The New Regime People Don’t Want To Accept | Jim Bianco

This episode dissects the prevailing economic misdiagnoses, arguing that we're in a new, inflation-prone regime where old fiscal and monetary playbooks fail, a critical insight for Crypto AI investors navigating market shifts and capital allocation.

The Prevailing Economic Misjudgment

• Jim Bianco, from Bianco Research, and the Host kick off by addressing the widespread inability to accurately assess the current economy, with Bianco reiterating his long-held view that the economic landscape has fundamentally and permanently shifted post-2021.
• The discussion highlights the April Job Openings and Labor Turnover Survey (JOLTS) report, which showed an increase in job openings from 7.1 million to 7.39 million. This contradicted prevailing pessimistic forecasts of a "soft data collapsing" and an impending recession, which had gained traction in April.
  • JOLTS (Job Openings and Labor Turnover Survey): A monthly report by the U.S. Bureau of Labor Statistics that measures job vacancies, hires, and separations, providing insights into labor market tightness.
• Bianco emphasizes that economic models and expectations rooted in the pre-2019 era are no longer applicable. He states, "every time there's a recession and/or a financial crisis and we had both, the economy changes. It has changed and everybody's got their 2019 playbook and they keep running it out there and it doesn't work."
• Strategic Implication for Crypto AI Investors: The persistent misreading of economic strength suggests that investment theses based on imminent recession or a return to pre-COVID low-interest rate environments may be flawed. Crypto AI projects needing long-term capital should factor in a potentially more resilient, yet inflationary, macroeconomic backdrop.

Diagnosing the Disconnect: Fundamentals vs. Vibes

• The Host pinpoints two core issues: a misdiagnosis of economic drivers (overemphasis on monetary policy over fiscal realities) and a disconnect between negative public sentiment ("vibes") and strong economic fundamentals.
• Bianco dismisses the concept of a "vibe session," arguing that soft data (survey-based opinions) are lagging indicators, not predictive of economic shifts. He attributes the negative sentiment to an overly narrative-driven environment, amplified by polarizing political figures.
  • Soft Data: Economic indicators based on opinions, surveys, and sentiment (e.g., consumer confidence) rather than direct measurements of economic activity.
• A significant focus is the market's obsession with Federal Reserve rate cuts. Bianco questions the assumption that cuts are necessary or imminent, pointing out that current inflation, while at a four-year low, remains higher than any point between 2010 and 2020.
• He argues that the bond market's reaction in late 2023, with 10-year yields rising despite Fed discussions of easing, was a "rejection of the policy," signaling that stimulus wasn't needed and inflation was a greater concern.
• The conversation touches on the idea that 5% yields might be the new normal, not an anomaly caused by excessive government deficits, though deficits are acknowledged as large. Bianco notes, "5% yields are normal. That's where they should be right now."
• The low Move Index (a measure of bond market volatility) suggests no inherent stress in the bond market itself; the stress is among those clinging to outdated, pre-COVID economic models.
  • Move Index: The ICE BofA MOVE Index measures U.S. interest rate volatility by looking at prices of over-the-counter options on Treasury bonds. It's often considered the "VIX for bonds."
• Actionable Insight for Researchers: The divergence between sentiment and hard data, and the market's potential mispricing of Fed actions, creates opportunities for research into alternative economic indicators and models, potentially leveraging AI for more accurate forecasting in this new regime.

Trump Administration's Economic Policies and Narrative Shifts

• The discussion shifts to the economic policies and narratives under the Trump administration, including initial focuses on "Doge" (Department of Government Efficiency—an initiative to cut wasteful government spending) and austerity, which seemed to pivot after "liberation day" (a term used by the host, likely referring to a specific market event or policy announcement).
• Bianco, referencing economic advisor Steven Mirren and the "Mar-a-Lago Accord" (a conceptual framework for U.S. economic policy, particularly trade), posits that the pre-2024 status quo of massive budgets and deficits was unsustainable, necessitating change.
  • Mar-a-Lago Accord: A term associated with economic discussions among Trump advisors, like Stephen Moore and Larry Kudlow, focusing on policies for economic growth, including tax cuts and deregulation, and potentially a more managed dollar.
• Trump's strategies, including tariffs and demands for increased European defense spending, aimed to address these imbalances.
• The failure of "Doge" is highlighted as a significant loss, with Bianco remarking, "If he [Elon Musk, referenced as 'the richest guy in the world'] can't get Doge to work, no one can get Doge to work. Washington is just going to be a wasteful pile of money until the bond market stops funding it."
• Tariffs are analyzed through two potential goals: leverage for negotiation (which markets might tolerate) or revenue generation (which markets would view as a large tax increase). Bianco suggests Trump has recently leaned more towards tariffs as leverage.
• Strategic Implication for Crypto AI Investors: Understanding the motivations behind major economic policies like tariffs (leverage vs. revenue) is crucial. For AI and crypto sectors reliant on global supply chains or international talent, tariffs as a blunt revenue tool could pose significant operational risks and cost increases.

The Nuance of Tariffs and Alternative Economic Levers

• The Host emphasizes the lack of nuance in tariff debates, noting that a ~15% effective tariff rate might be manageable, while 30% could be highly disruptive, conflicting with goals like normalizing the trade deficit.
• Alternative strategies are explored, such as taxing remittances or pursuing currency devaluation (as implied by the Mar-a-Lago Accord), which might be politically more palatable than broad consumer-hitting tariffs.
• Bianco maintains that Trump is unlikely to abandon tariffs, as they are central to his political platform aimed at the working class who felt disadvantaged by globalization, particularly after China's WTO entry.
  • WTO (World Trade Organization): An intergovernmental organization that regulates and facilitates international trade.
• A key observation is the dramatic realignment of political party stances on economic issues, reminiscent of Neil Howe's "Fourth Turning" theory, where traditional Republican and Democrat positions on taxes, trade, and fiscal policy appear inverted.
  • Fourth Turning: A concept from a theory by William Strauss and Neil Howe describing a recurring 80-100 year cycle of generational archetypes and societal moods, with the "Fourth Turning" being a period of crisis and major upheaval.
• Bianco states, "everything is upside down when it comes to our politics...in 2025, I don't know what it means to be a Republican and I don't know what it means to be a Democrat because whatever you think a Democrat is supposed to do, that's probably what the Republicans are doing."
• Actionable Insight for Researchers: The "Fourth Turning" environment implies heightened uncertainty and potential for radical policy shifts. AI researchers could model the impacts of such non-linear changes on economic stability and investment landscapes, while crypto researchers can assess how decentralized systems might offer resilience.

The Shifting Role of Monetary Policy and the Fed's Future

• The conversation probes the Federal Reserve's role in an era of fiscal dominance. Bianco anticipates a significant shift in Fed leadership and policy direction post-May 2025, assuming a new Fed Chair appointed by Trump (mentioning Kevin Warsh as a potential candidate).
• Drawing from Sydney Homer and Richard Sylla's "History of Interest Rates," Bianco argues that the 2010-2022 period of zero/negative interest rates and quantitative easing was an extreme historical anomaly, unlikely to be repeated due to the current inflationary environment.
• He suggests the Fed should look to the 1980s and 1990s for a more relevant policy framework, accepting that positive term premiums and real rates are becoming normal again.
  • Term Premium: The additional yield investors demand for holding a longer-term bond compared to a series of shorter-term bonds, compensating for risks like inflation uncertainty.
  • Real Rates: Interest rates adjusted for inflation (nominal interest rate minus inflation rate).
• Bianco criticizes the persistent narrative focused solely on rate cuts, exemplified by some commentators who still view zero percent funds rates as "normal."
• Strategic Implication for Crypto AI Investors: The unlikelihood of a return to a zero-interest-rate policy (ZIRP) means Crypto AI projects must demonstrate sustainable business models and paths to profitability, as cheap capital is no longer a given. Valuations will be more sensitive to interest rate expectations.

Rate Hike Risks and the MMT Perspective

• The Host raises the MMT-style argument that rate hikes, with high government debt, could be inflationary by increasing interest income for bondholders who have locked in low-rate liabilities.
  • MMT (Modern Monetary Theory): An economic theory suggesting that monetarily sovereign countries (like the U.S.) are not operationally constrained by revenues when it comes to federal government spending and can issue currency to fund spending, with inflation being the main constraint.
• Bianco expresses sympathy for this view, noting that higher rates transfer wealth to bondholders (often the affluent top 10% who drive a disproportionate 50% of retail sales).
• However, he clarifies this isn't an argument for cutting rates, as interest rates are not arbitrary. There's a fundamental market rate. "When the Fed was hiking rates aggressively in '22, I as a bond holder could say they're on the case fighting inflation... Every time the Fed gets dovish, rates go straight up."
• Attempts by the Fed to impose artificially low rates when fundamentals dictate otherwise would be met by "bond vigilantes" pushing long-term rates even higher.
• Actionable Insight for Researchers: The complex interplay between fiscal deficits, monetary policy, and wealth distribution highlighted by MMT-like effects warrants further AI-driven analysis to understand second-order impacts on inflation and asset prices, crucial for crypto investment strategies.

Global Bond Markets: Who Bears the Burden?

• The discussion addresses the precarious state of the long-duration bond market, with the Host questioning who will absorb these bonds as yields face upward pressure. Strategies like "Yellenomics" (prioritizing Treasury bill issuance) are noted as going global.
• Bianco asserts that ultimately, "the sucker is you and me. The sucker is everybody," because the U.S. will always fund its debt, but potentially at punishingly high interest rates that stifle the broader economy.
• He is skeptical of schemes to force bond buying, such as relaxing the Supplementary Leverage Ratio (SLR) for banks or relying on stablecoin issuers.
  • SLR (Supplementary Leverage Ratio): A U.S. regulatory requirement for large banks to hold a minimum amount of capital relative to their total leverage exposure, regardless of risk.
• Banks, already sitting on unrealized bond losses, are unlikely to increase holdings simply due to SLR changes. Stablecoin yields, Bianco notes, often don't compete with traditional money market funds, questioning their appeal for large-scale Treasury absorption.
• The primary driver for bond investment will be relative attractiveness. Bianco introduces his "4-5-6 markets" framework: cash returning 4%, bonds 5%, and stocks 6%, suggesting bonds offer a compelling risk-reward profile, explaining current ETF flows into fixed income.
• Strategic Implication for Crypto AI Investors: If traditional bond markets require significantly higher yields to clear, it could divert capital from riskier assets like early-stage AI and crypto. However, instability in traditional finance could also accelerate adoption of decentralized alternatives.

The Global Shift to Bill Issuance: A Risky Gambit

• The Host observes a global trend among indebted nations to heavily issue short-term bills while avoiding long-duration bonds, questioning historical precedents and potential outcomes.
• Bianco likens this to "Operation Twist" strategies, which historically provide short-term relief but often end poorly when market forces overwhelm manipulation, citing the Liz Truss "mini-budget" crisis in the UK as an example of markets rejecting unsustainable fiscal paths.
  • Operation Twist: A monetary policy tool where the central bank buys long-term government bonds and sells short-term ones to lower long-term interest rates and flatten the yield curve.
  • Liz Truss Moment: Refers to the market turmoil in the UK in September-October 2022 following then-Prime Minister Liz Truss's announcement of unfunded tax cuts, leading to a spike in government borrowing costs and her eventual resignation.
• He warns, "it will work for a while and then it will end poorly," because such strategies mask underlying fiscal problems, delaying necessary adjustments until a crisis forces them.
• Actionable Insight for Researchers: The systemic risks associated with a global shift to short-term debt financing are immense. AI-powered risk models could be developed to monitor sovereign debt sustainability and predict potential contagion effects relevant to all asset classes, including digital ones.

Monetary Hedges: Gold, Bitcoin, and Policy Red Flags

• With traditional long-end bonds suppressed, the Host asks if the rise in gold and Bitcoin signals a red flag to policymakers. Bianco agrees, noting these are smaller markets, easier to move.
• He observes a divergence in how central banks view these assets. Bitcoin's rise (mentioning a figure of "$110,000 on Bitcoin" as a recent point, though current market prices are lower) is often dismissed by central bankers as speculative ("degen" activity like GameStop) rather than a loss of confidence in fiat systems.
• Bianco himself sees crypto as dual-natured: "there are some people that are going into it because they think that, you know, they want to have an alternative to the current financial system... And then there's others that are, you know, racing into it because it's all number go up."
• Gold's rise is similarly downplayed by officials as representing a small cohort, a view Bianco cautions against.
• Strategic Implication for Crypto AI Investors: The official dismissal of Bitcoin and gold as serious monetary signals, despite their performance, suggests a potential blind spot in traditional policy circles. This could mean continued policy errors that favor non-sovereign stores of value, benefiting crypto investors who understand this dynamic.

Capital Repatriation and Shifting Global Equity Valuations

• The final segment explores capital returning to domestic markets, impacting both bonds (e.g., Japanese investors preferring JGBs as yields rise, unwinding the Yen Carry Trade) and equities.
  • Yen Carry Trade: A strategy where investors borrow Japanese yen at low-interest rates and invest in higher-yielding assets elsewhere. Its unwinding can cause significant market shifts.
• The decline of the Yen Carry Trade is significant as Japan is the largest foreign holder of U.S. Treasuries; reduced Japanese buying adds upward pressure on U.S. rates.
• Regarding equities, Bianco dismisses the "loss of American exceptionalism" narrative as an overblown insult. He argues the rotation from U.S. to European stocks is a valuation play: U.S. stocks have a high forward P/E of 22, requiring near-perfect conditions, while European stocks at a P/E of ~12 offer a better risk-reward in an uncertain global environment.
• Actionable Insight for Researchers: The unwinding of global carry trades and shifts in equity valuations present complex dynamics. AI can be used to model capital flows and identify undervalued global AI and tech opportunities outside the U.S., or to assess the resilience of U.S. tech dominance amidst these shifts.

Conclusion: Navigating a New Economic Order

This discussion underscores a fundamental economic regime change demanding new analytical frameworks. For Crypto AI investors and researchers, this means vigilance against outdated assumptions, a focus on sustainable value, and an understanding that fiscal dominance and persistent inflation are key features of the foreseeable future.