Jim Bianco of Bianco Research LLC chats with TrimTabs’ Charles Biderman about the financial impact of the Presidential Election and our economic future. The full transcript of the video is below:
Charles Biderman: What’s your take on the market, the election, bonds stocks and the aftermath?
Jim Bianco: I think that going into the election, we weren’t worried about the fiscal cliff at all. If you look at the Wall Street Journal a few weeks ago, they did a survey of fund managers. Eighty-three percent of them said there wouldn’t be a fiscal cliff. Citi Group did a survey of fund managers and 86 percent said there wouldn’t be a fiscal cliff. Then we had the election and it was completely predictable (the results coming out of the election. But I think what happened was the partisanship this country has – the dividedness of this country – we were reminded of it and just how hard it’s going to be for our elected officials to come to a deal. And we started to price in the cliff yesterday (Wednesday). Because I don’t think it was priced in at all. And at this point right now, what the market is worried about is, will there be a deal to prevent a massive tax increase. Will there be a deal to prevent massive spending cuts. It’s questioning it for the first time. Even though we’ve talked about the fiscal cliff for months, we’ve really only started to price it in yesterday (Wednesday).
CB: In my twisted way of looking at the world, a Pollyanna stock market where stocks go up no matter what, that people were, “Well, Obama will win and the market will go up.” Or, “Romney will win and the market will go up even more.” The market has trained people since ’09, saying you can’t go wrong buying stocks during dips. Do you think there’s any validity to that?
JB: Yes, but I wouldn’t use the word “Pollyanna.” I would use the words “Federal Reserve.” Going into the election, the conventional wisdom had evolved to, we were electing both a President and a monetary policy. If we elected Obama, that would mean more money printing. Even if Bernanke left, we would find ‘Mini-Me’ Bernanke to run the Fed and the policy would continue. If we had gotten Romney, we would have gotten John Taylor and things would change. That’s what I think the market was stumbling on initially prior to the election. There’s a chance we might get Romney. And then the idea or the hope was coming out of the election, we would get more money printing. And that’s what the “Pollyann-ish” view was. The market would rally under two scenarios. Either things would get better and the market would rally, or things don’t get better and the Fed would print money. But now we threw a monkey wrench into that when we said, ‘wait a minute. Maybe this fiscal cliff is real. The market had misjudged it until Election Day.’
CB: It was clear when it was 1:2 odds that Obama was a lock. Real money can’t be taken in and snookered. But I was saying that whatever happens I cannot imagine any scenario where capital gains and dividend tax rates go up – maybe not to 40 percent, but certainly at least 20-25. And higher tax rates are going to create selling in tax-related stocks regardless of the other nonsense, AKA the fiscal cliff. Why did nobody else see this and do you see any scenario where capital gains and dividends don’t go up?
JB: They didn’t see it, because they didn’t believe it, like they said in those surveys. Everybody was assuming, and I’m going to put myself in that camp to. There’s going to be a lot of histrionics. But at the end of the day, they learned their lesson from the TARP vote. They said no on TARP, the stock market fell almost 800 points and then four days later, with their tail between their legs, they pushed TARP right through. They weren’t going to let that happen again.
But I think what happened on the election was that they were reminded that the reason Washington doesn’t agree is because that’s the type of representatives we send from both sides. We send people there not to compromise. We send people there to fight from our viewpoint whether it’s on the right or the left. So yeah, you’re right. I think what was coming on the market place was, “no, there wasn’t going to be a big tax hike. They weren’t going jack up capital gains. They weren’t going to jack up all those taxes.” Now, maybe that’s a possibility. And I think that’s why the market’s struggling. If the market were to rally, they would really need is a sign that’s not going to happen. Right now, it looks like that is going to happen.
CB: Bob Woodward in his book about Obama said that he’s a horrible administrator in essence. And the democrats in congress say he’s a terrible leader of their party and the republicans… But it seems like this is not the guy unless there’s a dramatic transformation of who he is and how he deals with his political colleagues. This is nota guy to lead a coalition and resolve anything in a substantive and positive way. Do you agree or am I over-stating it?
JB: No, let’s look at the last four years. What collisions has he led? His first big achievements in his first two years, the stimulus and health care were all done with democratic vote. After the shellacking the democrats took in the 2010 midterm election, it was Obama that caved and said the economy couldn’t handle a tax increase and he extended the Bush tax cuts two more years. There was no deal. So if you look at everything that’s happened, there never was a deal. There’s never been a collision. Now, you’ve got Obama who ran on, “I want to raise rates.” We’ve got the republicans who have said, “we are the only thing standing between you and higher taxes and we will continue to stand there.” We’ve got to immovable objects. So now, for the first time since Obama became President four years ago, we need a true compromise, a true coalition. We didn’t even get that during the debt ceiling fight in 2011. We got the Super Committee that failed to agree and we got the sequestration which is now known as the fiscal cliff. So history tells you that there’s never been any deal on one side or the other and now we need one. That’s why we’re so pessimistic. There’s no example of the past where we’ve actually had that.
CB: I liked the phrase I used in my video on why Obama could end up as the worst fiscal President ever, and is “people who think they’re smarter than they are, are very dangerous. Particularly when they’re the President of the United States.”
JB: I would agree with that. I want to throw out one more technical thing for people to wrap their head around: Moody’s and Fitch have threatened to downgrade the US if we don’t get our act together with the fiscal cliff. Now that I’ve said that, everybody says, “who cares? What difference does that make? It’s not going to change treasury yields.” I agree with that. But the idea that the US treasury is a Triple-A-rated security – it still is because two of three rating agencies have it rated as Triple-A – if the US loses it’s Triple-A rating, it matters for the plumbing of financial markets.
Repo-transactions, margin deposits, cash transfers… How does one transfer $100 million in cash to another person in a contract? You usually send them government securities because they’re Triple-A rated and used as cash substitutes. How does one do a repo-transaction? You use collateral of a Triple-A security. What happens when they’re not Triple-A securities? How does one put up margin at a futures exchange? When that happens and they’re not Triple-A, it creates all kinds of problems for Wall Street. It really matters for the US. It doesn’t matter that they’re going to change the yields for treasuries. But treasuries are cash substitutes and all of a sudden that cash becomes worth a little bit less. That can become very problematic and that’s wrapped up in this whole thing to, because what else is going to happen around the end of the year with the fiscal cliff? The debt ceiling is going to come as well.
Everything comes together at once. It does matter, if the debt ceiling gets extended or doesn’t get extended. If we don’t do it the right way according to the rating agencies, it does matter. So these are important issues. You’re right, we’re going into these issues without an example of the republicans and this President without agreeing on anything over these last four years and that’s why the initial reaction since the election has been the Dow losing 400 points.
CB: I’m shocked that you think the government is ineffective at getting stuff done.
JB: It’s amazing isn’t it. All it takes is one trip to the DMV and everybody’s’ mind has changed about this stuff.
CB: Talking about spending, to me, people who look at GDP are just not wanting to look at reality. There’s income, there’s the budget, there’s what we’re spending. Right now, the US is spending about $3.5 trillion per year, and it looks like a 10 percent cut would be $350 billion. And that’s roughly what they’re talking about cutting in spending if there’s no deal at $250 and higher taxes. But to me, if the government is as ineffective at providing services as I say they are, meaning at less than a 50 percent effectiveness rate – let’s say it’s 4:1. So if it costs the government $4.00 to provide one dollar in service, if we cut them by 10 percent, we’re actually improving productivity in the US economy. Does that make any sense?
JB: It makes perfect what sense. A lot of people make that case and I’m kind of with them. We want to reduce the size of government if you want to believe that government is inefficient, and I do. If you want to reduce it, then that is a positive. But, the efficiencies that you get from reducing the government come over time. The cuts are just that the ‘G’ part of GDP falls immediately because there’s cuts there. There’s no benefit to it. If you cut ‘G,’ meaning government, out of GDP, do I get a tax rebate so I can use that money in the private sector more efficiently? No, you get a tax hike at the same time. So the initial response to all of that is to lower GDP.
We’ve been talking about Hurricane Sandy, right? Sandy rolls through, you have the broken window fallacy and we spend money to fix that stuff and GDP goes up because of construction and rebuilding, but it doesn’t help net worth. This is the opposite of that. GDP goes down because it doesn’t help the cuts in spending, but it has positive results in the long term. That’s where I think the issues come in because we’re looking at this at a short-term basis. This comes back to the Federal Reserve, because what drives financial markets right now is Federal Reserve policy. And if we’re going to have a fiscal cliff-induced, statistical recession, we’re going to have a federal response to it that’s going to make your head spin. That’s why it matters to that end. We can’t look long term because of the fact.
CB: Here’s my off-the-wall thinking. Imagine if we’re in gridlock and we go off the cliff. So if taxes go up, wiping out any growth, spending goes down, hurting GDP initially, you get a major stock market correction, the economy starts to slow. But maybe people realize we can afford to keep cutting spending. We’re better off giving people unemployment than their jobs, because you have to pay all the overhead for them not doing anything. And then maybe you could cut rates six months in and say, “Hey, that was a mistake.” Maybe I’m being hopeful of something good coming from a horrible situation.
JB: I think you are being hopeful, because those weren’t the election returns that I saw two days ago. And that is not the conventional wisdom that we said as a country two days ago. So I’d like to think you’re going to be right, but I’m not holding my breath on that.
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