Hidden Forces Podcast Summary

Episode Title: What’s Driving the Rise in Long-Term Bond Yields?
Host: Demetri Kofinas
Guest: Jim Bianco, President & Macro Strategist, Bianco Research
Release Date: January 20, 2025

Main Theme

Demetri Kofinas sits down with veteran macro strategist Jim Bianco to dissect the recent surge in long-term bond yields across developed economies. The conversation ranges from the Federal Reserve's evolving interest rate policy to the broader macroeconomic variables—deficits, inflation trajectories, global synchronized growth, recession risks, and market psychology—that inform and react to those shifts. The discussion is especially salient for investors, unpacking the challenges facing bond and stock portfolios, and exploring structural economic changes in the post-pandemic world.

Key Discussion Points and Insights

Jim Bianco’s Background and Media Experience

• (03:52–07:13) Bianco recaps his journey from Wall Street research departments to launching Bianco Research and becoming a staple in finance media.
  • Early media involved real barriers to entry: “Of course, I know what I'm talking about. I'm on television.” —Jim Bianco (06:13)
  • Transitioned seamlessly into newer platforms like Twitter and YouTube to maintain influence.

The Recent Rise in Long-Term Yields & Fed Policy

• (08:13–14:23)
  • Since September, the Federal Reserve has embarked on an aggressive rate-cutting cycle (totaling 100bps in three months), yet long-term yields have paradoxically risen.
    • “That is very rare to see in the middle of a rate cutting cycle where the Fed is lowering its short term funds rate to see long term yields being rising at the same time.” —Jim Bianco (09:09)
  • Market expectations and Fed rhetoric have diverged: officials signal further cuts, but markets price in far fewer.
  • Comparison drawn to 1981, when an overly aggressive Fed cut led to a spike in long-term yields due to loss of market confidence and inflationary fears.

Drivers of Higher Yields: Fed vs. Deficits vs. Global Trends

• (11:42–14:23)
  • Fiscal deficits, expectations of future Trump tax cuts, and tariffs all contribute, but these have been persistent since yields were much lower.
  • Bianco’s view: The decisive marginal factor was the Fed's aggressive rate cuts in September— a “change on the margin.”
    • “Deficits and tariffs … that's holding rates up. But the change on the margin was definitely Fed policy.” —Jim Bianco (12:06)
  • Global comparison: Gilt and Bund yields have surged in the UK and Europe, respectively, while Japan and Germany face their own inflation and competitiveness challenges.
  • China is bucking the trend due to steeply falling yields, a signal of economic malaise.

Structural Economic Weaknesses in Germany and China

• (14:45–19:26)
  • Germany: High energy costs post-Ukraine war have devastated manufacturing competitiveness; unable to lower rates due to ECB policies.
  • China: Reported GDP growth rates (~5%) are at multi-decade lows (excepting COVID and Tiananmen), mirroring plummeting bond yields and deeper structural issues.

Rethinking High Interest Rates as Stimulus

• (19:26–22:05)
  • Quoting Warren Mosler, Bianco acknowledges that high rates boost retirees’ income, but “I don't think it's big enough to drive the entire economy.”

The Mortgage Market “Trapping” Effect

• (22:05–25:01)
  • Many homeowners refinanced into 3% mortgages during COVID. High current rates “trap” them, reducing housing turnover and mobility.
    • “Everybody's trapped. You know, they refinanced their house all the way down to 3% mortgages. … If I want to move … now I have to give up my 3% mortgage and … go get another …above 7.” —Jim Bianco (22:32)
  • Assignable mortgages (prevalent in Europe) could help but are unlikely in the US due to industry resistance.

The Fed Lacks a Working Theory of Inflation

• (26:08–28:16)
  • Bianco—citing ex-Fed governor Daniel Tarullo—asserts the Fed “has no working theory on inflation.”
    • “The difference is the Fed presents itself as if they do have a working theory of inflation … That's not true.” —Jim Bianco (26:15)
  • Inflation is too complex, with non-linear psychological and economic drivers, for any single lever to control.

Inflation Expectations and Market Messaging

• (28:16–33:00)
  • Treasury Inflation-Protected Securities (TIPS) and other market signals do reflect higher expected inflation but are akin to “the point spread in a football game”—informative, but not predictive.
  • The rise from 2% to ~3% inflation is “a very big difference” for markets and especially lower-income households.
    • “This level of inflation going from 2% to 3%, it really matters. … The bottom half of income is kind of falling. They're the bottom K … because of inflation.” —Jim Bianco (28:16)

The Post-COVID Structural Regime and Persistent Inflation

• (33:00–39:02)
  • The “rebooted” US economy is fundamentally different: remote work, political volatility, persistent frictions.
    • “The economy changes in certain ways coming out of the 2020 shutdown. … And part of that difference, I think, is leading to persistent inflation.” —Jim Bianco (33:44)
  • Fed Chair Powell’s statements about a “broad normalization” are questioned— data show 3%+ core CPI for 45+ months post-COVID, breaking a 25-year trend.
    • “The inflation rate is doing nothing of the sort. It is a higher level than we've seen in the past.” —Jim Bianco (33:44)

The Federal Reserve’s Dilemma and Political Traps

• (39:02–44:40)
  • Powell boxed in by public pronouncements to bring inflation back to 2%. Reputation and “credibility” at stake.
    • “He's made a promise that I don't think that they can currently fulfill in this cycle.” —Jim Bianco (41:19)
  • 2025 “framework review” may reset the inflation target.
  • Fed policy perceived as potentially partisan given the proximity of aggressive cuts to the 2024 election and Trump’s criticisms: “The Fed is not partisan, but they are political.” —(42:20)
  • The market remains skeptical of the Fed’s narrative, as evidenced by rising bond yields despite rate cuts.

US Growth Outperformance and Risks

• (44:47–50:25)
  • US outperforms Europe and Asia due to creative destruction, flexibility, and technological innovation (especially AI).
    • “I think the old line that the US innovates and Europe regulates really comes into the fold.” —Jim Bianco (45:20)
  • Recessionary periods typically require “a murder weapon”—an exogenous crisis—rather than mere old age.
    • “Economic expansions don't die of old age. They're murdered.” —Rudy Dornbusch, quoted by Bianco (47:36)

Recession Risk: Tariffs, Geopolitics, and Exogenous Shocks

• (50:25–53:33)
  • Tariffs and retaliation (example: potential US-Canada conflict) could be recession triggers, but often serve as negotiating tools.
    • “I tend to think that they’re more of a gambit than an actual weapon that [Trump] intends to employ.” —Jim Bianco (52:25)

What’s Next: Portfolio Strategy in a Bond/Stock Correlated World

• (53:33–END PREVIEW)
  • The remaining conversation (Premium feed) was set to cover:
    • How rising long-term rates could disrupt stock markets.
    • The fragility of the traditional 60/40 portfolio when stocks and bonds move together.
    • Safe portfolio construction in a high-inflation, high-volatility world.
    • Chinese economy developments, gold’s role, and the risks of US equity concentration.

Notable Quotes & Memorable Moments

• On TV Credibility:
  “Of course, I know what I'm talking about. I'm on television.” —Jim Bianco (06:13)
• On Market Messaging:
  “Now, today ... that doesn't mean anything. But back then, it did.” —Jim Bianco (06:13)
• On Unprecedented Market Reaction:
  “That is very rare to see in the middle of a rate cutting cycle ... long term yields being rising at the same time.” —Jim Bianco (09:09)
• On Inflation Targeting:
  “He's made a promise that I don't think that they can currently fulfill in this cycle.” —Jim Bianco (41:19)
• On Recession Triggers:
  “Economic expansions don't die of old age. They're murdered.” —Rudy Dornbusch, quoted by Jim Bianco (47:36)
• On Inflation’s Real Impact:
  “This level of inflation going from 2% to 3%, it really matters.” —Jim Bianco (28:16)
• On Remote Work as Structural Change:
  “The biggest thing ... is probably remote work. Remote work is a thing. ... That's one structural change.” —Jim Bianco (33:44)

Timestamps for Critical Segments

• 03:05 – Bianco’s career retrospective
• 08:13 – Fed’s recent rate cuts and market response
• 12:06 – What’s actually driving long-term rates
• 14:45 – International yield comparison; Germany and China
• 19:26 – Can higher rates be stimulative?
• 22:05 – Mortgage market dynamics
• 26:08 – The Fed’s theory (or lack thereof) on inflation
• 28:16 – Interpreting inflation expectations
• 33:44 – Post-COVID regime & persistent inflation
• 39:02 – The Fed’s inflation target “trap”
• 45:20 – U.S. economic outperformance
• 47:36 – “Murder weapon” and recession risk
• 50:52 – Tariff risk as potential shock
• 53:33 – Transition to portfolio and Premium content

Tone, Style, and Takeaways

The episode exemplifies Demetri’s probing, critical style and Bianco’s measured, research-driven approach. The tone is accessible yet intellectually rigorous, with plenty of historical context and candid skepticism about institutional narratives. For listeners seeking to understand the complex mechanics behind recent bond market moves and the macroeconomic challenges ahead, this episode delivers nuanced insight—and flags the existential risks for portfolios clinging to old assumptions.

Quote to Remember:
“The economy changes in certain ways coming out of the 2020 shutdown… And part of that difference, I think, is leading to persistent inflation.” —Jim Bianco (33:44)