— Since Donald Trump won the presidential election,
the stock market has been on a tear and bond investors
have been losing money.
less than two months, stocks have surged 6 percent in
what’s being called the "Trump rally." With
people losing money in typically safe U.S. Treasury
bonds and hoping to hold onto their unusually large 14
percent gains in the Dow Jones Industrial Average this
year, individuals are on edge. They want to know if it’s
time to be careful of stocks, and whether bonds will
continue to inflict loses.
Bianco, president of Bianco Research, is telling
professionals who invest money for clients to expect a
nerve-wracking early 2017. He thinks both stocks and
bonds will be tough to stomach amid significant
volatility next year as "we go into the great
unknown," he said.
54, is known for his outspoken voice and independent
views on the economy and markets — especially the bond
market. His research, written at the firm he began in
1998 in Chicago, is followed by professional investors
throughout the world — from hedge fund to endowment
an independent voice, I can say things others can’t,"
he said, contrasting his style with Wall Street firms
that must sometimes tone down their messages to appease
business interests. The interview has been edited for
length and clarity.
The economy has been stuck in a very slow-growth period
for years. Now the stock market rally suggests there are
high hopes — expectations that we are finally going to
have stronger growth. Are those expectations justified?
There is an expectation that with Trump as president,
wages will go up, that there will be more hiring and a
better economy. People expect infrastructure spending,
lower taxes and less regulation, but the devil is in the
details. Trump will have to be sworn into office.
Congress will have to take action. The impact on the
economy isn’t likely until 2018.
In 2017, will the economy grow any more than the
sluggish 2 percent growth we’ve had?
GDP growth will be 2 to 2.5 percent and maybe push 3
percent. If you were to give it a grade, it would be
Longer-term, do you think Trump voters will get what
I don’t know how Trump can deliver unskilled jobs in
an economy of robotics. The future of manufacturing will
go to Purdue college graduates programming robots. If
the hope is to get a good-paying eight-hours-a-day job
in a factory, you might get it for a while before it
goes to Mexico. But even the $3-an-hour jobs in Mexico
will only be temporary until they are replaced by
robots. Cashier jobs will be replaced by kiosks and
drivers will be replaced by driverless cars and trucks.
We are in the midst of great social upheaval. But at
least Trump is acknowledging the problem and those
afflicted. I think he’ll try, but I don’t see how.
Does the Trump rally have staying power?
The market rally is based on the assumption that you
have a businessman president who will be more focused on
business and move the economy forward that way. That
doesn’t mean it will happen. What happens if Congress
doesn’t want to give Trump $1 trillion for
infrastructure spending? Or what happens if the Chinese
don’t need us more than we need them? At this point we
don’t know who Trump is or how it will turn out. There
is a risk for stock investors if Trump doesn’t
deliver. As long as we think he’s moving toward the
goal, it will be OK. But the moment he seems to be
stalling the rally could be in trouble.
What about the near term for stocks?
I could see a 10 to 15 percent correction. There are a
lot of expectations in this market. We have priced in
expectations for stronger growth, less regulation and
lower taxes. So if Trump delivers we could get sideways
action in the stock market. He would have to
over-deliver in order for the markets to keep going.
Do you see a bear market or recession?
Economies don’t die from old age. Something breaks it
— either a financial crisis like 2008, or high oil
like $147 oil in 2008, a political crisis like 1974,
high interest rates like 1980. So I don’t perceive we’re
going to be walking into a recession unless it looks
like something will break.
We’ve had an amazing bull market in bonds, with people
making money for years in simple U.S. Treasury bonds,
typically the investment people buy when they don’t
want to take risks. Do you think it’s over?
There’s a very good chance that it is. If you’d been
holding bonds up to July of this year, you experienced
the greatest bull market in 200 years. In July, yields
fell to 1.31 percent when everyone thought that the
Brexit was going to cause a recession. That didn’t
happen. Now the expectation is for growth. So yields
were at 1.7 percent on election night. Now they’re at
2.55 percent. That is a lot for three months — a big,
When yields rise like that people lose money in bonds.
They’ve been dumping bonds. What’s ahead?
The big issue is whether there is real growth in the
economy. If we get growth, bonds are going to be the
worst place to be. If we get inflation, bonds will lose
you money, but not as much as stocks.
People hold on to bonds for protection in the bad times.
But in good times there are losses. Do losses continue?
Everyone is bearish on rates now. They are all making a
one-sided bet on growth, stocks, copper and the dollar.
All of those bets are vulnerable because everyone is
betting the same. If there is uncertainty about Trump,
everyone will run the other direction. Then we will see
a pullback on rates.
Is there a place to go in bonds that will be more
secure? Treasury Inflation Protected Securities?
They might be a better place to be if you are a bond
investor looking for a better relative investment. But
if you are a retail investor and you want something that’s
going to go up, TIPS might not provide you with what you
want. You might be better off in the stock market. You
might be better off in real estate as well.
What about municipal bonds, or munis?
If tax rates are falling, that’s negative for munis
because it reduces the incentive to invest in munis to
save on taxes. So I think munis are going to be
problematic if we are really in a tax-cutting