Written by: Qin Jin
We know that the three important factors that will affect the market trend of Bitcoin in the next 1-2 years are Bitcoin ETF, Bitcoin halving and the Federal Reserve’s interest rate cut.
If the first two are micro factors that have a relatively close impact on the Bitcoin market, then the Fed's interest rate cut is an important macro factor that affects the Bitcoin market. How to understand macro factors? Try to listen to and observe the speeches and thoughts of authoritative figures.
On February 4, Federal Reserve Chairman Powell gave a rare exclusive interview to CBS. Powell did not give an exact time for the interest rate cut. But he expected that there would be no interest rate cut in March, but after March. Other Federal Reserve officials also said that it would be appropriate for the Federal Reserve to cut interest rates 2-3 times in 2024. Carbon Chain Value tracked this authoritative information as soon as possible.
The macro team of Guojin Securities recently published an article stating that the shift in the Fed's monetary policy is a main theme of global macro in 2024. Since the "last" rate hike in July 2023, the Fed has suspended rate hikes four times in a row. Since the end of 2023, the market has begun to fully trade the Fed's rate cuts, and the volatility of overnight interest rates has increased. This is a signal of "structural shortage" of money market liquidity, which means that the liquidity of the money market is no longer in a state of "super surplus".
On February 19, Jim Bianco, founder and macro strategy analyst of Bianco Research, a financial market research institution with a history of more than 20 years, talked about the Fed's interest rate cuts and the number of interest rate cuts in an exclusive interview with New Zealand Markets. He said that the Fed may cut interest rates 0-2 times in 2024, which means that the number he gave includes 0 times, which is less than the Fed's forecast of 3 interest rate cuts.
His explanation is that monetary policy is still tight, but not as tight as everyone imagines - which is why the strong economy frustrates the recession crowd, the "soft landing" crowd, and the 2% inflation last mile crowd.
On February 20, well-known investor Anthony Pompliano expressed a similar view in a letter to investors. He said that the current consensus across Wall Street is that inflation has fallen and the Federal Reserve is ready to start cutting interest rates. Investors are ready to benefit from rising asset prices. Central banks are preparing to wave the flag of victory. The media keeps reporting on the elusive "soft landing." But what if this consensus is wrong?
He said that now (market forecasts for the number of rate cuts) have been reduced to 3. As early as January 12, the market expected 7 rate cuts in the whole of 2024. So, we have removed the expectation of 4 rate cuts this year, and now the first rate cut will not be priced until June. The probability of June is about 75%, but 10 days ago they were 100%. This decline in confidence in the number and speed of rate cuts is a direct response to the worrying inflation data reported in the past 2-3 months.
He also said that if inflation does not disappear and accelerates month by month at an annualized rate close to 4%, the central bank will continue to raise interest rates. However, the problem now is that the Fed told the market that they have completed the rate hike. "Market participants do not want an unreliable Fed." Anthony Pompliano said that they rely on the Fed to do what it says.
The Fed has already violated it once in the past 4 years. They told the market that interest rates would remain near 0% for years. When the central bank began raising rates at the fastest pace in history, market participants found themselves completely unprepared. Remember when regional banks were failing every day? That was a direct result of the Fed's inconsistency. So now the Fed has painted itself into a corner - they are telling the market that rate hikes are over. The fight against inflation is almost won. Get ready for multiple rate cuts in 2024.
It would be very unfortunate if inflation still persisted and the Fed had to change its mind, but it is becoming more and more likely as time goes on. I am not ready to say that the Fed is likely to raise rates, but I think the probability is much higher than most people in the market think.
Anthony Pompliano says this means both opportunity and potential disaster, depending on how you look at it. Keep an eye on inflation data and start thinking critically about how the Fed might respond if the data gets worse. This can help you see a turnaround earlier than others.
Given that Jim Bianco and Anthony Pompliano’s stance on the Fed’s future rate cut expectations may be instructive for readers, Carbon Chain Value has translated the full text of the New Zealand Markets’ interview with Jim Bianco, founder and macro strategy analyst of Bianco Research, into Chinese for readers’ reference.
In an in-depth interview with New Zealand Markets, Jim Bianco explains why the US economy continues to outperform expectations and what drivers are keeping inflation moving higher. He also outlines the opportunities and risks facing investors and how he is betting on continued attractive yields through his new total return bond index.
Jim Bianco does not expect the Fed to cut interest rates quickly. Financial markets are shaken. New data on the US economy heightened concerns that the greatest progress in fighting inflation has been made, while on the contrary, the hardest part has just begun. As a result, the Fed may be forced to keep interest rates higher for longer.
As long as inflation gets back to 2%, the Fed can do whatever they want, they can cut interest rates to zero, they can do quantitative easing. But if inflation doesn't get back to 2%, their options are narrowed. So inflation is really the key.
"In a world where investors are speculating whether the Fed will cut rates four, five or even six times this year, persistent inflation will kill that speculation. It will make all talk of rate cuts moot." - Jim Bianco
The following is the full text of the conversation:
By Christoph Gisiger
Compiled by: Qin Jin
Q: The macroeconomic environment is keeping the market on its toes. What are you most concerned about right now?
A: What I'm most concerned about is the bond market. What we're seeing is that there are some concerns in the market about a "soft landing," fears that the "last mile" to fight inflation may be more challenging than people think. The market may think this is a "no landing": the plane will not descend, and the economy will grow at 2.5% or higher. I don't want to say that the bond market is accepting this view, but it is definitely starting to get worried.
Q: What are the reasons for supporting "no landing"?
A: You have to wonder: Where is the weakness that everyone is talking about? The economy grew 4.9% and 3.3% in the last two quarters, wages grew sharply, and the stock market hit a record high. The Atlanta Fed model shows GDP growth of 2.9% in the first quarter. So we are not getting any of the bad news that everyone is talking about. Maybe next month or 60 days from now, things will turn around and get worse. But you can say that for a year and a half, and if you keep repeating it, eventually you will be right. But right now, I don't see any reason to think the data will get worse.
Q: Why is the U.S. economy performing much better than people generally feared?
A: The reason people are always worried is because of the old saying that the Fed will raise rates until something breaks. I agree with that, but there is no evidence that interest rates are breaking anything at the current level. At least for now, it seems that the economy can handle 5% Treasury yields, it can handle 6% or 7% mortgage rates. Obviously, 4% or 5% mortgage rates would be better for the housing market, and 6% or 7% would be a drag on the housing market. But I don't think it will kill the housing market. Now, will something eventually happen? I think it will, but it hasn't yet, which is why there is such strong demand.
Q: How long can this situation last? In the past, the Fed's aggressive rate hikes since the spring of 2022 have typically triggered recessions.
A: Yes, but I think people are running into an anchoring problem: They have become psychologically anchored to zero interest rates because they are used to the low interest rates from 2010 to 2022, when we even had negative real interest rates. So people convince themselves that this environment is somehow normal and that current interest rates are too high. But I think the opposite is true: interest rates were extremely low during this period, and current interest rates are closer to normal. That's why I don't think the economy can't withstand it.
Q: Yet the Fed raised its target rate from zero to 5.5% in a short period of time. Wasn’t that a huge shock to the system?
A: If you analyze the impact of higher interest rates, it leads to interest expense: You have to pay more for mortgages and loans and so on. But there is also interest income, which means your fixed income investments are now earning a nice return. Warren Buffett is now earning about $6 billion to $7 billion in interest income from Berkshire's huge pile of cash, while two years ago he had zero interest income. The same is true for other large companies like Microsoft. They are earning more because they have a lot of cash. So if you compare the interest income of the entire economy to the interest expense, the financial situation of many companies is actually improving.
Q: What about family?
A: It's mixed. According to the Federal Reserve's Survey of Consumer Finances, about 90% of assets are held by the top 10% of income earners. They own almost all of the assets, and a large portion of them, at least half, is fixed income. Now, if you look at liabilities, the bottom 50% of income earners have no assets, but they own more than half of the debt. This is an unfortunate reality: the poor have the debt, the rich have the assets. They also bear 80% to 85% of personal consumption. So when interest rates go up, the poor are hurt, they get mad at the president, and the president's approval rating goes down. But the rich make more money, they buy things, and continue to drive the economy. So, looking at the economy as a whole, these levels of interest rate increases are not as hurtful to the economy as everyone thinks.
Q: So the key question is what happens next in terms of inflation and interest rates. What do you think?
A: Because I think there is no problem with the economy, but what I am most worried about is excessive growth and excessive inflation, which will put upward pressure on interest rates. Investors tend to compare what they want with what actually happens. Wall Street's expectations for inflation to return to 2% are a case in point. But in reality, I would even say that we have reached the "last mile" of lowering inflation, which brings us to a low of 3% or a high of 2%. I think we've basically reached that level. We may have hit a bottom and may start to move slightly higher. I'm talking about 3% to 4%. I’m not talking about 8%, 10% or Zimbabwe.
Q: The latest inflation data was unexpected. What were the main drivers?
A: The three most important factors driving inflation higher are base effects, higher gasoline prices, and housing. These factors all suggest that inflation could "stabilize" above 3% over the next few months, assuming factors like the oil price crash or financial market panic don't change these dynamics. Importantly, any meaningful decline from here will need to come from services other than energy, and when you analyze the major contributors to services inflation, the vast majority of it comes down to housing prices. That's still up 5-6% on a 12-month basis. A lot of people are saying housing inflation is going to come down significantly. But I think that's wrong, and that means inflation is going to continue to move higher.
Q: What led you to make that assumption?
A: You have to look at it in context: Housing -- the equivalent of owner-occupier rents and rents for primary residences -- makes up a third of the overall CPI. Looking back, housing inflation has been up about 20% since 2021, according to the CPI. But if you look at market measures like the Zillow Rent Index or the Case-Shiller Home Price Index, they've been up as much as 30%. That suggests that the housing component of the CPI is understating how much home prices have risen over the past three years. That doesn't mean that number won't come down. But it won't come down as quickly as everyone thinks because it has more work to do to close the gap with market measures. So housing inflation will remain stable, which will keep services inflation elevated.
Q: What impact does the Red Sea shipping problem have on inflation?
A: The optimistic view is that no ships are sunk. No containers are dropped into the sea. Everyone will get what they ordered. But we live in a just-in-time world, so the question is not "Can I get it?" It's "When will I get it?" The answer is that you will get it later, and that will ultimately increase goods inflation. But not as much as in 2020, because there was a demand factor then, too. But I agree with what Oxford Economics says: If shipping delays continue for a few more months, annual CPI inflation could be added by 0.7 percentage points by the end of 2024. What I'm saying is that we've squeezed goods prices as much as we can, and goods inflation could rise.
Q: What does this mean for the Fed’s monetary policy?
A: As investors speculate whether the Fed will cut rates four, five or even six times this year, continued inflation will kill that speculation. It will make all the talk of rate cuts self-defeating. As long as inflation returns to 2%, the Fed can do whatever they want. They can cut rates to zero, they can do quantitative easing. But if inflation does not return to 2%, their options will be narrowed. So inflation is the real key.
Q: To what extent do you think the Fed will cut interest rates?
A: I think 0-2 rate cuts this year. That's less than the 3 rate cuts the Fed has expected, and I certainly see it differently than the market. Here's why: You can argue, as Jay Powell has, that a 5.25-5.5% federal funds rate is not neutral. It's restrictive. But how restrictive is it? The common narrative is that inflation should average 2%, and then add 50 basis points to that, which means the neutral funds rate is about 2.5%. So if we're at 5.5% right now, we have 300 basis points of tightening in the system.
Q: What do you think?
A: I disagree. Average inflation is probably going to be somewhere between 3% and 4%, let's call it 3.5%. If you add 50 basis points to that -- or more realistically closer to 100 basis points, as inflation continues to move higher -- the neutral funds rate is closer to 4.5%, or even 5%. That means monetary policy is still tight, but not as tight as people think -- which is why a strong economy frustrates the recession crowd, the "soft landing" crowd, the 2% inflation last mile crowd.
Q: What does this mean for financial markets?
A: Again, it all comes down to inflation. For example, as a bondholder, I need to be confident that Powell will look after me and try to keep inflation down. Even if he might sabotage me and cause a recession, I can hold bonds. But as soon as there is a fear of a new round of inflation, I don't want to touch bonds anymore, and the 10-year Treasury yield will go back to 5%. Simply put, if the economy slows and inflation falls, and Powell wants to talk about ending quantitative tightening (QT) and cutting rates, the bond market will accept it. But if he talks about ending QT or cutting rates, and inflation remains high at 3%, he runs the risk of a very bad market reaction.
Q: One problem that keeps coming up as interest rates rise is the commercial real estate market crisis. How dangerous is that now, nearly a year after the collapse of Silicon Valley Bank?
A: We knew it was bad for a long time. Now, we're finally admitting it. We've realized that remote work is going to be a permanent problem, and we're going to have to start revaluing office real estate. 70% of commercial real estate loans are made by regional banks and small banks. Interestingly, Powell recently said that the big banks are fine. He even admitted that several of the small banks may be swallowed up. In other words, he's not saying that any one bank can do it alone. I agree with that. It's going to be a mess for regional banks and small banks; it's going to have some adverse effects on the economy. But I don't think it will be catastrophic, just like the failure of Silicon Valley Bank was not catastrophic in the end.
Q: Are there other risks that may be underestimated?
A: One of them is probably going to be artificial intelligence. The idea that AI is going to work miracles in productivity seems wrong. Sure, there will be big improvements with these big language models and things like that, but it’s going to be much slower than people think. At the end of the day, the question is: Who’s going to be the winner? Of course, everyone says Nvidia, Microsoft, or Amazon. But I doubt it. You can’t tell me that the greatest invention since the internet is going to happen in artificial intelligence and the end result is that trillion-dollar companies are going to be able to force me to pay for a monthly subscription. That’s not the case. It’s going to be free, it’s going to allow people like me to compete with Goldman Sachs, and it’s going to cause problems for trillion-dollar companies.
Q: Why?
A: I think it will be something that we all access on our own, just like the internet or social media. The internet was a fantastic innovation because it was free and you could do whatever you wanted with it. So the idea that you have to have trillion-dollar companies because they’re going to be the gateway to AI doesn’t work. It’s very similar to 1999, when everyone said: You have to buy Cisco, JDS Uniphase, Microsoft, the biggest companies, because they’re going to provide the internet. It turned out to be the exact opposite. This is a free product that anyone can create out of nothing. Google, Facebook, or YouTube: They didn’t need big companies to do it.
Q: Another topic that is more relevant to the market this year is the US election. How big of a risk factor is this?
A: At least for now, we have exaggerated the impact of the election on the economy and markets. For example, Donald Trump said he was going to cut taxes. But first, he has to win the election; second, don’t forget how the Constitution works. The president is not a dictator, and he cannot just announce new tax rates. He has to pass a bill through Congress, which involves many steps. Let’s be honest: I don’t even know who the nominees are, let alone what their policies actually are. If Trump goes to jail, will he still be the nominee? Or what if Joe Biden can’t turn around poor polling results by May? Are the Democrats going to tap him on the shoulder and say, "Joe, we've got to try Michelle Obama or Gavin Newsom or somebody else named Joe, because that's not going to work for you." kick in"?
Q: What are the best options for investors in this challenging environment?
A: As my friend Jim Grant likes to say, when there are interest rates to watch, there's a newsletter called "Grant's Rate Watcher." So while I think inflation is going to get firmer, which is bad for bonds, those yields need to be managed. You don't want to give them up by exiting the market. You need to hold on to them and maybe get some capital gains. That's why I came up with the Bianco Research Fixed Income Total Return Index. It's a long-only index that seeks to outperform a comparable baseline neutral portfolio of fixed income securities, and WisdomTree has an ETF, ticker WTBN, that tracks my index.
Q: How do you do this specifically? Which parts of the bond market are most attractive?
A: The thing we like most is Treasury Inflation-Protected Securities, or TIPS. It's an investment vehicle that provides protection if inflation gets worse than the market thinks. Basically, it pays you the rate of inflation plus a nominal interest rate. Of course, these haven't been great investments over the last year because inflation has been falling and you're getting less and less money every month. But if inflation hits the bottom and stays there, then TIPS look very attractive.
Q: What do you think about stocks?
A: I don’t think the stock market is going to crash, but we’re starting to see competition from higher interest rates. Over the long term, the expected return on stocks is about 8% per year on average. Going back to 2017 or 2018, when money market funds were yielding essentially zero, you had to do something else. You couldn’t just sit in cash. That’s why we coined the term “TINA”: There’s No Alternative to Stocks. But today, the average yield on money market funds is 5.3%, which means you’re getting two-thirds of the stock market’s return without taking any market risk. For most people, that’s more than enough. They don’t need to take on additional risk to get the last third, assuming that third actually comes through. That’s why the stock market has been essentially flat over the past two years, and I don’t think it’s going to be able to keep going higher.
Q: What advice do you have for investors who still want or need to invest in stocks?
A: From 2000 until about 2022, I was as vocal as anyone about how stock picking was a dead art. You just bought an ETF of the S&P 500, the Nasdaq 100, or the Russell 2000 and watched all boats float as the index rose. But now, I think the era of passive strategies may be over and we’re going back to the era of stock picking. That means we’re going to see a wave of actively managed ETFs. I don’t think the next Peter Lynch is going to run an institutional fund or some super secretive hedge fund with a 2/20 management fee where you get a letter every month telling you how you’re doing. The next Peter Lynch is going to be an ETF that anyone can buy and sell. So the key is to invest in certain sectors and themes and/or find active managers with a proven track record of stock picking.
Q: Where are your opportunities in this area?
A: I tend to be bullish on energy. To be fair, I've been trying to be bullish on the energy sector since last summer and haven't been able to succeed. Maybe it will start to work, maybe it won't. But at the end of the day, the bullish case for lower inflation is just that: the hope for lower gasoline prices and lower energy costs. But those lower costs need to stick. If, for example, there's unrest in the Middle East that causes energy prices to rise, then that hope will be dashed. Higher inflation would become a big problem.
