortunately, that's the way I see it right now. Well, Jim,

Starting point is 01:14:30 I think there's perhaps only one person in the world who can compare Bank of Japan interest rates to the Terra Luna relationships who can understand Dauze as public goods and talk about how these things are ultimately bullish for crypto. And I think that's you, Jim. So it's definitely why we enjoy bringing you on this show and giving us this clarity because there's so few people that can that can extrapolate so such like distant parts of the global markets to what we see here in the crypto world just one last question before we wrap things up here where should we look for opportunity in all the asset classes they're like of course i'm bullish on crypto i always will be bullish on crypto but like what have you how have you repositioned yourself and either your actual portfolio

Starting point is 01:15:18 or perhaps just your brain as to like where opportunity still remains in these markets and when there's such like doom and gloom everywhere. Like, what are you up to these days? I'm hiding under a rock like everybody else. I've got a lot of money in, you know, the Tradfai version of a stable coin that can hold its peg, which is called Money Market Fund, you know, waiting for opportunities. Yes, I'm losing money on an after inflation basis because it's paying me 1% in an 8% inflation world, but it's better than losing 23% in the stock market or 16% or 12 or 16% in a bond market or whatever horrific number we've got going on in the crypto market right now.

Starting point is 01:16:00 75%. Yeah. I was thinking more like this year. It's only 50% for a year to date. Yeah. But my point is I'm seeing economic upheaval and I'm not looking at it in terms of asset classes except for I do play a little bit in the commodity markets. I own some ETFs that are tied to commodities.

Starting point is 01:16:20 I own some things that are tied to energy. And I marvel at every day they move five to eight percent. And every day the press seems to be uninterested in a five or eight percent move in crude oil or energy related products when four or five months ago it was, you know, breathing through a paper bag hyperventilation. Oh my God, look at what crude oil is doing. It's moving 5 percent a day. Now it's just Tuesday that it seems to be doing that as well.

Starting point is 01:16:47 So that's another way that I'm trying to play this. but I'm looking for signs that inflation is going to settle out at some lower level that we're getting back into balance. And then I think at a lower level of all markets, I want to pile back in. So I'm out and I'm looking for a way to get back in is this simple way to answer it, except for some commodity plays. Keeping that dry powder ready. And of course, I've got a bunch of, you know, and to be clear, I've got a bunch of crypto plays that are worth a hell of a lot. less than they were last year, like everybody else as well, too. Absolutely.

Starting point is 01:17:25 Buy and hold. It's got to be part of the strategy as well. Jeff, this has been so much fun. We really appreciate you explaining inflation and what's going on in this economy. I think everyone has a much clearer understanding of your perspective. And we're looking forward to having you back soon. Thank you. Bankless Nation, of course, risk and disclaimers.

Starting point is 01:17:43 None of this has been financial advice, but we are all signed up for tumultuous times. It doesn't matter what asset class you're in. And that is what is ahead of us, of course, in the crypto world. We know that Bitcoin and eth are risky. As is all of crypto and so is defy. You could definitely lose what you put in. But we are headed west. This is the frontier.

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Starting point is 01:18:51 The layer two era is upon us.

Bankless - How Bad will Inflation Get? | Jim Bianco

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