Bonds Are Finally Fair Value — What I’m Buying Now

I see the bond market as being maybe fairly valued now where it was too expensive for the last six years. The way I would look at it, if the bond market is offering me mid 5% yields, I want to start getting in. If it wants to offer me high 5% yields, I want to get in more. If it gets to six, I want to get in even more. They were too expensive bonds for six years. That expensiveness is gone. I wouldn't go as far as call them cheap, but at least we've got this reflected. So, a lot of what I said, the economy is strong, inflation is sticky. That doesn't sound bullish for bonds, but I would argue yes. And now a mid5s [music] yield reflects that. A fouryield or a low four yield, which we had maybe three or four months ago, did not reflect that. It does now. So, that's priced into the [music] market. And that's why I would want to start this shift towards the bond market. A bare market is time, not price. And what I mean by that is everybody says stock market always comes back. It does. But is it going to be 2000 where the market peaks and it comes back in 13 years to a new all-time high? Or is it going to be 2020 during co where the market peaks and goes down and in 5 months it makes a new all-time high. Welcome to the Master Investor podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, an edge. The Master Investor podcast is sponsored by Else, Interactive Brokers, the World Gold Council, and BMY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is Jim Biano, the president and macro strategist of Biano Research, which he founded 20 years ago following roles at UBS and Lehman Brothers. He is one of the go-to experts uh for views on the markets, all markets, but bond markets in particular. He shares a lot of his insights uh on his exac account at Biano Research. It's a mustfollow account if you don't uh already. He manages the Wisdom Tree Banko Total Return Fund ETF. And he's also joined the podcast hosting platform recently as well. His podcast Rational Descent launching 10 weeks ago. >> Yes. Uh 10 weeks in and it's a fantastic podcast to check out as well. Jim, welcome to the Master Investor podcast. Thank you for having me. Looking forward to the conversation. >> Great to great to be with you um in person here in London and uh great timing because it gives us a great you know today this morning same goes in the US we're hitting you know fresh sort of 28-year highs on bonds but this morning the the 30-year in the UK crossing 6%. >> Uh so sort of setting the scene for what we've got to talk about now. You have been bearish on the bond market since 2020. So you've been right about that. Yields have risen. uh bond prices have fallen this past week or so. You've you've kind of turned maybe not banging the table for everyone to buy all these bonds. Maybe not bullish on them, but but it's you're moving in favor of owning some duration now. >> That is correct. Uh I see the bond market as being maybe fairly valued now where it was too expensive for the last six years. If I was to give you a statistic in the bond world, we have a statistic called the modified duration. And what that means is every time yields move 1% how much will the price move? And that always fluctuates with what the yield is. So in 2020 the average yield was 2%. And the duration was seven. So that meant if you went from 2% to 3% you lost 7% of your money but you were only getting a 2% coupon to cushion you. today that is five and a half on the yield the average yield all in in the bond market in the US and five and a half on the duration. So now instead of having to have the market move 30 basis points or a third of a percent against me to lose money has to move a whole percent against me over to to lose money. And that's what I meant by the value is finally back in the bond market now that we're at 5%. And so I'm getting off of my bearish position and going long bonds. Now, I'm not You're right. I'm not pounding the table that they're a buy. That they're going to rally and fall. So, I'm not talking about the economy falling or the inflation situation turning around, but now you're finally getting paid for the risk appropriately. And and I guess, you know, your point there is that there is attractive enough value to to put some money to work in the in the long end of the curve. And we'll dive into that that call a bit later. But but in order to set the scene, higher rates that have obviously been rising for five or six years, but have really surged over the last five or six months, >> why have they surged? What are the main factors you see as driven yields higher in the last five or six months? >> So, two things. Um first of all, when you look at yields, what is the appropriate level for a country's yield? Um, if it was Venezuela a couple years ago at 100%, or if it was Japan a couple years ago at zero or the US at around five or the UK around six, start with what's called nominal GDP. Nominal GDP is inflation and growth together. If your country has 100% nominal growth in Venezuela did, it was all inflation. It might actually had negative real growth, but it had so much inflation that its nominal growth was 100. You have 100% interest rates. Same with uh Japan. It's nominal growth. Add the two together was not now but was zero. A couple years ago at zero. So as the country's nominal growth moves up, the interest rates should move up. So what's causing nominal growth to move up in most the developed world and particularly in the US? The first thing is the inflation rate. It's not that the inflation rate is moving up. It's that we're learning we can't disinflate. We can't get it to go down. It's stuck at this 3-ish percent range and it's not falling. Now, why is it not falling? Let's go back to December of 20 2001. China joined the WTO. Over the next 18 years, goods inflation was minus half a percent a year on average. Deflation, prices were falling. China was constantly sending us cheaper and cheaper stuff. Postcoid that minus half a percent goods deflation has been positive too. Why? We're deg globalizing. We have tariffs. We've had um countless supply chain problems and we've got two wars going on. So to get ever cheaper goods is not happening right now. So you've got more goods inflation. Services inflation is not doing much of it's still kind of stuck where it's been. So, I'm, you know, Charles Goodhart did a book on this called The Unanchored Central Banker, and I kind of ripped on it by saying that a lot of central bankers mistake brains with a Chinese trade deal, and that's what kept inflation low. And now that we can't disinflate those goods anymore, we can't get the inflation rate down. So, that's the first thing that's holding up. The second thing that seems to be holding it up is that economies especially the US economy is just moving right along in ter despite the higher energy prices or despite whatever other problems we have. Recently the energy information agency reports uh many statistics but one of them is crude oil demand. Crude oil demand is topping 20 million barrels a day in the United States which is not quite a record but it's really close to a record. So, if you think about it, we've been complaining about high gas prices and crude oil prices going up for 6 months, but the demand for crude oil is at an all-time high. The economy is so strong that all we do is we complain about the price of energy and then consume as much of it as we possibly can. So, you put the two together and nominal growth has been expanding and interest rates should be expanding. So, I don't see interest rates as being going way out of hand or that they're problematic. I see them as following the appropriate fair value higher right now. And that's why I think that they're no longer expensive and they're uh, you know, at least attractive now. >> So, so just let's pause on the last six months then first. So, US 10ear today 5.3% US 30-year 5.7 5.6 5.7%. in the last couple of weeks even it's really surged at the long end. I think it's fair to say that GDP growth >> hasn't surged in the last few weeks and inflation expectations haven't particularly surged in the last few weeks. So so while I get your point that simply said growth plus inflation might say 5 a half% is warranted. Why have we gone from five to five and a half so quickly? Is that not a disorderly gap up? >> It it I would say as of the day we're recording it isn't, but we're not done with this move. And maybe when this comes out next week, it is. And hopefully I don't think uh hopefully it isn't, but there's that is definitely a risk. >> We're recording Thursday, by the way. You'll be listening to this from Monday. >> Yes. Okay. So, that said, what what has changed in the last couple of weeks is I think the central bank. Now, I've been I didn't invent the line, but I've been using it a lot. Uh, and that is bond traders can stop panicking when central bankers start panicking. And over the last couple of weeks, the Fed has talked about raising rates and then kind of backed off of that idea that they would raise rates at the October meeting. And I think that the market is wanting them to take this inflation problem, this growth problem, maybe even the deficit problem a little bit more seriously. And they're not. And that's why the bond investors are quote panicking. Remember, with a bond investor, you get, as the word says, a fixed income. I get the same amount of money every year. The biggest concern I have is what can I buy with that money next year, two years, three years, and that's the inflation rate. The more the inflation rate goes up, the less purchasing power I have with that money, the more I'm willing to abandon the bond market to find some other investment that will help me keep pace with inflation. So, if the central bank is not going to be vigilant, panic, if you will, uh then maybe I should panic out of the market. And that's what I think has been happening. Last thought off for you. In September of 24, the Fed started cutting rates and they started raising rates two weeks two weeks ago. So rates went down 1 and 3/4% from the funds rate. The 10-year Treasury went up up 1.3% during that entire rate cut cycle. That is the first time in 50 plus years that the Fed did a rate cut cycle and long-term interest rates went up. So this argument, be more vigilant about inflation, worry more about the deficit, worry more about the strong growth, get interest rates at their appropriate level. The market, I think, has been signaling that for two years as you've been cutting rates in long-term interest rates have been going up because if you're not going to worry about this, if you're not going to panic about this, I don't want to be in the bond market. And they've been abandoning it. And I think what's happened is this October meeting is coming up and the Fed is looking like they're probably not going to raise rates where the market wants it. And the la final final thought for you is the reason that that meeting is so contentious is it's the week before the midterm elections. Most of Wall Street is saying the Fed's not going to raise rates because it's the week before the election. Okay, you've told me they're going to make a political decision. they're that the that the election calendar trumps the current state of economics. Okay, if you're going to do that for October, can you make another political decision in December? Can you start making more political decisions in 2027 and there could be a credibility problem on their hands? If you're going to find an excuse for one, you're going to be in the business of finding excuses and then we're going to start worrying about our future purchasing power and start leaving the bond market. So hopefully they'll come around and realize that if you want yields to stop going up, if they become a little bit more aggressive, they could actually get bond investors to calm down. >> So the timing again that we're meeting is so interesting because obviously a couple of weeks ago, the Fed did hike rates >> and they did get a positive reaction uh from the bond market, i.e. long-term yields fell in response, >> right? >> That was short-lived. uh it lasted for half a week or so and a week and a half later we're we're at these new highs. So So one could have framed this the other way to say two weeks ago they did reestablish their credibility and yet yields are still higher today than they were two weeks ago. Is what you're saying that the market doesn't think one hike was was credible enough and and they need to hike quite a few times before that credibility is returned. I think so. I think that they what they started um two weeks ago was you started the process as uh Fed Chairman Worsh said we took back some of the accommodation that we've applied meaning we cut 1 and 3/4% we raised one quarter% so we took some of that back and the attitude in the market was okay you're going to have to take back some more and then you're going to say but not in October so we're going to have to wait maybe till December for you to start acting again and then maybe if you find another reason in December it might be in 27. And so that's the concern I think that the market has is that they're at odds with the Fed and I would go back to that 24 to 26 period they were cutting and long-term rates were going up. They established they were uncomfortable with this easy policy and the lack of a cut is just kind of defaulting back to easy again and they want to see a little bit more vigilance out of them to help at least get interest rates to those appropriate levels. it the credibility theme. It's interesting and that period 24 to 26. Michael Hartner was talking about it last week more on its impact on the MAG 7 uh than than necessarily on long-term yields, but but a similar kind of message as as you're echoing now, Jim. [music] This episode of the Master Investor podcast with Wilfred Frost is sponsored by BMY Investments, a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice. This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset, provided marketleading research to help investors understand gold's role, and modernize how gold is owned, traded, and used, developing industry standards and market infrastructure. Learn more at goldhub.com. >> [music] >> Let's um step back a little bit because uh I I want to ask you a bit about how you think the Fed's going to operate long-term going forward with this big shift we've had from PAL to Walsh chairing it because you did a piece in August and I thought this was absolutely fascinating. Essentially, I think I'm right in saying you think it's going to be much more unpredictable >> going forward. So give us the reason why you think it'll be harder to predict what the Fed goes going forward and and offset that for me then with what ended up happening in September which was a unanimous 12 to zero >> vote to hike. So so just ex explain that for us. >> So we all know that President Trump has been a big critic of the Fed and um the Fed has been worried about its independence. Okay, correctly so. And they wondered what can they do about their independence? They it it's almost like the real the the answer was right in front of them. They are 12 voters, but for decades we've never thought of them as 12 voters. We've always thought of them as the chairman. You know, you know, even to the ludicrous like 20 years ago when we were looking at the size of Alen Greenspan's briefcase because he was all that mattered. The other 11 would just validate whatever the chairman told them. And so the argument was if you're worried about your independence, maybe if you turned yourself into 12 independent voters, and that's not unprecedented. Here in England, last year the MPC, the monetary policy committee, which is nine voters, had a vote to cut rates, which was 441. Um, and we've seen 63 votes in Japan. the bank uh excuse me, the ECB doesn't disclose their vote, but it's largely understood that if they did, there's a lot of dissents there. So, there's nothing wrong with dissense. It's just the way the Fed decided to do it. So, I've was arguing that dissents would actually make the institution more independent and would insulate chairman Worsh because Chairman Walsh meets with President Trump. I have no problem with that. If President Trump wants to jump up and down and tell him you've got to cut rates, you can't raise rates. He could credibly say I'm one of 12 voters, you know, I I can only con I I carry extra weight because I'm the chairman, but I can't force them to do something. Then you got to the September meeting and I was arguing going into the September meeting. I had this little table where I was like, here's what all these 12 voters were saying before the meeting. Here's what they were saying after the meeting. And I had the the the the tally, six were in favor of raising rates, five were in favor of holding and one which is Jay Powell because Paul says he's not going to give any speeches and he didn't give any before or you know around there. So we so he was the unknown and I had 651 and I was arguing if this turned out to be a 75 vote to raise rates that would be the optimal outcome for the Fed. They raised rates. They gave Paul Walsh the credibility that he needs to say to Trump, if you're unhappy about raising rates, I alone can't change that. But they voted 120. And I argued that might have been a mistake because now you're going to tell President Trump, see, if I put my knee in his back and twist his arm hard enough and get him to stop raising rates, the other 11 will fall in line and they'll just do whatever. So, it's all going to be focused on Worsh right now. And that's where I think that the mistake could come. >> That's fascinating. So the the unanimous 120 vote to hike almost makes it harder for the Fed to reestablish that they are credibly fighting inflation because if you look at their speeches, and I'm talking about up until the September 16th meeting, they were a number of them. Um Chris Waller, John Williams, I thought that their speeches were very clear that they were not in favor of raising rates. Anna Pollson, who was the head of the Philadelphia Fed, was another one. Not in favor of raising rates. Maybe Michael Bar too. And yet they voted for it anyway. And they voted for it. You have to wonder if it's the default of the last 40 years because the chairman told me he's going to vote for the rate hike. So I'll fall in line with the with the chairman. And your base case then because of the midterms is that they won't hike this next meeting or or is it in play? >> Yeah, I I still think that the meeting is in play. It a lot of it will come to we are going to get the payroll report. We're going to get the CPI report. We're going to get third quarter earnings. Maybe we get a deal out of the straight of Hormus and the price of oil goes up or down. So maybe that will put it in play. But I still think it's in play. But even if it is, it puts the Fed in a very difficult spot where that 120 vote could be a problem. If we rolling into the October meeting and the market is pricing 70 80% chance that the Fed would raise rates, which it was at the beginning of this week before some Fed speech, especially by uh New York Fed President John Williams, knocked it down. If we get back to 70 80%, then they're in a in an interesting pickle. It's the week before the midterm. If we don't raise rates, we can upset the bond market, as I was saying, because market's pricing it in, wants you to do it. And >> and if we do raise rates, we incur the wrath of the president. So you you're you're in a no-win situation then at that point. >> If I hope Kevin Walsh isn't listening because I know his new plan was to to stop people pontificating about what they may or may not do, which is all we've done so far, right? >> Which uh which no doubt won't be pleasing him, but tough tough luck, Kevin. Well, that's also part of the um by the way, I would say he doesn't offer forward guidance. >> I'm actually in favor of that be because forward guidance, forward guidance is a fancy word for tell me what you're about to do. Give me some signal of what's coming next. For every time you do that, you solve a problem. There's other times you've made it worse. We called it the taper tantrum or transitory inflation. And because >> when the Fed offers forward guidance, we're going to hike. we're going to hold, we're going to cut. The market takes it as a promise. Okay, they just told us what they're going to do. Then the data changes and now they're like, well, do we, to use a crypto term, do we rug the market and change policy or do we say, well, we kind of committed to this and we'll follow through on this mistake. And that's why I don't think getting rid of forward guidance is not such a bad idea. But without it, that's exactly what we're going to do is pontificate on where they're going to go. >> Exactly. We are. Um, but Kevin, you're still welcome on the podcast. Um, either way, despite us annoying you in in the buildup. Hi guys, it's Wil. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a fivestar rating and leave us a comment. It really helps other people find the podcast, too. Now, back to the episode. Let's move from central bank to to treasury. talk me through just quickly what Scott Besson announced over the summer and and your take on how significant it is in terms of his attempt to to keep longer term yields in check. >> So he has announced a couple of things and I have a little different take. First of all, if we go back first he announced an intervention in the Japanese yen. uh the Japanese yen had been weakening that has been causing um inflation in Japan and the Japanese ministry of finance I as we understand it was about to intervene in the market they have a they have the largest foreign holdings of treasury securities in the world over a trillion dollars they were going to sell some of their treasury securities and they were going to use that to buy yen to prop up their currency Scott Besson got wind of it and he said hold on I'll do it for you so So, the Treasury didn't sell dollars. It sold euros and used as proceeds to buy yen to help prop up their currency. Why? Because they didn't want them to sell treasuries and put upward pressure on interest rates. That was the first thing he did. The second thing he did was he announced a Treasury buyback program, $6 billion, which was larger than was expected. Now, a couple things about that real quick. Treasury buyback program has been around for 25 years. That's not new. Usually what the Treasury's been doing is they'll buy some 30-year bond that was issued two years ago. So, it's got 28 years left. It doesn't trade. It's very illquid. They'll offer a program to buy that back. And then they'll issue a newer, more liquid 30-year bond. That's good. It helps to raise the liquidity in the bond market and get rid of all those older issues that never move. Um, and but the way that they went about doing it is we're going to buy back that 28-year bond or that 8-year bond that was a 10-year issue two years ago, and we're going to issue Treasury bills. We're not just going to issue another 10 year or another 30-year. And that is been why people said it's a form of QE, quantitative easing. It's not that the buyback program was the the the the lynch pin in making it QE. It was that you're issuing short-term money in order to do it. You're not just swapping an eight-year bill for an 8-year bond for a 10-year bond or or because that would be the difference. That was the second program he did. Now, my different take on this is I think Treasury Secretary Besset has the hardest job in Washington because the president himself fancing himself the expert on interest rates. I know that because he said that multiple times. He even floated the idea of appointing himself the Federal Reserve chairman because as he said, "Nobody knows more about interest rates than me." So maybe Secretary Marco Rubio, Secretary of State Marco Rubio, Health and Human Services JFK Jr., they'll come into the president's office and say, "Here's what I think we should do on these issues." And he'll listen to him and say that that sounds reasonable and okay. Besson walks through the door. He probably says, "Scott, here's what you're going to do, and I'm going to tell you what you have to do." And so he's in a difficult position that he I think he's being dictated to as much as he's advising. And sometimes he's being dictated to policies that he has to go out and sell. And maybe he's overselling them like his famous statement in early September. I am the house. Um you didn't need to go that far. I don't think by ch because when you do that, you're challenging the mark. you're you're you're daring the market to challenge you and the market has been challenging him. So I think it you know he's been doing these programs to try and lower interest rates. And the f final thing I'll say with him he was there at Soros Fund Management 30 years ago when they broke the British pound. He was watching Stan Duck Miller and George Soros do it. He has to know these kind of programs and saying I am the house is not going to work in the long run. So that's why I c I personally conclude he's being dictated to to do this because his boss the president has told us repeatedly no one knows more about interest rates than me. He's not saying he knows more about vaccines or he's not saying he knows more about foreign policy but he is saying he knows more about interest rates than anybody else. So, so it sounds like therefore you're a bit skeptical that these yield curve management tactics can work. It sounds like you're skeptical that the market at least will believe in the Fed's credibility for for the next couple of months at least. So, couldn't long yields rise more in the short term? >> That is the risk. That is absolutely the risk that they could rise more. Um, and I would, you know, to get into the the nuance of it by getting longer the market and, you know, saying that there's fair value, I did it in a kind of a hedged way is I bought long-term tips, Treasury inflation protected securities or real rate bonds. The argument here is if yields keep going up, those bonds should outperform what we refer to as nominal, the non-TIP bonds. Um but and if yields were to fall a lot, those would I'd be better off in nominal bonds. So I saw that there was value there. But you're absolutely right. the risk is that these yields could keep going up, that these programs don't work, that maybe the risk is too that non US rates as they continue to move up in Europe and in Japan largely driven by their higher nominal growth driven by more energyinduced inflation that world bond markets are related to each other. So if European yields are going up and if Japanese yields are hitting the highest levels in 30 years, which both of them are, there's going to be a gravitational pull to pull the US up as well. And we've been seeing that too. So yeah, that adds absolutely the risk. But it, like I said, at this point, if you're getting in at 5 and a quarter and they go to 550 or 575, the losses you are going toain is not very large like it would have been six years ago. So that's why it was the first salvo of a move, but just trying to say there's finally some value in the bond market right now, even if we still think that yields might move higher. I >> in terms of um those other international bond markets you just mentioned, how closely do you watch those as a factor that will influence the US yields? Is is is the US still ultimately the house to use Scott Besson's term or is the correlation going to hold and we could look at as you say Japan, UK, France has been a very uh bumpy bond market the last few months as well. Are they critical to what the US yield is? >> Yeah, now they are. You're right. Most of the time the US is the house that the US moves and everybody else follows. But there are instances like now where the other bond markets are moving first for their own reasons. France, as you mentioned, uh is definitely one that's near the top of the list that everybody's paying attention to because there's a couple of things going on there and it's impacting everybody else. Melishan is running for president. He is effectively talking about if let's just default on all these bonds and therefore we've solved our debt problem. um maybe he's not going to win, but that kind of talk is is very unsettling. Uh you know, they've got they've they're at the brunt of the energy problem. The energy problem is simply every day we wake up, I look on social media and there's another Russian refinery on fire, which means there's that much less diesel and energy to export to Europe, which is why their prices are going up and pushing up their inflation rates and pushing up their nominal GDP rates. it's really focused more on France uh although it's it's hitting everybody and so they are the focus and they are maybe as much driving our rates and and Japan. Japan has finally gotten some inflation. They were stuck with zero inflation for decades and now their economy is finally starting to show some signs of life. They've got 2% inflation. They've got 3% plus yields. That may not sound much for an American or for a Brit, but these are the highest levels they've had in 30 years, you know. So, these are a big deal for them that they finally got off zero on both of those numbers. And as they continue to move up, it's starting to impact us. If nothing else with Japan, as I mentioned, they own over a trillion dollars worth of Treasury securities. Uh why? Because they had no yield. We did. We being the United States. as they start looking at the United States at five and their yield is at three. Some Japanese investors might be saying maybe we just leave our money here and not take because you have to take it to currency risk because the currency constantly fluctuates. Maybe we just leave our money here and not take the currency risk because that spread is narrowing right now and driving money back um to or at least in giving them consideration to send money back to Japan. I refer people back to our episode with the billionaire investor Jim Melon from July with the a lot of what Jim just said there was a reason to buy the yen. Um why do you think Jim this hasn't derailed equities more the equity market is kind of an interesting thing and I'll I'll speak to the US market because when we talk about equities that is really the house >> alas at alas it is we're tiny these days. Yeah. And I would argue that the equity market is effectively two stock markets. I'll use the S&P as my example. There is about 50 stocks that you could identify as AI related. Uh those would be the MAG 7, the semiconductor, some of the equipment makers, and coming soon to that list is well SpaceX has finally joined that list. Coming soon is Enthropic and Open AI. Right now, those 50 stocks are about 45ish, 48% of the size of the S&P. The other 450 stocks, the nonAI stocks are 52 to 55% of the S&P. So, right there, you've got one theme that's half and another theme that's the other half. Um, and what's also happening is if there are stock indexes that are the S&P AI only stocks and the S&P XAI stocks, they're starting to diverge. Their correlation is going down. One goes up one day, one goes down the other day. And I've been, you know, back in July and August, I was, you know, rhetorically tweeting. The some financial news headline says the stock market is down today because investors are worried about the growth of the economy. That's the standard line you use. I was like, but the 450 nonAI stocks were actually up that day. It was the 50 AI stocks were down so much that the oil index was down. So, are they worried about the state of the economy? If all the healthc care and the consumer stocks and the financial stocks and the energy stocks are going up that day, but a bunch of semiconductors went down a lot that day. So, it's two stock markets is is where I'm I'm going with it as far as the stock. Now, the issue is let's take the AI stocks. They have high growth potential. Potential is the key word. And if they have high growth potential, I don't think they're as sensitive to interest rates as everybody makes it out to be. I don't think they're as sensitive to economic growth as everybody makes it out to be because we're we're hoping that AI is orders of magnitude larger in the coming years. And we're we're betting on that happening. So those stocks are running independent of the other stocks which are very dependent on economic growth and currently economic growth in the US is very strong. The third quarter estimates are well above 3% well above three and a half% in some cases which is historically a very strong number. And so that's where I think you when you look at the stock market why isn't it bothered by it? Well, the AI stocks are looking ahead and going, how many people are going to be using uh AI in a workflow and how many people are going to be using agents to help augment their job and how much are they going to be paying for that in the future. And then the other half of it is the economyy's going right now. As I mentioned earlier, people complain about gasoline prices, but they are using gasoline or they're using crude oil in record amounts right now. There's been no demand destruction in the United States. This episode is sponsored by Interactive Brokers. Building wealth starts with the right broker. And Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com/masterinvestor. This episode is brought to you by Else, the leading global financial markets, infrastructure, data, and analytics provider. To learn more about how Else connects businesses, investors, and markets worldwide, visit elg.com. At the same time as uh I guess the shape of the index changing a lot over the last decade and the huge tilt as you're pointing to towards AI, the makeup of who's doing the most trading has changed as well. And and you've written a lot about this in the past. You wrote a great piece about a year ago about the rise of the retail trader. I think you said it it peaked as being 24% in in the meme stock moment in 2021 of of daily trading volumes. It's it's a bit off that high, but it's still above 20%. Much higher than it was historically in past decades. H how much has that shift changed how you have to think about assessing how new data points are going to be interpreted? Oh, I think it's been a big one and especially within the stock market because retail traders are not as interested in bonds. They're not as interested in commodities, but they're really interested in stocks and they're really interested in AI mag seven type of stocks. First of all, how did this happen? Well, a couple of things came down the the line over the last several years. The first one was in the late 90s, we put in um decimals. So, you know, we don't trade stocks of fractions. We put in you could trade them out to you could trade them out to sub pennies. Now, that matters because then the second thing that came in is you could buy fractional shares. You could buy less than one share. So, as a retail trader, if you've only got a few hundred, you could buy 4.3 shares of some stock and pay out to the third penny. The next thing that happened is social media. Retail traders didn't work in a professional setting on a trading desk with analysts and portfolio traders that would collaborate. They were isolated. Now, they're not. We've got Reddit rooms. We've got financial Twitter podcasts. There's no shortage of them basically replicating what a professional trader does if they want to get that deep into this business and they are. And so they have now started to assume doing that themselves. Now the last thing I'd mention is gambling is a very popular thing. We see this with Poly Market. We see this with Kelsey. We see this with FanDuel. We see this with DraftKings. And so they're tending to gravitate towards meme stocks, zero DTE options. That's zero days to expiration options. That is an option that starts trading today that that [snorts] expires on the close today. And if that's not enough, Chicago Board Options Exchange and others are talking about hourly expiration on options. So, it's almost like, you know, analogous to if you go on some of the betting sites. If you're a baseball fan, you could bet next pitch. If you're a tennis fan, you could bet who's going to win the next game. Now, we could bet what the market's going to do for the next hour. And that is really growing. And the catalyst that kicked all that off was COVID. >> Because when COVID shut down and they shut down sports gambling, all of these sports gamblers, Dave Portoi of Bartool was probably leading the charge. He started doing a daily stock market uh podcast because he didn't have a daily sports podcast to do. Still does this uh daily stock market podcast too, giving short-term opinions on what stocks to buy and sell that day. And it really launched retail traders in there. And the biggest argument that I or debate I face with my professional investors uh clients is they say, "Yeah, you're right about all that, but it's not that big. It's just this little sideshow." And I'm like, "It's a little bit more than a sideshow right now. It's a bigger thing that's going on with them." And so it is a change in the dynamic of the market. It's it's also you the short- termism is very interesting because I guess the whole discounted cash flow valuation where the discount rate and where those bond yields are becomes less relevant if you're trading for the short term and so that rise in yield obviously kind of impacts um stock prices less for for for that reason. Um >> let's uh let's touch on this idea of debt monetization. I mean, look, we we've clearly been been discussing the credibility of the Fed. We've been discussing yield curve management. How much do you think there is serious longer term, whether they're admitting it or not, whether it's sort of subconscious or not, G7 governments and central banks wanting to to monetize the debt so they can get out of these huge debt to GDP holes and binds that they're in. And what does that mean for for the likes of gold and crypto to you? >> Yeah. So there's already been some action. I mean there was clear debt monetization in Japan. There was minor versions of it in Europe uh and in the United States when we called the quantitative easing expanding the balance sheet. As I mentioned earlier, Malachan is talking about let's just do a jubilee. That's where the word came from just to you know uh stop paying uh stop paying our debt. Uh so they they've talked about this for a long time. I've argued that that if there was an era that you could do that, it's an era of low inflation where you can't get inflation up. That was 2010 to 2020. And you saw some of that around the edges resulting towards the end of the decade with negative interest rates in Europe and negative interest rates in Japan. Now that we're in an era in the postcoavid of inflation, 3-ish% inflation, I think you can't do that anymore because if you do debt monetization, that is incredibly stimulative. You've got people that are under debt obligations to pay back that are now free of it to go out and spend that money on something. Whether it's a corporation, a government, or an individual, they will go out and spend that money on something. whether it's in the government's case a social program or more military or both and that is going to push inflation higher. Um governments consume goods and services. We're just saying debt monetization, you know, jubilee debt, uh the central bank printing money out of thin air, buying back their debt is going to relieve them of paying that so they could spend that money in the real economy and create more inflation. So I don't think we can do that now that we have an inflation issue. we'd have to get back to something similar to 2010 to 2020 in order to consider that. So they're going to be constrained by doing it. So they're going to be stuck with this whole debt problem that they have. And the debt problem is, if I nuance it, I've actually arguing that the debt problem itself is a bit overstated and also not overstated. And so what I mean by that is if you look at the total level of debt, I'll use the US because I'm familiar with that. It's I if you add in not just government debt but you add in all private sector debt and all loans it's 364% of gross domestic product in the US three and a half times the debt of the size of the economy. 20 years ago in 2006 it was 362%. It's exactly the same number as it was 20 years ago. What's changed is the mix has been much more government debt and private sector has been deleveraging since the financial crisis by by reducing the level of debt that they have. That mix is more the concern than it is the level of debt. So I don't think that we're choking on debt in the United States yet. I've likened it to everybody loves him, you know, a health metaphor. You go to the doctor and he says your blood pressure is 142 over 92. The break point's 140 over 90. You know, okay, I'm concerned, you know, don't go out for steak dinner and eat a lot of salty food. But on the other hand, I'm not rushing you to the emergency room because you're in it for a heart attack. That's kind of where we are with the debt problem, I think, in the United States. It's a concern, but it but too many people overstate it as we need to immediately, you know, put the paddles on you because you're about to have a heart attack because we've got too much debt. So, where are you on gold? >> Uh, the gold market is I'm I'm generally constructive on the gold market, but I've been a bit disappointed in it because what happens with gold is everybody talks about gold as being alternative asset, a safe haven, a port, and a storm. And going back to what I was saying about retail traders and then I go and look at the gold market and I say it's futures, it's ETFs, it's zero options, it's become to use the crypto term as degen that's short for degenerate gambling as anything else that we've seen. And that's why you saw the wild moves in gold in the last year. So when the environment gets good for gold and you could throw silver in there too, it doesn't go up. It goes up 80% or 120% in the case of silver. And when things turn south, it crashes 50% in two weeks. So that there there in lies the problem. The underlying fundamentals make sense for gold, but you're now stuck with this cryptosization of uh of the of those markets >> and crypto. Where do you stand on that? >> I've been a generally a a bull on crypto with a caveat. And the caveat is if crypto is going to hold itself out as the alternative asset, the new financial system, decentralized finance is going to be compared to the banking system and the brokerage system and the exchanges. And crypto is going to be ex compared to the dollar and gold and everything else. I'm in. I'm in. We need a new financial system. We in the UK and United States don't necessarily need it. Where it's needed is there's two billion people in southern Asia, in Latin America, in Africa, in the Middle East that have unstable currencies and shaky financial systems. They could use this new system. Now, the problem is occasionally the the crypto community is what they call developing that. We're building out new things like that. And then occasionally the DGens take over and it all becomes about number go up and crypto summer and and the last DGEN move I would argue was the advent of the Bitcoin ETF in 2024 and you know that the argument was we have the Bitcoin ETF. It was the fastest growing ETFs in history. We need the public, you know, if the public would only put two or three% of all of their money in wealth management money into it, it would it would moon another crypto term. >> And for a while it did. But I was arguing that is an anathema to what you're trying to do. You were trying to build something different. That's why I'll f I'll conclude with I actually thought it was a good thing that the Clarity Act failed. You don't need to go ask permission to the existing system to be allowed in. You need to be a disruptive force to say, I'm going to build a better mousetrap. And I've got two billion people in the rest of the world that are waiting for that mousetrap. If they get back to that, I'd be extraordinarily bullish on crypto. They seem to be kind of inching in that direction. And the more they do, the more positive I'll get on it. And and in terms of that theme, the long-term theme for those two billion people and the decentralized financial system, where do you stand on which of the blockchains is the way forward? Like the Ethereum versus Bitcoin debate and and the others, there's a long list, >> right? Um I think that, you know, you can have several blockchains, but I I would argue that the blockchain you have to have has got to be completely decentralized and permissionless. These are fancy words for no one can take my money away from me. No one can um um uh uh put put rules on what I can and can't do. For a lot of governments, that's very unsettling. What about terrorism financing? And what about drug dealer cartels and stuff? They seem to be doing just fine with the current system that has a multitude of know your customer and anti-moneylaundering rules to prevent that from happening. But for the rest of the world, it is definitely something they can use. I'll give you one quick example. The World Bank did a study of all of the programs that have helped lift people out of poor in Africa. They identified a program in Kenya called Empa which was run by safari.com which is their mobile phone system where you could you can to put it simply you overpay your bill by a couple of shillings which the currency they use and you have a credit and you could text that credit to somebody else. So now a subsistent farmer in Kenya can use that money to buy a cow, could use it to get a bus ticket to get home, and that instead of walking around with a pocket full of currency, paper currency and coins and get mugged and have it stolen that they they could also invest it and get small amounts of interest. that that has helped to lift the country out of now it's helped to lift the country out of its poverty. We need more of that in the world. We need more of that because even in the poorest countries, 80% of the people have a mobile phone. So if they have a way that they can hold their currency on their mobile phone, same thing's happening as Venezuela. In Venezuela, if you want to get you want to exchange your Venezuelan bolvars into US dollars, you have to probably go to the Bance um brokerage from the crypto brokerage from it and exchange it into Tether. That is the most active market right now is it's it's currency to a stable coin, not necessarily US dollars. Rest of the world uses this stuff and that's the that's the place that really can help a lot. portfolio construction. A few things to race through before we run out of time. Where do you stand on 6040 and what portion would you put to things like gold and crypto? >> So 6040 was originally precoid set up on that stocks and bonds would move in opposite directions. So that was under the guise that there was no inflation. So when we were worried about deflation then what would happen is stocks would go down and bonds would go up. We called it the risk on or riskoff trade. And when we were worried about inflation the opposite would happen. Bonds would go down and stocks would go up. We call it the risk on trade. That's broken. So 6040 as a set of numbers I still think works. Bond y bonds now are have a place in your portfolio. Not because they're a hedge against stocks going up or down, but because they've got a yield. I've argued on portfolio construction that going forward from here, it's called the 456 markets. And uh is 4% cash is what you should expect over the next several years. 5% bonds, 6% stocks. If you want to quibble with me and say maybe stocks are closer to seven, bonds are closer to five and a half. Sure. But four, five, six. >> This is their annual returns. >> Yes. Over several years. over several years going forward. Four on cash, five on bonds, sixish on stocks. That's what I think you should get. Now, when I say that, in a lot of venues, people act like I kicked a puppy. What do you mean I'm supposed to get 20% on my stocks? I'm supposed to when things get dicey, I go into uh gold, as we talked about. I get 80%. In gold. That's an entitlement that you shouldn't have. You shouldn't be expecting, you know, it shouldn't be January 1 and go, where am I getting 20% this year? If the markets give that to you, great. take it, but don't expect it. That's what you should expect. If we're in a 3% inflation world, those are reasonable numbers to expect. So, in that environment, if stocks are going to return you 6, seven, bonds are going to return you five, they own a piece of your portfolio, maybe it's still 30 or 40%, but for different reasons. To your last question about crypto, gold alternatives, sure, anybody that's got the amount of risk tolerance should peel that off off maybe their equity portfolio and put it into some kind of alternative. Mhm. Um, so to to start to wrap things up, Jim, I want to kind of come back to where we where we began that obviously you've become slightly more tactically constructive on the long end of the yield curve, but and I don't know, we've returned to this a couple times already, but equally, a lot of what you say to me suggests now is not really the time to go in significantly. Where's your conviction? Where would you say having been bearish bonds for five, six years, are you literally just dipping your toe into the long end of the US bond market or or is it a bit more than that? >> No, I'm I'm beginning a process. I'm beginning a process. And I think that as as the way I would look at it, if the bond market is offering me mid 5% yields, I want to start getting in. If it wants to offer me high 5% yields, I want to get in more. If it gets to six, I want to get in even more. Unless there's a dramatic change in the economy, I would I I I would definitely want to get into those numbers because I also think that if there's a there's always the risk that things go bad, you know, we have a recession or some other unforeseen event and that could create a bond rally because people will fly to the safety of bonds and yields will go down. So that's the process where I've been. In other words, as I said, they were too expensive bonds for six years. That expensiveness is gone. I wouldn't go as far as call them cheap, but at least we got we've got this reflected. So, a lot of what I said, the economy is strong, inflation is sticky. That doesn't sound bullish for bonds, but I would argue yes. And now a mid5s yield reflects that. a fouryield or a low four yield which we had maybe three or four months ago did not reflect that it does now so that's priced into the market and that's why I would want to start this shift towards the bond market >> and finally Jim uh as I fight to you in advance we like to end always by asking what is your overriding piece of investment advice for our listeners >> a bare market is time not price and what I mean by that is everybody says stock market always comes back it does but is it going to be 2000 where the market peaks and it comes back in 13 years to a new all-time high or is it going to be 2020 during co where the market peaks and goes down and in five months it makes a new all-time high. So I would argue or tell people think about this this market always comes back. What if it takes 13 years? If you're 68 years old you might not want to hear that and that's not good. If you're 38 years old you might actually cheer that on. You mean I can dollar cost average at lower prices for the next 13 years that when I hit 50 we're going to have the next big upswing and I've got this larger base of equities at a lower price. So think of it always as time not price and ask yourself the question if the market peaks and goes down and market peaks and goes down how long is it going to take to go back come back and how much tolerance and time do I have to worry about how long it's going to take to come back >> I know that is a very sensible piece of advice that's sort of unrelated to current market environment >> but to to add the annoying followup based on uh challenges that are pregnant in the market in the world today. If we do see a big correction, do do you think it'll be a quick bounce back afterwards or a slow one? Um it all depends. I guess if you if I was to rephrase your question and ask what is the current thing that I'm most worried about is probably about energy prices right now. And um Jeff Curry who used to be the director of research at Goldman Sachs and is now running his own firm. I think it's called Real in Madrid. Um you know he likes to say something that I I'll I'll pair it. Why does anybody care about the price of crude oil? Because you and me and everybody listening is we don't use crude oil. We we use the products crude oil is made from. The only person who uses crude oil is a refinery. And right now we have a product shortage because of all those refineries that are on fire and maybe an export ban in the United States. And that is concerning to me that we might be announcing the straight of our moose is open. Oil is flowing. Why isn't the price at the pump going down? Why is it staying higher? Because we don't stick crude oil into our into our cars. we stick the product and the facility to make those products is running short right now. [music] That is my probably my biggest concern. >> Well, uh for those that missed it, Jeff Curry of course joined the podcast at the start of September and I refer people [music] back to that episode. But uh Jim, it has been an absolute pleasure catching up with you today. Thank you so much for joining us here on the Master Investor podcast. >> Thank you. I enjoyed it. >> Jim Biano, Biano Research. We'll put all of the links to his research in the show notes. His Twitter is Biano Research. You must follow that. That does it for this week. Next week we'll be speaking to Django Davidson of Hosking and Partners. Their performance this year has been unbelievably strong. We'll unpack why and uh get some of his thoughts. Um so please hit follow or subscribe on your podcast app to make sure you get that episode. For now, our thanks again to Jim Biano. The Master Investor podcast is sponsored by Else Interactive Brokers, the World Gold Council, and BMY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. This podcast is produced by Paradine Productions and Master Investor Limited in association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.