From Neue Zürcher Zeitung's TheMarket.ch, February 19:
Jim Bianco worries that inflation in the US will remain persistently high given the robust economy. Therefore, the President and Macro Strategist at Bianco Research does not expect the Fed to cut interest rates quickly. In an in-depth interview, he explains where opportunities arise in a more challenging market environment.
Financial markets have taken a hit. New data on the US economy is fueling concerns that the greatest progress in the fight against inflation has been made and that the most difficult part is only just beginning. As a result, the Federal Reserve may be forced to keep interest rates higher for longer.
«The Fed can do whatever they want, as long as inflation goes back to 2%,» says Jim Bianco, founder and president of the Chicago based research boutique Bianco Research. «They can cut rates to zero, they can do QE,» he adds. «But if inflation does not go back to 2%, it really narrows their options. So inflation is truly the linchpin.»
In an in-depth interview with The Market NZZ, which has been lightly edited, the investment strategist explains why the US economy continues to perform surprisingly well and which drivers are keeping inflation elevated. He also outlines opportunities and risks for investors and how he’s betting on sustained attractive yields with his new total return bond index.
In a world where investors are wondering if the Fed will cut interest rates four, five, or six times this year, sticky inflation is going to kill that. It will just take all of the talk about rate cuts off the table: Jim Bianco.The macroeconomic environment is keeping markets on their toes. What are you focusing on the most right now?
I’m most focused on the bond market. We’re looking at a market that’s having some doubts about a «soft landing» and worries the «last mile» of the inflation fight may be more challenging than people think. It’s a market that might be thinking it’s looking at a «no landing»: that the plane doesn’t descend and the economy just keeps going at 2.5% or more. I don’t want to say the bond market is coming around to that opinion, but it’s definitely starting to get worried.
What are the arguments for a «no landing»?
You just have to wonder: Where’s this weakness everybody’s talking about? In the past two quarters, the US economy expanded at 4.9% and 3.3%, we have blow-up payroll numbers and the stock market is at an all-time high. For the first quarter, the Atlanta Fed model indicates 2.9% GDP growth. So we’re not getting any of this bad stuff everybody’s talking about. Maybe next month or in sixty days things turn around and go south. But you could say that for a year and a half, and if you just keep repeating it into perpetuity, eventually you’ll be right. But right now, I don’t see any reason to think that the data is going to turn bad.
Why is the US economy performing so much better than feared?
The reason everybody’s always worried is the old saying that the Fed hikes until something breaks. I agree with the idea, but there’s no evidence that the current levels of interest rates have broken anything. At least for now, it looks like the economy can handle a 5% Treasury yield, it can handle a 6% or 7% mortgage rate. Obviously, a 4% or 5% mortgage rate would be better for the housing market, and 6% or 7% are a drag. But I don’t think it’s killing the housing market. Now, could it happen that eventually something breaks? I think it will, but today it hasn’t – and that’s why there’s this robust demand....
....MUCH MORE
