How Bad will Inflation Get? | Jim Bianco

Hey Bankless Nation, welcome to another state of the nation. We got a hot topic today. It is definitely top of mind as all of the markets around the world tumble, including crypto. That topic is inflation. David, who's on and what are we about to get into?

Jim Bianco, which every time we bring Jim Bianco on, I just feel like we're getting a little smarter. Uh, and I definitely could feel like I'm being a little bit smarter right now, Ryan, because there is like it we all know why the markets are tumbling. The Fed is raising interest rates. But what happens next is just like a fog of war to me. I do not know what happens next. There are fallouts of what's going on across the world. This is not just a crypto market phenomenon, this is a global equity, this is a US equities market phenomenon as well. But it's also going on in like all macro fiat currencies. Uh, and we have like the the the war in Ukraine is still relevant, the food shortage is relevant, supply chain is still broken. So, how the how we get out of this pain, I do not know. Uh, and so I Jim Bianco, uh like no one really knows what the future holds for us, but Jim Bianco knows more than I do, and so I think he's gonna help shed some light on what feels like a very confusing and tumultuous time.

Yeah, at uh you know, we're hopeful Jim can help explain some of this to us because we feel very comfortable in the crypto world. But as we said before on Bankless, we're kind of learning a bit more about the old financial world by way of crypto. And we just haven't gotten to that chapter yet of you know how does inflation uh interact with the crypto assets. You know, uh crypto has never been present in an era as um like like the era that that's happening right now. So Jim is going to serve as that bridge for us. What I love about him is he knows macro very, very well and can school us there, and he also knows crypto and DeFi, so we can talk about that too. So we're gonna get into that episode with uh Jim. Want to give a shout out to our friends at MetaMask as well. I know uh buying crypto is probably not on people's radar right now. Although when the market is down historically, that is the time to buy. MetaMask wanted us to let you know that they have a buy button inside of their wallets. If you're looking to buy some crypto to make a trade uh very quickly inside of your wallet, get some gas gas fees, top things up, dollar cost average in. You can hit that MetaMask buy button both on the mobile wallet and also in the uh extension. So go ahead and check that out. We'll include a link in the show notes. David, I'm gonna ask you the question we ask at the beginning of every state of the nation, which is what is the state of the nation today?

Ryan, the state of the nation is fearful and confused. It goes without saying uh when markets are going down as rapidly as they are, it feels like there is no bottom uh and everyone is just trying to get some information and get some clarity as to why this is happening, how bad is this gonna get, uh why is uh and so like what are all the fallouts of this and and what happens next. Uh so I think we have the agenda for the show cut out for us. Uh so yes, Ryan, the state of the nation is uh fearful and confused.

All right, well let's get right to it. I uh I know that there's a lot to discuss in the macro side of things, so I want to get Jim on the uh on the podcast and we'll pick his brain for a little bit. Before we do, we want to thank the sponsors that made this episode possible. Hey guys, we are back joined by Jim Bianco from Bianco Research. Jim is a macro guy, friend of the podcast, crypto investor, investor in traditional markets as well, and he's DeFi savvy. Jim, how are you doing today? These are trying times, sir. Are you hanging in there?

Yeah, I'm hanging in there. I like that uh description. So I'm losing money in about seven different ways.

Aren't we all? This is gonna be a a cope episode a little bit, but uh Jim, we want to pick your brain on a few things. I think the headline for this episode is really inflation, because it seems like that's the boogeyman that's causing all of this pain that we're in. And we want to dissect that and talk about why inflation is breaking everything or why it appears that way, and then how do we fix it? And then thirdly, what happens next if you could try to per prognosticate and see the different possible end solutions to all of this? But let's start with uh the why is inflation breaking everything. And I want to uh turn our attention to this tweet. I think you you tweeted this out on the 12th. Um, and this was uh what you said markets open Sunday night, and it is clear they are viewing Friday's CPI as a watershed event. The go down with some stats here. NASDAQ 100 futures drop 2%, SP down 1.5%, yen is weakening, one slumps 1.5%. You go through a whole bunch of other stats, but what is happening in the markets and why was Friday's CPI event that's the consumer price index higher than expected? Why is that a watershed moment? Can you explain this for us?

Yeah, so we've been, we've the collective whole of the markets been struggling with this idea that inflation is transitory.

Now, let me give you a definition of transitory.

Transitory, I think, currently means

the Federal Reserve, the federal government, all of us, we don't have to do anything. It will naturally peak, it will naturally go away on its own. That's what the whole idea about transitory doesn't require intervention.

Now, going into CPI's report,

I'd say

60, 65%. I mean, there's actually surveys done by Bank of America and some others that quantify this. About 60, 65%

of Wall Street did not believe it was transitory, but about 35%, 40% did believe it was transitory.

Huh.

So when you got the CPI report on Friday at 1% above the highest estimate, 70 economists were asked by Bloomberg.

Their highest estimate was nine tenths of a percent. It came in at fully 1%, way above the highest estimate.

I think those 35% said, that's it.

I'm out of this idea that inflation is transitory. I now believe it's persistent.

And they started to restructure their portfolio. Now, this is a fancy way of saying they were long stocks, they were long bonds. And they were hoping that the report would give them ammunition to say, see, the inflation stories peaked. It's going to go away. I'm right to belong these instruments.

And then it was a slap in the face.

It's not going away. And that's what I think you saw was, and I'll use a technical term here for you, they vomited up their positions because they were they were just tired of waiting around for if inflation to go away. And that's why you saw the marketplace start to also uh price in the idea of 75 basis points for the Fed to raise rates uh at the same time. So it was the watershed event was.

We've talked about this, we in the trad file markets. Oh, yeah, all the bad news is priced in.

No, it wasn't. We found out on Friday that there was a lot of people that were still clinging hope

that somehow inflation would naturally peak and go away on its own. But now they started to realize the only way it's going to go away is with intervention. We're going to need to have restrictive policy by the Fed andor restrictive policy by the federal government. And that involves some kind of pain. And that's why you saw the market sell off.

Maybe, Jim, this is cope, but what about the argument that uh inflation is a lagging indicator? As in inflation is actually transitory. It's just waiting for it, like the death of the markets, both in the crypto markets, the equities markets. Like we're down, we're down big no matter what market you're in. And therefore, a lot of wealth has been destroyed, therefore, a lot of spending has been destroyed, and we are just waiting for that to finally show up in the inflation numbers. Is there anything to this argument, or am I just trying to cope?

No, it's true. Inflation is a trend, is a lagging indicator. Um, the CPI, PPI are are officially classified

as lagging indicators. But when you look at the forward indicators that might tell you where inflation is going to go,

none of them are giving us any hope.

Um, gas prices.

National average of gas price made a new all-time high again today, 502 a gallon nationwide, more like $7.5 a gallon if you're in California.

The

uh University of Michigan Consumer Confidence Survey, I think, was equally as devastating for the markets on Friday. That came out Friday.

That survey started in 1952, 70 years ago.

And June 2022, the survey result Friday was the lowest ever in 70 years. It wasn't the Kennedy assassination. It wasn't the Vietnam War, 70s gas line, 70s inflation, the 87 crash. It wasn't the tech bubble. It wasn't the great financial crisis. It wasn't COVID. It was this month that we made the 70-year low in consumer confidence. People are scared shitless, to use another technical term for you, when it comes to inflation. And that showed up in that survey as well. So, yes, inflation is a backward looking indicator, but all the forward looking indicators are not giving us any hope that it's going to moderate. And let me be specific on something here, too. There's two

Discussions going on at the same time.

When will it peak?

And when will it come down a lot?

And the when will it peak argument? I'm still in the camp that we might be very close to a peak in inflation. You know, whether 8.6 is it, or maybe in the next month or two, we might see it.

But I don't think that matters. I think what matters is when is it going to come down a lot?

And that's the problem, is that it looks like it's, even though it might peak, it's going to stick around at unacceptable levels.

I want to um get to the answer of that question or thoughts on that question of when will it come down and what the Fed's toolkit is for actually combating that and how effective uh it will be. But before we we get there, I uh actually read an article in the The Economist earlier this week, and uh the TLDR of that article, it it's entitled Does Inflation Matter? Economists in the public have very different views on the question. The TLDR of this article is that like inflation and wages, they kind of like, you know, um track each other, and one might be go higher than the other, but they sort of attract each other. And the the main thrust of the argument is that inflation is more of a psychological uh problem than it is an actual in-depth economy uh problem. And I'm wondering what you make of this argument. The question I have for you, Jim, is is inflation really a big deal? Like, what's wrong with 8% inflation? What's wrong with double digit inflation? By the way, bankless listeners, I am not myself making this argument. I'm stating an argument that the economist made. But what would you say about this, Jim?

Well, first of all, let's talk about what inflation is. It's a loss of purchasing power.

It means you need more money to buy the same thing you bought previously, whether it was last year or last month.

A study came out earlier today

that

the uh average grocery uh average uh food item at a grocery store is up 14%.

In the last year. So you need $1.14 today

to buy the same thing that cost you a dollar a year ago. You're not getting any more value, you're getting the same thing. So that's the problem with inflation is that it reduces my standard of living.

The other problem with inflation,

which I think a lot of people are having a hard time getting their head around,

is it affects 100.0% of the population.

Inflation impacts Elon Musk.

It affects Tesla, it affects SpaceX, but he's got enough money to deal with it, but it still affects him.

Inflation affects somebody who's on public assistance. Inflation affects every single person in between.

Whereas a recession

only affects those, and I'm not trying to diminish a recession, but it only affects those that have lost their job and their immediate family or friends. That's maybe 5 or 10% of the public when you have a recession. And yes, that's not good.

But inflation.

Affects everybody. That's why it matters. Now, to the other issue that was brought up in that economist story,