Inflation: Fed ‘not moving that target,’ Bianco Research president says
Yahoo Finance Video
Bianco Research President Jim Bianco joins Yahoo Finance Live to discuss what a ‘no landing’ scenario would mean for investors, inflation, economic uncertainty, and the outlook for the Fed.
Video Transcript
BRIAN SOZZI: Sticking on the topic of no landing, let's bring in our next guest who says that we may be running out of runway, Jim Bianco, Bianco Research president. Jim, great to see you, as always. We'd love to get your take on our discussion here on no landing. Is it a real thing?
JIM BIANCO: No, it is a real thing. I mean, no landing is basically-- as you said, it's a takeoff on the metaphor about an airplane, and it just means that the economy is not going to slow down. It's not going to go in recession. It's not going to have a soft landing. It's going to continue to grow. And the fear is if it continues to grow, the Fed has no reason to cut rates. And there's heightened concern that inflation will not hit their 2% target because the economy is growing, and they might even continue to start raising rates.
And you've seen that just this week now, the market is starting, for the first time this cycle, to price in more than what the Fed is suggesting. It's always been pricing in less. It's always been talking about pauses and step downs and pivots, but now it's pricing in more and that we've got an expectation that the Fed is going to go to 5 and 1/2% in June, and it may not stop there if the economy continues to move forward.
JULIE HYMAN: Jim, maybe I'm just getting caught up in the language here but the idea that-- no landing, I just hate the analogy because, like, eventually the plane has to land whether it's now, whether it's later. The landing has to happen, right? And I guess I'm just wondering, like, if it's not landing, are we looking at another decade-long economic expansion? It doesn't feel that way, does it?
JIM BIANCO: No, it doesn't feel that way, but I think what people are expecting is that inflation-- everything comes back to inflation. It's all about inflation. What they want or what they're hoping for, both at the Fed and on the Street, is that the inflation rate is going to hit 2%. Well, the only way that it's going to do that-- at least the belief is the economy has to slow. And if it doesn't slow, then the inflation rate stays up. And if the inflation rate stays up, the Fed keeps hiking, and eventually they hike to some number-- as you mentioned, Bullard, 7%, or whatever number it takes to actually break the economy.
There's an old adage the Fed keeps hiking until something breaks. You know, I could summarize what I just said. We've raised rates to 5% and nothing's broke. So let's go to 6% and see if we break something. Let's go to 7% and see if we break something, wherever we have to break something.
So yeah, if-- yes, eventually the economy will land. But until it does, the heat's going to be on when it comes to interest rates. They're going to continue to stay up and maybe go higher.
ALEXANDRA SEMENOVA: Jim, on the topic of 2% inflation, I'm curious to hear your thoughts. So Fed Chair Powell said that he and his colleagues aren't going to budge on that long-term inflation target, but then some investors are saying that we're going to have to settle for 3% to 4%, that there are factors that interest rates can't quite fix like, you know, supply chains moving closer to home, making things higher, these post-COVID factors that will make us have to accept 3% to 4% inflation. Do you think the Fed will get back down to the 2% inflation target eventually?
JIM BIANCO: Well, two things there. One, investors live in a fantasyland if they think that the Fed is going to redefine inflation at 3% to 4%, and I say that because Jay Powell could not have been more clear throughout the fall when he's been asked this question. They are not moving that target, conversation over. You can stammer your feet all you want that they should change it to 3% or 4% because you want the Fed to stop raising rates so they could start cutting rates so the stock market can go up. They're not going to do that. They're only going to stop when we get to 2%.
Now, can they get to 2%? This is a very sticky problem. You mentioned supply chains. They're looking at, you know, labor hoarding and tight labor markets with large wage increases. I've argued this is a post-COVID economy.
Now, that's a fancy term. What does that mean? It's different. Everybody keeps talking about this is so uncertain. We don't know what's going on. The labor market's confounding everybody. Yes because all the rules up to 2019 don't work anymore. We shut down the global economy. We reopened it. We need a new set of rules. We've got to stop waiting for 2019 to return.
And those new set of rules what I fear is going to lead to persistently high inflation, and we have to come to the reality that we are in a higher-inflation and a higher-interest-rate world, but we don't want to do that. We want to say change the target to 4%. Cut rates. Let the stock market go back to 5,000. Everything will be OK then.
If we did that, 50% of the public has less than $1,000 of savings. They have no assets. They get killed if we accept higher inflation. We can't do that because it would be too painful for them. If it means tough markets, it means tough markets, and I'm just repeating what Jay Powell has said. You're very smart. You're very capable. You have assets. Deal with tough markets. I'm not going to send the people that shop at Dollar Tree to be consigned to 4% inflation because you had a tough year in the S&P.
I mean, I'm trying to be as blunt as I can. That argument just is not washing, I think, at the Fed, and I, frankly, don't buy it either.
BRIAN SOZZI: Jim, I like your bluntness. It fits with my vibe for me that I'm feeling here on Friday. For those investors on our platform that are buying into this notion of no landing, at the most basic level, what stocks will suck wind in that environment?
JIM BIANCO: You know, the fancy term is long-duration assets. Those are assets that are most sensitive to interest rates. Now, that's technology. That's growth stocks. Why? Because they're supposed to earn a lot of money off in the future, not a lot of money now. And if you discount what is Zoom's profitability going to be in 10 years back in a higher interest it's a lot less. So those companies get hurt.
What help-- what it helps or what companies do better are companies that are making money today, this afternoon-- energy companies, industrial companies, consumer, noncyclical companies that make money right now because you don't have to discount that money back. We're not worried about how much they're going to make in five years, and so those companies will do relatively better.
The last thing I'd say about people on this platform, I've argued that in this new post-COVID world, we're going to go back to something like the '90s. It's going to be more like stock picking again. It's not going to be buy energy or sell technology. It's going to be which energy companies you're going to buy, which technology companies you're going to sell.
We're so ETF driven. We just want to buy the sectors. We want the S&P to go up or the S&P to go down that we forgot about that it's 500 stocks, and some of them can go up, and some of them can go down. And it's been so long, like a couple of decades, that we're going to have to start to relearn the whole art of stock picking all over again.
JULIE HYMAN: I mean, just to pick up on what you were saying about even if it's individual stocks within these groups about energy and consumer staples, for example, those groups haven't done so hot this year, right, because the paradigm, the view, the sentiment has not been what you're talking about. What's going to change it? What's going to convince people that no landing isn't real and that things are not going to go as the market is pricing in right now?
JIM BIANCO: Those companies haven't done so hot this year because up until literally a week or so ago, the idea was the Fed's going to stop. Then they're going to pivot. Rates are going to go down. So all of the, you know, FAANG stocks plus Microsoft, Nvidia, and Tesla, they've actually accounted for over half the gain in the S&P, just eight stocks, and the other 492 have accounted for less than those eight stocks. So that has been what has been driving the market.
But if we're going to pivot-- use that Fed term-- that we're going to see the Fed go beyond 5% to 5 and 1/2%, we're going to be worried that inflation is going to be sticky, then those FAANG stocks, those growth stocks are going to suffer, and, yeah, then all of those cyclical stocks and those companies that are making money today, not what are they going to make in five years, they should rotate back into being in favor.
BRIAN SOZZI: Jim, you always crush it for us. Be sure to follow Jim on Twitter. Bianco Research always a good follow. Jim Bianco, Bianco Research president, thank you so much, and Thanks to our very own Alexandra Semenova. Appreciate it.