The Bond Vigilantes Are Back & Rejecting The Fed | Jim Bianco

**Jim Bianco** (0:00)
There's only been one other time in 60 years that we've seen interest rates go up this much as the Fed, or long-term yields, I should say, as the Fed has been cutting its funds rate. That was 1981 That was the period when the funds rate was 20%. Yeah, it was 20%. And the Fed, in May of 81, started to cut that rate. And the bond market didn't like it. And it took 10-year yields to 16%. Yes, they went to 16%.
And Eddie Ardenny coined the term bond market vigilantes. Why did he coin that term? Because what he was saying was, the bond market was saying to the Fed, we want you to be worried about inflation. And if you're going to cut interest rates, it says you're not serious about inflation. I don't want anything to do with your bonds. I sell bonds, the price goes down, yields go up. That is the bond market vigilante walking away from the bond market. I think there's a version of that going on right now.

**Adam Taggart** (1:04)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. Despite the confidence Federal Reserve Chair Jerome Powell is doing his best to project, inflation has not yet been slain. And today's guest expert, Jim Bianco, founder of market research firm Bianco Research, thinks it's gonna continue to prove problematic. We'll talk about his reasons why, as well as his concerns about the current extreme valuations in stocks, and why, if they experience a material correction, bonds may not provide the protection to portfolios that they did in the past. Jim, thanks so much for joining us today.

**Jim Bianco** (1:40)
Thanks for having me, Adam.

**Adam Taggart** (1:42)
Hey, Jim, it's been far too long since we've been able to chat live like this. Thanks so much for coming on the program. Happy early new year. A lot's already happened in the first two weeks of this year. It's a little bit crazy. So I've got so much to ask you about here that we're gonna just plow through as much as we can in the time we have. If we can, let me start just by asking you the general question I like to kick these discussions off with. What's your current assessment of the global economy and financial markets?

**Jim Bianco** (2:12)
Bifurcated on the global economy. The US economy seems to be doing very well. I think it might be poised to do even better. But that brings an issues onto itself. In other words, we've been seeing the US at the top line growing at its potential of about 2% to 2.5%, if not more. We've got the Trump administration coming in before the end of the month. And they're going to probably bring with them an extension of tax cuts, deregulation, tariffs, which would all be stimulative, which will push the economy even faster. Well, that sounds great. What's the downside on that? Inflation. Inflation is the downside on that. And what's being really augmenting that inflation story is the Federal Reserve is cutting interest rates at the same time, which is why I think you've seen the rejection of that policy with rising bond yields. Now, about the rest of the world, it's not so good. The Chinese economy, let's start with that, which is arguably the second largest economy, is in a world of hurt. There are GDP growth rates. If you believe what the government is putting out, it's about under 5%.
There's only been two other times in the last 50 years, it's been growing at that level or worse. Remember, there are a high growth economy, and there are a bunch of commies giving you data, so they probably put their thumb on the scale too. But yet, they're telling you it's the second lowest number in the last 50 years. Only COVID and Tiananmen Square were lower. So take and measure it against itself, they're not in a very good spot. In September, it seemed like they hit the panic button and was announcing like a stimulus program a day to try and stimulate their economy to move forward. It produced a bunch of hedge fund managers to get all excited to rush in the Chinese stocks, but then that peaked about a week after the stimulus programs ended and their stock market's falling back down the earth and their bond yields are plunging to all time lows as an indication or a market signal, their economy is not in very good shape. If you look at Europe, Europe is upside down. The sick man of Europe right now is Germany. Germany is in a terrible position. Their economy is awful. The reason that their economy is terrible is what has been the big German economic engine of the last generation? Manufacturing. What has been the advantage that Germany has had in manufacturing? Cheap energy from Russia, the gas lines, the gas prompts that are putting it on the Nord Stream, that are sending them ever amounts of cheap energy. If you're a manufacturer, what makes you competitive to everybody else? One of two things, you've got cheap energy, because all manufacturing is about energy inputs to make something, and or you have cheap labor. Well, Germany had very cheap energy from Russia. That ended with the Ukraine War. And now their energy prices or their energy expenses is going up and up, and they're not having a good place to compete. And their economy is in a world of hurt. They're probably the weakest growing economy right now. What they could use is very low interest rates. But because they've shackled themselves to one central bank, the ECB, with 17 other European economies, they're not getting low interest rates. They're getting interest rates that are actually staying elevated. So it's really hurting them. Now, if Germany is the sick man of Europe, who's the strong man of Europe? Right now, the leader of Europe might be Georgia Maloney in Italy. And I think I should just stop there and say, if I'm telling you that Italy is the leader of Europe, you can tell that they're in a world of trouble. And we're not talking about food.