Inflation, Fed triggers one-way journey to market misery: Jim Bianco – Reuters

Until inflation peaks and the Federal Reserve stops raising interest rates, market forecast master Jim Bianco warns that Wall Street is on a single ticket to misery.

“The Fed has only one tool to drive inflation up, and that is to curb demand,” the president of Bianco Research told CNBC’s “Fast Money” on Tuesday. “We may not like what’s going on, but in the Eccles building in Washington, I do not think they’re that sad about what they’ve seen on the stock market over the last few weeks.”

The S&P 500 fell for the fifth day in a row and sank deeper into a bear market on Tuesday. The index has now fallen by 23% from the highest level ever on 4 January. The Nasdaq has fallen 33% and the Dow Jones 18% from their respective highs.

“We’re in a bad news and good news scenario because you have 390,000 jobs in May,” Bianco said. “The [the Fed] the impression that they can make the stock market sour without creating unemployment. »

Meanwhile, the leading 10-year government bond yield reached its highest level since April 2011. It is now around 3.48%, up 17% from last week.

“Complete mess right now”

“The bond market, and I want to use a very technical term, it’s a complete mess right now,” he said. “The losses you have seen in the bond market since the beginning of the year are the largest ever recorded. This is set to be the worst year in the history of the bond market. The mortgage-backed market is no better. Liquidity is terrible. »

Bianco has been preparing for a return to inflation for two years. On CNBC’s “Trading Nation” in December 2020, he warned that inflation would reach heights not seen in a generation.

“You have a quantitative easing on the way. The biggest bond buyer is traveling. And that’s the Federal Reserve,” Bianco said. “You intend for them to be very hawkish about raising interest rates. »

Bianco expects the Fed to raise interest rates by 75 basis points on Wednesday, which is in line with Wall Street estimates. He also expects a 75 basis point increase at the next meeting in July.

“You could raise interest rates enough, and you could ruin the economy, and you could knock demand off a cliff, and you could bring inflation down. Now that’s not how you or I want it to be done,” Bianco said. “There is a likelihood that they will end up going too far and creating a bigger mess. »

He argues that the Fed must see serious damage to the economy in order to repeal its austerity policy. As inflation affects all corners of the economy, he warns that virtually all financial assets are vulnerable to large losses. According to Bianco, the odds are against a soft or even soft landing.

Its exception is commodities, which are positioned to beat inflation. However, Bianco warns that there are serious risks as well.

“You’re not there yet to demand destruction. And so, I think until you do, commodities will continue to rise,” he said. “But the caveat I want to give people about commodities is that they have levels of cryptocurrency.”

For those with a low risk tolerance, Bianco believes that state-insured money market accounts should start to look more attractive. Based on an increase of 75 basis points, he sees them jump 1.5% in two weeks. The current national average interest rate is 0.08% on a money market account, according to Bankrate.com’s latest weekly survey of institutions.

It would be difficult to keep up with inflation. But Bianco sees few options for investors.

“Everything is one-sided in the wrong direction right now,” Bianco said.

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