#428 Jim Bianco: After 6 Years Bearish, I’m Finally Turning on Bonds — Why 5% Is the New Normal

Jim Bianco · Bianco Research, L.L.C.

The Fed is splitting into independent voters in transition, and will look very different in a year.

Trump's push for near-zero rates, and his talk of appointing himself Fed chair, has worried the Fed about its independence. The Fed is asserting independence by acting as 12 independent voters rather than deferring to the chair. Williams's recent speech suggests a real internal fight, with hawks wanting hikes and doves opposing them, and possibly a 6-6 committee. Warsh has not given forward guidance, and after Williams said there was no urgency to raise rates, the market's odds of a hike plunged. Task-force recommendations are coming, so the institution will change. This transition creates volatility until the committee's direction becomes clear. Other central banks such as the BoE and BoJ also vote openly with split results, so this is not unusual.

“The Fed a year from now is gonna be a very different institution than it is.”at 37:01

Jim Bianco · Bianco Research, L.L.C.

The Fed should drop forward guidance because its past promises caused the 2022 inflation error.

Bianco says he is a fan of getting rid of Fed forward guidance, which he describes as a promise of future action. He argues it has backfired: in late 2021 and early 2022 the Fed called inflation transitory and said it did not need to price in hikes. Having made that promise, the Fed felt it could not reverse course, so it kept policy loose until March 2022, when inflation had reached 8.5%. He concludes that forward guidance reduces volatility in the short run but produces larger volatility later, so he would be fine eliminating the practice altogether.

“I'm a fan of getting rid of forward guidance. Forward guidance is a fancy word of saying, tell me what you're gonna do.”at 37:49

Jim Bianco · Bianco Research, L.L.C.

Bonds have reached fair value near 5%; he has turned neutral after six years of bearishness.

He was bearish on bonds since 2020 and has now moved to neutral. He argues about 5% is a normal nominal rate: nominal yields should track nominal growth, which is roughly 3% inflation plus about 2% real growth, about 5%. The 2010-2020 zero and negative rate era was abnormal, and people who anchored to it see 5% as a shock. With a 5% coupon, the risk of capital losses is much lower, so he expects roughly a 5% return from carry. He would turn bullish if growth slowed to about 4% with 5% rates, or if inflation fell sharply. If the economy holds, yields would need to rise to about 6-7% across the curve for bonds to express value. The main risk is a Middle East escalation pushing oil toward $200. He notes he started a bond fund.

“Five ish percent interest rates is where we should be.”at 2:05

Jim Bianco · Bianco Research, L.L.C.

He sees no recession on the horizon, with real growth near 2%, and would need evidence of a slowdown.

He describes the economy as operating in a 2% growth world. Combined with about 3% inflation, that gives roughly 5% nominal growth, which he uses to justify 5% bond yields. He sees no recession on the horizon at present. He acknowledges that one could still emerge, but he would need real evidence of a slowdown to change his view. A recession would be the one thing that could reduce demand enough to pull inflation down, so it is the downside risk to inflation.

“I don't see recession on the horizon right now. That doesn't mean one can't come up, but for the moment, that's what would get me.”at 4:17

Jim Bianco · Bianco Research, L.L.C.

Oil spiking toward $200 from Middle East escalation is the one risk to his bond view.

He says a Middle East deal could lower oil prices and help bring inflation down, but would not bring it all the way down. The one development he thinks would hurt bonds is a Middle East escalation pushing oil toward $200. That would feed inflation and push yields higher, which is the main upside risk to his neutral-to-bullish bond view. Apart from this, he does not see a major threat to his view.

“the only thing I would put on the horizon that would potentially be bad for bonds would be if the Middle East spun out of control and the price of oil went to $200”at 5:10

Jim Bianco · Bianco Research, L.L.C.

Cheap imported goods won't return because tariffs and a political choice keep them out.

He rejects the economist view that cheap goods will return and push goods inflation down. First, the world is messy: tariffs, container and tanker supply-chain problems and two wars add friction to bringing goods prices down. Second, it is a political choice. Deaths of despair after China's WTO entry and the 2016 backlash led both parties to limit cheap Chinese imports. He cites the Chinese Seal EV, priced around $15,000 and similar to a Tesla Model 3, which was banned by the Biden administration in 2022 on safety grounds, and which would carry a 100% tariff if allowed. Letting in cheap cars would hurt Detroit and Michigan, so both parties avoid it. Goods inflation therefore stays elevated.

“Cheap goods aren't coming back for basically two big reasons. Reason one is the world is messy. We've got tariffs.”at 10:24

Jim Bianco · Bianco Research, L.L.C.

US inflation is stuck near 3%, not returning to 2%, because of tariffs and sticky services prices.

Core PCE averaged 1.7% from 2001 to 2020, helped by cheap Chinese goods after China joined the WTO. Core goods inflation averaged about minus 0.5% in that period, which held down overall inflation. Since COVID, core PCE has averaged 3.4%, about double. Cheap goods are not coming back because of tariffs, supply-chain disruption (containers, tankers, two wars) and a political choice to keep cheap imports out. Services inflation, now about 4% versus 2.5% before, is sticky because most services are wages, and raises rise with prices. He does not expect 4-6% inflation but sees no path back to 2%. The 2010-2020 pattern of inflation settling below 2% will not repeat in this cycle, though the cycle could change in years to come.

“So bottom line for you, we're in a 3% inflation world.”at 15:26

Jim Bianco · Bianco Research, L.L.C.

Democrats likely win the House, but a DSA faction could make the majority unstable and hit markets.

He accepts betting-market and polling consensus that Democrats will likely take the House and are favored, though not overwhelmingly, in the Senate. The key question is which Democratic party wins: the DSA and its true-believer members, or the moderate, working-class and union wing. Citing Jim Carville, he says Democrats need a 25-30 seat win so moderates can outvote 10-12 DSA members. With an eight-seat majority, DSA members could block leadership, as happened with McCarthy and Johnson, causing chaos. Democrats are also split on data centers: unions want the construction jobs, while the DSA opposes them. If the DSA holds leverage, he expects a leftward move in the party, with market implications. He also sees Senate control turning on swing votes, such as Elissa Slotkin in Michigan.

“Oh, I think it could have big implications in markets because at that point, you could...”at 21:24

Jim Bianco · Bianco Research, L.L.C.

Compute demand will keep rising as agentic AI spreads, so overbuild fears are premature.

He contrasts the two sides of the AI trade. Anthropic's IPO risk section focuses on not having enough compute, chips and power. Wall Street's fear is the reverse: overbuilding compute and power, with debt that may not be repaid. He thinks both are partly right. He agrees with Silicon Valley that adoption of AI and especially agentic AI will drive much more compute demand in the future. Wall Street's concern is about near-term debt service: coupon payments in six and twelve months, not an open-ended future commitment. He thinks the current build-out is not yet at an over-capacity level. Compute demand is being throttled now, so once it is unleashed, demand should rise.

“I think that Silicon Valley's thinking out as people start to adopt AI more and more and especially agentic AI, that there's gonna be a lot more demand for compute”at 24:48

Jim Bianco · Bianco Research, L.L.C.

Voice and thought interfaces will replace keyboards as the main way people use computers.

He expects that in two years, maybe five, people will no longer use a keyboard. Talking to a computer, or eventually thinking to it with Neuralink-style devices, will be far more efficient for telling a computer what you want and getting information back. He says the keyboard will become the bottleneck. Most people dismiss this and see AI as a cooler way to get box scores than Google, but he thinks the wider potential is not yet appreciated. He points to speech-to-text tools that let people speak and have AI clean up the text in minutes instead of typing.

“in two years, maybe five years, you won't be using a keyboard anymore. You shouldn't be using a keyboard as your primary interface with your computer.”at 26:52

Jim Bianco · Bianco Research, L.L.C.

Corporate IT bans keep powerful AI agents throttled, though personal agents are game changers.

Most workers are told not to connect Claude, ChatGPT, Gemini or similar tools to their email or work servers, so they still see AI as a sophisticated Google search. He uses personal agents that can read his inbox and calendar, book Ubers and flights, and file expense reports from a two-sentence voice command, saving an hour of work. He says that as companies unlock these agents, demand will surge. He singles out Wall Street firms as the most restrictive, and he says that for now the technology is being held back by IT departments that see it as too dangerous.

“that so many people are not using because your IT department's telling you it's too dangerous to connect your email with the servers”at 31:02

Jim Bianco · Bianco Research, L.L.C.

AI is a bubble that has a couple more years to run before it pops.

He defines a bubble as overbuilding to unsustainable levels, not as a current collapse. Every major technology, from railroads, the internet, television and radio to bicycles in 1890s London, has gone through this cycle. The current volatility is normal for a new technology. He does not think AI capacity is overbuilt yet, and he sides with Silicon Valley's view that demand for compute will grow once agents are unleashed and used for more than simple questions. Demand is currently being held back by IT departments. So it is a bubble that will keep expanding and is not popping immediately.

“So yes, I think it's a bubble, but it's got a couple more years to run before the pop occurs.”at 32:22

Jim Bianco · Bianco Research, L.L.C.

Many universities will close because too few kids are coming through the pipeline after the fertility drop.

Bianco traces a demographic cliff. US fertility fell below replacement in 2007, and those children are now 19, so the cohort reaching college age is smaller. He points to a recent Wall Street Journal story about Syracuse University as an example, and he looks at the counts of students in high school, eighth, seventh and sixth grade, which show the pipeline is thin. From this he concludes that many universities, not just Syracuse, will close.

“There's gonna be a lot of universities that are gonna close. Yep. Because there's just not enough kids coming through the pipeline.”at 40:05

Jim Bianco · Bianco Research, L.L.C.

Undocumented immigration has fallen to effectively zero, removing the labor supply that propped up job growth.

Bianco says the US has historically made up for its low fertility rate through immigration, both legal and undocumented. Legal immigration is about a million a year, but undocumented inflows that once reached about 3 million have dropped to effectively zero. Without that inflow, the working-age population stops growing, which in turn lowers the number of jobs the economy needs to create and raises the risk of wage inflation if hiring is strong. This is the main reason he thinks weak payroll data overstate labor market weakness.

“We have legal immigration about a million, but we used to have like 3,000,000 people coming in the country undocumented. That's effectively zero.”at 40:59

Jim Bianco · Bianco Research, L.L.C.

The US labor market is fine: breakeven job growth is about 30,000 a year, given shrinking labor supply.

Bianco argues weak payroll numbers are not a sign of a weak labor market because the working-age population is no longer growing. Fertility fell below replacement in 2007, and with undocumented immigration effectively zero, natural births and deaths alone will shrink the 15-64 population within about three years. He says the US needs only about 30,000 jobs a year to keep up, against 60,000 created so far this year and five negative payroll reports in the last 12. If the economy did add 200,000-300,000 jobs a month without population growth, employers would have to bid up wages, creating more inflation. He expects that within a year people will recognise that the days of strong monthly job gains are over and that the labor market has changed fundamentally.

“So the number of jobs The United States economy needs to create is about 30,000 jobs a year, that's it. We've created 60,000 jobs so far this year.”at 41:06