The Bond Vigilantes Are Back & Rejecting The Fed | Jim Bianco

Faith in central banking is eroding

Despite the confidence Federal Reserve Chair Jerome Powell is doing his best to project, inflation has not yet been slain.

And today's guest expert, Jim Bianco, founder of market research firm Bianco Research, thinks it's going to continue to prove problematic as the return of the "bond vigilantes" increasingly undermines the Fed's efforts.

We'll talk about his reasons why, as well as his concerns about the current extreme valuations in stocks, and why if they experience a material correction, bonds may not provide the protection to portfolios they did in the past.

For all the details (and there are many), click here or on the video below:

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Adam’s Notes: Jim Bianco (recorded 1.13.25)

EXECUTIVE SUMMARY:

• The U.S. economy is growing at a robust rate of 2-2.5% annually, with potential for further acceleration due to incoming stimulative policies such as tax cuts, deregulation, and possible tariffs under new leadership. While this growth is positive, it comes with the risk of higher inflation. The Federal Reserve's decision to cut interest rates during this period of strong growth has raised concerns that monetary policy might be overly stimulative, further fueling inflationary pressures.

• A clear divide exists in the performance of global economies. While the U.S. economy is thriving, major players such as China, Europe, and Japan are facing significant challenges. China's GDP growth has fallen below 5%, with stimulus efforts failing to deliver sustained recovery. Europe’s Germany, traditionally an industrial powerhouse, is now the "sick man" of Europe due to soaring energy costs post-Ukraine war, which have eroded its manufacturing competitiveness. Japan shows signs of economic struggle despite efforts to recover, with rising interest rates and a sluggish stock market. This divergence positions the U.S. as the primary driver of global growth.

• U.S. stock market valuations are at historically high levels, raising concerns about sustainability. Market cap to GDP is over 200%, forward PE ratios are in the low twenties, and the Schiller PE ratio stands at 37-38. These figures indicate that the market is richly valued, with much of the anticipated future growth already priced in. High valuations historically correlate with lower future returns, suggesting that investors should temper their expectations for significant gains in the coming decade.

• The market today resembles