Fed That Won’t Help? (Uncut) 04-16-2025

50/50 Recession Odds & a Fed That Won’t Help? | Jim Bianco

The market is putting a 20% chance that the Fed is gonna cut rates at its meeting on May 7th. 20%, meaning 80% chance they won’t cut rates. What more does the Fed need to see? Everybody’s calling for a recession.

We had a 20% correction in stocks. We’ve got markets that are dysfunctional and yet they’re not gonna cut rates at their next meeting. Oh, but they’re gonna wait till the June meeting.

I didn’t know that’s the way that the Fed worked, right? The shit hit the fan, but don’t worry, you’ll get a rate cut in 90 days. It’s usually the shit hits the fan, you’ll get a rate cut in 90 minutes is the way the Fed is supposed to work. So that doesn’t seem to sit well with me is that no, they’re not gonna cut rates in 90 days if everything’s going bad.

They’re not gonna cut rates, period. Hi, everyone. Welcome to Wealthion, I’m Maggie Lake.

And today I am joined by Jim Bianco, President and Macro Strategist at Bianco Research. Hi, Jim, it’s great to have you on. Great to be with you, Maggie.

Have some interesting things to talk about. Yeah, we have a lot to talk about. And I think investors are really just trying to digest what happened.

We’ve had so many dramatic moves in so many different markets at the same time. Huge selloff in U.S. stocks, U.S. dollar, oil, big spike higher in bond yields and gold. It just seems like everything’s moving.

So as you think about this, first of all, what are you most focused on? What’s happening that we should really kind of keep our laser focus on? The bond market. I think the bond market is the center of the universe right now. Not always, but now.

I think that what you’re seeing in markets is the bond market moves and everything is reacting to it. Yields, the day we’re recording yields are down. So the stock market is up and vice versa.

Why is this happening or what is happening in the bond market? And you’ll hear a lot of people talk about positioning, basis trades, lever traders, China selling, Japanese banks in trouble. And some or all of that might be true. And I think some of all of that is true.

But I always like to say that positioning never ever creates a trend in markets. Something else creates a trend in markets, but positioning can exaggerate the move. And I think that that’s what it’s done.

Last week, the bond market had, let’s take the 30 year bond. It was up 46 basis points. That’s its biggest one week rise since 1987.

So you have to go back 38 years to see a move like that. So what happened last week? I think that over the last two weeks, the Federal Reserve has made it very clear. They’re worried about tariff driven inflation.

We’re gonna get tariffs of some degree. Even though Trump has backed off of some of them, he hasn’t backed off all of them. We’re gonna get tariffs.

That means that we’re gonna get higher prices. That means that the measure of CPI is gonna go up. And the Fed has said, look, we’re gonna see higher inflation prices.

And everybody’s talking about that we’re gonna have a recession. We’re not gonna cut rates. We’re gonna have to hold the line because inflation, tariff driven inflation looks problematic.

That upset everything because their perception is the minute the economy wobbles or has any kind of problems, don’t worry, the Fed will cut. If they have to, they’ll cut to zero. If they have to, they’ll print money.

They’ll do whatever it takes to try and stimulate a weakening economy. Now what they’re saying is, good luck. We’re not gonna move.

And I think that’s what started the move higher in rates. And that shock that the worldview has been changed, created a scramble to get out. And then with all these leverage traders and basis traders and Chinese selling and Japanese banks having issues, overdid the move.

Now, the last thing I’ll say is, does that mean that Friday, April 11th at 4.58 on the 10-year yield was the high of the move? I don’t know if that was the high of the move. You can’t predict it within one or two days. We’ll only find out in the due course of time.

But I wouldn’t be surprised if it wasn’t and that we’re gonna continue to see yields moving higher. So I would start with something that’s more traditional as to what’s going on here and a shock, right? Everybody understands that if we all started saying the R word, the Fed would step in and start cutting rates left and right, forward and center and talk about printing money. And they’re not doing anything of the sort right now.

And I think that that’s really the thing that’s really slipped up everybody. So there’s a lot to ask as a follow-up to that. So if we are in a situation, it sounds like you’re saying that Fed put, that sort of come to the rescue that everyone had really gotten used to and has been in place for more than a decade now is gone.

If that’s the case, are we heading into a recession? Is that happening into a recession? Yes, it’s possible. I’m at 50-50 on a recession right now. Let’s talk about what a recession is.

We’re a capitalist economy. I know, insert joke here about when I say we’re a capitalist economy, but we are. And that means that a capitalist economy always kind of remakes itself.

So the natural state for our economy is to grow. 90% of the years since World War II, we grow. Sometimes we grow slow, sometimes we grow fast.

What’s a recession? A recession is what the economists from the 1970s, Rudy Dornbusch quoted a famous line, right? Economic expansions do not die of old age, they’re murdered. Some event happens, scares the hell out of everybody. We stop doing economic activity and the economy contracts.

The last one was COVID, the world shut down. That’s what caused the contraction in the economy. So the big question is, is all this tariff hysteria going to get people to say, do what they say? I don’t know what to do.

I don’t know if I should hire. I don’t know if I should be importing or exporting. So I’m going to do nothing.

I’m gonna stop economic activity. If the answer to that question is yes, then we’re gonna have a recession and I’ll put it at 50-50. Why isn’t it much higher than that? I’ll just remind everybody two years ago, we had Silicon Valley Bank fail.

We had Signature Bank fail. We had Republic Bank fail and we had Credit Suisse fail, all within days of each other. Collectively, it was one of the biggest run of failures of banks that we’ve ever seen, 2008.

And then you gotta go back to the Great Depression. Two years ago, we were seeing exactly the same thing. We’re gonna have a financial crisis because all these bank failures.

And banks aren’t gonna loan and people are gonna change their habits. They’re gonna be scared about the stock market. It had corrected more than 10% and we never had a recession.

So just because everybody’s saying that they’re gonna do this and that, doesn’t mean they will stop doing economic activity. But there’s a real high probability that they can. That’s why I put the odds at 50-50.

And how long will a recession last? Until they can kind of get some semblance of an all clear and they can go back to their economic activity. Just like the last one was, once we reopened, the recession then ended. But that’s what we have to understand what a recession is.

It’s an unusual event. Economies don’t die of old age. They just don’t roll over because there’s a certain number of years and that’s it.

We have to start contracting. It’s a war, it’s an oil embargo, it’s a pandemic. It might now be unsettlement about tariffs and the like.

Those are the types of things that cause recessions. Yeah, the Silicon Valley Bank is an interesting example because as much as we all felt it, I wonder how much the consumers, it didn’t seem to hit them in the same way. They didn’t, if they weren’t exposed or didn’t have their money there, it seemed like a financial event.

Whereas tariffs, you can’t go get a car, if you can’t go get a TV, although they’re electronics for the moment. You know, if you are seeing prices rise, that feels like a little bit more of a stomach punch to consumers. That’s right.

And that’s really what we’re gonna be waiting on, right? Is that in the next couple of months, the question really becomes, are we gonna see dramatically higher prices because of tariffs? If the answer is yes, we could very well have a recession. And then the Fed will say, because of higher prices, we’re not gonna cut rates. Give you one interesting statistic, 71% of the sellers on Amazon source their products from China.

And so you should expect all things being equal, even though we’re not at 145% tariffs, which was the peak that we threatened. We’re still up, you know, like, I think like in the 80 or 70% point of all in tariffs, when you add all of the different variations in, we should see dramatically higher prices on Amazon within weeks. You know, they’ve still got inventory that they could work off that they’ve got with the lower prices.

But unless there is a quick resolution to this, there should be much higher prices there. Anything at, you know, 10% of what’s on the shelves at Walmart comes from China as well too. We should be seeing dramatically higher prices at Walmart within weeks.

And if that does happen, you’re gonna get two things. You’re gonna get a dramatically higher CPI number and you’re going to get people to behave, change their behavior, stop economic activity and possibly have a recession. Now, if on the other side of the equation, we don’t see higher prices, and that’s always possible that somebody eats it, either the supplier or the importer, either Walmart eats the price or China somewhat eats the price.

Or I’ve even read a story now that we’re actually collecting no tariffs because the customs agency doesn’t know what to do because we change it every five minutes. They don’t know what they’re supposed to be collecting. So they’re not collecting any, but I suspect that won’t last more than a few more days.

But if we, for some reason, don’t see higher prices in weeks, then we might not have a recession at that point. So that’s the great unknown when it comes to what the economy is gonna do. Yeah, and this is where it’s gonna get interesting hearing from executives and looking at corporate balance sheets.

If you’re big, maybe becomes a market share issue, not a price issue, which is gonna be really, really interesting, but we won’t know that yet. So let me ask you about these inflation expectations. We’ve seen a dramatic fall in the price of energy, as I mentioned, right? Oil is down sharply.

Does that not at some point help offset in terms of inflation? Okay, I’m paying more here, but wow, the gas just got a lot cheaper, which we know as Americans really respond to that quickly. Why is that having as much of an impact or is that just a lag, a timing issue? Yeah, I think it’s a lag and it’s a timing issue. Actually, what you’re referring to is the price of crude oil is down a lot, but the national average, AAA, the Auto Association, puts out a national average for the price of gasoline and it hasn’t fallen but two cents in the last couple of weeks.

Now, that might be coming in the next 10 days to two to three weeks. We might be seeing gasoline prices coming down quite a bit, but to this moment, they really haven’t. Now, gasoline, CPI, one of the things that people have to also remember about CPI, which is kind of useful, is they do do extensive work in trying to figure out what our basket is, what we, as a country, spend our money on.

And they’ve got CPI gasolines waiting at 3%. So 3% of the average budget. Now, some people pay more, some people pay less, but the average budget is three, is what we pay on gasoline.

So yes, falling gasoline prices will help, but it’s only 3% of the budget. Now, when it comes to things like clothing and food and other things, hardware we need and everything else, the stuff we buy on Amazon, that’s actually a bigger part of our budget than gasoline. And we’re talking not about those prices going up one or two or 3%, right? We’re talking about an 80% tariff on Chinese.

I mean, these are hard to fathom numbers that we’re talking about, a near doubling of prices. When we’re talking about 3% of our budget is on gasoline, and maybe if all things are equal, we’ll have about an 8% drop in gasoline prices. So does it offset? Yes.

Will it completely offset? Well, if we are gonna get the type of price increases that we are expecting, the answer is no, it won’t completely offset it. And we’ll see much higher prices as we go forward. And I will emphasize CPI prices is what we’re going to see.

I’m involved in a little spat with Jared Dillian on Twitter about what is the definition of deflation. And his definition of deflation, it might be correct, but I’m talking about that inflation means higher CPI prices. Yeah, I just talked to Jared.

It’s always good to have some robust macro conversations about inflation. Everybody fights about it, including the Fed. So what about people? I’ve heard people say, listen, this tariff policy, it’s chaotic, it’s confusing, but I think overall it’s deflationary.

What are they seeing that makes them think it’s deflationary? Where do you disagree with them? They think that what will happen when you see the price rise is that no one will pay, no one will buy that stuff, right? When the prices of that 71% of stuff, let’s just go with the extreme. 71% of the stuff on Amazon is gonna be 80% more expensive in three or four weeks. None of that stuff will get sold, right? They’ll have sales of zero at that point.

And that that will collapse economic activity so much that there will be no demand for any of that stuff and the prices will have to come down. That’s kind of like an Old Testament kind of disaster is what we’re talking about at that point. I think that’s what they mean.

And so I agree with that concept, right? That as those prices go up, you’re not gonna buy as many things or you’re gonna defer stuff, especially if it’s a discretionary item to make one up. If you were in the market for a tennis racket and they go up 80% in the next month, I ain’t gonna buy a tennis racket because my life doesn’t depend on me having a new tennis racket right now. I’ll wait until this thing blows over.

That is true. But the question is how much of that is going to happen? First of all, we have to see how much prices actually go up and then we have to see how much people react to those prices as well. If cars go up in price, what’s going to happen with us when cars go up in price a lot? Remember that during the pandemic lockdown, when we were coming out of recession and everybody thought we were still in recession, cars were trading, new cars were being sold for enormous premiums over sticker prices.

The prices of these cars went up and instead of people saying, well, I ain’t gonna buy this car if I have to pay 20% over sticker, they ran to the store before it was 25% over sticker. So we don’t know what the reaction is gonna be in the public when they see these higher prices. Are they gonna say, man, I better buy that tennis racket now because it’s gonna be even more expensive next month or are they gonna say, I’m just not gonna play tennis anymore? That’s what we’re gonna have to figure out.

Harder when you need a car, which most people do, although I will be opting for a bicycle this summer as my driver. They’re going up in price too. They’re all made in China.

That’s what happened during COVID. How could we know that I better buy one now? This is the scary thing about, this is why we’re spending some time talking about inflation because this is what the bond market, so to get back to the bond market, which is the center of the universe. So you don’t think four, five, eight, the 10 year, which is what things are benchmarked off of, you don’t necessarily think we’ve seen the high for that.

Where do you think it could go? Like, what are the scenarios that you’re looking at here? Right, exactly. So yeah, we hit four and five eighths or so thereabouts on the 10 year yield. Now I just emphasize once again, it’s this unusual situation with all this talk about inflation that has got the Fed saying, we’re not gonna cut if we have a recession unless we see signs that the recession is going to negate all of that tariff-driven inflation.

And that’s like, whoa, that’s not how it works. So where do rates go from here? I think the Fed’s done cutting rates at this point. No cutting today.

The market’s made a bunch of rate cuts. Right, the market is, that’s another good point too. Had been.

Right, right before we came out, I looked. The market is putting a 20% chance that the Fed is gonna cut rates at its meeting on May 7th. 20%, meaning 80% chance they won’t cut rates.

What more does the Fed need to see? Everybody’s calling for a recession. We had a 20% correction in stocks. We’ve got markets that are dysfunctional and yet they’re not gonna cut rates at their next meeting.

Oh, but they’re gonna wait till the June meeting. I didn’t know that’s the way that the Fed worked, right? The shit hit the fan, but don’t worry, you’ll get a rate cut in 90 days. It’s usually the shit hits the fan, you’ll get a rate cut in 90 minutes is the way the Fed is supposed to work.

So that doesn’t seem to sit well with me is that no, they’re not gonna cut rates in 90 days if everything’s going bad. They’re not gonna cut rates, period. And that’s because of this inflation thing.

So if the funds rate holds at four, I think that the two-year note, just to get back into where I’m gonna go with this, the two-year note historically, you know, if you look at the two-year note yield to the funds rate, it’s about 40 to 50 basis points. So if that means half a percent, so that means if the funds rate’s at four, then that means that the two-year note should be around 440 to four and a half. It’s a little bit below that right now.

And historically, the 10-year note trades about one full percentage point above the two-year note. That’s 540. Well, we’re at 450, 440 right now on the 10-year note.

So we’ve got a little ways to go. I think that fair value is gonna be somewhere above 5% on it. And I would emphasize that word fair value.

When I say, oh, we’re gonna go above 5%, everybody gulps. Oh, what’s it gonna do to mortgages? What’s it gonna do to the economy? What’s it gonna do to borrowing rates? And the answer is, if it’s fair value, it’s gonna be fine. Yeah, I’m old enough to remember the 80s and 90s.

Those were the rates that we had. My parents had a 15% mortgage at one point and homes traded and the economy continued to move forward because that was the appropriate interest rate for that environment. And that’s why I say fair value.

The appropriate interest rate for this environment, I think is gonna be a 5% yield. And we’re just not ready to accept that because we’re still anchored to that zero interest rate we had throughout the 2010s. And we have to kind of realize that that era ended and now we’re in a different era.

So even if we get a 5% rate, that doesn’t mean that it’s gonna be bad. It’s just that this is the world we live in. So one would think at least mentally there’s an adjustment period, right? People feel trapped in their homes if they have a low mortgage because it seems a mortgage above 7% seems outrageous if you had a mortgage at three.

I mean, you’re very reluctant to move. So if there’s a transition period that seems like it’s gonna be a little rocky. If we step away from that, what kind of position are corporate balance sheets and consumer balance sheets? Can they withstand an environment where we are more often at 5% and it’s unusual to go below that now that that’s where fair value is? Can we withstand that kind of interest rate? Are we prepared for that? Yeah, I think we are.

And the reason is, and there’ll be a little bit of a mix because if you look at the consumer balance sheet, the consumer is largely a net beneficiary of higher interest rates. What do I mean by that? We own more, so we have $7 trillion in money market funds. We’ve got trillions of dollars we own in bond funds and annuities and everything else.

So when interest rates go up, our interest income is going to go up. Now, for those that are borrowing, when we talk about 7% mortgage becoming an 8% mortgage, for those that are taking out car loans and stuff like that, that’s going to be a net negative. But as an economy as a whole, I think it’s a net benefit.

Now, the problem is the people that are getting the interest income tend to be the wealthier. They have investments and they own annuities and bonds and have money and money market funds and those yields will stay up and throw off them interest income. Those that tend to borrow tend to be less wealthy.

If they were wealthy, they wouldn’t need to borrow. And so they’re going to be hurt. So it will have a disproportionate impact on the economy, that so-called K-shaped economy.

You know, the lower half of income will be hurt a little bit worse than the upper half of income. And it’s the same thing with corporations too. If you look at corporate balance sheets, they also, I think, are kind of a wash to a positive benefit for all of the levered companies that need to borrow to keep going that are going to be troubled by higher interest rates.

You’ve got a Microsoft or you’ve got, you know, actually the better example is Berkshire Hathaway. Warren Buffett is like the sixth largest owner of treasury bills in the world. He owns more than some foreign central banks do.

He has like $300 billion worth of them. So if you tell Warren Buffett that he’s going to continue to get a 4% interest rate, he’s going to get like 12 to $14 billion a year just sitting on a pile of treasury bills. So that’s also got to be factored into the equation too.

But again, Berkshire’s not going out of business. Microsoft, which is in somewhat of a similar, is not going out of business. But some of these levered companies that need lower interest rates might very well go out of business with higher interest rates.

So it’s not uniformly, but at the top line for the economy, higher interest rates should not be a negative for it. That’s so interesting because it’s sort of not how we’ve been thinking about it lately, but it benefits the big, benefits the wealthy. And some of these levered companies, by the way, are startups too, right? Small, medium-sized companies tend to borrow.

Sounds like that’s not great for the Russell, but is this bad for stocks? Because now if you have an option and cash is attractive, it competes for the stock market, right? So why would people put their money necessarily in stocks if you are able to park your money in a bond in a way that you haven’t as a saver? So this gets to something I’ve been arguing now for several months, that I think that over the next decade, we’re gonna be in what I call the four, five, six markets. 4% would be what cash returns, like I said, the Fed’s not gonna cut rates, they’re gonna hold them in around four, and that’s what money markets will churn out for the next several years. You’ll have better years and worse years.

5% is what the average coupon is on the bond market, not just treasuries, but when you add in mortgages and you add in corporates, agency securities, the average investment grade yield is around 4.95, well, 5%. I think that over the next several years, bonds will return you five. You’ll have good years and you’ll have worse years, but they’ll average five, so four, five.

And six, where I come up with six is, if you look at some of the stuff that Bob Shiller’s done at Yale University with his CAPE ratio, cyclically adjusted PE, won the Nobel Prize in 2011 for this, actually, excuse me, 2013 for this work, and that the Shiller PE is at 37. That is a very high PE number. Remember, we had a 22% gain in 23, a 24%, or 25% gain, excuse me, in 24 that was powered by the MAG-7, and the market was really rich at the beginning of the year.

And his work says, at a 37 PE, you should see the stock market, just bottom line, it returned you about 1% more than what the bond market’s gonna return you. So that’s where the six comes in. Now, those numbers don’t sound very good, right? Because we, like I said, we had 25% last year in the stock market, 22% in 23.

Now we’re talking about six going forward. So at the top line, I think that these markets are gonna give you mid-single-digit returns. It’s not terrible, because it’s gonna be above the inflation rate.

I think the inflation rate’s gonna be, I’m, the cap is gonna be elevated, and it’s gonna be three. And money markets will return you four, bonds five, and stocks six. But, and here’s the big but, I think that we’re going to transition away from, by the index, the index goes up.

And we’re gonna start thinking about themes, stocks, sectors, whether or not I wanna be in growth or value, big cap, small cap, Europe versus US, emerging versus developed. How about financials versus energy versus healthcare versus consumer cyclicals? That’s where you could get a lot of your money. If there’s an environment that this might be closer to, somewhat, is the 70s.

During the 70s, the S&P, I think, returned 4%. That was it. And in the 70s, inflation was six.

So you actually lost to inflation. But, during the 70s, if you caught the energy trend right, if you caught the gold trend right, if you caught the consumer trend right, the banking trend right, there were two, 300% gains that could be made up and down. We’ve so gotten away from that, right? That everybody just buys SPY or sells SPY, SPY being the S&P index fund, S&P 500 index fund.

And now everybody wants to know when is the S&P going to go up? And the answer is, maybe it doesn’t. And maybe there’s going to be themes within that or outside of that, that you could be playing. And the big problem with that is, nobody’s had to do that for a long time.

It’s all been just buying broad indexes and watching the tide lift the boat. And now it’s going to be a little bit more selective. And that’s a different skillset altogether.

And it’s going to be difficult for people to start to transition to it. I think the easiest way to do it is, how do you do it is, there are professional managers that do that kind of stuff. And I think that a professional manager would probably be the best way to go if you were thinking that’s the way that you want to be making money.

Even in the way that 401 system is structured, you get the wheel, right? And it’s like, maybe you have a choice to pick some individual type funds, but a lot of times it’s just percentage wise, right? Do you want how much equity? Do you want balanced growth, aggressive growth or not? There’s not a lot of leeway in some of these. It just wasn’t set up that way. So this is a completely different way that people are going to have to approach this.

Yeah, that’s exactly right. And you’re already starting to see the beginnings of that on Wall Street. The ETF, one of the fastest, when you take the Bitcoin and the crypto ETFs out of the equation would suck up all the oxygen.

What’s the next biggest theme within ETFs and that’s active managed ETFs, both fixed income and equity. So that the wheel, if you will, will have as an active equity manager, an active fixed income manager as a choice in order to do that. And in full disclosure, I do have an actively managed fixed income ETF through WisdomTree, WTBN is its ticker symbol.

So that is, and when we rolled that out in 23, it was somewhat unique. And now even Vanguard is starting to, not only actively fixed, but active equities. And they haven’t made it yet to your 401k sheet of options, but they’re coming.

So whenever I have this conversation with Mike Green about we’re gonna go to active managers, he goes, well, the ETF is here to stay. The ETF is gonna be, and I was like, yeah, you’re right. And the active managers are gonna be another ETF symbol is what they’re gonna become.

That’s the way that we invest and that’s gonna be the fix with it as well. So let me ask you about this higher rate environment. And it’s good to have an option and a line of thought that this isn’t gonna kill the system because that’s what you were hearing, right? It’s gonna blow up, the treasury market’s blowing up.

But one of the things that concerns people about that, I think, is this idea that, okay, the US economy maybe can handle consumers and businesses, the big ones can handle and maybe even benefit from higher rates. The US government can’t. We can’t roll over our debt when we have higher rates like this.

So they’re unsustainable. They’re gonna have to go lower one way or the other. What are your thoughts about that? And I know it’s a big topic that you can spend a whole hour talking about that and people have different views on it, but is that something that might sort of throw a wrench in that idea that we can tolerate higher rates? Yeah, so that’s the fiscal dominance argument that you’re giving them, right? That the Fed can’t raise rates, we have to cut rates because we’ve got so much interest.

But the problem is it doesn’t work that way. You know, we can’t set the interest rate which is convenient to us. We get the interest rate which is appropriate for the environment that we live in right now.

And I think to answer the question without having another hour discussion, I’ll say it this way. What is Trump doing with tariffs and with all of this talk about Europe’s gotta pay for security and a sovereign wealth fund and everything else? And there is a method to the madness. And of course, maybe the execution is not being done properly.

And that is we are at an unsustainable period right now that we’ve borrowed too much. We’ve got too much debt. It can’t continue.

Radical policy is what is needed. And he’s offering that radical policy. And the retort I’ve always given is, okay, you could disagree with his radical policy.

He’s got it all wrong. Then give me another radical policy. In other words, to do.

Because if the answer is just forget it, like Larry Summers in the day we’re recording has got an op-ed in the New York Times and he’s like, just forget it. Let’s just go back to last year with $7 trillion budgets, $2 trillion deficits. Let’s lift the debt ceiling and go to $40 trillion of debt.

I actually think the bond market would sell off even harder because we’d have to have treasury note auctions every other day because we’d be issuing so much bonds for that. We can’t go back to that. So ultimately you’re right.

We’ve got this problem and this is what we’re trying to address. One of the things that we’re worried about is what the economic historian, Neil Ferguson has pointed out. We pay more in interest costs than debt service.

And he’s pointed out that, and he went through for the last 200 years that every empire, US is an empire, that has run into that problem that they pay more in debt service than defense, they stopped being an empire. And so we have to correct this situation that we just can’t keep buying goods from foreign countries, sending them money, letting that money get recycled back in the treasuries forever. We have to break that cycle.

And that’s what they’re attempting to do. Now, are they doing it correctly this haphazard way? Maybe the answer is no, they’re not. But the idea of what we’re trying to do is trying to reduce our reliance on a huge trade deficit with a huge capital surplus that comes back to the US that we fund it more domestically, getting Europe to pay more for defense, to defend themselves so we don’t have to, maybe realizing more assets in terms of a sovereign wealth fund, this has also been known as the Mar-a-Lago Accord.

So what I’m arguing is, yeah, we do need to keep that in mind. And that’s part of what is the bigger hole here that they’re attempting to do. And ultimately in government and in business, there’s always two things, right? There’s, do you have the right idea? And I think they do.

Are you executing the proper solution? That’s the open question right now. Yeah, there doesn’t seem like there’s too much accord anywhere, but who knows what will happen. So, you were talking about Europe and we’ll finish on that and the dollar, and then I wanna get kind of a speed round of just how we should be thinking about this as we close.

This idea that Europe’s gonna start spending, I mean, just the initial way this has been executed has them opening up their deficits, spending more, making plans to up defense spending in a way they haven’t in many, many years, post-World War II. Some people look at that and say, okay, valuations are low, they will be spending, our valuations are high, we will be getting our fiscal house in order one way or the other, whether we like it or not. That’s negative for U.S. stocks, everywhere else in the world looks like a buy right now.

Are we seeing a profound shift away from U.S. assets? Do we need to worry about what that will do to the U.S. stock market? The answer is yes, we are seeing a profound shift. I mean, if you look at the surveys of global fund managers and the like, they are moving their money to Europe and other cheap markets to degrees that we haven’t seen in at least a decade, if not longer or so. And yeah, if the argument was that we were being supported by this ever increasing inflow of money from foreign sources into the U.S., now we’re gonna have to compete.

And it isn’t just so much that we’re gonna have to compete with Donald Trump can’t be trusted, and you don’t wanna put your money in the United States. I’m sure there’s some of that, but really it’s more along the lines of what you said. We are very expensive, and we have to rein in our government spending.

They are very cheap, their PEs are down at 10 or 12, our PEs are over 20, 37 on the Cape, it’s a little different measure. But they’re half of our valuation, and their governments are about to start deficit spending, where we’re about to go the other way. That alone is gonna get people pushed in the other direction.

By the way, that’s gonna be a lot of government spending in Europe, and that’s gonna be inflationary, because government spending is always inefficient, it creates inflation as well too. So I think that that’s really gonna be one of the things you’re gonna have to think about as an investor, is maybe we should be looking overseas, maybe we should be thinking more international, or when you get that 401k list, maybe there’s an international fund on it. But yeah, I think that these are some of the types of things that are gonna go on.

We refer to this as the end of American exceptionalism, which by the way, just I gotta say it, I take great offense at that term, because that was a term that was coined 200 years ago about the American experiment being different, and American experiment being unique in terms of freedom and democracy. I know a lot of my European friends take offense at that term, thinking that we’re superior. That term never meant that we were superior.

So I always think of when they say the end of American exceptionalism as being kind of a shot that the entire American system is gonna go away. No, it doesn’t mean that. Alexis de Tocqueville actually coined the phrase in his book in the 1830s.

But to that point, I think people mean American exceptionalism, meaning that we are no longer gonna be the dominant financial markets for returns. If that’s what you mean by it, then I’ll agree with it. It is, and I like your clarification, because I think that there’s a lot of other sort of meaning that’s thrown into there or bias.

Yeah, it’s a partisan shot at the US. Let’s call it what it is. But also, it’s important because I think people might rail at it and then not wanna do something because they don’t like the way it hears.

So clarifying it helps keep it neutral, and you gotta think about things differently when it comes to your money. So I just wanna ask you about the dollar, because we’ve seen a dramatic, dramatic drop in that. And so we’re thinking about what does this mean? You’ve gotta think internationally, and maybe we’re in a different environment.

The dollar, is this a sort of devaluation or a decline in the dollar that’s necessary and healthy, or is this something we should be concerned about and signaling some loss of confidence? What will that mean for us? A little bit of both. So let me go with what Scott Besson says about the dollar. He says that the dollar is the preeminent monetary currency in the world, and it will remain its status as the reserve currency.

Okay, fine, I agree with you. And I agree with you, it will remain its status as the reserve currency for all the argument that you hear people say, the dollar’s gonna lose its reserve currency status. To what? To what? I mean, there’s $5 trillion of dollars, 5 trillion with a T, that trade every day.

World trade is done in dollars. You know, we get used to this in the United States, right? What’s the price of crude oil? It’s priced in dollars. What’s the price of gold? It’s priced in dollars.

Ask a European, what’s the price of gold? They’ll tell you what it is in dollars, and then they have to convert their currency. They have an extra friction step in there to buy gold or to buy oil. We don’t.

So what currency can do that if the U.S. loses its reserve currency? The euro can’t, the yen can’t, the yuan isn’t even a convertible currency. Cryptocurrency can’t do that, gold can’t do that. So we are the reserve currency by default.

But, as Bessett would say, the value could go down, and that’s okay, and that’s what’s happening with it now. Now, what’s driving that could be very interesting right now, especially with what we’ve been talking about. The euro has really been the surging, the euro’s been surging, the dollar’s been declining against the euro the most.

Now, part of that might be that flow we were just talking about, right? Get into cheap stocks, that’s Europe. Get out of expensive stocks, that’s the U.S. But also what’s been happening is interest rates in the U.S. have been going up, and European bond interest rates have been falling at the same time, which suggests get out of treasuries and get into European bonds. Now, who’s doing that? Quick tangent for one second.

In 2014, Russia invaded Crimea, and we wanted to punish Russia because they had $170 billion of treasuries held in the foreign custody account at the New York Fed. New York Fed does that for every country. They had $170 billion.

We were gonna say, we’re gonna freeze those $170 billion. The next week, those $170 billion were transferred out of that foreign custody account, and a week later, they came back into that account as an increase in China’s account. In other words, the Russians made a deal with China to hold their treasuries because we weren’t gonna sanction China.

Now, why did I go through that? Because Russia and China learned, we gotta be careful because the U.S. can sanction us. So the last 10 years or so, China has made legal entities in Belgium and in Luxembourg to hold about 700-ish billion dollars of their $1.4 trillion of treasury securities. The other 700 is held directly in China.

So when you start seeing massive selling of U.S. treasuries, massive buying of sovereign bonds in Europe, come in the Euro surging and the dollar falling, and you ask, who’s the big seller of treasuries out of Europe buying European bonds? The answer is it could be the Chinese. And that’s how they’re doing it, is that they’ve got these entities in Europe, which we can’t sanction. They fall under Belgium law.

They fall under Luxembourg law. We, the United States, can’t sanction them or put restrictions on those accounts. And we’d have to ask the Belgians to do it or the Luxembourgers to do it, but they won’t do it because they’re mad at us over tariffs anyway.

So that’s where we might be seeing what’s been happening a little bit in those markets. It’s been rather interesting. And it makes more sense to me than saying that it’s European fund managers that are selling treasuries and buying sovereigns.

Oh yeah, there’s probably some of that going on, but I don’t think enough to see these dramatic moves in the dollar. So that’s what I think is gonna keep pushing the dollar lower. So I’m not concerned about the dollar losing its reserve status.

That would be a problem for the US. Because like I said, to what is it going to lose its reserve status to? Because anything else, the Saudis tried this last year or two years ago. They said, we’re gonna ditch the dollar and you gotta buy oil in Saudi dinars.

That lasted like a week. And the reason it lasted a week was there isn’t enough Saudi dinars in the world for everybody to buy up, to use to pay for oil. And it just ground the market to a halt and they just stopped it with after a week.

There’s only one currency you could do this in and that is the dollar. And unfortunately the world has to deal with it and that’s allows us to abuse it because we’ve got kind of a monopoly. Although all of this maybe is a little warning that nothing has to be forever.

If you keep abusing it. And it won’t be, it absolutely won’t be. There will be another reserve currency probably in our lifetime, many years away from now, but we’ll see it coming.

We’ll see something that can compete with the dollar. Maybe it’s a crypto, but they still got a long ways to go. Yeah, there’s a lot of interesting work being done on that.

So is the dollar, so reserve currency still, is it a cheaper dollar, is it a lower dollar? Do we have to worry about it being inflationary? Is it good for us? Does it make some things more competitive? What does it do to our portfolio? Do we not really have to pay attention? No, I think we have to pay attention to it. A lower dollar means that the currency that you’re trading into goes up. So that means strengthening currency.

So you always want to be in a currency that’s appreciating in value. So that means international investments will do better. A lower dollar, all things being equal, should be disinflationary in normal times.

But if we’re going to have 80% tariffs, you’re not going to offset that with a 2% decline in the dollar, a 3% decline in the dollar. If we had an 80% decline in the dollar to offset those tariffs, we would collapse the financial system. So that’s not going to happen.

So we’re still going to have that inflation. So it does kind of push you into that idea that maybe you want to have more of an international flavor with your portfolio as we move forward from here, because of those relative valuations and everything else that’s been going on. So if we put this all together, which I think has been a sort of fantastic overview of all of the different moving parts, and boy, they’re moving.

If we talk about anything people should think about increasing or buying, people are, I think, really cautioning people maybe buy the dip for U.S. assets. That just knee-jerk buy-the-dip mentality should be over. What should people be looking at on a shopping list if they’re thinking about the future? Should it be international? Should it be some sort of bonds outside of treasuries? How can people find return in this kind of new environment that we’re in? So I would argue, first of all, that we need to temper our expectations.

You know, as a macro guy, everybody always turns to me and says, okay, it’s a new year. There’s going to be some multi, multi-trillion dollar giant asset class that goes up 20%. Which one is it? And- Trade, what’s the trade, right? Yeah, what’s the trade? And there’s largely been one.

You know, last year it was S&P. How about there isn’t one? And that, no, the market’s not necessarily going to be a disaster. Maybe we’ll still come back from this a little bit, but, you know, it’ll be kind of milk toasty is where it will be.

And as long as it’s above the inflation rate, which it will be, you’ll be okay. I mean, yeah, we all want to have 20% gains, but we always don’t get what we want. I think the Rolling Stones wrote a song about that once.

And so we need to start to think in those terms. Now, bonds and cash will be a competitive alternative, right? Cash, as I said, will give you two thirds of what the stock market will give you with a $1 NAV with no risk. Bonds will give you a little bit more with a little bit less risk.

You know, stocks, I would argue, like I said, don’t think like, when’s the S&P going to go up, but think about rotations. Europe is a place that you could definitely think about rotating to. Financials might be something, you know, under the same idea as Europe, right? Talk about a sector that has just gotten the shit kicked out of it for 25 years and has ridiculously low valuations.

It’s been financials and especially the banks. I mean, I’ve been one who’s hated on the banks as much as everybody else. But then when I look at some of these bank charts and go, man, they’re trading at the same levels they were trading at 20 years ago.

You know, and the world has advanced in 20 years and their stock prices haven’t that, you know, that’s usually when you start to see some kind of value. So there might be something there, you know, there might be something coming in energy because they’ve gotten so beat up. Gold has obviously got the momentum going with it as well.

Too late to chase gold? Huh? Too late to chase gold? No, I don’t think it’s too late to chase gold at this point. Especially if you look at some of the miners and some of the junior miners, which have not kept up with the price of gold. But the bigger issue is I wanted to say was, we haven’t had to think about this stuff, right? We’ve always talked about S&P up, S&P down, you risk on, risk off.

And that worked for a long time. But I think in this environment, we’ve moved beyond that to something that can to, you know, was what we had in the 80s and 90s. You know, Peter Lynch can come out of retirement now, you know, because we need him back.

And we need that kind of thinking. Dust it off, dust it off. We need a, what about, is there anything people should be thinking about lightening up on? Especially if we are maybe, you know, we’ve seen such volatility, but you know, there might be tradable dips and rallies now.

Is there, if people are looking and see they have a high concentration in something, what would make you nervous? Anything that’s got extreme valuation, you know, and that would probably go right to AI, Mag 7. And the reason is when you started in on the year, you would look at the AI and you’d look at the Mag 7 stocks. And you’d say, man, these got extreme valuations. And then everybody said, AI is going to, you know, eat the world and we’re going to do the world and everybody’s going to have to pay for this stuff.

What was embedded in that assumption was, and the world wasn’t going to have any issues. Well, now the world does have issues. And so I don’t want to be owning very rich stocks.

And one quick word about AI, my favorite example. The biggest stock of the 1920s was RCA, Radio Corporation of America. Took off on this new burgeoning technology called radio.

Everybody was going to have one in their house. The stock peaked in 1929. I forgot the price level it peaked at, but it held, it did not take out that level again until the 1960s, 40 years later.

Not only did everybody get a radio in their house, subsequently everybody got a black and white TV in their house and half the country already had color TVs in their house. By the time RCA made a new high in its price. Do not confuse that AI could be a transformative technology that could change the way we do life, do work, do business, do schooling and everything else.

And that’s already in those sky high prices. And so while that happens, the price doesn’t go up. You want another more recent example, 2000 we had the tech peak.

And we talked about the great things the internet was going to do. It did throughout the 2000s and into the 2010s. And it wasn’t until 2013 that the NASDAQ eventually took out its 2000 peak.

So you wound up saying everything that we hoped for for the internet happened for 13 years and you didn’t make any money. And so that’s what you have to be careful of with these AI stocks, especially if we’re in a period of transition, if we’re in a period of less government, if we’re in a period of a Mar-a-Lago accord, which could cause a recession or something like that. AI can meet its promise.

Doesn’t mean that the stock prices have to keep going up. That and it’s all about the valuation is why I’m worried about those stocks. Yeah, that’s a really, really good point, Jim.

And again, something we haven’t seen in a while. Last question, what’s the biggest risk? What are you most worried about at this juncture? That this whole shift, you know, towards tariffs and rebalancing or realigning the world order. While I said, I agree that something has to be done.

We can’t just go back to the status quo. As I said before, if you don’t like this radical policy, give me another radical policy. We get it wrong.

We get it wrong in some way. Not that we get the idea that we have to do this wrong. We get the prescription of how we’re trying to do it wrong.

And we wind up creating a mess out of everything. And that’s what I think you’re seeing in markets. And that’s what the big worry is, is that maybe we need to do this, but are we doing it in the right way? And the unfortunate answer is nobody knows what the right way is supposed to be.

And we’re kind of all feeling around in the dark, trying to hope that we get this right. The one solace I would give us about Trump is he’s a very transactional guy. I’ll try something.

If it doesn’t work, I’ll pretend like I never did it. And I’ll try something else. As much as that might be chaotic, and it is, maybe that’s kind of what we need a little bit here when we’re trying something new, is we don’t wanna be too dogmatic about, here’s how we gotta try this new untested thing when we don’t know how it’s gonna work.

Yeah, that’s a really interesting thought and a great place to leave the conversation. Jim, appreciate your insight and all the knowledge that you’re sharing, especially right now. We all need to sort of level up.

So thank you so much. Thank you, enjoyed the conversation.