Macro researcher Jim Bianco, the president of Bianco Research, joined me for a wide-ranging and thought-provoking discussion on my podcast this past week.
It's a must-listen episode, and I can't stop thinking about Bianco's ideas and insights. I'll do my best to convey one of the ideas here.
Bianco told me that three bubbles have primarily come to an end thanks to the pandemic accelerating all this change. These bubbles had previously kept inflation at bay. But in the future, we can expect chronic inflation and significant change and volatility.
“Prior to 2020, we used to talk about whether or not there was an everything bubble, whether there was a bond bubble, whether there was a stock bubble. We used the word ‘bubble’ a lot,” Bianco said.
According to Bianco, there were three bubbles — none related to the financial markets — including cheap labor, goods, and energy.
The bubble of cheap labor, fueled by immigration and globalization, held wages down in the years leading up to 2020.
"That's why most of the time, real wages didn't do much of anything for the last 25 years. I'm talking pre-pandemic. And that's why you had all these populist movements,” Bianco said, pointing to the Tea Party movement, Occupy Wall Street, Brexit, and Trump's election.
Bianco explained that offsetting the lack of wage raises in the first bubble, there was a second bubble in cheap goods, with globalization decreasing manufacturing costs.
“We had a bubble in cheap goods. Thank you, China. So everything at Walmart and Target just kept getting ever and ever cheaper. So while you weren't getting a raise, you weren't losing your purchasing power because of that bubble there,” Bianco added.
All the while, there was a third bubble that emerged in cheap energy, particularly in Europe.
“They [Europe] had a bubble of cheap energy. And that largely came from Russia through the pipelines that we're talking about now, and through energy as well. Russia is still the largest producer of crude oil in the world, even larger than Saudi Arabia,” he said.
To be sure, the three bubbles were “extinguishing themselves” going into 2020, with the movement of cheap labor giving way more towards higher-cost countries, the tariffs implemented during the Trump administration impacting the cost of goods, and the trend toward cheap energy being undercut by ESG and alternatives like wind and solar.
“Then we got the pandemic. And what a pandemic typically does, is it speeds up all of the trends that you had in place. And I think that the trends that we are seeing now in the post-pandemic era are things that were going to happen. We've jumped ahead 25 or 30, or 35 years, and we're way ahead of where we should be, and we've put all of this change in at once,” Bianco said.
According to Bianco, this change drives financial and economic volatility and persistent chronic inflation. Since 2020, Bianco has argued that inflation will come back and be persistent. However, he didn't expect inflation to run at 9% and is in the camp that the 9.1% CPI print for June might have been the peak, but there's still a chance that core inflation — which peaked at 6.5% in March — could still sneak out a new high by the end of the year, he said. To be sure, Bianco does not think inflation is going back to 2%, and instead, it might go somewhere around 3%, 4%, or 4.5%.
The three bubbles of cheap labor, goods, and energy he outlined are trends that are “over to some degree.” What's more, they kept inflation at bay for an extended period.
The cheap labor bubble is challenged by the shift in the balance of power where workers — not the management — now have the upper hand in a tight labor market, especially regarding the future of work and the return to the office. Bianco also points out that remote work changes the consumption basket, and people aren't buying the proportions of stuff they did in 2019. Plus, with the Great Resignation, people feel encouraged to take control and quit to find another job, fueling higher pay.
"You've seen a giant surge in wage inflation. Wage inflation is running at around 5% pretty consistently. And what that means, in general, is, if we keep giving people 5% raises, they can keep paying 5% inflation, or maybe 4.5% inflation. But if you're going to give people 5% wages and think that inflation is going to go back to [2%], it's not, because they'll start bidding up for stuff that they really want because you're giving them more money than prices are rising over time,” Bianco said.
Next, the trend of cheap goods is being challenged by the reshoring of manufacturing and companies replacing just-in-time inventories with just-in-case inventories, which can lead to higher storage costs.
"We're not going to go back to globalization. We're not going to go back to ‘send everything to China because they make it the cheapest,'” Bianco said.
As for cheap energy, Bianco said, “We are not going to kiss and make up with Russia, and they're going to send cheap gas back to Europe after this episode that we've seen.”
And while crude oil and gasoline prices in the U.S. have fallen 80 days, the phenomenon of “anchoring” alters consumers’ perception of costs.
“It [gas] used to be $5, and it's $3.80. Boy, if I told you six months ago, ‘Yeah, the price of gasoline would be $3.85 on Labor Day,’ you would say, ‘Oh my God, that would be terrible.’ But because it's coming down from $5 in June to $3.85, we all want to think that the problem has been licked. It really hasn't. So that's going to keep everything very, very high,” Bianco said.
The world has changed
To give a historical analogy, Bianco says 2022 is similar to 1947 after World War II ended and the economy transitioned from wartime to peacetime, which eventually led to the boom in the 1950s. That period, though, included two recessions — one in 1946 and another in 1949 — and high inflation.
“But, the big, big difference is in 1947, two or three years after the war ended, everybody knew we were headed to a new era. Nobody was pining for, ‘When am I going to get my job back making Sherman tanks or fighter planes?’ That era was over. We were moving forward,” Bianco said.
Coincidentally, Bianco and I recorded our conversation on Tuesday after Labor Day, deemed “judgment day” on Wall Street, with the big banks making the return-to-office full-time mandatory. Bianco noted that many are “cemented in the past” because “they still believe it's 2019.”
“And they still believe that eventually, what you're going to see is a return to the past, that we're not in a new era, we've not sped up the calendar 25 years, and we have to start thinking about how the world has changed,” Bianco said.
Because of all of this, Bianco observes that there's been tremendous economic and financial market volatility as the changes started. He also observed that the frictions and inefficiencies brought about by the changes lead to persistent and chronic inflation.
“The economies are not as efficient as they used to be. And we need to start thinking about how to make them efficient in this post-pandemic world, but we don't want it to have that word ‘post-pandemic,’ we'd rather have an argument whether there is a post-pandemic world,” Bianco said.
To be sure, Bianco doesn't see the change being ushered in by the three bubbles as an apocalyptic or pessimistic scenario but rather one of significant change and volatility that will also lead to opportunity.
“So if you want to wonder, ‘When are we going to go back to the Fed's going to cut rates to zero and pump money up and I don't have to do anything, and my house and my portfolio just go up, because TINA, there is no alternative.’ That era is over.”
He continued: “There is a new era now where there's going to be tremendous change and tremendous opportunity if you catch that change right. But you have to do some work, and you have to try and figure it out. But what you're not going to get is, ‘Just throw a dart at it, buy it, just wait, the Fed will print it higher.’ I think that era has ended.”
Listen to the full episode on Apple Podcasts or Spotify. Be sure to subscribe to my YouTube channel for full interviews and show clips.