Is It Time to Start Buying Bonds? | Jim Bianco

In Episode 502 https://hiddenforces.io/podcasts/return-to-normal-the-case-of-bonds-jim-bianco of Hidden Forces, Demetri Kofinas speaks with Jim Bianco, founder of Bianco Research and Bianco Advisors, about why he has turned bullish on bonds after six years of warning they were overvalued, what the K-shaped economy and the dominance of AI-related stocks mean for markets, and how mounting fiscal pressures in Washington, Paris, London, and Tokyo could reshape the investment landscape over the next three to five years. The first hour covers Jim's thesis on the bond market, the K-shaped economy, and why asset ownership and capital gains, rather than wages, now drive both consumer spending and the public's sense of how the economy is doing. They also discuss the growing concentration of US stock market gains in a small group of AI-related companies, the valuations of those companies, and how agentic AI is already reshaping the economy, including the financial research and continuing education businesses that Demetri and Jim operate. The second hour turns to the fiscal constraints facing the United States and other major developed economies. They take a close look at France and the warning signs emerging in its bond market, and what a dislocation in French yields and funding stress for the Fifth Republic could mean for the sustainability of the European Monetary Union. They also examine the competing risks of financial repression versus a balance sheet recession triggered by the enormous AI-related capex boom, the case for allocating to gold, the Fed's retreat from forward guidance, and how the midterm elections and populist movements abroad could shape the direction of fiscal and monetary policy over the next ten to twenty years. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Join our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 10/08/2026

• 0:00Speaker 00

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Jim Bianco, founder of Bianco Research and Bianco Advisors, where he manages a pragmatic approach to fixed income investment. He has recently turned bullish on bonds after having spent much of the last six years warning that they were overvalued. And in the course of this conversation, you will come to understand why Jim believes this, as well as what his views are on the equity market, the valuation of AI-related companies

• 0:42Speaker 00

  that are now responsible for the majority of the US stock market's gains, why there is a persistent disconnect between the positive economic data and the felt experience of the majority of the public, how the midterm elections could impact his thesis, and what the fiscal pressures building, not only in Washington, but in Paris, London, Tokyo, and elsewhere will mean for markets, the economy, and investors over the next three to five years. We spend the first hour of this conversation discussing Jim's thesis on the bond market, the K-shaped economy, and why asset ownership and capital gains rather than wages are now driving both consumer spending and the public sense of how the economy is doing. We also discuss the increase in concentration of

• 1:23Speaker 00

  US stock market gains in a small group of AI-related companies, and how the rise of agentic AI is already reshaping the economy, including our own businesses in the fields of financial research and continuing education. The second hour is devoted to the fiscal constraints facing the United States and other major developed economies. We take a particularly close look at France and the warning signs emerging in the French bond market, what a dislocation in French bond yields and funding stress for the Fifth Republic could mean for the sustainability of European Monetary Union, the competing risks of financial repression versus those of potential balance sheet recession caused by the enormous capex spend being undertaken to fund the AI boom, the case for allocating to gold, the Fed's retreat from forward guidance,

• 2:07Speaker 00

  and how the outcomes of the midterm elections and populist elections around the world could shape the direction of fiscal and monetary policies over the next 10 to 20 years. If you want access to all of this conversation, go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners and weekend retreats, you could also do that on our subscriber page. And if you still

• 2:49Speaker 00

  have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this incredibly timely and important conversation with my guest, Jim Bianco.

• 3:25Speaker 00

  Jim Bianco, welcome back to Hidden Forces.

• 3:30Speaker 01

  Thanks for having me. Looking forward to the conversation.

• 3:32Speaker 00

  So much, Jim. It's actually been a while. Some housekeeping notes for listeners. I'm going to be interviewing former president of the Federal Reserve Bank of St. Louis, James Bullard, for the CFA Society in New York's annual celebration at the Plaza Hotel on October 27. I just checked and it looks like they're sold out, but you can still get on the waitlist. So if anyone's interested in doing that, they can go to cfa NY.org and they can find the event and they can put their names on the waitlist. It's going to be a very timely interview, especially considering not just the upcoming rate decision, but the midterms and everything else. So Jim, like I said, it's great to see you again. You were on the, when was the last time you were on the show? It's been a while.

• 4:14Speaker 01

  Two or three years. Yeah, a couple of years ago, but I've been on before. Yeah.

• 4:18Speaker 00

  And I also interviewed you and Mike Green and Michael Cantorowitz at, was it at the NASDAQ?

• 4:24Speaker 01

  No, it was at the New York Stock Exchange. It was the Simplify Fall Conference.

• 4:27Speaker 00

  That's right. And you've been on the podcast at least once before. You may have also spoken to our Genius Community as well. And you've been banging this drum on bonds being overvalued for at least the last five or six years. And it seems that you've recently changed your tune on this. I've seen you on Twitter beginning to make the case for bonds. So to help set this up, tell me a little bit about what your overall view is on the US economy right now and on the global economy, if you have a view on that. And then let's use this as a jumping off point for our conversation about bonds, the stock market, and a number of other related topics.

• 5:03Speaker 01

  Well, first I'd say that's the right way to go about it because I have turned positive on the bond market for the first time in six years. And it has to do with where interest rates are relative to the economy. So a great place to start is where is the economy before we talk about how interest rates relate to them. And the US economy is a big economy. I mean, I'm stating the obvious. You know, it's 30-plus trillion dollars. So there's a lot going on with the economy at the same time, right? If you want to scream, "It's terrible," every day for the rest of our life, there will always be sectors or pockets of the economy that are struggling. But on average, if you look at the average numbers, it's pretty good. The economic data

• 5:46Speaker 01

  that we see in terms of growth in GDP has been running at around 2.5% for the last four years. That's a decent number, 2.5% relative to history. Most economists have this thing about called potential GDP, and they think it's between 2 and 2.5, and we're running at the upper end of that number. And in the last quarter or so, we've been running even higher than that. Inflation, I've been arguing that inflation has been running above trend now for five years, and will continue to do that, not because the fear that inflation is going to go up, but because we can't disinflate. And the reason we can't disinflate is because goods inflation

• 6:31Speaker 01

  is over. And one of the big influences on my thinking here is the book on Anchored Central Banker. I think you interviewed Manu Priggi, the author of the book with Charles Goodhart.

• 6:41Speaker 00

  And Charles Goodhart as well, both, yeah.

• 6:42Speaker 01

  Yes. And it was a very good book. And it basically, what they said was, I wrote a piece about this about a month ago for our clients, where I titled it "Mistaking Brains for a Chinese Trade Deal," is that when China entered the WTO in 2001, for the next 18 years, goods averaged falling half a percent a year, deflation. It offset services inflation. It kept the overall inflation rate down, and central bankers are slapping themselves on the back, saying, "What a great job we've done." Post-COVID, we've had deglobalization, tariffs, wars, and chronic supply chain problems, that goods deflation is now moderate goods inflation. It went from minus

• 7:25Speaker 01

  half a percent a year, falling prices, half a percent a year, to positive 1.8 post-COVID. And it doesn't sound like much, but when you add in that services inflation never got below 2% during the WTO period of 2001 to 2020, and it's pushing the high 3s right now, that's why we're stuck in a 3% inflation world. And my fear is that we're going to go to 4, 5, or 6. That would happen if we had a geopolitical problem and the price of oil skyrocketed, or something like that, but more that it's not going to go down because we're not going to get that deflation. So if you add the two together, the nominal GDP of the US, the nominal

• 8:07Speaker 01

  is real growth plus inflation, is running at around 5.5%. That is not a bad number. Now, throw in one other mix in there, the K-shaped economy. Let's define the K, or the way we define the K. The top of the K, you know, K-shaped economy because it looks like the letter K, the top of the K is anybody that owns assets. Do you own a home? Do you have a stock or an investment portfolio, not necessarily a stock portfolio? The answer is yes, you're in the top of the K. If you rent, live paycheck to paycheck with basically no assets, and that's roughly half the country, if not more, you're in the bottom of the K. And so the economy is very uneven

• 8:51Speaker 01

  for the top and the bottom of the K. Now, you might say, "Isn't it always?" Yes. But it's more so now than it typically has been. Why is it more so now? Because of affordability. That 3-ish percent inflation that we've been seeing has been running faster since the end of COVID than wages have been increasing. So paychecks have not been keeping up. To give you the number, CPI is up 31% since April 2020. That's the end of COVID. The average wage, average hourly earnings, is up 26% since the end of COVID. So if you live paycheck to paycheck and you're in the bottom of the K, you're falling behind. Now, maybe if you're in the top of the K, you

• 9:34Speaker 01

  might raise your hand and go, "Wait, my paycheck is also not keeping up with inflation." Yes, but you look at your house on Zillow, you watch your ETFs or whatever investments you have, and they've been doubling during that period, at least the stock market has. You know, home prices are up 30 or 40%, and that's made up the difference for you so that your net wealth has outpaced inflation and you're able to deal with it. That's what's different about this K. The bot is that the wealth effect from housing and from investments has been so strong for the top of the K relative to the bottom of the K, that that's why we've been seeing this split even larger than normal.

• 10:14Speaker 00

  I just looked it up, and it appears that the S&P 500 is up roughly 140% over the same period. Does that track with what you know to be true?

• 10:22Speaker 01

  Yes. Although a lot, a little bit of that is because April of 2020 was the low, you know, it fell 30% during COVID. I tend to look at the definition of a bull market, and it's not unique to me, as whenever you take out the previous high. So I go back to the February 2020 high, and I say, "Only when you get above that is the day the bull market starts, not the day of the low." But if you took the February 2020 high, we're up about 100% since that price, but 140 since the low.

• 10:52Speaker 00

  So I have another question about this distinction between the upper and lower parts of the distribution. When thinking about the larger question of why the data about the economy and how great it's doing, drws doesn't track with people's broad sense of how the economy is doing day to day. Even those of us who are in the upper part of the K seem to feel that, for example, the jobs data doesn't convey the sentiments that people seem to have.

• 11:18Speaker 00

  With respect to asset prices, are capital gains and dividends becoming a bigger share of the income for people on the upper part of the K? And because of the outperformance of assets, is this also why their experience of the economy is so fundamentally different than people who are largely making their money from their own labor?

• 11:37Speaker 01

  Yeah, I absolutely think so. You've really seen it, especially when you get to the extreme examples. I'll give you one extreme example. The average home price in the United States is about $420,000. Average size of the home is, I think, 2,200 square feet. Forgot the average size, but I do know that the average price for a home in the United States, $170 a square foot, 172 to be exact, at least the last numbers I saw, which were August numbers. Now, if you go to San Francisco and you go to the most desirable neighborhood in San Francisco, say, the Pacific Sites neighborhood, Pack Heights, homes there are getting $5,000 a square foot. Is it because people in San Francisco have an average income of $13 million a year?

• 12:22Speaker 01

  Or is it because they've been awarded assets, stock options, stock in a lot of these tech companies, that is now worth $13 million? And I think it's the latter, not the former. And so that's an example of what's been happening, that a lot of what's been driving a lot of the economy's average numbers has been the upper part of the K, which has been driven by wealth effects greater than we've ever seen. Mark Zandi at Moody's has been putting together a number about spending, and he looks at the wealth effect in spending, and he says that the top 20% of the country accounts for half of all retail sales in the United States, and that's the most concentrated it's ever been.

• 13:05Speaker 01

  And it's not because the top 20% are making their income, their salary is much greater than the bottom 50. Their salary is always some multiple of that, but it's that they're all staring at their phone, watching their house and their stock portfolios go up, just like the Pack Heights neighborhood in San Francisco, everybody's watching their stock price go up or their expected stock price with Anthropic coming, and that's what they're spending. They're not spending the fruits of their labor, their income, they're spending the assets that they were awarded that are skyrocketing in value.

• 13:40Speaker 00

  So there have been a lot of drivers for the outperformance of assets. One of those relates to something you hinted at earlier, which is the recycling of dollars from current account surplus countries, most notably China, into US capital markets. The same goes for the persistent price deflation as a result of the importation of cheap goods from these same countries that kept inflation low and allowed central banks to keep monetary policy loose, allowing multiples to expand. Systematic passive investing is another one, as is the psychological conditioning of investors who have come to expect stock market prices to mean revert every time there's a sell-off. Where would you rank some of these drivers? And what are the most important ones to understand if we want to assess the durability of this

• 14:25Speaker 00

  trend?

• 14:26Speaker 01

  So I'll give you a statistic that I put on social media earlier today, the day we were recording. Michael Kembless at JP Morgan put together a list of S&P 500 companies that are AI-related, and he's got 41 companies on the list out of 500 companies. And those 41 companies are 49% of the S&P's market capitalization half. The other 459 companies are 51% of the S&P. And SpaceX, which is Grok, XAI, is not on the list because it's not in the S&P, because it's not going to qualify to be in the S&P until one year after its IPO date, which would be next June.

• 15:06Speaker 01

  But if you kind of mentally put that into the equation, you're 51%, 52%, and if you kind of mentally slot in someday OpenAI and Anthropic will come public, and then they'll qualify and they'll get into the index, you're at about 55% of the S&P is a handful, 44 companies that are AI-related, and the other 456 companies will be 45%. When was the last time the stock market saw a single theme more than 50% of its overall value, using the S&P as the metric? It was probably the railroad boom in the 19th century. We haven't seen anything like this in maybe 120-plus years, if not 150 years.

• 15:47Speaker 01

  Now, the reason I bring that up is, when you ask the question about capital recycling, the AI boom, the innovation boom that the United States has is unique to the US. That's what's getting the recycling boom going. That's what's been propping up the market. We run a statistic where we look at gains in the stock market, looking at those 41 companies. Since November 29th, 2022, why did I pick that specific date? That was the date ChatGPT, you know, launched its research service as a free service, November 29, 2022. 70% of the gains in the US stock market, 7-0, have been AI-related. The other 30 have been the other 459 companies. That's what the capital recycling from the rest of the world is trying to get.

• 16:32Speaker 01

  That opportunity doesn't exist in Asia, it doesn't exist in Europe, it exists here, and that's why you've been seeing that money come in. There's an old line that I'm thinking about when I'm saying this, that the US innovates, China replicates, and Europe regulates, and everybody's going to the innovation, and that's in the US right now.

• 16:53Speaker 00

  Do you view the role of systematic passive as being that of an amplifier, or do you view it as an independent variable that provides positive uplift to equity markets irrespective of underlying trends?

• 17:06Speaker 01

  I think it's more of the independent positive uplift. Mike Green has done a lot of great work on the passive thing, and it is, it's structurally built that you shove your money into the market, and then, you know, it's harder to get it out. For instance, you go to work for a company, they have some kind of an investment scheme where you can take a percentage of your paycheck, and they give you a list of ETFs, or they give you a list of investments, and you check the boxes so it equals 100%, or maybe your company's stock. And you fill out the form and you hand it to Human Resources, and it comes out of your paycheck every month. A lot of people forget that that's happening. No one from Human Resources is ever going to call you and say, you know, the stock

• 17:49Speaker 01

  market's having a bear market, and maybe you ought to consider redoing your investments percentages. But if you use your money with a wealth manager, that's exactly what they'll do. So a lot of that is really much more independent, that you kind of set this up, you take some of your money out, and the money just flows in every single month, and it's been a big support for the market. Now, it's not going to go on forever. If you look at the demographics of the country, eventually all those people are going to retire, and then they're going to start spending down that money, and they're going to start reversing that whole inflow into an outflow. And then the dynamics of passive investing might work against the market, but it's not working against the market right now.

• 18:32Speaker 01

  It seems to really be a benefit to pushing the prices higher.

• 18:36Speaker 00

  So I mentioned the jobs numbers earlier. What are we seeing in terms of employment in the United States?

• 18:42Speaker 01

  Dare I say some pretty good numbers? And dare I say that somebody's yelling at me, what are you talking about? We just produced 29,000 jobs in September, and for the year, we've produced about 60,000 jobs a month, and that sounds like a terrible number. And I would say, you're right, if you look at over history, those are below-average numbers. So why did I say that they're very good? Because ultimately, the economists have this thing called labor breakeven. How many jobs does the United States need to create? And the answer is, how many people do we have of working age population, which the Bureau of Labor Statistics defines as 15 to 64?

• 19:23Speaker 01

  We, since 2007, maybe it was the financial crisis that did it, have had a fertility rate of below replacement, 2.1 children per woman. It's been below that number since 2001. So now we're starting to roll, you know, into those kids being 18 and 19 years old, and by 2030, here's an unbelievable stat for you, the number of 64-year-olds turning 65 will be greater than the number of 14-year-olds turning 15. So that pool of 15 to 64-year-olds will be shrinking. The only way we've augmented that was immigration. Now, we still have legal immigration in the US, it's about 600,000 a year, so it's not nothing.

• 20:06Speaker 01

  But illegal immigration, which was running into millions during the Biden years, is now effectively zero. So let me sum it up for you. The pool of people that are in the 15 to 64-year-old cohort

• 20:19Speaker 01

  Increases by about thirty thousand a month. That's it. So if I told you that in the last six months, I'm looking at the statistic right now, that the US economy has averaged about sixty five thousand jobs a month, you might say, but over the arc of the last ten or twenty years, that looks like a very low number. And I would turn to you and say, but for the number of people that are fifteen to sixty four year olds, we only need about thirty five thousand a month, and we're producing sixty four. So that's why we've got a fairly good number. That might also account for why the unemployment rate is still very low at around four point one, four point two percent. And again, the day we're recording, the initial claims for unemployment insurance came out today nationally.

• 21:01Speaker 01

  The four week moving average is a hundred and ninety eight thousand people filed for claims over the four weeks ending October second. That's the lowest number in the fifty seven year history of that statistic. Again, because the number of jobs, the number of people, it's all very low. And because it's very low, these what appear to be low numbers are actually okay. And that's why I think that the labor market is seems to be doing okay. Now, again, okay, shaped economy, it's a three hundred million job economy. You can point to big sectors of the economy where it's struggling, maybe those that are working in office real estate. You could point to other sectors of the economy where it's booming, just to use a similar one, those that work in data center real estate.

• 21:44Speaker 01

  So that will always be true, but on average, it seems to be doing well.

• 21:48Speaker 00

  I've seen some reports that entry level employment is beginning to diverge with the historical average against the broader labor pool. Have you looked into this at all? And how does it tie into the AI story? Because we've heard a lot of concern that AI is going to displace a lot of entry level employees and white collar workers.

• 22:07Speaker 01

  Yeah, I, you know, I've, I've looked into it a little bit, and the data is inconclusive from what I've seen. But let me back up and say about the AI thing. There's a company called Ramp that helps companies manage their expenses and their travel accounts and their credit cards and everything else. And they put out a statistics that's very popular, right? The number, the percentage of companies, and they've got a large number of companies that are spending money on AI. And it's something like sixty percent of companies that are spending on AI. But then there's other statistics that companies that are self reporting in surveys, that AI workflows are making a meaningful difference on their bottom line or the way that their company operates. And that's about two or three percent.

• 22:50Speaker 01

  So let me square that. About two or three percent of companies in the United States are saying, you know what? This AI thing matters to our company. The other fifty four percent are paying twenty bucks a month for a Claude account. And I'm not demystifying them, they're still trying to figure it out. So we're in very, very early days of AI being a potential displacement force in the economy. Now, as far as the, I looked at this, I looked at the data from the American Consumer Survey and some of the other surveys and a breakdown of the surveys. The problem with the data on entry level employment is a lot of people that get non STEM degrees, STEM being, you know, science, technology, engineering and mathematics

• 23:33Speaker 01

  are, are really struggling right now. We wrote a piece, we called them, you know, baristas with a bachelor's. And that is a big problem that you come out of school, to be flippant about, you come out of school with a poetry major, and it's really hard to get a job, harder now than it's ever been. You come out of school with a math degree, you come out of school with a solid business degree, you come out of school with a computer science degree, and it's a much, much different world in order to get a job. And I think what we're seeing is the percentage of people that are coming out with non STEM degrees that are really struggling. But if you adjust for that, it doesn't seem to be that the entry level jobs are really at a struggle right now. Now, that might change, that two percent that say it's meaningful and fifty five

• 24:16Speaker 01

  percent are paying twenty bucks a month, maybe in two or three or four years, twenty or thirty or forty percent of companies are going to say AI is a meaningful thing in their workflow, and that probably will change the dynamics of the labor market. And the one thing I would argue to you is that the narrative is, well, that's it for kids graduating from school. Dare I say, it might be that's it for people with fifteen years of degree, fifteen years at the company. They are expensive. The kids coming out of school are not expensive. And so there's, there's an appetite to get cheap labor, and that would be the kids coming out of school. But if AI can take the forty year old job and reduce that, that might be where you might see the pain point come.

• 25:00Speaker 01

  So I think we're looking in the wrong place if we're worried about AI. I think we got to look higher up the employment stack, you know, at more of a cost basis and how much people are, are cost. I know that's kind of a pessimistic view of AI, but I think that that's really where we got to start focusing on.

• 25:16Speaker 00

  I saw a report across my desk this morning that we're already seeing evidence of displacement at call centers, which is kind of what you would expect. Do you have an anecdotal sense of how this technology is being adopted versus the web in the nineteen nineties and early two thousands? Do you feel like the adoption for this is faster? Because it took a long time for us to move into e-commerce. I mean, it took a long time for small businesses to adopt the web and do business over the internet. And it feels like people are adopting AI faster, even though I hear from many of my friends and colleagues that who work with clients directly or customers or companies, that actually, to the extent that it's being adopted, it's not being really used very productively yet. So I'm just curious what your perspective is on this.

• 25:59Speaker 01

  I'm there too. I think it's being used, but not very productively. Let me give a nuance on AI. There's two types of AI, there's generative and agentic AI. And just to give you the simple answer, a generative AI is a Google search in steroids, ask it a question, get an answer. Everybody's doing that with it. Agentic AI, I want to give it a simple answer. You, Mr. AI, I guess I've signed it a gender here, you, Mr. AI, take over my computer, do something with my computer. The way I use agentic AI, I literally tell it, I need you to get this data, make me

• 26:39Speaker 01

  a chart in Excel with this data, and I describe the chart, and it creates the Excel spreadsheet whole cloth. And then when it's done, it opens Excel, and I'm looking at the chart, I haven't touched the keyboard. That's agentic AI. Are you asking it to take over your computer and do tasks for you? Very few people are doing that right now. But are you searching for last night's box scores? Or are you helping it? Are you asking it questions because you're writing an email to somebody and you want to make sure your facts are right? You're using it all the time for that. But once we get into the agentic side of the business, and it starts to do the tasks as opposed to answering the questions, that's when you're really going to start to see

• 27:24Speaker 01

  the change in AI. Marc Andreessen of A16Z likes to say, I, it's not unique to him, but I learned it from him, a job is a series of tasks. And agentic takes tasks and automates them. So once you start automating parts of your job, the tasks of your job, that's when we're going to start to see it. We're not quite there yet. Now, part of the reason we might not be there yet is a lot of company IT departments are afraid of agentic AI. They're afraid of letting an automated bot get into their servers and get into their systems.

• 28:04Speaker 01

  And they've openly restricted the usage of it or the number of people that can use it. They don't want to let everybody say, hey, take over my computer, go out on the server, get this, get that, because they're afraid, once these automated agents start taking over on their systems, that things can go awry. That's what I think is holding us back. But eventually, when we get there, I think we're going to see a revolution in the way that jobs are being done.

• 28:32Speaker 00

  Yeah, it's really changed the nature of work. Work is, for me at least, and I imagine this is true for you as well, has become more prompting, more review, and less of doing the actual thing that sits somewhere in between those two things.

• 28:47Speaker 01

  Yeah, you know, the way I've explained it to people that are still struggling to say, you know, older people, I don't get this AI thing. And I said, my keyboard usage is down over fifty percent. I mean, you know, keyboard is the primary tool that you use to input to your computer. And I use Whisper Flow, and I use Speechify and some other programs where I talk to my computer. And that is kind of the primary way. I've made whole slide decks, and I've made whole, like I said, spreadsheets and chart packages and everything else by describing to my computer through AI what it is I want, as opposed to open the program, get the data, download the data, put it in a spreadsheet, clean it up, doing all that stuff by hand.

• 29:31Speaker 01

  You know, so that's where I've said, you know, that I could see a day in the future where everybody's going to have a keyboard on their desk, and it's going to be collecting dust, because the, you're going to be, you're going to, the inputs to the way you do your job is going to be much different. It's going to be mainly voice, maybe it's going to be brain to computer. I mean, that's what Neuralink was developed by Elon. I know he's been doing some amazing work with helping, you know, paralyzed people walk and stuff like that. But ultimately, you know, they want to try and have a way that, you know, you can think to your computer, tell it through your brain what it is that you want, and then get that output. I'm not ready to have Elon drill holes in my head yet to put wires in there to access

• 30:16Speaker 01

  my computer, but that might be the road we're going down right now.

• 30:19Speaker 00

  I had Thomas Reardon, I think was his name, he was the founder of Control Labs on the podcast years ago, and they had developed a system like this. So I don't know to what degree the field is significantly ahead of what Elon Musk is trying to do or not, but there's some interesting stuff that's happened in the field of brain machine interface for some time now. I promised listeners, we're going to get, we're going to get back to the conversation about bonds, the economy and inflation. But I do have a couple more questions for you on this subject. Do you think that startups or small businesses will be more advantaged from this technology or currently are more advantaged? Or do you think it'll be large companies?

• 30:54Speaker 01

  It really depends on the business you're talking about.

• 30:57Speaker 00

  Because to your point, it's much, it's harder to displace workers than it is not to hire them in the first place. And small companies are in the latter category. They don't have to hire those people to begin with.

• 31:07Speaker 01

  And so startup companies and small companies might have the advantage that we could get started. You know, we can have AI agents and the like, you know, do our back office, our compliance, our accounting, can help us keep us organized, can, you know, help us find, you know, potential revenue sources and the like, and can do various things like that. But if you're starting a business in a fairly regulated field, and I'll use the field that I'm in, financial services, you know, financial services are regulated by FINRA. And FINRA has long, this is not my, this is my criticism, but I'm hardly alone in this.

• 31:46Speaker 01

  FINRA's job, it seems like, is to make sure that, that the regulations benefit the largest companies. Cause they put in regulations that are very well suited for companies that have three fullers of lawyers and compliance officers to adhere to. But if you're a small 10-person startup and have to adhere to the same rules, it gets harder to do. Now, you could argue that AI agents and stuff like that will make it easier, but only to an extent that FINRA will, will put up these rules against you. Like, for instance, FINRA's, again, I'm using financial services because I'm familiar with it. FINRA's kind of stated position on AI, if I was to summarize, and my summarization of it is,

• 32:28Speaker 01

  do whatever you want. It's a great technology and you could do wonderful things. But if you ever screw up on that and you put a customer at risk, or something else goes wrong, we're going to use you as an example. And that's really been a chilling effect on, on I think the financial services business from being able to adopt this. And I've actually argued, that's one of the reasons why I think a lot of people in the financial services business have been somewhat skeptical of it, because they're being throttled in using this because of those exact reasons.

• 33:00Speaker 00

  How has the use of this technology caused you to rethink what it is that you do or the value that you provide?

• 33:07Speaker 01

  It's opened it up for me. I'm a small shop. We've got, you know, less than 10 employees right now that work with us. And I am very independent in the way that I do things. It has helped me to basically come up with new ideas, new ways to explain things in a much faster way than I've ever been able to do. So I'm juggling more things now than I ever have in the past. Before, in the past, I might be talking about bonds, and I might be talking about the economy, and I might be talking about inflation. But now I'm expanding out and talking about

• 33:47Speaker 01

  the wars and oil and currency markets, some politics, and I can juggle all of that because of the use of AI. And AI, what AI is doing for me is keeping my data up to date, keeping my outputs up to date, flagging me from when my data says, hey, here's something you should be aware of. And I'm looking at a lot more of that stuff a lot more efficiently. I could have done it in the past by hiring more people, like a lot more people, like doubling my staff. But now I can do it with just AI. So it's definitely helped me, you know, reach into other projects and get deeper into some other projects as well.

• 34:27Speaker 00

  Well, sure. And that's sort of the low hanging fruit. That's using AI within the current paradigm to become more efficient at your job. What I'm wondering is, what do you think, like, down at its core, what is the value that you provide? You work in, you produce financial research, you're educating investors. Like, if you had to distill this into a simple phrase or sentence, what would it be?

• 34:46Speaker 01

  Educating people on things that they sort of understand, but would like to understand better. That would be what I think I do for professional investors.

• 34:54Speaker 00

  Great, fantastic. So I feel like I'm in the same category. And this has caused me to reflect on what exactly, how exactly am I doing that? You know, I do that through a podcast. I've done it through written material. I do it in all sorts of ways, but fundamentally, that's what it is. It's a form of education. And I feel like this technology, Jim, is going to radically transform our business. And when I say our business, you know, I just mean educational media writ large. Because fundamentally, we are judged on how well the recipient of this, especially because we're doing subscription level content, the recipient of the material is learning the material. How it is actually, in the case of investors, materially improving their outcomes that they can directly tie to the material. But it's really about like, how efficiently and how well am I learning this stuff?

• 35:39Speaker 00

  And I think it's going to radically upend this industry. I think people are going to increasingly, and I might be wrong here, but my sense of this, Jim, is that people are going to increasingly spend their time training, among other things, digital twins with their epistemology and data sets that customers will then be able to interface with and use as part of a fundamental value proposition. Yeah, I mean, like, reading your reports is something, you write those reports, you're increasingly using AI to help you do that. But fundamentally, if I have the ability to interface with an AI that has your epistemology and your data, I can get from it things that you may not think to give me, because I have questions to ask. I can prompt my digital Jim twin, and I can ask him, hey, Jim, you know,

• 36:24Speaker 00

  what are your thoughts on this specific data series, blah, blah, blah? And it can rely on that epistemology and data. Is that something that you've thought about at all?

• 36:32Speaker 01

  Oh, absolutely. And I think that that's coming. And I don't quite know where it's going to lead, not just me, but everybody else, because ultimately, who is my customer? Who is your customer? It's a human being on the other end that's, you know, reading what I do because there's a valued input into their decision-making process. What I could envision in the future is my customer on the other end is going to be their AI agent. It's going to be my AI agent communicating with their AI agent, who then synthesizes my information and a bunch of other people's information all at once,

• 37:15Speaker 01

  and then presents it to the, the human that I used to talk to. And that, you know, so it'd almost be like, the way the business used to be for me when I was starting off when I was younger, is that I would be talking to a person's assistant, or the junior person. And then the junior person would take my information to the senior person. Well, we're going to go back to that. But the junior person now is going to be an agent. It's not going to actually be a human being. I think that that's where we're going to go. But I don't think it's just going to be my business, your business. I think it's going to be every single business is what it's going to be. I think that the Wall Street Journal is going to stop having humans as customers,

• 37:54Speaker 01

  is going to have everybody's agent as a customer. I don't know how that is going to play out in the future. How that business model is supposed to work. I think about it a lot. But it, we're so early days on it. I'm not sure where that business model is going to go. But yeah, that's what I do think about quite a bit.

• 38:14Speaker 00

  You know, I've heard a lot of people talk about how in a knowledge-based economy, information is free, or knowledge itself now has become ubiquitous, has become commoditized. But understanding still has friction embedded in it. Because to understand something, you have to go through a process yourself to interpret and process and digest and understand. And I think that's where the alpha is in our business.

• 38:35Speaker 01

  I completely agree. You know, because I, you know, that's what I've said is that the alpha is definitely in the interpretation and the understanding and the education. The alpha is not in sitting on a big database and trying to sell that database. There's some value to having unique data, but without the interpretation or the understanding. And almost everybody that sells data, you know, you know, think about like the tanker trackers and stuff like that, that are very popular now because of the war in the Middle East. A lot of them are not just selling raw data sets. They're also selling interpretations of their data sets. And I would argue, most people are paying for their interpretations of the data sets.

• 39:14Speaker 00

  Yeah. And just to cap on that point, and then let's move on, because I know people are eager to hear your thoughts on the economy and bonds and inflation. I think that, again, in a world where knowledge becomes commoditized, understanding will become scarce. Because it's very easy for people to rely on these systems to produce what appears phenomenologically to be understanding, but, but in fact is not. And that when I said the real alpha is understanding, I'm taking it one step further, which is, I don't just mean that you or I will be rewarded for understanding material. But to the extent that we can convey that and turn that into understanding for other people, I think is going to be the, the real alpha in this business. And I think that's where finding creative ways to use AI could be very beneficial.

• 39:57Speaker 00

  So let's talk about inflation. What are your preferred metrics for measuring inflation?

• 40:02Speaker 01

  I do believe in the core metrics of inflation, that means ex food and energy, because not because food and energy don't matter, they matter critically, but they're very volatile and they move on non-inflationary measures, shortages, bad harvests, wars and stuff like that, that might push prices up and down, that is not necessarily driven by whether or not there's an underlying tone of inflation. I do like the personal consumption expenditure measures of inflation because of their chain weighted measures. That's what the Fed has been using since 2000. And most of those numbers are saying that for the last five plus years, we have been above 2% inflation and currently are above 3% inflation. That is a problem. I know for people that don't follow the inflation

• 40:46Speaker 01

  rate, what's the difference between 2% and 3%? Go look at a political poll. And all you need to hear from people is how unhappy they are with the state of the economy and they put as the number one factor far away is affordability. And you could even turn it around and say, well, if the average price is up 31% since the end of COVID, and the average wage is up 25%, that's 5% over six years. Is that really significant? Go look at the political polls and people will tell you how angry they are that that has happened. So these marginal numbers, if you're not paying attention to this, if you're not in this field, they do make a big difference.

• 41:24Speaker 00

  So we talked about a few things before we got into the AI conversation, and we may have discussed this, but I don't think we did. Did we discuss what the primary drivers that you think are for bond yields? Like what has actually been driving the long end up?

• 41:38Speaker 01

  No, and that's a very good question because interest rates yields are nominal. So that means that inflation and real growth both matter to interest rates. There's a narrative out there, especially pushed by the president, that every time we get good growth numbers, then everybody, then interest rates go up because they think growth is going to cause inflation and it never does. And that's the wrong way of looking at it. Well, you're right, growth does not necessarily have to cause inflation, but growth matters for a nominal interest rate. So let me give you an example. I have argued, and this is to the basis of why I turned bullish on bonds after six years. I have argued that we are

• 42:20Speaker 01

  in a three-ish percent inflation world and a two and a half-ish percent real growth world. That's a five and a half percent nominal world. Well, let's write it big. Let's call it five to six. We're in a five to six nominal world. Every interest rate in the last two or three weeks, from the five-year note to the 30-year bond is above 5%. They're in that five to 6% range for the first time in 20 years. And what I've argued is, bonds were expensive because interest rates were too low. But now that almost all of the yield curve has moved into that five to 6% range, and I've defined the economy as being a five to 6% economy, they're now no longer expensive. I didn't say they're cheap. That might come

• 43:05Speaker 01

  later, maybe. But right now, we've gotten rid of the expensiveness in the bond market and they're at the appropriate levels, given the economy. So if the economy is growing strongly on a real basis, that pushes up nominal GDP. If inflation goes up, that pushes up nominal GDP. Either one of those weakens, that pushes it down. And keep in mind, I'm talking about expected, what we expect in the future, not what just happened over the previous 12 months. So that's kind of the basis of how I look at the economy and how interest rates rate to it. You could write that big, right? A couple of years ago, Japan had zero interest rates, their nominal growth was zero. Venezuela had interest rates over

• 43:48Speaker 01

  100%. Their nominal growth was over 100%. Nominal growth, yeah, it was all inflation and they might've actually had negative real growth. And the average Venezuelan, if you remember by 2017, the Reuters article that said that the average Venezuelan lost 17 pounds for the year, that the economy was so bad, but inflation was so high that they had nominal growth way up there that they had interest rates sky high. So interest rates and your economy should equal each other. One last thing, everybody understands when interest rates go up, that's bad. But what I also argued is, too low an interest rate is a problem for an economy as much as too high. Let's say we're in a 5% world,

• 44:31Speaker 01

  nominal growth, and we get what the president wants. He wants interest rates between zero and one. What does that mean? That means that I could borrow money, the most important statistic in an economy, I didn't say investment, but I said statistic, is the price of money. Every decision you make from an economic standpoint starts with, I need the money to do this. How much is it going to cost me to get that money? Is it 1%? Is it 10? Is it eight? Well, that, now that I know that benchmark, then I figure out whether or not that investment works or doesn't work. So that number matters quite a bit. So if you have 1% money in a 5% world, that means, what does a 5% world mean, a 5% nominal

• 45:16Speaker 01

  world? If I randomly pick investments, I buy stock, I buy a home, I buy a business, I buy a limited partnership, just randomly pick enough of them, they'll grow at 5%. Some of it'll be inflation, some of it'll be real. If I could borrow 1%, then all of a sudden, what happens is, below average investments, those that return four, three, or two, work because they have a positive carry. I borrow one and it returns two, but it's a lousy investment because it's not an average investment. It's a below average investment. We saw this in 2010 to 2015. By a lot of metrics, the economy grew close to what was doing

• 45:58Speaker 01

  in the 1930s, and we called it the Jabos recovery, and a lot of people were very unhappy. And I would argue, part of that was zero interest rates. We had a lot of zombie companies that were surviving because the cost of money was so cheap. If you're a below average investment, you have two distinctions or two choices. You either liquidate it or you restructure it. So too low an interest rate is as big a problem as too high an interest rate. It creates malinvestment, nice Austrian term, creates speculative excesses, and it eventually could create inflation. And so now that they finally move to the appropriate level, I think that's the most efficient for the economy. And that's why I'm liking bonds again.

• 46:39Speaker 00

  So is the correct interpretation here that you believe interest rates and long-term bond yields have been moving up because of the demand for investment capital from the private sector and not because of a particular view by the market about the sustainability of US deficits and US debt?

• 46:55Speaker 01

  You know, the interesting thing about the debt and deficit thing is, it is a problem, and I don't want to dismiss it, but it's not the primary thing. I think it is the demand for capital and it is the outlook for the economy that is more driving interest rates than the, you know, the crowding out theory that we've got $40 trillion of debt and we've got high interest costs and that that is what's been the primary driver. It's there. It matters, but it's not primary. Why? Because if you add in everything, because that statistic that we're talking about, that 40 trillion is federal debt. Let's add in agency debt, let's add in municipal debt, let's add in corporate, private sector, corporate

• 47:35Speaker 01

  bonds, commercial paper, foreign bonds, loans, mortgages, consumer credit, all of it, the whole ball of wax, every bit that we lend. That is 369% of GDP, second quarter flow funds report from the Federal Reserve, 369% of GDP. The amount of lending that we have in our economy, economy's about 30, 32 trillion, 369, it's a little over 100 trillion of loans. So it's three and a half, 3.6 times. In 2006, 20 years earlier, it was 3.6 times. It's exactly the same number it was 20 years ago. The difference was, 20 years ago, it was much more corporate debt, less, less federal or government debt, and now it's

• 48:18Speaker 01

  much more government debt and less corporate debt. Corporations, since the financial crisis 2008, have been deleveraging. And that has been the offset to that number. Now, everybody loves medical metaphors. So I've been using the medical metaphor. You go to the doctor, doctor says the break point for your blood pressure is 140 over 90, and you're 142 over 92. That's not good, but I'm also not going to call an ambulance or rush you to the emergency room because of that. And you still can't go out for a steak dinner and eat a bunch of salty food. So let's deal with this problem, but it is not an acute emergency. But everybody's acting like the deficit problem or the debt problem is your blood pressure came in at 220 over 190, and let's get the ambulance over here and get you over to the emergency

• 49:03Speaker 01

  room right away. And so I don't think we're at that point. It is a problem. I think the bigger issue has been an anchoring issue.

• 49:12Speaker 01

  You go back to 2010 to 2020, I would argue that was the most abnormal period in financial history. We had zero money, negative interest rates in Europe and Japan. We had money printing, you know, the expansion of the Fed's balance sheet and the like. And I happen to have on my desk, and I know we're recording this, but I'll explain it. I have Ed Chancellor's The Price of Time book I'm showing on the screen. And I also have the 2005 version of Richard, Sidney Homer, Richard Salles, A History of Interest Rates. This book, The History of Interest Rates, goes back 5,000 years. It was last updated in 2005. There's not one sentence in that book

• 49:51Speaker 01

  about negative interest rates. Because prior to 2010, 2015, that was never a thing. I'm talking about yields, by the way. I'm not talking about short-term rates. Some of the short-term rates did get slightly negative in the 30s and stuff. But I'm talking about long-term yields. That was never a thing. So I think part of our problem is why is the president one zero to 1%? Why does Scott Besen say, I am the house and I will lower interest rates? Why is everybody worried on Wall Street? Are these high interest rates going to impact the economy negatively? Because for some reason, we've decided that zero to 1% interest rates, that negative interest rates in Europe and Japan was somehow normal. That was the most abnormal period, maybe in 5,000

• 50:34Speaker 01

  years of the History of Interest Rate book. And I've argued, we might not see it again for another 5,000 years unless we have some kind of collapse in the economy. And that's why we look at 5% interest rates. And we think that these are somehow punishingly high levels. Last thought I give you, the Treasury Department has data on the 10-year yields back to 1790. And I've downloaded that data and I looked it up. What was the average yield for the last 225 years? And it's been 5.9%. We're 5.3% right now. And we're acting like we're on our knees begging for mercy because we've got these confiscatorily high interest rates, where most of the expansion

• 51:17Speaker 01

  of this country occurred with interest rates much higher than 5.3%. We just got anchored to zero, and somehow convinced ourselves that that unusual period was normal. And viewing it from that lens, it looks way out of whack.

• 51:33Speaker 00

  Yeah, I think that's a powerful idea, that there's nothing essentially wrong here. And that if anything, it's our expectations that are wrong. Because we've been malconditioned by the decade plus of zero or near zero interest rates, and excess bank reserves resulting from the policy response to the 2009 financial crisis. And that we're simply transitioning back to what would be otherwise considered normal by historical standards. That period, of course, has done lasting damage, not only to our expectations, but to the fiscal predicaments in developed economies. And that's where I'd like to take the conversation next, Jim, which is the US's and Europe's, in particular, France's, debt and deficit pictures, and the funding constraints

• 52:14Speaker 00

  that more indebted economies will face going forward. And how they balance those in the face of rising populism, and in many cases, the growing appeal of more redistributive wealth policies. One possible response that governments like France's may take is to institute measures of financial repression, including capital controls, investment mandates, that favor domestic bonds and equities, and even decoupling from European Monetary Union. This is a thesis that Russell Napier has put forward, often, including on this podcast, and listeners will be familiar with it. But I could also make the case that all of this capex spending will leave many large companies in the private sector that have been the primary beneficiaries of the AI boom,

• 52:57Speaker 00

  with impaired balance sheets, and a lot of debt. And so they end up spending the next decade or more, working through all of that, just like the Japanese did in 1990s, which would put downward pressure on interest rates, and make funding national deficits and debt servicing less expensive. So I want to talk about those two possibilities in the second hour. We spoke about the K-shaped economy, but you've also talked about the two different stock markets, the market with and without AI companies, which I think is also an important framework for investors to really understand. I also want to discuss changes in forward guidance, and what, if any, coordination there is between the Fed and Treasury under Worsch and Besen. And I'd like to end the episode

• 53:41Speaker 00

  by asking you how you think the outcome of the upcoming midterm elections could influence your thesis on the bond market and US growth. But we're going to leave all of that for the second hour. For anyone new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Jim, head over to hiddenforces.io/subscribe, and sign up one of our three content tiers. All subscribers gain access to our premium feed, so you can listen to the rest of today's conversation on your mobile device, using your favorite podcast app, just like you're listening to

• 54:23Speaker 00

  this episode right now. Jim, stick around. We're going to move the second hour of our conversation onto the premium feed.

• 54:32Speaker 01

  If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe, and join our premium feed. If you want to join in on the conversation, and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter, @Kofinas, and you can email me at [email protected]. As always, thanks for listening. We'll see you next time.