Jim Bianco: Will Dems Push For Price Controls If Fed “Policy Error” Leads To Runaway Inflation?

With Americans temporarily distracted by the drama in Ukraine, traders are losing sight of the real driving force behind markets: the Fed, and it’s sluggish approach to normalizing monetary policy. Just a few days ago, we shared research from Fed repo oracle Zoltan Poszar, who proclaimed that the central bank will need to crash markets to save the economy. Now, another Fed expert, Jim Bianco of Bianco Research, joins Erik Townsend to discuss the nature of Jerome Powell’s current predicament, along with a handful of other topics like the impact of the COVID lockdown on America’s working habits.

One factor recently contributing to inflation is the fact that Wall Street banks are doling out massive raises to coax their most valuable workers back to the office.

When pressed about Wall Street’s obsession with returning to the office, Bianco explains that banks like JP Morgan and Goldman Sachs are demanding employees return to the office because “executives” and “MD types” really like the office. After all, they’re the ones with the best office real estate. And since they’re the decision-makers, back to the office it is.

I think the simple answer is who is the office designed for and who likes the office the most? The office is designed for executives in you know, it is their office managing director types, senior vice president types, they prefer the office more than anybody else. Who are 75% of the employees roughly speaking in the service sector office, they can work from home, their administrative, they’re operational, they’re maybe clerical as well to. The office is not designed for them. They’re the ones that have to take the New Jersey Transit through the port authority, that is not a fun thing to do, even through this day. They would prefer to work from home. So that’s kind of the push-pull. Yes, Dave Solomon of Goldman Sachs wants everybody at Goldman Sachs back in the office 10-11 hours a day, five or six days a week, because the office is a wonderful place according to Dave Solomon. And he’s right for Dave Solomon It is.

During his opening question, interviewer Erik Townsend asks Bianco for his thoughts on an old Wall Street yarn: which is smarter, the credit market or the stock market? Because right now, it doesn’t seem like the credit market anticipates the possibility of long-lasting, secular inflation. As Bianco delves into his reasoning for why selling in credit has been more contained, he outlines why there might be more carnage to come.

But there’s another dynamic that’s going on in the credit markets, which I think a lot of people don’t realize is occurring. No one sells anymore in the credit markets. It’s either you buy or you hedge or you buy your hedge. What has happened since January is two things. If you look at puts on the HYG and the LQD indexes, these are the high yield ETF and the investment grade ETF, the iShares ETFs puts have exploded in volume and open interest since the market started getting a little messy around January 1. Credit default swap volume has exploded higher. ETF volume has exploded higher. ETF volumes right now, if you look at dollar volumes of the HYG and all the junk indexes that trade, it’s 80% the sell volume of the underlying cash market, no other ETF sector, whether gold, healthcare, international, whatever you want, nothing is approaching what is happening in the high yield and investment grade ETFs that they trade almost as much as the underlying market.

By the way, speaking of the underlying market, cash market volumes of high yield bonds and investment grade bonds that trade eight year low. They’re not trading bonds. You buy bonds when you’re bullish. You buy puts and you short ETFs. And you buy credit default swaps when you think things are going messy. So there’s an old adage in the stock market. It’s a market of stocks, not a stock market. I think that really applies for the bond market. It’s a market of bonds. It’s not a high yield market. But we trade this like it’s a high yield market. We just you know, buy the ETF, buy puts, buy credit default swaps, or not. Wait a minute, just so you know, bonds are not the same as an energy bonds, which are not the same as healthcare bonds, even more than casino stocks, energy stocks and healthcare stocks. But that’s the way that we seem to trade it right now. And that’s one of the things that might be masking the selloff that you see or the lack of urgency in the credit markets is it trades as one instrument, and when that one instrument decides that now’s the time to sell, which it hasn’t for many many years because it either buys hedge, you could have real problems moving forward with the market.

Moving on, Bianco shifted to discussing what, exactly, is going on with the Fed. Far from being an “apolitical” institution, Bianco explains that right now, the Fed is “more political” than at any time in at least a generation. One reason is that, since the Senate hasn’t voted to confirm Powell for his second term, the Democrats are effectively holding a veto over anything he might do, meaning he has limited scope to tighten interest rates to such a degree that it totally collapses the market.

Now, again, I don’t think that was the plan all along. And I don’t even think they think that right now. But effectively, that’s what’s happened is that he is the Federal Reserve Chairman. He is being asked to bring inflation for the first time in 40 years, and the Senate is holding the sword of Damocles over him. At any point he displeasures the Senate. They just want a 50 votes for him and he’s out. So the Fed is in a position of enormous pressure of loss of independence that we’ve frankly, I don’t think we’ve ever seen right now with the Federal Reserve. And we’ll have to see how it plays out. And what I’m suggesting is, it’s all about inflation. And it’s all about politics.

And that’s what cerebral Alaskans about. And that’s what this whole thing is about. It’s about politics, the Fed is one of the most political or, you know, the Fed likes to say that they’re non-political, that is not true at any point in at least a generation. The Fed is intensely political and it revolves around inflation.

How is this impacting the Fed’s ability to bring inflation under control? As one might guess, it’s not good. Well, Bianco fears that – as we have repeatedly pointed out – the central bank’s policy error has already been made: the problem is, inflation moved up “too fast” and the Fed has been “way, way too late” – maybe if they had started the taper earlier. They’re going to have to raise rates

So that’s where the debate comes in, as well. But I also think that the Fed has already made a policy error. They have another thing that the Fed likes to do, which is called forward guidance. In English what that means is, the Fed wants to tell you 16 times what they’re going to do before they do it.

This inflation thing that remember one year ago, inflation was one and a half percent. Today, it’s seven and a half percent. It moved up on them too fast. They initially put in their framework for their new framework to emphasize unemployment, dismiss inflation fears, call them transitory, say it was going to go away because remember, the original forecast of the Fed was inflation was going to peak in the spring of last year and come down.

And that was when it was at an unacceptably high rate, by the spring of last year was two and a half percent. And it was gonna come back down under 2%, by the end of December of 2021. Instead it shot up to seven and a half percent, as well. So they’re now, they’ve waited too long. Look, we’re recording this in February, the Fed is still buying bonds in February, they’re still easing. So they’ve been way way too late in this. Maybe if they had started to taper earlier, ended the taper earlier, maybe have one or two rate hikes in place now, they would have actually changed the outlook for the bond market, but they are operating so late in this and they are under so much political pressure.

If the Fed fails to react fast enough to bring inflationary pressures under control, Bianco fears there will be talk of “price controls” – just look at the “left wing” publications like “Mother Jones” and “Axios ” – before the end of the year as politicians grasp at straws in the struggled to try and curb inflation.

Look if the Fed can’t get inflation under control. Let’s just bring back price controls. Let’s just bring back wage and price controls. Yeah, they didn’t work in the 70s but they’re desperate right now. The day we’re speaking, the Washington Post has a story. The Democrats are the ones that love taxes, want to see fossil fuels usage reduced to save the planet, they’re getting ready to cut the gasoline tax for the rest of this year because they’re so panicked about what’s going to happen in December as well too. So if the Fed doesn’t get this under control, there will be I think, talk about price controls before the end of the year. I think the Fed also knows this. And this is another reason why the J saying don’t go there with those price controls. Let me handle this. I’ll move 50 in March. And I’ll just keep hiking every meeting until we slow the economy enough to bring down inflation.

In one respect, it has already started. And the end result is that financial markets will eventually be forced to reckon with the fact that they aren’t “the priority” any more.

During the rest of the interview, Bianco discusses what Americans can expect from monetary and fiscal policy over the next year or two. Readers can listen to the full interview below: