The Pomp Podcast - #1312 Jim Bianco | Wall Street REALLY Wants Your Bitcoin

Episode Date: February 19, 2024

Jim Bianco is the President and Macro Strategist at Bianco Research. He also has an ETF, called the WisdomTree Bianco Fund (WTBN). In this conversation, we talk about the pros and cons of bitcoin ETF, similarities to the gold ETF, centralized ownership of bitcoin, macro economy, federal reserve, interest rates, and more. ======================= This episode is brought to you by Frec — Just as easy as investing in an ETF, Frec Direct Indexing can help you earn more by unlocking tax savings, no matter the market. Done for you, automatically. Check them out at ⁠⁠⁠⁠⁠⁠⁠⁠⁠https://frec.com/⁠⁠⁠⁠ ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠⁠⁠⁠us.espres.so/pomp⁠⁠⁠⁠. They have a brand new offer waiting for you.  ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

What's up, everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Jim Bianco. He's the president and macro strategist at Bianco Research. He also has an ETF called the Wisdom Tree Bianco Fund. WTBN is the ticker symbol. In this conversation, we talk about the pros and

cons of the Bitcoin ETF, the similarities to the gold ETF, why Jim thinks that maybe Bitcoiners should be paying more attention to centralized ownership of Bitcoin, how he's thinking about the macro economy, where fixed income and his ETF should go if rates stay higher. And then we talk about a couple of surprises from the Federal Reserve, including could they actually hike interest rates rather than cut them in the coming months? This conversation we talk about a lot, and Jim is in rare form going ahead and sharing all kinds of new ideas that will make you think much more deeply about financial markets and asset prices. Here is my conversation with Jim Bianco. anthony pompliano runs pomp investments all views of him and the guests on his podcast are solely

their opinions and do not reflect the opinions of pomp investments you should not treat any opinion expressed by pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy but only as an expression of his personal opinion this podcast is for informational purposes only this episode is brought to you by freck historically the wealthy had a hidden secret in investing. They would spend a lot of money and use very big teams to conduct tax loss harvesting. Tax loss harvesting is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling the profitable assets later. But now FREC is bringing this incredible advantage to any investor. They'll literally lower your tax bill,

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messages i've slack open and i got a notes app i normally work on a desktop and it can be very very productive but everything falls apart the second i leave my desk if i'm traveling if i go to a coffee shop to do some work or just want to work from the kitchen table my laptop doesn't have enough screen space i lose my command center and my productivity falls off a cliff it's a major problem but this is where espresso comes in they have a portable screen that is so beautiful that you think steve jobs came back from the dead to create it the thing is incredibly light it comes with a nice stand and the user interface is so easy that i figured it out how to do it in less than three minutes if you listen to this podcast you know that's not an easy feat so the espresso

team and i we became friends i got to know them because i really like the product and those screens they now want to offer them to any fan of the podcast. So we struck a little deal. Here's how it works. Anyone who listens to this podcast can go to us.espres.so or that's too confusing, just go click the link in the description. If you go to Espresso's website,

they've got a brand new offer there sitting for you. You get a little discount and you'll get a beautiful screen. Trust me, I use mine every day. You'll love the Espresso screen and I think it'll make you more productive. Go check them out today by clicking on the link in the description. All right, guys. Bang, bang. I've got Jim here. Jim, you've set the internet on fire in the last

couple of days because you said, hey, this Bitcoin ETF, there's lots of flows. People are super excited. But wait one second. Maybe it's not all positive. There may be some downsides. I tend to agree with you that things in life have trade-offs. There's positives and negatives. What do you think the Bitcoin ETF downsides are or the things that maybe the Bitcoin community should be paying more attention to as these ETFs become more popular? Well, I think there's two things. I think that more on the philosophical level, you're letting Leviathan into the game. You're giving him a stake. Remember that you might talk about that there's 200,000 or so ETFs now owned by these ETFs, but those are being controlled by Larry Fink and Fidelity and all of those other firms that are really the big players in this space. And those firms are now going to be told by regulators what they think about things. And they're going to weigh the interest of the Bitcoin community against the interest

of their regulators. And you're going to, and I worry that you're letting them in. And I worry that in a decentralized world, you're introducing more centralization and an avenue for more regulation. The second thing I'm worried about is there is this narrative that ETFs are bought by wealth managers who just got off the golf course with the guy that owns 12 dry cleaners and they need to put 5% of his money or 2% of his money into the Bitcoin ETF. It's a nice narrative, but that's like 2% of the ETF community.

I think what they don't realize is ETFs are the trading vehicle on Wall Street. 40% of all of the volume on Wall Street every day is attributable to ETFs. They are the tool that hedge funds and traders use all the time. I put out a tweet where I compared VOO, which is the Vanguard S&P 500 fund, and FPY, which is the Spider S&P 500 fund. There's exactly the same things. But SPDR has not gotten any inflows in the last 25 months. And VOO has gotten $100 billion of inflows.

Why? Because Vanguard markets its ETFs towards 401ks, pension plans, savings plans at companies, wealth managers that are looking to hodl or allocate money into the stock market. SPY is a trading vehicle. And so what I worry, and I ask the question, is these Bitcoin ETFs trading vehicles or are they allocation vehicles? Everything I see points to trading vehicle, which means that the flows might be closer to zero sum.

Sure, in an uptrend, you're going to get many, many billions of dollars into these funds. But in a downtrend, a lot of that money is going to leave and it's just going to kind of waffle up and down all the time. This is not unusual if you've been in the ETF business. You see this a lot with speculative funds. Speculative funds have a run. They get a ton of money. Everybody's excited.

And then they run into a dry spell and most of the money leaves. That's what you have to be careful of with this money right now. Now, I'll be fair. We don't know. We don't know how much of it is allocation versus trader. I know there's some people that want to believe it's mostly allocation. I happen to think it's mostly trader. The way we'll find out is in the next downturn, and let's say 20%, 30%.

Look, we had a 20% correction two weeks ago in Bitcoin. But in the next 20% or 30% downturn, how much of this money actually winds up leaving? That'll give us an indication of how much of it is trader money versus allocation money. It's trader money. Again, this might be more zero-sum than people think. What's really interesting about what you're bringing up here around people who want to for the long term versus maybe who are traders is it almost is like steroids to what was already happening pre-etf in the bitcoin community right we had these massive run-ups of hundreds of percent

and then we'd get like an 80 drawdown and along the way on the way up we had those 20 and 30 drawdown sometimes four or five six of them in a single bull market uh and what you're really highlighting here is the bitcoiners right they would hold through all of that volatility and i think it's stanley drunkenmiller said at one point the thing that convinced him and paul tudor jones was they called each other and they said, hey, do you know that 80 something percent of these yahoos who hold Bitcoin at 20,000 are still holding it at like $4,000? He's like, this thing's definitely going back. And so they decided they went and they bought it because of that holder base. We know today that in the last six months, 80% of Bitcoin circulation hasn't moved

in the last year. It's like 70%. But what you're saying is, wait a second, those numbers may stay exactly how they are because that's the actual Bitcoin. But what may occur here is these traders that are holding the ETF, the second they get wind of a downturn, they're going to dump and that could actually accelerate a further drawdown. And so maybe there's more volatility in the future versus less volatility? Yeah, that's the fear. That is the fear. In fact, you might even be seeing that volatility in the last two weeks or so as all this money has been pouring in and we've run it up to $52,000. And then, you know, are they weak hands or are they strong hands? I mean, it is basically the simple Wall Street term on it. And I think that they're more weaker hands.

And if they are and they bring it back down, the problem with that is, you're right, The Bitcoin community, the non-ETF holders of Bitcoin, they're going to hold through. They're going to be true believers. They're going to argue about decentralization. But if what you're hoping for is a whole new class of adoption to come in, being that the public needs to put 1% of its money in, the public could never figure out Coinbase was too difficult. Kraken was too difficult.

Private keys were out of the question. this they're comfortable with. So we're going to get this whole new wave of adoption. If you just wind up seesawing this thing with wild volatility, you're going to scare them away. You're going to really scare them away. Wealth managers, oh, yeah, they'll have some customers that will reach out to them and say, put a couple of percent in my account in Bitcoin because you never know.

But it may never really materialize to the degree that everybody thinks. Let me just finish by one thing. this whole if everybody puts one percent of their money in bitcoin this is not a new argument this is exactly the same argument that was used 20 years ago when gld came on gld is the gold etf it has 55 billion dollars of assets in it and i think there's seven other gold etfs and this was the whole the exact same language the whole adoption everybody's going to go into gold They've got a vehicle to use gold. It never really materialized.

Why? Because over time, what we found was most of the traders in GLD, most of the people that bought GLD were traders. Now, this came out in 2006. It's 17 years later. It finally has $55 billion in it. But it took 17 years to get that kind of money into it. It didn't come right away.

So this language that we're hearing, that's what really picked me off is I've heard this exact language and these exact words before with gold two decades ago. And so this is nothing new what the Bitcoiners are arguing, but there is an example of it. It didn't work out the way that they thought it would. How do you think about the initial flows of call it, you know, 10 billion or so inflows in all of the vehicles combined over the first 30, 40 days? And I use that as a numbers like there's been a little bit of appreciation. Obviously, if you go back and look at GLD, that 55 billion, there was a lot of appreciation from when GLD launched to now. And so Bitcoin still is, you know, for the most part, that's inflows that represent, you know, kind of interest in Bitcoin. And so it's already called 20 percent or so of GLD. Is that a positive sign? Does that suggest that we should expect it to get bigger, or is it just, hey, there's a big launch, and then we should expect the inflows to kind of peter out from here?

Well, two things. I think, one, it is representative of the saturation and the understanding of the ETF community and the ETF instrument that it could launch this big and this bold on day one. I don't think if you would have done this, if the ETF community was 10 years earlier, Bitcoin was 10 years earlier, but I think people just are so comfortable with the product right now and understand it so well that when a new product comes out, they don't wait for it to season. They don't ask basic questions of how it's going to work. They know how it's going to work and they're ready to plow into it.

And this was filling a need that was absent in the ETF community. So I'm not surprised that it set records. I am surprised by the level of the records it set. It's been astounding what I've seen. And I would not be surprised if in the week or two we see more and more people come flying into it. Again, whether they're allocators or traders remains to be the question. But I think it really more goes to, one, there is an interest in ETF.

ETFs, but from whom? Is it from allocators or traders? And two, it really goes to the comfort level that people have with the ETF product itself. Let's talk about centralization versus decentralization. One of the interesting things that I think you're calling out here is there's centralization of ownership that is occurring that doesn't necessarily have an impact on the decentralization of the network as a kind of computer network, right? So the network is going of remain as decentralized as it was before the ETF and miners and node operators, et cetera, kind of go untouched. But centralization of ownership may have different challenges or positives, right?

Depending on how you kind of look at it. And one of the things that I see there is we know 80% of all Bitcoin hasn't moved in six months. So if you kind of just take that out and say of the, you know, 90 plus percent of the 21 million, 80% of that is kind of on the sidelines being held. Maybe there's some price point which those people will sell. but for as of right now, they're just going to hold. So at a trillion dollar asset, call it, there's approximately $200 billion or so that's kind of tradable, right? That's out in the market,

that's floating around, that's being moved. If these guys were able to suck in $10 billion, I mean, that's 5% of the tradable Bitcoin, right? Depending on how you kind of cut these numbers, like this is a big number. And so you're just calling out, hey, look, there's centralization of ownership. Add in Michael Saylor owns 190,000 Bitcoin, Cameron and Tyler Winklevoss own 1%. But you very quickly may get somewhere close to 3% to 5% just from a couple of people and a couple of organizations that own Bitcoin. And if they all decide to do something, it could have negative impacts. I think that's what you're saying, right?

Yeah, no, exactly. A couple of things. You're right about the centralization of ownership. Just start right there. Because as you centralize that ownership, then remember, who is the owner of those? It's technically Larry Fink and BlackRock. It's not all of the other people behind them that actually bought that. It's Fidelity and Abby Johnson.

They're the ones that are going to make the decision about the ownership. And they're going to have competing pressures being put on them by Gary Gensler and by Janet Yellen and by Liz Warren. They're going to ask them and tell them certain things. And they're going to have to weigh the interests of the Bitcoin community versus their own personal interests. And is that something that you really want? So yeah, you're right.

I mean, a lot of people have been tweeting back at me that the network is decentralized, but this is not about the network being decentralized. You put it very well. This is about centralization of ownership and all of the things that it could bring and inviting in that massive ownership centralization is going to be big problems. On your other side, you know, the other side, you're talking about if there's $200 billion of tradable supply and 5% of it has been sucked up by ETFs in the last month, and that might not stop in the next week or so, that is going to be a huge, huge issue. And there's something else too,

a little bit technical about ETFs. ETFs have flexible supply. So their supply changes all the time so that their NAV, their net asset value, trades right on top of the underlying asset so that there's very little premium or discount in it. Along the way, they do have what's called create and redeem, that you can create new shares and you can redeem new shares. Within the redeem community, and I hope I'm not getting too technical, there is what's called in-kind payment. And ETFs use this all the time.

In-kind payment means if I go to sell my Bitcoin ETF and I sell $100,000 worth of it just to keep a simple number, I expect $100,000 to be deposited in my account. But with in-kind, what I could get instead is $100,000 worth of Bitcoin at the price that I sold my ETF. Now, again, the ETF community in high-yield bonds and in a lot of other places, they use these in-kinds all the time as ways to settle transactions. The SEC banned that.

The SEC banned that, that you can't do in-kind transactions because of the custody issue. Because they don't like what a wallet is, and they don't want people to have to open a separate wallet and be subject to the custody of taking Bitcoin directly. Why is that a problem? Because if $500 million a day is coming into ETFs, and let's just say something happens and something always does, and who knows when, there could be a billion dollars that wants to leave instantly or within a few hours. The way the ETF works is it's for sale. And if the price starts to air gap down, I don't care what the price is. I have to get out of this. I have to

get cash, mark my ETF to that, and then transfer that cash to all of my sellers. I cannot say the market's chaotic, I'll in-kind the coins to them, and therefore I've settled the transaction. So you've removed that vital mechanism that pretty much all other ETFs use, and it can become very problematic in another downturn. And again, why did they do this? Because the SEC is not clear about what a wallet is. They're not clear about self-custody. They didn't want to go down that route. And the ETF providers accepted that. Remember now, if the ETF providers as the market air gaps down, if they don't immediately sell into that, they risk letting me out or you out your ETF at a higher price than the coins trade. And then the fund itself takes a loss. So they're

going to be forced, forced to sell in any in an unregulated 24-7 market, at least with the New York Stock Exchange, when this gets, when the markets air gap, they close trading and they try to reduce the volatility. You can argue whether that's good or bad. It's got, I think it's got arguments on both sides, but not in an unregulated, not in the unregulated Bitcoin market. So why do you think some of these traders are buying Bitcoin? Like if you kind of zoom out for a second and look at the macro environment, to me, one of the things that seems pretty interesting is like there's a long tail or long-term trend that we're going to print more money. We're going to devalue our currency. We're fighting a proxy war. We've got a southern border

issue. We've got all these things going on. It's like we just need more money in the system. At the same time that America, Europe, and Japan are all been contracting their balance sheets, China's been flipping the middle finger to everyone, and they're still expanding their balance sheet and doing a bunch of QE type activities. But then at the same time, you also have a ton of lagging performance in many of these funds. So if you go and look at hedge funds, It's like almost none of them are beating the S&P if you go throughout kind of all of this. And to me, maybe they're like looking at Bitcoin like, well, this thing seems to be doing a pretty good job of beating all of our indexes. And like we should sprinkle some of that in our portfolios to help us out as well.

Or like, why are they buying Bitcoin? So let me give you a cynical answer and then I'll address some of your other issues. Why did the Super Bowl have 123 million viewers, which is an all time high? And if you and by the hint, it has nothing to do with Taylor Swift. uh if you ask most of the people in the nfl and if you ask most of the people in television they'll quietly tell you that the reason that you've seen such a massive upswing in interest in the nfl is gambling it's basically it's prop bets it's draft kings it's the rest of those that you could bet play by play whether or not there's going to be a first down and it gambling is

driving everything we're gambling culture we love gambling does anybody remember game stop from three years ago. Half of the options that trade right now on the Chicago Board Options Exchange and all the other options exchanges are what's called zero DTE options. They're listed that morning and they expire at the close that day. That's half of options trading right now. We are a gambling culture. So part of the reason why I've been tweeting about DGENs and everything else is this is what we are. And so I think to some extent, what you're seeing with Bitcoin is an extension of our culture of gambling. We gamble on everything. This is why we love ETFs, because they're liquid, they're transparent, they're easy to trade 500 stocks, they're easy

to trade high yield bonds, they're easy to trade commodities, and we punt on them all the time. Now, stepping back from the cynical answer to your other answer, yeah, I mean, I've been one that's been interested in this space for over seven years now, and I've really enjoyed this space. I am a long-term bull, and I'm a believer in this space. And what I am a believer in is the financial system itself has failed large parts of the world. It has failed Latin America, Asia, Africa, the Middle East, billions of people. They're stuck with unstable currencies in shaky financial or banking systems. And the promise of Bitcoin, the promise of decentralization

is to give them a store of value at a hard cap and hopefully in some kind of a wallet with private keys that no government or no one else can take it away from them, something that they do not currently have in large parts of the world. And so that's where the appeal is. I recently read a story where Bitcoin was banned in Nigeria three years ago, yet it is still probably, Nigeria is still probably has the

highest adoption rate of any country in the world when it comes to the population that's in crypto in general, Bitcoin in particular. And it just goes to show you how the corrupt government, the shaky financial system, they're searching for ways to protect themselves. So this has got this general appeal to it. And that's why I think the industry that wants to move should be moving towards trying to smooth out those edges to make this a tool that can be used as an alternative financial system. My fear is, is that by sucking it into the current system, we're just going to basically make it a digital version of what we already have. And we already have that version.

We don't need a digital version of it. And we're going to lose that narrative of what we're trying to do. when we look at um that view of the world some people will argue it's because there's been a devalue of the currency the wealth inequality gap like like it's out of necessity people are gambling because they can't get ahead uh whether you believe that or not what they're gambling on i think becomes really interesting because to your point the zero-day options blows my mind right i mean like literally it's a coin flip in terms of what's going to happen by the end of today. And my guess is that actually most of the people who are buying those probably don't have

any edge or unique information, et cetera. If you look throughout history, the best investors essentially do the opposite of what American culture has become. Buy shares, think like an owner, have a cash flowing type business and just hold for the long term. Bitcoin seems to be the one piece of technology or the one asset that has entered into the market where even if people are gambling on it if they simply hold it for the long term. Yes, it doesn't have cash flow in the traditional sense, etc. But if you think of it from a savings perspective, it has done very, very well and seems to be outpacing inflation and protecting wealth. And so I do wonder how much is like price is the marketing campaign. And when price goes up, a bunch of people hear about it,

they go check it out, they start out gambling, but they get an education along the way. And then they get converted to that saver or that long-term holder versus once a gambler, always a gambler, And, you know, you get a hit of Bitcoin's volatility. You just pushed out in a risk curve and you look for the next crypto that's got even more volatility. I mean, I hope that that's the case. I hope that I'm overstating the amount of gambling that we're seeing in this. And like I said, I guess we'll find out on the next downturn.

What we do know is, you know, on-chain analysis tells us that, as you pointed out, 80% of people that own it don't trade out of it when the market goes down. Well, we'll find out when the market goes down, because it does. That's what cryptos do, and Bitcoin in particular. When it goes down, we'll find out how many of these people were actually just ranked gamblers and how many of these people are actually allocators. That's when we'll get the real test to this. But I hope that it really does come down to that.

The other thing is that in order for Bitcoin to really move forward, I think the real adoption is not just going to be that I hold Bitcoin, I hold it in a regulated brokerage account, but that they take the next step, that they maybe move to Coinbase or they move to Kraken or do a centralized exchange. And then maybe they go the next step and move to a decentralized exchange or hold them in cold storage. That's why I said I'll come back to it's interesting that the SEC won't allow in-kind transfers because they're not even going to allow you that opportunity to even consider that or put you in any position to do that. So really, are we detaching them? Are they just basically owning shadow Bitcoin is what they're doing. They're never actually going to

touch and feel it and experience the system that we have. My other concern is if we all get sucked into a number go up cheerleading with this and we wind up seeing this, that the money that's coming in for development is going to start to get diverted. Oh, I don't want to put money into a VC fund, or I don't want to put money into this project or this protocol. I'll just plow it into the ETF because number go up and I'll just make as much money and it's transparent and it's simpler for me and it's not as complicated. And so that could be actually, I know people like to say to me there, but if the price goes higher, that means that there'll be more development. If the price goes higher in this type of environment, I worry if that's going to lead to more competition away

from the developers. That's hard. It's hard to invest in developing. And it's hard to find a protocol that's going to work and work properly. And now if you're going to have to compete with, I could just put it into BitTow and just watch it go to the moon, and I don't need to deal with this headache of putting in developing, it could wind up backfiring on us. We'll have to see. And like I said, as you pointed out too, everything is about a trade-off. So there are trade-offs. That is a trade-off that we'll have to worry about. When you look at the macro environment, do you think Bitcoin will do well in the future

year or two? Yeah. Pivoting to the macro environment, that's my wheelhouse, what I'm known for and stuff. I have been in the camp that inflation is a real problem. It is a real 3% to 4% problem. It is not a real 8-10 Zimbabwe problem. And if it is going to stay to be a real problem, interest rates are going to stay up. And that is going to change a lot of the dynamics in the financial system where you have higher

interest rates. It's going to provide competition for stocks and interest rates by staying higher. Actually, if we're in a 3% to 4% inflation world, they might not be high enough to compensate you for inflation, because they should trade at a premium above inflation, probably 1% to 2% above that. If that's the type of environment we're going into, then alternative investments like Bitcoin or before 2009, you would have argued the same thing with gold, would have been a very good place to be.

And I think it will be. Commodities might be something else that you would look at in that space. Commodities have a whole other supply dynamic that you have to be careful of. It's not just demand, whether or not we have higher inflation. So yes, if we are in a period of higher elevated inflation, it does make alternatives more attractive. And if Bitcoin is an alternative, if crypto is an alternative, it will become more attractive. Final thought for you, and I'll just bring this back to the ETF.

If what we're seeing with Bitcoin, and I've seen some stuff done, and I've actually done the two, that it is re-correlating to triple Qs, or it's re-correlating to the NASDAQ 100 because of these flows, maybe because of these flows. If all it becomes, and to put it in ETF terms, if all these ETFs, all of them wind up becoming just TQQQ, TQQQ is the 3x NASDAQ 100, the 3x triple Q. We already have a 3x triple Q. If that's all Bitcoin is going to be, is that 90% correlated to the 3x triple Q, it's going to lose that appeal of being an alternative asset. So that's another reason why sucking it into the system, you're just turning it into the 3x triple Q.

We already have that. And, you know, and that is something that people are more comfortable with than with Bitcoin. I'd like to think that that's not going to be the case. And I'd like to think that what we're going to see with Bitcoin is that it will maintain its kind of independent correlation to the current financial system, and that if we have that inflation spike, that it will wind up being a good alternative. When you say that we'll have the higher inflation, which means we'll also have higher interest rates, is there a world where we actually get interest rate hikes still to go, even though everyone thinks that there's going to be interest rate cuts here in 2024? Well, two things. First of all, the cuts are rapidly disappearing before our eyes. January 12th, the market was pricing in seven interest rate cuts, seven, for all of 2024. By the way, there's only eight Fed meetings a year. And so what they were basically saying was the Fed wasn't going to move in January 31st, which they didn't. And then they were going to cut rates at every other meeting for the rest of the year. Well, that was January 12th. Now it's down to three. So we've already removed four rate cuts for the year. And the first rate cut is now not priced in until June. And the probabilities,

there are Fed fund futures and swaps markets, you could actually calculate the probabilities on it. The June probabilities are still at around 75%. But 10 days ago, they were at 100%. So they're starting to disappear as well. So at a minimum, what we're seeing in the US is we're seeing that the rate cuts are disappearing. Now let's go to New Zealand. New Zealand is a developed world and its central bank, the Reserve Bank of New Zealand, has actually been one of the forward looking reserve banks in the world. They developed inflation targeting in 1989. It took the Fed 23 years to adopt it. Maybe it wasn't a good idea, but they've been ahead of it. The New Zealand Central Bank was the first one to raise rates in early 22, January of 22. They were the first one

to pause in early 23. They have been the leader. What are they talking about in New Zealand? And by the way, their funds rate or their official cash rate is five and a half percent, which is exactly the same rate as the funds rate in the United States. What are they talking about in New Zealand. Inflation is not solved. We have to raise rates again. And so they're now debating when and how they're going to raise rates and how high they're going to go. And it looks like they're going to hike rates maybe two more times to 6% somewhere by summer. So the leading central bank, it's New Zealand, it's not the US. And yeah, you could argue it's the GDP of Cleveland. Sure. But those small, independent-minded central banks can be the leaders from these big monoliths.

And that's what New Zealand has been. They're talking about raising rates again. And they're talking about raising rates because the inflation rate hasn't been, the inflation problem hasn't been resolved yet. Larry Summers, you could say what you want about Larry Summers and about his past, but pay attention to the guy when he talks about economics. He still is one of the foremost economists in the world today. He's talking about a probability less than 50%, but now above zero.

The Fed is not done raising rates and might be hiking rates. So are we talking about the Fed could hike rates again? No, but we've gone from seven rate cuts to three rate cuts. And New Zealand, Larry Summers, and some others are broaching the subject that they might not be done hiking. So we're moving in that direction. What happens in that world? Let's say that they do continue to hike rates because it's one thing when they they tell people, hey, we're going to hike rates off zero and the market kind of, you know, grumbles, but gets ready for it.

They begin to hike the rates and we go up the fastest rate hikes in history. Now, it seems like they've told the market and also the market is expecting interest rate cuts. And so if we get the hikes, it's almost like a pump fake a little bit like people have now said, we're turning the corner, right? I'm getting long. I'm getting ready to go do this. is it almost more painful now if they were to hike because of the expectation setting that actually we're going to go into rate cuts? Oh, yeah. I think it definitely could be that by some metrics that we've had, the Wall Street term is pivot. We've had several attempts at arguing that the Fed was going to pivot towards rate cuts. This has largely been the strongest

of all of them that we've seen over the last two years. If the pivot dissipates and goes away, it's a tremendous blow because talking about what economists and what deep and trad fight world is talking about, they're trying to convince everybody that the inflation problem's over. Thank you very much. Drive home safely. This game is completed at this point. And if I'm right, and it's not yet completed, that will really come as a real shock to everybody.

And then they'll have to really sit down and think about hard, we really understand inflation. And I might throw in as an aside, Dan Tarillo was a Fed governor from 2009 to 2017. And I like to argue that the best Fed officials to listen to are the ones that recently leave because then they're not reading talking points handed to them by the Fed staff. They tell you what they think. So go listen to Jim Bullard. He recently left as the St. Louis Fed president,

and he's now the chairman of the economics department at Purdue. And when he starts talking, pay close attention to him. He was always a maverick anyway, but now he's an unencumbered. But in 2017, when Dan Tarullo left, he went to the Brookings Institute

and he gave a speech and he presented a paper. And basically the paper said, the Fed has no working theory on inflation. And if I was to summarize the paper, the single hardest thing in economics to understand is what drives inflation. We all think it's easy. It's too much money chasing too few goods or whatever, or some version of MMT or some other version of rational expectations or inflation expectations or something like that. If you correlate all of these, they correlate to zero. Inflation is its own animal that's hard to understand. And I think he's absolutely right. So if we were to see all

these rate cuts disappear, maybe start talking about rate kites, we're going to have to go back and say, you know what, we really don't understand what's going on here with inflation. The Fed wants us to believe that it understands with inflation. What does that mean for markets in the economy? Well, there's two arguments here. Argument one is more of the description of MMTs versus the prescription, or what the description of MMT would be is higher interest rates means higher interest income for the wealthy. And so the wealthy, let's define the wealthy as the top 50% of income. The top 50% of income, half the country, owns 94% of the assets in the United States, stocks, bonds, real estate, retirement funds, and the like, probably crypto too,

at least among American investors. The top 10% own about half the assets in the United States. They don't have very much debt. So when interest rates go up, they get interest income. They get more money. And when interest rates go up, who owns all the debt in the country? Unfortunately, the answer is the bottom 50% own over half the debt of the country. So the rich have assets and not much debt. And the top 1% has virtually no debt. That's why they're in the top 1%. The bottom 50% has credit card debt, student loans, mortgages, personal loans, and the like. So when interest rates go up, they get squeezed. So we might be in an interesting scenario that the MMTers would argue. The higher interest rates go, the faster the economy gets because of the

interest income going to the top end. And the more inflation we get, the top end, the top 50% is 85% of the spending in the country. The bottom 50%, they suffer because of more inflation, because virtually all of the bottom 50% live paycheck to paycheck. And if their paycheck is not rising with inflation, they fall behind. And then they also see the interest costs of their debt, whether it's student debt or credit card debt or mortgages, go up as well, too. That's why you can have this paradoxical situation where if you look at the economic data, it looks really good. Booming jobs, inflation is beating, retail sales, except for January. But if you look at the last several months, it has been very, very strong. And people are optimistic about the economy.

The top 10%, the top 50% are getting interest income and they're feeling really good and they're spending. The bottom 50% are hurting because they're just getting higher interest costs, and they're also seeing higher inflation. So the top 1% person in this country spends 11 times more money a year in retail sales than a bottom 50 percenter. So their vote for the economy counts 11x more than a bottom 50 percenter. But in presidential approval ratings, it's one person, one vote. The bottom 50% show up in the president's low approval rating, why Trump is leading Biden in the polls because he's the opposition party from the incumbent, and they're very unhappy. So two things could be true at the same time. The economy is doing well because the top end

is spending and getting income, and the bottom end is hurting more than they have before because of higher interest rates and higher inflation, and that's showing up in the president's low approval rating. When we see President Biden, I don't know, maybe two years ago, he called Fed Chairman Powell to his office. And I wrote a piece and I was like, it's like the principal calling in a teacher, like they're like reprimand them essentially. And the Fed made it very clear we are independent. In the latest 60 Minutes interview, Powell was asked, you know, there's people who would critique you and say you're not cutting interest rates now because you're waiting to get closer to the election and you're going to cut interest rates and it's going to help support

the incumbent. We've also seen both sides of the aisle, Elizabeth Warren and President Trump attack the Fed. And so how independent do you really think they are? And is it a good thing that they're independent? Or should they consider political landscape and various other kind of inputs outside of just the economic data in their decision making? So a couple of things. On your first part, May 31st, 2022, President Biden, because I focused on this a lot too, that's why I know the date off the top of my head, that President Biden called Jay Powell into the White He sat on the couch. Janet Yellen was there too. And President Biden literally pointed at Jay Powell and said something to the effect of America. We have an eight and a half percent inflation rate. That's what we had in May 31st, 2022. This guy, he pointed him, this guy is going to make it go away, is what he said. And he put all the onus on the Fed. And from that day forward, Powell has been very clear, we are not stopping till we get back to 2% inflation. And I actually have argued, and I got a tweet thread out about a week ago, why I think that's

going to be very, very difficult to see 2% inflation come back. So in terms of independence, it was actually a bold move that he actually boxed the Fed in that he made the 2% target their goal. They've got to get 2% down. And Paul's even gone one step further. when I talked about the bottom 50%. Paul has even said, we understand the hardships that inflation is putting on the American public. And there was a narrative, I used to promote this narrative too, in 2022, you know, do your patriotic duty and lose money in stocks and bonds, because that will

soften demand, that will bring down inflation, that will help the bottom half. You have to lose money to help them. That was actually a narrative in 2022. Then people got tired of losing money, in 2023 and into 24. They're back to, you know, all time highs. And it's and Lamborghini is sold out of cars for two years. If you want to go buy a new Lambo, you got to wait two years to get one right now. So we're back to that all over again. So in terms of independence, the Fed has got that independence, but he boxed them in in terms of being on inflation, in terms of having an independent central bank. That is a good thing to have is an independent central bank. But to get into a nuance, the Fed has kind of lost the narrative with the tremendous amount of group

think that goes on at the Fed. The Fed demands, there's 12 Federal Reserve voters, and the Fed believes that if they don't have a 12-0, 11-1 vote for monetary policy, that it reduces the credibility of the Fed to conduct monetary policy. So everything is focused on this idea that they cannot have dissents, that everybody has to agree and that the Fed will even tell you, oh, yeah, Fed officials can meet with Jay Powell anytime they want before the meeting, make whatever case they want. He'll put on his I'm very seriously paying attention to your face, but they've already made their decision on where they want to go. So what I'm trying to argue is I'd be all for an independent Fed if it acted more like the Supreme Court, nine independent people on the Supreme

Court voting. And since they are independent, we as the public understand a 5-4 vote, a 9-0 vote, you know, that's still the law of the land. We're not ready to accept a 7-5 vote or 12-0 vote at the Fed. It's still monetary policy. And it is that groupthink that is really, I think, more problematic than the independents. The groupthink is what gave us transitory inflation back in 21 and 22, where the Fed really missed the boat and was way too slow to respond to the uptick of inflation because the staff told all the voters and told everybody else that this is nothing to see. There was no dissenting voice allowed, although subsequently a number of Fed officials came out and said they tried to dissent, but no one would listen to them. I mean, I'm talking about staffers,

economist staffers at the Fed trying to tell senior staffers, maybe we got this transitory thing wrong, go back to your office and shut up. We've already made the decision that it's transitory. That's really the bigger problem with the Fed is this groupthink before we even get to politics. You, on top of having amazing research and have thought through a lot of this stuff, you also have an ETF. It's a fixed income ETF. Talk a little bit about how that fund works and then what happens if interest rates stay high or they go higher? I'm assuming that fixed income type ETF probably does pretty well in that scenario? Well, yeah. So this is one of the reasons why I got myself so jazzed about this whole ETF thing. I run an ETF. And just as an

aside, my wife is a partner in an ETF company too that has got $3 billion and 14 ETFs as well. So we're kind of an ETF family. So I'm very familiar with the ETF business. And so my ETF came out in december uh it is uh the wisdom tree bianco fund wtbn uh wisdom tree bianco nancy is its symbol it is a long only fixed income uh fund so it's always long the bond market i manage an index called the bianco research total return index it's discretionally managed by my investment team and we wait it serve various ways and wtbn tracks it kind of like the s&p investment committee It manages the S&P 500, and SPY and VOO track the S&P 500. So it's set up very similar to that.

In a rising rate environment, long-only, always-invested fixed income funds don't do very well. And our fund is down on the year. But the biggest pile of money in the world is long-only fixed income. It's larger than equities. Worldwide, there's more money. So there are trillions and trillions and trillions of dollars that has to be always long the bond market. What I'm presenting with my index is to say, if you're managing that money versus a benchmark

index, I could do better than that. Now, what's my hubris that makes me say I could do better than that? 30 years in the bond market. But one other quick, important point. In S&P, in equities, it's understood that the S&P beats the vast, vast majority of managers. You can't beat the index. It's really very difficult. Why?

Because your biggest weightings in equities are your All-Stars, your NVIDIAs, your Googles, your Microsofts, your Amazons, your Apples. If you're not pressing the bet with a full or extra or above weighting in those stocks, you fall behind the index. and all of those stocks are almost always by understood metrics overvalued and stretched on momentum and it's very hard for a human manager to say i have to own more nvidia after the amazing run that it's had over the last couple of years most can't and that's why most underperform and that's why it's so hard to beat it and index inequities but in fixed income the index falls

around the 50th percentile it's about half the world first of all it can beat it why because your biggest weightings in fixed income are your problem children, your over-levered country, over-levered companies, your countries that have borrowed too much debt, that are running into trouble. And you could see that they're running into trouble. Sidestep them. They blow up. They've got a big weighting. You wind up outperforming the index. And so that's what we're trying to bring to the table is, yes, you have to always be in the bond market. Wealth managers have a 60-40 portfolio. 40 means that they've always got 40% of their money in the bond market. We can do better than just buying the index. We can outperform. So while our index is down on the year, and while

our ETF is down on the year, it is way outperforming the index. And hopefully, when this upcycle in interest rates is done and there's another rally, we will catch it right and reposition for that as well too. But so far, we've had the positioning correct. So the whole idea really is if I didn't understand that about the fixed income index is actually only in the 50th percentile. It's pretty crazy that half of the people outperform the index. You know, what's interesting is if you talk to equity managers, the argument will say, oh, well, no one can beat the S&P. So why should I invest in you? Why don't I just go buy VOO SPY? But if you talk to fixed income managers or fixed income investors, they won't say, why can you beat the index?

They'll say, well, can you beat BlackRock? Can you beat PIMCO? Can you beat Jeff Gundlach? Can you beat any of the well-known, successful fixed income managers? They've already accepted the fact that the index is somewhere in the middle. It's whether or not you can beat your competitors, rather than whether or not you could beat this bogey. As I like to use a sports analogy, investing in equities against the index is like playing

golf. You're playing the course, is what you're doing in golf. but investing in fixed income is like playing tennis. You're playing your opponent is what you want, is what you do in fixed income. That's the difference between those. If you understand those two sports. That's a great analogy. I love that. Jim, where can we send people to find out more about Bianco Research or find out more about the ETF or even find you online? Yeah. So I'm active on Twitter at Bianco Research or X as it's called right now. I'm active on LinkedIn at Jim Bianco. I'm active on YouTube at Bianco Research as well.

My research business, which is my original business, which is about to celebrate its 26th year in operations. We're like, we're a small business and we're like, you know, restaurants, you know, are you successful? We're still open. So the answer is yes, we are successful. It's biancoresearch.com. And if you want to find out more about my ETF, it has its own website called biancoadvisors.com.

Or you could just reach out to me on social media and I can answer any questions that you have about it. Amazing. Still being in business, surviving throughout all the chaos is definitely a win. So congratulations on so many years of success and we'll definitely do this again in the future. Thank you.