At the Money: Managing a Portfolio in a Higher Rate Environment



At The Money: with Jim Bianco, President Bianco Research (April, 03, 2024)

Interest rates have risen by over 500 basis points during the past 24 months. In this new interest rate regime, TINA is no more. Investors should be considering capturing some of that yield in their portfolios.

Full transcript below.


This week’s guest: Jim Bianco is President and Macro Strategist at Bianco Research, L.L.C.

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Ever since the early 2000s starting with crash and 9:11 and then on to the great

And then on to the great financial crisis, we have been in an ultra low rate environment. Sure, rates have been steadily falling since 1982, but starting in the 2010s, they were practically zero. And in Japan and Europe, they were negative.

That era is over. Regime change occurred, and now rates are much higher then they’ve been since the 1990s. Investors should consider the possibility that rates remain high and for much longer than they’ve been. The era of zero interest rates and quantitative easing is dead.

I’m Barry Ritholtz and on today’s edition of at the money. We’re going to discuss how these changes are likely to affect your portfolios and what you should do about it.

To help us unpack all of this and what it means for your money. Let’s bring in Jim Bianco, chief strategist at Bianco Research. His firm has been providing objective and unconventional commentary to 1990s and remains amongst the top-rated firms. amongst institutional traders.

So let’s start with the prior cycle. Rates were very low for a very long time. Tell us why.

Jim Bianco: Coming out of the financial crisis in 2008.  The Fed was worried that the psyche of investors was to stay away from Riskier assets like home prices or equities. Remember the stock market fell almost 50 In 2008 home prices had their biggest crash according to the k schiller measure ever  and so they wanted to try and reinforce That these assets were safe to own  by doing that one way to do that was they took safe assets Like bonds treasury bonds And their yield and tried to make them very unattractive By lowering their interest rates all the way down to zero and they used a fancy term for it They called it the portfolio balance channel, which meant that you were like I have this internal clock in my head I need to make so much every year these bond yields will never get me there.

So what do I have to do to make my Yield? I have to start thinking about taking on a little bit more risk, putting money in corporate bonds, putting money in equities, maybe putting money more back into real estate again The idea behind it was to try and push people into riskier assets.

Barry Ritholtz: And we saw in the two thousands, it certainly was a contributing factor to the financial crisis. When they took yields as low as they did, they sent bond managers looking for higher and riskier yields. And it obviously raises a question in the twenty tens, “Why were they on emergency footing long after the emergency ended?”

How much of this is just a function of the Fed tends to be conservative and move slowly? Is this just the nature of a large, ponderous, conservative institution?

Jim Bianco: Oh, yeah, I definitely think it is. And you’re right, the first example of emergency policy was after 9/11, when they cut rates down to the unfathomable level back then, of around 1%. And they kept it there all the way to 2004, and the joke was in 2003 and 2004 was an emergency rate when there was no clear emergency.

And by keeping that money cheap, they encouraged speculative movements in markets. And the big one that we’re all aware of was housing prices took off like crazy because everybody borrowed at low variable rates. And produced a big peak on it. But you’re right that the Fed is very, very slow in starting to think.

And part of the problem, I think, with the Fed is there’s a group think at the Fed.  That there’s a consensus view of the world and everybody is to purport to that view. And they don’t allow Heterodox opinions.

Barry Ritholtz: I have a vivid recollection following 08-09 of you and I having a conversation. At the time, we were both constructive – hell, I could say bullish – but for very different reasons. I was looking at, hey, markets cut in half tend to do really well over the next decade, down 57%. I’m a buyer.

You were the first analyst of any kind. Everybody on Wall Street who turned around and said “Zero interest rate policy and quantitative easing is going to leave no alternative and all of this cash is going to flow into the equity markets.”

When you talk about change, is that the sort of substantial change in government policy that impact markets? Tell us about that.

Jim Bianco: I think it’s even more basic than that. It impacts psychology. One of the reasons that the Fed wanted to put rates at zero and push all that money in the risk markets was the psyche coming out of 2008 was people were afraid. They were afraid that their nest egg, their net worth, their wealth was at risk and that they can work their whole life, save some money and it just disappears.

And so the fear was that they were just going to all pilot in the tertiary bills and they were never going to move into risk assets. And without that, you know, investment in the economy, we weren’t going to get the economy forward.

So they cut rates to zero to force that money.  But what did people do in 2012 when they saw, wait a minute, my house price is recovering. My stock portfolio is recovering. My net worth is starting to go back up. They felt better. Oh, good. My nest egg is still there. It’s still safe. It’s not going to fall apart. They didn’t do anything other than they felt better. They felt a comfort level because that was happening. 2020 comes. We have a big downturn in 2020. We have massive fiscal stimulus. We have massive spending, the CARES Act, as you point out.

And so because we’re spending more money, we’re seeing higher levels of growth. We’re seeing higher levels of inflation again, like I said three or four percent not eight ten zimbabwe And the higher levels of growth and higher levels of spending means that the appropriate interest rate in this environment is higher.

It’s probably in a four or five percent range. If nominal growth is running at five or six percent, you should have five or six percent interest rates.

Barry Ritholtz: Active managers have not distinguished themselves in an era of rising Indexing at what point is there enough inefficiency in price discovery that active managers can begin earning their keep?

Jim Bianco: Oh, I think that we might be seeing it, you know, evolve now with the whole, you know, and I’ll answer the question in two ways in the whole area of like artificial intelligence. And everything else we’re starting to see somewhat of you know The fancy wall street term is a dispersion of returns that certain stocks are returning much different than other stocks Look no further than what some of the ai related stocks are doing And if you want to look on the other side a big the big cap stocks that are really struggling look at the banks They’re really kind of you know retrenching in the other direction because the banks are struggling with uh, Overvalued office, real estate, and it’s really starting to hurt them where AI is the promise of some kind of, you know, internet 2.0 boom that’s coming with technology and people could start looking at managers to try and differentiate about that.

This is not the 2009, 2010 to 2020 period where basically all you needed was. And I’ll, I’ll use the, Vanguard example, VOO, which is their S&P 500 fund, 60 percent in that. And then, uh, BND, which is their, which is their Bloomberg aggregate bond fund, 40 percent in that there.

I just need two instruments, 60 in stocks, 40 in bonds. Thank you. Uh, let’s see how the decade plays out. I don’t think that the next decade is going to be quite like that.

As far as at, yeah, as far as active managers, I did want to make this distinction and throw in a cheap commercial here. Cause I do manage an ETF, um, and explain that, um, in the equity space, it is well established that active managers have a hard time beating the index.

And I, there’s several reasons for it, but I’ll give you one basic, broad reason. Your biggest weightings, your Nvidia’s, your Microsoft’s of the world are your all stars. And if you’re not all in on your all stars, it is very, very hard to beat the index. And so that’s the challenge that an active manager in equities has.

In fixed income the index runs it around the 50th percentile, right? There’s a lot now one of the big reasons is your biggest weightings in in in fixed income and bonds Are your over levered companies and your countries that have borrowed too much money and so they’re your problem children And you could recognize them as your problem children and you avoid them. And that’s why so many active managers in fixed income can beat the index.

To put up sports metaphor on it. Equities is like playing golf in golf. You play the course,  but fixed income is like playing tennis. In tennis, you play the opponent, right? No one asks in. I shouldn’t say no one asks you’re more likely in fixed income to be asked the question, not can you beat the Bloomberg aggregate index, but can you beat Jeff Gundlock? Can you beat PIMCO? Can you beat Metropolitan West? That that’s the question you’ll be asked in fixed income and equities. The ask question is. Can you beat the S& P 500? Can you beat the course?

Barry Ritholtz: Let’s put a little flesh on the, on the active bones. You know, you look at the active equity side and historically, once you take into fees, taxes, costs, you know, after 10 years, active equity, Doesn’t, doesn’t, there’s very, very few winners, but on the fixed income side, it seems like there are many, many more winners in the active bond management.

If nothing else, as you mentioned, you screen out the highest risk players, the bad companies, the over leveraged countries, and just dropping the bottom, pick a number, 20, 30 percent of the worst Transcribed participants, you’re way ahead of the index. Is that a fair way to describe it?

Jim Bianco: Yes. And that’s exactly right. Because  you know, it’s a very different type of game in fixed income where it is, you know, just avoiding, avoiding the landmines is really all you have to do. And you wind up doing better. And remember 15 years, There’s a yield. So he said, there’s a yield to observe. So if you can avoid those landmines in continue, you could start the year by saying on a fixed income portfolio, a broad based bond portfolio, it’s going to return 4.8 percent that’s if every price is unchanged, that’s what the yield is going to be now. I’ve got to try and avoid those landmines that keep taking me down from 4. 8 percent and you know, trying to, you know, protect that yield and hold as much of that yield as I can.

Barry Ritholtz:: So to wrap up from crash to the COVID-19 pandemic, that’s 2000 to 2020. Monetary policy was the chief driving force in markets, but since the 2020 Cares Act. The pandemic, which led to an infrastructure legislation, to the semiconductor bill, to the Inflation Reduction Act, the shift has been to fiscal, not monetary stimulus.

This tends to mean higher GDP, higher inflation, higher yields, and perhaps lower market returns from the equity portion of your portfolio. Investors should take this into account when they think about. Alternatives to riskier stocks.

I’m Barry Ritholtz, and this is Bloomberg’s At The Money.




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