"Trump 2.0" Roadmap: A "Grand Chess Game" of American Debt Restructuring

Recently, Jim Bianco participated in an interview on Kai Hoffmann's podcast. Jim Bianco is the president and macro strategist of Bianco Research. Since 1990, his objective and sharp insights have provided unique perspectives on the global economy and financial markets. Previously, he was a securities and stock technical analyst at UBS, as well as a market strategist for equity and fixed income research.

Bianco pointed out that the global economy and financial markets are facing significant changes, with the high levels of debt and interest expenses in the United States exceeding the defense budget, making the patterns of the past 70 years unsustainable.

Trump is using tariffs as a negotiating tool aimed at lowering the value of the dollar, promoting the return of manufacturing to the United States, and forcing other countries to make concessions. Trump initially targeted major trading partners such as Canada and Mexico because he believes these countries are responsible for the hollowing out of American manufacturing.

Although Trump's series of policies may bring uncertainty and volatility, Bianco believes they can ensure America's long-term prosperity and national security. The "Mar-a-Lago Agreement" is at the core of this transformation, essentially exporting inflation from the United States to the rest of the world, making other countries pay for American debt.

Bianco also predicts that in the coming years, the returns on money market funds, bonds, and stocks will stabilize at around 4%, 5%, and 6%, respectively, while bonds are no longer traditional "crash insurance" but have become an alternative to the stock market.

Despite facing challenges, the current situation is not a forced recession but a necessary adjustment to address unsustainable conditions.

Here are the highlights from the interview:

• The question is, can the current situation be maintained? Can we go back to the past? Can the current situation be maintained? The answer they give, the answer given by 81 million voters, and the answer that Jay Paul seems to agree with is no, we cannot go back to the status quo.
• The "Mar-a-Lago Agreement" is not something that actually exists. It is merely a parody of the idea named after a resort or hotel. But the goal is to lower the value of debt, lower the value of the dollar, and reduce costs. It is conducted under the guise that this is the safe bill we have been paying for the past 70 years, and now you must start paying it.
• Any major power whose interest costs exceed defense spending is no longer a major power. In 2022, U.S. interest expenses exceeded defense spending.
• We need to bring manufacturing back to the United States. That is why Trump has been vigorously promoting companies like SoftBank and Intel to start talking about making large-scale investments in the U.S. to bring people back to work. So, using tariffs as leverage to lower the value of the dollar.
• Trump is pushing Europe to increase defense spending, hoping allies will share the costs of maintaining world order and lighten the financial burden on the U.S. The U.S. has been playing the role of world police for years, and it is time for other countries to pay for it.
• So I don't think it is a coincidence that when Trump came in with tariffs, he wanted to start changing things, he first targeted Canada and Mexico. Why did he target them? Because they are the two largest trading partners
• I believe that, from a natural perspective, yen arbitrage trading is nearing its end, but it has been more related to emerging markets rather than the United States.
• However, I have always believed that in the next few years, what I call the 4, 5, 6 markets, money market funds will give you a return of 4%. Bonds will yield about 5%. The index level of stocks, U.S. stocks, will provide about a 6% return. But within stocks, there will be other opportunities to earn more.
• Bonds are just a low-volatility version of the stock market with a coupon. Slightly lower returns, slightly lower volatility. It has been redefined. The previous 60/40 portfolio existed because it was a form of "crash insurance." But that is no longer the case. Bonds are now an alternative to the stock market.
• I do not think we are entering a forced recession because I do not believe anyone wants that. But I do think they feel that the status quo is unsustainable. It all comes down to we have no choice. We have to do this.

The following is the full interview:

The Transformation and Uncertainty of Trump's Economic Policy

Jim Bianco:

Do you think we are currently in a crisis? Do you think the U.S. economy, with its massive government debt, excessive deficits, and high interest payments, has reached a point where change is necessary? Ambassadors and Bluednick have said so. Yes, change is necessary. We must take a different approach.

Kai Hoffmann:

It’s great to have you back on our show. It’s nice to see you. Thank you very much for joining me. Before we dive into some topics and discuss the game plan, we need to set the scene a bit. What is your assessment of the current economy and financial markets?

Jim Bianco:

Thank you for the invitation. I am enjoying this conversation. I will answer this question from two perspectives.

On January 20th, I thought the economic situation was good, and I believed the financial markets had a certain view of how the world would operate. Now, in mid-March, I still think the economy is okay. However, the world has become more uncertain as we try to figure out what the government wants to do. I want to add that what makes it really difficult to understand is that you have to consider Trump's personality. Trump is a dealmaker; he is not an ideological person. So what he is doing seems to be an ideological shift, but he is doing it in a transactional way. Therefore, he has not made any significant policy speeches to tell you what he wants to do, etc., because that is not his style, but it seems he is doing it this way. So the financial markets are somewhat confused, trying to understand what he is doing.

Of course, the market absolutely hates uncertainty. That is what we are seeing. The VIX index has been rising. Perhaps we can start with some cabinet members and staff, which may help in formulating policies. Scott Bessen reminds me of this. What are your thoughts on his cabinet members and how they can drive the game plan we will discuss here? I believe that cabinet members are now more focused than before. They have a theme behind them. Lutnik focuses on e-commerce, Bessen is in the Treasury, Scott Milen, I think he might be the least understood in the Council of Economic Advisers, and then there's Jason Furman, who is the Chairman of the National Economic Council. These people are really great. They are truly excellent, smart individuals who seem to have a big vision.

But let me delve deeper into this. What is this vision? Let me start answering this question with one question. Do you think we are currently in a crisis? Do you think the U.S. economy, with the government heavily in debt, excessive deficits, and high interest payments, has reached a point where change is necessary? They would think so. The ambassadors and Lutnik have said so. Yes, change is necessary. We must take a different approach.

Now let me critique The Economist magazine, which featured a cover last week with a photo of Trump holding Canadian gasoline and ignited dollar bills, about to set the world on fire. The basic premise of the article is to stop doing this. He cannot stop doing this. Because the issue is, if you believe we are in a crisis, and they do believe so, his 81 million voters believe so too.

Many people in the financial markets think that the debt is unsustainable. Jay Paul has said that the debt and fiscal situation are unsustainable, and if Trump were to step up to the microphone now and say, I have to change your mind, I am a dealmaker. Forget the debt, it's all over. We are going back to a $7 billion budget. We are going back to a $2 trillion deficit. We are going to increase the debt to over $40 trillion. We are going to give Ukraine a blank check, letting them take as much as they need when they need it.

I think the market's reaction would be worse than what we are seeing now, and interest rates would soar. So what we have to accept is that even if you disagree, he believes that the status quo we had in the past can no longer be maintained. We must push forward with something completely different. The goal is to lower the value of the dollar, reduce the debt relative to GDP, decrease the deficit, and try to control the situation, which is why they believe their target is the yield on the 10-year Treasury bond, to lower the level of the 10-year Treasury bond yield. If we achieve all of this, the S&P 500 will do well. So this is the real question we need to start answering. The question is, can the status quo be maintained? Can we go back to the past? Can the status quo be maintained? The answer they give, the answer given by 81 million voters, and the answer that Jay Paul seems to agree with is no, we cannot go back to the status quo. That is why we need to push forward with something different.

Debt, Deficits, and National Security: The Logic Behind the Mar-a-Lago Agreement

Jim Bianco:

You know what people like to say about Trump is that he is a coroner, not a killer. You know, he just looks at the corpse and says, yes, it’s dead. You mistook him for the killer. So that’s the thing about Trump, and it also leads to another point, if you believe the status quo cannot be maintained, then, or let me prove that the status quo can be maintained, because that means going back to the past way of huge deficits and huge spending, and so on So what do we do? The answer is to do nothing. If the status quo can be maintained, we don't need to do anything. We don't need to raise taxes. We don't need to cut spending. We don't need to do anything. Just keep going. But otherwise, another question is that it's easy to say he did it wrong. He is fine. This is a bad policy. This is a bad policy. The implication has always been to return to the status quo. But if we can't return to the status quo, then it's incomplete. You can't say he did it wrong. You can say what we should do. The question is, we should raise taxes on the rich, we should cut spending. This is the status quo. This is what we've been arguing about for 60 years.

You know, you adjust the baseline budget, and the result is $36 trillion in debt, which is 120% of GDP, and a $2 trillion deficit. So what should we do? Finally, I want to say that I completely agree that the proposal he put forward may not work. It may, you know, but I also want to suggest, what else can we do? I don't want, you know, as I said, just to go back to big spending, back to the way we've been cutting budgets, and talk about taxing the rich. This is the status quo. It doesn't work. We can't go back to the past. That's why we must take a different approach.

Kai Hoffmann:

He has been given a mandate to solve problems, plain and simple. The question is, you used the word "theme." I have to understand, this is actually the biggest challenge I face when running this podcast, like, what is the plan? You say he is very focused on deals. There are no policy speeches or anything like that. But do you think he has met with his cabinet members, Besson, Milken, Lutnick, and they all sat down, and Trump said, okay, we need to solve this problem. How do we do it?

Jim Bianco:

Milken wrote a paper last November, shortly after the election, titled "Restructuring the Global Financial System." In it, he proposed an unpopular idea called the "Mar-a-Lago Agreement." To let everyone know, the reason this happens is that all these major adjustments regarding world currencies and courts are always named after the resort or hotel where the adjustments take place. The Bretton Woods system, we all know the Bretton Woods Agreement of 1944. Bretton Woods is actually a resort that still exists in New Hampshire today. The Plaza Accord of 1985 was named after the Plaza Hotel in New York City, and coincidentally, Trump bought the hotel in 1988 after the agreement was reached. So the "Mar-a-Lago Agreement" is not something that actually exists. It is just a parody of this idea of naming things after resorts or hotels. Probably it would be held at Mar-a-Lago. So the goal is to reduce the value of debt, reduce the value of the dollar, and lower costs.

Now, the assumption behind this idea is that I don't want to say "court," because I don't want people to think that Mar-a-Lago is really having a meeting now. But the assumption behind this idea is that the status quo is unsustainable, and we want to go back to the past.

Secondly, the high debt deficit and interest costs pose a national security risk to the United States. They have now surpassed debt and deficits, and it's no longer about Scott Besson, the Secretary of the Treasury, and Harvard's Lakhman, the Secretary of Commerce Now, it also involves Secretary of State Marco Rubio and Secretary of Defense Peter Heg. We must also address this issue.

A few weeks ago, Neil Ferguson published an article in The Wall Street Journal, citing another Ferguson, Adam Ferguson, who was a 17th-century economist. The article was about the Ferguson Law, which states that if the interest costs of any major power exceed its defense spending, it is no longer a major power. The rest of the article reviewed all the examples of this happening over the past 200 years. One of two things happens: either your debt and interest costs quickly fall below your defense spending, or you are no longer a major power. In 2022, U.S. interest spending exceeded defense spending.

That’s why, as I said, this is now a national security issue, and this is what they are trying to address. If you listen to Elon Musk, why are we doing this? The first thing he points out is that the money we spend on interest exceeds defense spending. He highlighted this and emphasized it repeatedly. So, what do they want to do? In short, they want to lower the value of the dollar by using tariffs, which should make the U.S. more competitive and bring jobs back to America.

Will this cause more inflation? Many people, including former Goldman Sachs Chairman Lloyd Blankfein, published a commentary in The Wall Street Journal on the day we recorded the show, saying that the plan being implemented by Trump might work. Of course, it might make you pay an extra couple of thousand dollars for a car, which means inflation, but in the long run, it might be worth it because we will have more people in America with more jobs who can actually afford a car. Now, you might be shocked by this. But what drives Trump is 50% of the American population. 54% of people cannot come up with $1,000 in savings in an emergency. They have to use credit cards to borrow money from others. So if their water heater breaks down, or their car breaks down, or something similar happens, they don’t have the money to deal with it.

Most of these people voted for Trump, and their businesses, their industries, heavy industry, manufacturing, etc., have been hollowed out by globalization. I understand the advantages of globalization, and I support the benefits of globalization. But I also understand the tremendous economic losses that globalization has caused to these communities. Trump is saying there that we need to help these communities revitalize.

We need to bring manufacturing back to America. That’s why he is vigorously promoting companies like SoftBank and Intel to start talking about making large-scale investments in the U.S. to get people back to work. So, using tariffs as leverage to lower the value of the dollar.

This is also about another characteristic of him as a dealmaker, right? Tariffs go up, tariffs go down. What is the purpose of tariffs? Because he focuses on deals. He wants to get something from tariffs. He has no ideological stance on tariffs Part Two. In particular, since I am talking to people from Europe, this part is more controversial. Since defense is now a national security issue, we need it. We hope our partners will help pay for defense costs, which is a huge impetus for Europe to increase defense spending. This idea did not appear in this year's budget, but if they spend more, they can take on more and share more of the burden of maintaining world order and the free world. The United States can reduce its spending in this regard. This is what they are really pushing for.

Now, listen, I will say this in a cynical way. History has repeatedly shown that when great powers run out of funds or exhaust themselves, overspend, and essentially deplete their resources, they ultimately look for funding abroad. Historically, this has meant war. We will go to war with other countries, trying to plunder their reserves. We will not go to war with Europe. We will not warn our allies. We are doing this, and we are working on the 2025 version. We send him the bill, and we say, here is a bill, pay up.

Currently, especially under the leadership of Friedrich Merz in Germany, they seem willing to say, yes, we will pay the bill, which will free Germany from debt and allow for a deficit spending of 500 billion euros. We are willing to do this. This means for the United States that if you build an army, gain defense, and you can do certain things, we, the United States, do not have to do so. This should lighten our burden.

I can say a few words to the European audience. If you look at Trump's approval ratings, I mentioned this on Twitter a day before we recorded the show, on March 16. His approval rating in the U.S. is actually at its highest, even though it has dropped in the past few weeks, it is still higher than at any time during Trump's presidency, higher than at any time in the last three and a half years of Biden's presidency, and higher than the average over the past 13 years since Obama's second term, reaching 47%. So you could say, well, not below 50% is not popular in this polarized world. But his approval rating is high. In other words, you can hate him however you want, I understand. I also do not want them to do these things. But the American public is currently not rejecting this, even if the stock market has dropped by 10%, even if he seems to be causing all the turmoil and spectacle, they are not rejecting it. He will continue to do what he is doing.

Scott Bessen said on a Sunday talk show, I have been a hedge fund manager for 35 years. The market goes up and down. Corrections are healthy. Don't worry. It's nothing serious. Just 10%. If we set the right policies, everything will eventually be fine. Nothing terrible will happen in the White House just because someone had a bad quarter. In this environment, they will continue to implement these policies. So as I said, you can hate them however you want, but understand the reality. He will continue to do what he is doing, and whether you shout at him, claim he is wrong, or threaten that he will set the world on fire like The Economist, he will not change anything about what he is doing now This is the reality of our lives.

But for now, my approach is also very pragmatic. I fully agree with what has happened. We will see that the bills will come due at the end of the term, and then we will address the issue. Perhaps ten years from now, we will look back and say, oh, what he did may not have been entirely in vain. So we will base it on that.

Strong Dollar vs. Weak Dollar: Can We Have the Best of Both Worlds?

Kai Hoffmann:

However, I have read the report on the Mar-a-Lago Agreement, and the role of the dollar is an interesting question in all of this. It's a bit like a double-edged sword. Yes, A, we want to maintain our status as a reserve currency, but B, we also need to slightly assess or devalue the dollar to remain competitive. Which side will you ultimately stand on? Which camp will you be in, and how can we achieve the best of both worlds here?

Jim Bianco:

Scott Bessen, I want to emphasize what you just said. He said, you know, he came out to talk about the role of the dollar and a strong dollar; he wants the dollar to strengthen, but he has a specific meaning for strength. He refers to the reserve currency and a strong currency brand. That is what he means by strength. Because what he is going to say next is that this does not mean that other countries can weaken their currencies. So to explain, what he means is that we want to maintain our status as a reserve currency. We want to keep this excessive privilege. We want the dollar to be regarded as the most important currency unit in the world, but we also want its level to decline. So they want both at the same time. When they talk about both at the same time, do not confuse them.

Now, it is important to understand which level they are referring to. The Federal Reserve has released a series of data called the Trade-Weighted Dollar Index. It involves 26 currencies, weighted by trade volume. The largest weight is Mexico. Next is Canada. Third is the UK. This is different from the DXY, which allows U.S. financial professionals to focus on it; it includes six currencies, with the euro having a weight of 57% over the past 40 years. Starting with the DXY, it has declined by 8% over 40 years. In other words, its return is effectively zero, with a slight negative growth each year, declining by about 0.22% annually. But the trade-weighted dollar has risen by 220% over the past 40 years because it includes Canada and Mexico, and the exchange rates have been depreciating.

So I don't think it's a coincidence that when Trump came in with tariffs, he first targeted Canada and Mexico. Why did he target them? They are the two largest trading partners. They are the biggest trading partners that have led to the hollowing out of manufacturing and industrial bases. Now, to be fair, I think, I'm not sure what happened with Canada. I just started with them. I think it may have initially been a prank because he didn't like Justin Trudeau, calling him a governor, saying he wanted 50 states. He wanted Canada to be the 51st state, and so on. Things started to develop from there. You can't let it go because I'm not quite clear on what the problem is there But Mexico is a bigger problem. The fentanyl crisis, the illegal immigration crisis. Also remember that 30 years ago, when we signed the North American Free Trade Agreement, which eventually evolved into the USMCA, Canada had a trade deficit with Mexico of about $10 billion.

So when he talks about lowering the dollar, he is talking about this. I think he is talking about the peso. He is talking about the Canadian dollar, and he is also talking about the renminbi. He is not necessarily talking about the pound, euro, or yen. What we are referring to are finance-oriented currencies. Remember, the trade-weighted dollar rose by 200% during the same period, while the DXY stagnated. So the trade-weighted dollar could fall significantly, but that does not necessarily mean the euro will fall, the pound will fall, the yen or the dollar will also fall. And the yen.

The Global Reserve Currency Game Under Tariff Threats

Kai Hoffmann:

Now, this is the interesting part. For example, if BRICS wants to establish its own currency, they will be under tariff threats. So they have an interest in maintaining the status of the world reserve currency. Because, basically, one of my biggest concerns is that the U.S. has been avoiding problems and will eventually, like Japan, give up its reserve currency status. They just, you know, have a debt of 250%, and the situation remains the same, right? Do you think this will happen under Trump or the current administration? I think this is something they desperately want to avoid.

Jim Bianco:

No, I don't think this situation will happen at all right now. As far as he is concerned, you know, basically saying to give up, because as I said at the beginning, what is the point of giving up, right?

Like I said, if, if he suddenly says during our recording, I’ve changed my view on the deficit, about, sorry, I’ve changed my view on tariffs. I’ve fired Musk and Dogecoin. We’re done with this. You know, we’re not going to try to control government spending. What do you think the reaction would be? I think the bond market would collapse because it would see the massive bonds we need to issue to meet our initial trajectory. I think we are at 4.25% and not higher, the only reason being that we are currently trying some different approaches, and the bond market is open to this idea, thinking it might work to some extent without producing a 10-year yield of 6% or 7%.

That’s why I don’t think he will give up now. If you tell me a month or 90 days from now that his approval ratings have plummeted and he is a very unpopular person, you might be right. But Trump doesn’t care. He will continue doing what he is doing. Yes, but the Republicans might care because they want to be elected again, and he might lose the support of some of them. This could effectively stifle his plans. Remember, the Republican advantage over the Democrats in the House and Senate is very slim. If he becomes very unpopular, some Republicans seeking re-election will not vote to support the plans Trump wants now. Don’t give him anything he wants because they think he is very powerful. So this could change in the coming months We will wait and see. But so far, there hasn't been any. So he will continue to push this plan, forcing Europe to sign a bill to start paying for defense costs.

Kai Hoffmann:

Okay, I have conflicting thoughts. Now, how to conduct this conversation, I want to quickly talk about geopolitics, about billing other countries, like we discussed with Europe. This morning in the Financial Times, there were some rumors. I think it's an interesting article about possibly billing South Korea and Japan. Then there are the Philippines and Southeast Asia, where the U.S. also has bases. How does this affect things? Is it now a capacity constraint? Is he more focused on Europe because the war in Ukraine is imminent and is now making headlines? When will it be Asia's turn to possibly start paying the bill?

Jim Bianco:

Yes, it may be Asia's turn to pay the bill by the end of this call. But what I mean is to give you an idea of this thought, right, we have $36 trillion in debt. We didn't create this in a few years. We created it over decades. What could be the biggest reason for us having so much debt? We have been the world's police. We have fought terrorism. We have spent trillions of dollars to keep trade flowing and to combat anything that hinders the free world. For decades, the U.S. has spent 5% or 6% of GDP on defense each year, while Europe has only spent 1% or 2%. Over the years, what has Europe done with the extra 3% or 4% that they didn't spend on fighter jets or paying soldiers? You know, nationalized healthcare, progressive movements, green movements, and so on.

That was J.D. Vance, the Vice President's speech in Munich, talking about different interests, right? Europe has gone further towards a progressive movement, towards universal healthcare and all the green movements, while the U.S. has had to play the role of the world's police.

Now he is considering that since we have all this debt and have protected them all, it's time for them to start paying for it. That's why, you know, the bill is coming due. This is also part of the moral agreement, where everyone is confused about this death swap thing, where he will turn to the Europeans and NATO members and say, look, you have trillions of dollars in U.S. Treasury bonds. Give them to us, and we will give you a 100-year zero-coupon bond with a market value of about 13 cents to reduce the debt level. That's it.

Do you agree that you should, we, you owe, you should pay? Europe seems to agree. Europe says we will pay by doing this ourselves. It's just another way of paying. But everyone thinks the moral record is, no, that's just a way of paying. It's like, you agree, you agree to send me money, and now you have to write me a check. You are going to use Venmo. The debt swap is actually just a way of paying, you know, Europe can do this too.

They could say, look, rather than trying to build our own military, let's just pay the U.S. to continue doing this. Maybe that's what South Korea and Japan will ultimately do, which is to say, building our own military is too difficult for us. We will just write a check to the U.S. to pay for our security costs This is a different way of thinking. I know this is a different way of thinking, and it's one that you might disagree with, but I will return to this point. This has gone beyond just being a financial issue. Now it is a national security issue. Our interest costs are higher than our debt costs, and I think the White House has a lot of sympathy for this. If we do not reduce our debt levels, we will no longer be a great power, and for reasons of national security, we must reduce our debt levels, which is why we are working so hard in this direction.

This is very different from what we see under Biden's leadership and very different from what we saw under previous presidents. But as I said, as long as his approval ratings remain unchanged, you can tell me all day long that this is wrong and should not be done. In some ways, I would agree with you. But the reality is, we are doing this.

Kai Hoffmann:

I wonder if the claim that Japan and South Korea are, in a sense, paying the U.S. by buying U.S. bonds is true? I wonder how much the yen carry trade plays a role in this payment system to maintain the operation and liquidity of the U.S.? How do they fit together?

Jim Bianco:

I think the yen carry trade does exist, but it is not necessarily a major driver for the U.S., but it is for emerging markets. To make it easier to understand, let's define the yen carry trade first. Japan's interest rates are close to zero. Until recently, they were at zero, and now they have been raised to about 0.25%. They have been maintained near zero for decades.

So many people would say, let's borrow a large sum of money from Japan because we don't have to pay any interest. Japan has done a good job of keeping its currency relatively stable, and the yen does not fluctuate much. And what do we do with all this borrowed money? We go buy something high-yielding. A good example is Mexico's three-month treasury bills, known as "bonos," which yield about 10%. So, we will borrow at zero interest from Japan, and we will not take on exchange rate risk. We will buy a bunch of Japanese bonds, we will buy something in Argentina, we will buy something in Brazil because they all have high yields.

This is how the yen carry trade works. Now, to some extent, there are some people who have bought U.S. Treasuries, maybe even U.S. stocks, but this is very little. But the difference is that the yen carry trade is coming to an end. The Japanese are raising interest rates, and their currency is becoming more unstable. The simple cost of borrowing in Japan.

Now, interest rates are no longer zero, and they are rising. As I said, if the market is very efficient, if I want to borrow yen, hedge currency risk, and buy something in the U.S. with a 5% yield, that would cost me 5%. So, it doesn't make sense to do this. I have to take on currency risk. Now, this situation is undergoing some changes Last August, the Bank of Japan unexpectedly raised interest rates significantly and showed a very hawkish attitude, triggering a major reversal in yen carry trades. Then, they apologized like the Japanese do, apologizing again and again. This trade has rebounded somewhat. But I think the air for this trade is slowly running out, as Japan's inflation rate is 3.6%, surpassing the U.S. inflation rate for the first time in history. Japan's inflation is more severe than that of the U.S., and they must continue to raise interest rates. As they do so, the advantages of engaging in this trade will disappear. Therefore, I believe that, from a natural perspective, yen carry trades are nearing their end, but they have been more related to emerging markets than to the U.S.

If you want to make a conspiracy theory about this issue, do you know where Kazuo Ueda obtained his PhD in economics? Harvard, MIT. But what's important about MIT is who was in the auditorium, who his economics professors were, and who the students next to him in the office were? One named Mario Draghi. You may have heard of him; who was one of his mentors there? Another named Ben Bernanke. Perhaps you've heard of him too. So, I mean, he comes from the source of all these things, you know? Stan Fischer also had a significant influence on him. So when you're talking about him sitting there listening to what they tell him, the apple doesn't fall far from the tree. Things like that. These have always been, yes, these have always been his peers. You know, these people have always been the ones he interacted with.

The Era of "4, 5, 6 Markets" Arrives

Kai Hoffmann:

Interesting. But before we turn to Asian topics, another topic I've been thinking about is indeed the bond yields in the bond market, and we will also welcome the Federal Reserve meeting this week. What should the yield on the ten-year bond be? What does it tell you now? You mentioned it before, but Jerome Powell will also do a "dance" this week to soothe everyone. Personally, I don't think we will see a rate cut. I wonder what your thoughts are. But he has to "dance," and I want to know how you think he "dances."

Jim Bianco:

We'll see. Let me answer the question about bond yields. As we speak, the yield on the ten-year bond is about 4.30, slightly below that number. Let me remind everyone, do you remember last September when the yen carry trade was unwound, and we weren't worried about a recession? At that time, the stock market had an 8% pullback, dropping to 4.3, and in September last year, it dropped to 3.6. Now it's at 4.30, and the stock market has fallen by 10%. We're all holding paper bags, feeling like a recession is about to happen, and they ask, why are we back at 3.6?

Why aren't we at 3.50 now? I think, to some extent, people are worried about inflation, and inflation is spreading through the system. Japan's inflation is more severe than ours. Europe is heavily stimulating the economy. Regarding Europe, you could say, look at their rising bond yields, etc., you will release the debt brake, and you will start spending money. Will you get stimulus in your economy? Yes. You will also face inflation. Moreover, in terms of many data points, the United States also has a sticky inflation problem. This is why I believe we should maintain interest rates now. As I said, under the same conditions, we should be at 3.50 now, but we are not, because people have potential concerns about inflation. If we relax this, no, we will not experience a recession. I believe yields will return to 4.75 or 5%, but I do not think they will reach 6 or 7%.

This is what I am worried about. If we do nothing and just let it take its course, allowing all this borrowing, deficits, and the weakness or strength of the dollar relative to trade partners. So we will not do that, but I do believe we will continue to see interest rates remain in this sticky range. Therefore, for stocks and other risk assets, do I think stocks will recover? Yes. But do I think they will rebound significantly and break historical highs? No, they may still create new historical highs, but I have always believed that in the next few years, what I call the 4, 5, 6 market, money market funds will give you a return of 4%. Bonds will give you about 5% return. The index level of stocks, U.S. stocks, will give you about 6% return. But within stocks, there will be other opportunities to earn more.

Maybe Europe, maybe German stocks could also be a good choice. But the German DAX index may be more concentrated than the U.S., you know, companies like SAP account for 16% of the index, and about five stocks account for more than half of the index. So, we always complain about the U.S., that FAAMG is so concentrated in the S&P index. It is more concentrated in the German stock market.

However, you know, these similar things, or let me give you another analogy I have been using to describe the U.S. stock market. If it continues to deliver 20% returns every year like it has in the past few years, it’s like sailing. I know nothing about sailing. But if you let me sail on a sailboat at 20 knots, all I have to do is raise the sail, and the boat will move forward. I don’t need to do anything else. But if you let me sail in a 6% or 6-knot wind environment, now I need to learn how to adjust the course and trim, etc. I don’t know how to do that. But if you do that, you can move forward.

So I believe we will see 4, 5, 6 in the financial markets, but themes, sectors, and concepts can help you make money. If you want to think about it this way, if you came to someone at the end of last year and someone came to you and said, I have a great idea about investing in healthcare stocks, energy stocks, or financial or consumer cyclical stocks. Walk away. I just buy VOO or SPY, just raise the sail, the wind is at my back, and we will move forward. I don’t need to be that detailed. Well, in a 6% world, you may need to be detailed. If you do it right in detail, you can ultimately do better than that. Therefore, the next few years will be a very different environment, it will be 4, 5, and 6 Regarding bonds, let's briefly discuss. We used to say, Tina, there is no alternative (Tina: There Is No Alternative, referring to the lack of other investment options). Now, they will provide you with most of the returns that the stock market used to offer, but with much less volatility. So, you know, you will get about 80% of the returns that the stock market used to provide, but with volatility around 30% of the stock market, roughly speaking. For those in specific age groups or risk tolerance ranges, this is not a bad choice; it will be a very viable option, unlike the situation in 2019 when there was another alternative. The only reason you hold bonds is for their crash insurance. If the stock market crashes, the bond market will rebound.

By the way, the last thing, the stock market has corrected by 10%. What did the bond market do during the last 8% drop in the stock market? It dropped by 2%. Our yield was 4.30. Then it went from a 2% drop to a 10% drop. We went from a 4.30% yield to a 4.30% yield, but the stock market did not provide you with any returns. Or rather, the bond market did not provide you with any insurance against the stock market decline, as was the case in 2022, when we experienced a significant drop in the stock market and a massive rise in interest rates.

So bonds are just a low-volatility version of the stock market with a coupon. Slightly lower returns, slightly lower volatility. It has been redefined. The previous 60/40 portfolio existed because it was a form of "crash insurance," you know, when the stock market falls, bonds rise. But that is no longer the case. Bonds are now an alternative to the stock market. As I argued to everyone, last year was not a good year for the bond market. What was its total return? It rose by 1.5%. Now this is considered a bad year; the bond market rose by 1.5%. When the stock market performs poorly, the increase will not be 1.5%, it will be much worse. So, perhaps you can get a 5% coupon each year, while the bond market rises by 1%. In good years, bonds will rise by 8% or 9%, averaging 5%. This is very attractive for many people, depending on your risk category.

Kai Hoffmann:

Yes, it has been like this for a long time, until we encountered the global financial crisis, and the S&P 500 was like a dog, you know, someone stepped on its tail.

Jim Bianco:

That was because we did a lot of money printing and other operations. We managed to get out of the financial crisis. In 2020, we could lower interest rates to zero. Europe could implement negative interest rates, and we could print money like crazy because we had no inflation.

Now, I think when the Federal Reserve cuts rates in September, the first reaction of the bond market will be rising yields. I joke that, you know, we are discussing the week of the Federal Reserve meeting. What can Powell do to stifle the bond market? I mean, make yields soar, come out and act very dovish? No, we are going to take risks These tariffs are terrible. I want to cut interest rates like a madman. I want to start the printing press. Do you know what the first thing that will happen is? Buy bonds, and the yields will skyrocket, and they will crush the stock market. You can't do enough. You can't reach the point of excessive money printing. Yields rose from 2008 to 2020. But now we can't do that anymore because people are afraid of inflation, and if we talk about cutting interest rates and printing money, it will completely destroy the bond market and affect everything else.

Is the U.S. entering a forced recession?

Kai Hoffmann:

I know we only have a few minutes left, but I have to ask you. This might be a bigger topic, are we entering a forced recession?

Jim Bianco:

I don't think we are entering a forced recession because I don't think anyone wants that. I don't think Trump wants a recession. But I do think they feel that the current situation is unsustainable. They are not afraid of the adjustment process they have to go through. If we are going to go through this adjustment process, we will go through it. So even if it does cause turmoil and volatility, they feel we will be better off on the other side of this process.

So no, they are not trying to force a recession. But they are also not afraid of things becoming unstable again because they believe they no longer have a default option to rely on. Right? If they stop doing this, stop what? Then go back to what to calm everyone down, bring the fear index below 12, set new all-time highs in the stock market, and let everyone sleep again? What scenario would lead to that happening? Their argument is that it no longer exists. If we stop doing this, there will be volatility. If we continue doing this, there will also be volatility. We have to push forward with this new adjustment, pay for safety, weaken the dollar, and work to bring back those manufacturing jobs for the middle class. If we risk greater inflation, I cannot emphasize this enough. It all comes down to the fact that we have no choice. We have to do this. This is probably what they are considering right now.

Kai Hoffmann:

Yes, I've been thinking about the terms "shock therapy" and "detox." I've been thinking about those two terms. We will wait and see how it turns out. But Jim, let's have you back in about six months to see how we are progressing here. You know, globally, in fact, the global financial markets are influenced by the U.S. That's why we often talk about the U.S. on this channel because it affects everything else.

Jim Bianco:

I would be happy to come back in six months because now they are giving Munchkin the nickname Blackstone Fred. We will have to see how he is doing as your new Treasury Secretary in six months. He has been making concessions.

Kai Hoffmann:

He has already started making concessions. I'm not even sure; I'm feeling confused. I need to read more articles about how he will spend money, but he has already started making concessions. I read this morning or this afternoon in the Financial Times online, one of the countries, I think it was, which one was it? Spain, we want to put green spending under defense. This is an article in today's Financial Times. They are trying to "greenwash" some things so that I can satisfy the voters. Maybe we will do it this way. I don't know. Maybe we will color it, rainbow colors or something. I don't want to do that, but I am trying.

Jim Bianco:

It will be interesting. We will come back in six months to talk about Germany's green. Looking forward to it. Of course.

Kai Hoffmann:

Great. Jim, thank you very much for your time. Oh, of course. Maybe the last question, because I should have asked it earlier, as it goes back to the first question I asked, or the second question I asked you, is the Mar-a-Lago agreement the final plan?

Jim Bianco:

I think so, if you consider this plan, it means lowering the dollar, breaking the debt, you know, we need a lot of money to pay off the debt. It's not the rich in America. It's you. It's NATO, Japan, South Korea. It's being done under this pretext: this is the bill for the security we have provided for the past 70 years, and now you have to start paying for it. Maybe you choose to do your own defense to pay for it, so we can do less. Or maybe you pay us to do this. But either way, that's basically the impact of this plan