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The Bumpy Road to Reopening, Long-Term Supply Shortages, and Inflation

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Real Vision managing editor Ed Harrison welcomes back Jim Bianco, president of Bianco Research, to discuss the newest release in the weekly jobless claims data, comparing the vaccine roll-out in the U.S. to other countries, and how we are on the precipice of inflation. Bianco points out how, even though jobless claims fell to the lowest level since the pandemic, the question of job growth is trickier to address as enhanced benefits seem to be deterring people from seeking out work. He also considers how the level of COVID-19 infections and the pace of vaccine roll-outs both differ between the U.S., Europe, and Asia, which means that globally, the reopening is much further away. Bianco and Harrison also address how supply chain disruptions may feed into inflationary pressures, how new methodology may have an impact on CPI metrics, earnings expectations for this year, and Bianco’s thoughts on the trajectory of the bond market and rates.

Video Transcript

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ED HARRISON: Strong numbers out of the US, is it supportive of equities? Also, it seems like momentum has shifted away from value and toward growth. Is that true, or is it not true? And behind that shift are bond yields. Is this a short squeeze in the making? Jim Bianco, president of Bianco Research, is with us to break that all down. Welcome back to The Real Vision Daily Briefing, Jim.

JIM BIANCO: Well, thanks for having me.

ED HARRISON: You know, we're supposed to-- it says I'm in Washington, DC. But actually I'm not. I'm really in Bethesda. I'm just outside DC. Are you really in Chicago right now?

JIM BIANCO: Yes, I am really in Chicago. I could walk to Wrigley Field in about 15 minutes when I say I'm in Chicago.

ED HARRISON: Oh yeah, very nice, very nice. Well, you know, speaking of nice, we had some nice numbers that came out this morning, very strong numbers across the board. I think there were three or four things I was looking at. There was the Philly Fed, the Empire Manufacturing, there was the jobless claims number. And then there was a fourth number, I'm forgetting off the top of my head now.

There were-- oh, it was retail sales. They were all very positive, ahead of expectations. Very strong numbers, what do you make of that?

JIM BIANCO: Yeah, I mean, the two that really jumped out at us was the blowout in retail sales at 9.8% that just stunned everybody. I guess it shouldn't have. Because this was the March retail sales number. And this was the month that the $1,400 stimulus checks went out. But nevertheless, it did. And the other big one I thought was the claims number. You know, for the first time, basically since the pandemic, I know you follow this closer than me, we actually printed below the old 2009 high in the number of claims made.

Forever that 667 high, we had printed every single-- 667,000 jobless claims, we printed every single month above that until this week. So we've got a new 13 month low in claims as well, too. So that was another good number. So yeah, anyway you slice and dice the economic data, it's been very good.

ED HARRISON: Yeah. And you know, I think that that claims number, when I think about claims, you know, they've been high. And they're still relatively high, 500 some thousand a year into this. You know, the way I'm looking at it, especially when you look at the monster number that we had on the jobs number this month, is that really what we're seeing is a churn and a behind the scenes that this has been a extremely difficult period.

We're still finding our footing. And even though, we're still adding jobs. We're still getting back to square one. We're really far away from where we were at the beginning of 2020. And so even though we're losing lots of jobs to initial claims every week, we're winning back a lot more. And overall, there's a positive view on the economy. Would you say that that's a fair assessment?

JIM BIANCO: Yes. If I was to maybe draw a little finer point, you said we were adding jobs. I would say we're restoring jobs.

ED HARRISON: Right.

JIM BIANCO: So that basically we're getting back jobs that we had 13 or 14 months ago. Whether or not we're actually growing, obviously, we are. But how much we're growing is a little more difficult to say. Because in the process of reopening, we're just recovering what we've lost. And that seems to be a lot of the churn that we've been seeing in the jobs market as well, too.

And it's become a very complex job market, too. You know, with the extra $300 a week in unemployment at the lower end, I know it's been very difficult for people that-- to get people back to work when they're getting paid so much to not work at this point. Maybe that changes once these benefits expire or maybe attitudes change later on this summer.

But there is a tremendous amount, and I thought you put it well, churn in this economy and especially in the jobs market. That people are kind of coming and going at nearly a record pace in terms of employment.

ED HARRISON: Yeah. So, you know, we're talking about the US economy. The numbers that we're all talking about, these were US releases. How do you look at Europe in particular, as compared to the US, given what's going on there with the vaccine rollout and lockdowns and things of that nature?

JIM BIANCO: Well, Europe is definitely behind the US. I mean, our numbers are down, our infection numbers are down. Our vaccine numbers are up as well, too. And so we're definitely well ahead of where they are in Europe. Maybe the UK is a little bit different. They're closer to us than continental Europe. But their vaccine rollouts have been much slower. They're picking up pace now. But they're still behind.

And unfortunately, a lot of their cases, infection cases, are starting to head north as well, too. Not as much as they are in, say, India or in Asia, I don't know if you've seen those numbers. But holy cow, the numbers for infections in India and Asia are going absolutely vertical. And they're even talking today with the big spike of cases in Japan that the Summer Olympics are at risk right now.

They're up to 200,000 cases a day again in India as well, too. So the world numbers are starting to head up higher as well. So while the US is getting closer to getting everybody vaccinated, the true reopening doesn't happen until you get herd immunity worldwide. And that's a ways away. And the new case counts outside of the US, outside of the UK, outside of Israel, these are three countries that have had very high vaccine numbers, percentages of population vaccine. The case counts are really quite worrisome outside of those countries.

ED HARRISON: Yeah. And so how do you look at the economy, the global economy, over the medium-term given that backdrop? You have the US, Israel, UK you mentioned in particular ready to move on to the next phase. But globally, we're not there yet. Do you look at this as sort of like, OK, we'll get there eventually? And then we'll have all that pent up demand, et cetera, et cetera. Or are there other complications behind the scenes there?

JIM BIANCO: No, I think there's-- we're eventually going to get there. But there is a big complication that needs to be resolved. And that complication is the supply chain. There is-- we have a chart of it. Hopefully, we can throw it up there. But there is in the supply chain numbers, if you look at delivery times, they're the longest according to the regional Fed surveys in the ISM in 70 years, 70 years.

In other words, what's happening in the economy is there's this giant demand for stuff. And no one wants to raise their price because they're getting demand. Because we've been taught-- managers have been taught for the last 25 years, never raise your price. Because if you raise your price, you're on the second page of a Google search lowest price to highest price. You lose all your market share.

So what you do is you sell it at that cheap price. And then you tell them they have to wait, ration the product. Well, that has become so pervasive that the entire supply chain is now starting to sputter. Because everybody's selling you stuff [INAUDIBLE] the supply chain. But you'll get it next month. You'll get it in six weeks. You won't get it tomorrow is what the problem is. Now the way you fix the supply chain is you raise your prices.

The supply demand is out of balance because the price is too low. You're creating too much demand for the amount of supply that we have. Nobody wants to do that. So what I'm afraid of is, when I see 70-year highs in vendor deliveries, when I see 70-year highs in rationing of the products, the next step, all that's left now, is to finally start raising your prices. And so while the economies of the world are moving forward, we're eventually going to get there, don't worry about it. It's going to be reopened. it's going to be fine.

We could be on the precipice of finally starting to see inflation come back. And if we finally see inflation come back, you can have two things be true at once. You can have the strong growth plus you have inflation, which translates into very strong nominal growth. And that could really bother the bond market, although it's not bothering the bond market today.

ED HARRISON: Yeah. And we'll get to that at the end I'm sure. Because that's a big move. You know, as you were saying-- you were talking about supply shocks, in the back of my mind, you know, I'm a cyclist. And I've wrecked my bike. And I looked for another bike. There were no bikes equivalent to mine. I did eventually find one that was two years old. It was new, but it was the two-year-old model. And I was able to get that at a discount. But nothing that was recent.

And when you look out for cars as an example, it's the same sort of thing that, because of semiconductor manufacturing and chips being in shortage, GM is not going full throttle in their North American plant. And actually, you might even be able to say that there's a de facto price hike, because the average discounts in the American auto market are lower than they were in 2020 or 2019. And that's sort of a stealth price raise. Is that the beginning of what you're talking about?

JIM BIANCO: Yeah, I think so. I mean, to use your two examples, they're both-- I'm a cyclist, too, and that's something we share in common. And if you look at some of the websites where they sell used bikes, they're more expensive than the new bikes. If you look at the Manheim Index of Used Car Prices, it is absolutely booming right now. The average used car price is 22%, 22% higher than a year ago.

Now remember, a year ago was the bottom of the pandemic when the bottom dropped out of all the prices. So that's somewhat distorted by the base effect. But it's stunning what's happening. So the new car manufacturers, the semiconductor companies won't raise their prices. But instead, they're just telling-- they're telling the GMs, the Fords of the world, you have to wait on these components, which is bottlenecking their supply.

So used cars are booming in price because people don't want to wait. They want a car now. They want a bike now. They go to the used car-- they go to the used bike websites, then they buy them there, as opposed to waiting for the new bikes. And so that's where I think we're starting to see the beginnings of that as it starts to factor in. Let me give you one other technical thing for everybody to put in the back of their mind.

When it comes to inflation, there's two issues you have to remember about inflation. Number one, the BLS that calculates inflation used to send out thousands of price checkers. These are people that literally went to the stores and looked on the shelves and wrote down the prices on a clipboard to input into their system, to figure out what the price of stuff is for the CPI and the PCE index. They stopped doing that a year ago because of the pandemic.

Now they check the prices online, or they call the stores. Because they're not allowed to go into the stores because of the pandemic. That's a series break. We now calculate it differently than we did a year ago. I'm not going to tell you definitively that means we're understating or overstating inflation. I'm just going to tell you that I've seen enough statistics that, when you change your way you do things, you start getting different results.

ED HARRISON: Right.

JIM BIANCO: And so we're getting different-- we're getting different results. The second thing to keep in mind is there's a basket of stuff that we buy. That basket has, and to be honest, as I already admitted, this has undergone the most radical change in history. So to give one example is men's clothing. If you look at men's clothing, it says that there's a big deflation in men's clothing, D with a deflation. Why?

Because the basket says that you and I, we buy a certain number of dress shirts and slacks and suits. We're not buying that stuff. And we buy-- and the basket says we buy less athletic wear, which is sweat pants. So the price of men's dress shirts has been falling, but we don't buy those. But the price of men's sweat pants has been rising. So you and I keep paying more and more and more for this stuff.

But according to the BLS, the price of men's clothes keeps falling. And so they need to adjust the basket. But prior to the pandemic, the basket has never changed this quickly. So the old argument is there's only inflation in the stuff you want, not the stuff that they measure. And so that's what's also been going on when it comes to inflation as well, too, is that I question how the new methodology has changed the measures.

And what we're seeing that we buy is no longer what we buy. We buy different stuff now because of the pandemic.

ED HARRISON: That is a really interesting point. Because it reminds me of when we had the lockdown, and we had the jobless claims numbers. I don't know if you remember this from a year ago. But I was saying that the way that we did the seasonal adjustments was totally off, because we had a step change up in the level. And we were using a multiplicative seasonal adjustment.

And lo and behold, five or six months later, the Economics Bureau, the Bureau of Labor and Statistics said, yes, we screwed up. We're going to do it a different way now. And so they changed it to an arithmetic method. So I mean, this is the same kind of thing that you're talking about right now.

JIM BIANCO: Yeah, absolutely. I do remember that. And that's what happens a lot when you get kind of these sharp changes in the economy. Things change. Things adjust. You know, my favorite-- our favorite example from a year ago was the great toilet paper shortage, remember. And the reason you had the big toilet paper shortage was we were producing toilet paper. And about half of it went into a commercial supply chain to supply restaurants and office buildings and stuff.

And about half of it went to grocery stores. Well, in the early part, nobody was going to offices or restaurants. And there was like this glut of toilet paper in that supply chain. And we had people beating each other up in aisle 6 to try and get it in the grocery stores. Because we were running out of the stuff. And it took them a while to realize, hey, we got to redirect the supply chain now to the grocery stores. Because that's where all of the sales are going.

So you get that kind of stuff happening all the time when you get into a severe situation. And we might be seeing the back end of that right now. And the back end of that is, we are in the process of reopening this economy. And people have asked me, what's the reopening going to be like? And the best answer I can give you is, in your mind go back and remember what life was like in January 2020, OK, it's not going to be that.

It's going to be faster. It's going to be reopened. But it's going to be different. And I'm not exactly sure how it's going to be different. I don't know how anybody is going to be sure it's different. And the one example I will give you is commercial real estate. Just before we started, I read two stories. Apollo Management is relocating some of their staff from New York City to Florida. And Guggenheim Scott Minerd is relocating from Los Angeles to Miami.

We seem to be moving around all over the place. Those big office towers in midtown Manhattan, what is their purpose? Why do we go to them? What do we do there? I know David John-- David Solomon, excuse me, the CEO of Goldman Sachs, is demanding that everybody's got to get back to the office. You just reported a blowout quarter with everybody at home. They seem to be doing just fine at home.

What is-- I mean, I'm not saying that we never need to have an office. And I'm not saying that we don't need to have human contact. We absolutely need that. And I want it just as much as everybody else. But do we need to go back from 9:00 to 5:00, Monday through Friday? If the answer is no, and we only have to go back two or three days a week, there's a 50% vacancy now of Manhattan real estate.

And commercial real estate and the ancillary businesses, like the shops on the first floor and the restaurants on the first floor, that's a significant part of the economy. And that might not recover in a reopening while other parts of the economy might boom as well, too.

ED HARRISON: Yeah. But for the time being, the strong numbers that we were talking about the beginning seem to be powering forward earnings. That's what people are looking at. And they're sort of not thinking about some of those problems that you're talking about. I'm looking at the charts. And I see that tech has rallied big time off of its March 2021 lows. And we're back in a period where NASDAQ can make record highs. What do you see in the markets?

JIM BIANCO: Yeah, you know, on the earnings part for starters, yes, a lot of people are looking at the reopening and going, this is going to power the earnings numbers forward. And the answer that I've always given is it better. Because, right now, there's an expectation that earnings, first quarter earnings, are going to be 25% higher than first quarter earnings last year. Second quarter earnings are supposed to be somewhere around 55% higher than second quarter last year.

Remember, that was the bottom of the lockdown. And given all of this heady expectation for earnings growth, the forward PE on the S&P 500, or the S&P 500 with the next 12 months expectation of earnings, is still in the mid-20s. That is a very, very high number. And so, you know, to use a track and field analogy, we're going to set the bar at 8 feet. And that's the world record for the high jump.

And I expect everybody to jump over it. And maybe these world class athletes can jump over it. But that's a big ask. So yes, we are expecting big earnings. But we've already priced it in. And we better get it. Anything that stumbles on that earnings thing could wind up being a problem. So far, the early signs, a lot of the financials reported this week, they're ain't no stumble. Everything seems to be doing very, very well.

ED HARRISON: Yeah. And you know, when you say everything's doing well, I'm thinking about the market internals. And some things are doing relatively better than others. From November, it was value over growth. It was industrials and cyclicals over non-cyclicals, banks over tech. But the NASDAQ is back big. We had Coinbase just the other day list publicly. It seems like the momentum's shifted, and it's much more of a growth over value momentum right now in the markets.

JIM BIANCO: Yeah, that definitely-- the thing about value versus growth is let's cut that a little finer, too, and call it tech versus financials. Because tech is the biggest part of growth. And financials are the biggest part of value. And you can explain a lot of the value growth by tech financials. Or I could explain it by interest rates. And that when interest rates-- when interest rates are going up and financials-- and people look at financials and go, oh fatter net interest margins, this is good for the banks. They rally.

And then we all say, oh, look at this value shift. Well, maybe it's really more about interest rates is what it is. Now interest rates have peaked. And they're starting to come down. And all of a sudden, the financials are, even though they've reported decent numbers, are somewhat sucking wind here, especially like JP Morgan reported blowout numbers yesterday. The stock was still down as well, too.

So that's where I think what we're seeing between the value growth proposition. And on that respect, when you draw it bigger, it makes a little bit more sense. The other thing to keep in mind about what's going on with value and growth is going into last fall value had its worst underperformance relative to growth ever by-- and some of the numbers go back to 1926. It had been a relentless underperformer.

And what really drove it to those extremes last year was the collapse of energy. Now, when you get everything all twisted up into that kind of an extreme, and you build up a lot of potential energy, when you unleash that, you get these unbelievable moves in the other direction. And you wonder if those are really trend changeable. There has to be a trend change, look at how much value has outperformed growth.

Yeah, but look at how much they underperformed in the years before. And that's might all you've been seeing. So what I'm leading up to here is count me as skeptical as that the value was nothing more than a trade. But the secular story is still growth is going to continue to be the dominant play, especially the tech side of that is going to continue to be the dominant play. Maybe the arc stocks are not really going right now.

But the QQQs are starting to move. In fact, the NASDAQ 100 did make new highs in the last couple of days. So those stocks are definitely moving forward.

ED HARRISON: Right. Yeah, that makes a lot of sense. When you look at the bonds, I think the story-- this goes into what you were talking about in terms of the short squeeze. Let me first say that, when I look at the bonds, it was the weekend of March the 5th to the 8th where we did not confirm, or we did confirm rather, I should say, the move above 150. OK. So we confirmed the move above 150 that weekend.

And literally, since then, we've been in a trading range between 150 and 175. We tried to hit the top. We tried to break out above. We missed it, failed it on the 18th. We failed again on the 30th of March. And now we're back at 153, which you mentioned earlier. We're taping this about 3 o'clock between 3:00 and 3:35. That's not supportive of bank stocks, not supportive of value. It makes a lot of sense what you're saying about the rotation given that.

Here's my question though. Given the inflation story that you're talking about, is this just a short squeeze that maybe over time we're going to see a rerating? We're going to see yields go up again.

JIM BIANCO: Yeah, I think it is a short squeeze. And let's rewind all the way back to last month into March, which was only two weeks ago. What was the one thing that everybody agreed upon two weeks ago. Bond yields were going up. Not only were bond yields going up, but the chairman of the Federal Reserve, Jay Powell, would give speeches and say, this is a good thing. You should want bond yields to go up. Because break out into a course of "God Bless America" because that means things are getting better.

Higher bond yields are better. Well, problem with that story, first of all, is higher bond yields in and of themselves are neither good nor bad. It depends on why. If they're going up because of real growth or reflation, as I like to say, yeah, then they are good. If they're going up because of inflation, it's not such a good thing. So a month ago, everybody was ridiculously short bonds.

We have another chart of that, hopefully. And that is, there's a service called Consensus Inc. And they survey dozens of newsletter writers. And as of March 26, they only had 19% of their newsletter writers that were bullish on the bond market. That equaled an 18-year low. So all those people that said of course bond yields are going to go up. And we so know that bond yields are going to go up, even the Federal Reserve Chairman admitted that they're only going to go up and that it's a good thing.

We got everybody so bearish that we were destined for some kind of a short squeeze. Did I know it was going to be today and 10 basis points today? No. But I had a feeling that we were going to see something like this. And what typically happens after a short squeeze, and I don't think it's over with today, is it will end when everybody comes to the agreement that 177 peak a couple of weeks ago on the 10-year, that's the high of the year.

And that we're now in a new regime for interest rates. And then that's when we start to move to 2% is the way-- is the way it typically works. And I think that's because the backdrop of the inflation story hasn't changed. We just-- the bond market got ahead of itself. Too many people got too bearish on the bond market. And now they're paying a price with the short squeeze.

And eventually, when things settle out, I think that longer term uptrend will reassert itself. But not before they inflict so much pain on everybody that they announce, nope, nope, nope, it's all over with now. There's no more new highs in yields for the rest of the year.

ED HARRISON: Right. Yeah, so I mean, let's give a medium term outlook given what you're saying. So we've got a situation where we have supply bottlenecks. We have the reopening. It's not going to be just the US. It's going to be global by the end of the year. And we also have a bond market that is repositioning itself given-- and this isn't just in the US. It's also globally. We have bond yields going down, given the current backdrop, which was excessively bearish on bonds.

So what does that say to you in terms of your asset allocation over the medium term? What do you want to do given that backdrop?

JIM BIANCO: Well, in the medium term, the story's== the story is going to be a couple of things in the medium term. The inflation story, like I said, I think that we've hit the supply constraints have gone as far as they can. And it's an easy fix with supply constraints, raise your price. But even if they do do that, for the next, say, 90 days to 120 days, whatever happens on the inflation front has got a built-in excuse called the base effect.

So that if inflation goes up or inflation goes down, it doesn't mean anything. Because we knew it was going to go up, because there was an inflation-- there's a base effect coming and stuff like that. So the inflation story is not going to play. I think it's the second half of '21 story where it's going to-- where it's going to play. The earnings story, one of the things that when we look at the earnings numbers we've been noting that, on average, 75% of all SAP 500 companies beat the consensus on the street. That's because it's a game system.

Everybody knows that you're supposed to kind of under guess and let the companies beat, so you could say great quarter guys on the report. And then when Larry Kudlow's on TV, he hits his hand on his forehead and goes, oh my god, America's great. 75% of the companies beat. They do every single quarter. And they did even in the great-- in the financial crisis, Larry, when everything was collapsing. They were still beating by 75%.

So you're going to get good earnings numbers. Or you're going to get the perception of good earnings numbers. You get the perception of no inflation. So I think bond yields will continue with the short squeeze. Short over the medium term equities, they're not going to have that headwind of a problem with inflation. Then we're going to keep getting stories every day, another 3 million people have gotten vaccinated as well, too.

The earnings numbers, everybody beats because-- or to just say the same thing as I used to joke around, 5 seconds before somebody reports I said, just say they beat on earnings, and they were in line on revenues. Just yell that out 5 seconds before they report, you're right-- you're right 75% of the time. And so, as long as we continue to do that, you know, it's going to be hard to say that the earnings numbers are going to be a big disappointment.

Now, if any of that doesn't come true, maybe the earnings numbers are a big disappointment. Or maybe the inflation numbers just go somewhere that no one expects, then we'll adjust. But what I'm trying to say is, I think it's-- we're 41, 60-ish or so on the S&P. Here comes 4,200, if not higher, over the medium term. And bond yields will continue to hover in the-- 10-year yields will hover around 150 maybe a little bit lower.

But then the question becomes, once we get past this, then I think we start turning the table on bond yields. And they start higher. And then the stock markets got the same issue it's had all year. OK, bond yields are going up, is that because of reflation or inflation? If it's reflation, it's good. If it's inflation, it's bad. And we'll figure out which one it is at that point.

ED HARRISON: Very well said. I like the framing there at the end. Let's-- we're not going to wait until that all plays out in June to get you back on. But at the next juncture that we see how this is playing out, let's revisit this conversation and see where we are then.

JIM BIANCO: Sounds good. And good luck with your bike.

ED HARRISON: Thank you. Yes, I need it.

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