Between Ukraine and ISIS, 2014 has been a year marked by geopolitical tension. Yet, contrary to intuition, market volatility has continued to trend downward along with the price of gold and oil, while stocks continue to hit new all-time highs. Why? Jim Bianco, President of Bianco Research, provided a number of key insights in his recent interview with Financial Sense Newshour.
Here are a few excerpts that recently aired to our subscribers (click here for audio):
Why do you think gold and oil haven't reacted to geopolitical events this year?
"Whenever there's a geopolitical event, you have to ask yourself a simple question: Will this change the supply-demand outlook for the world economy? Will it mean we get less of something or will it change people's attitudes about purchasing things? And sometimes those attitudes can be changed because we are applying sanctions or going to war or something along those lines. The thing about the current set of geopolitics is that the President himself has said that he wants to take a minimalist approach when it comes to Ukraine. The President went out of his way twice in press conferences in the last month to six weeks to say the sanctions were designed to not impact the global markets or the global economy. So, for things like the Ukraine, the President is saying to you it doesn't matter... It is not going to change the supply of any products you get, the demand of any products you get, and we're not going to put onerous regulations on banking or financial services or the energy sector because of what's happening there—that's why the market is ignoring it. When it comes to ISIS in Iraq, we've kind of taken the same approach: we're not going to do a whole lot about it; they're not near the oil fields so nothing has changed. So, that's why I think from a geopolitical standpoint, these events aren't resonating in the financial markets... Now, with that said...typically, when markets react, the first market reaction is the wrong reaction...at some point in the future the market is going to have an epiphany and say, "You know what, I got this wrong. Maybe this is a bigger deal than we think."
What do you expect will happen once the Fed has fully tapered QE3 this October?
"A lot of people forgot this—they actually tapered QE1. We've been through this exact exercise before. They stopped. They told us they were done. Then four months later they gave us QE2. They abruptly stopped QE2 in June 2011. Again, they said they were done… Then they gave us Operation Twist. Then they promised us that they were going to end Operation Twist in September 2012, but as that date drew closer they said, "No, we're going to extend it." And then they said that they were going to extend it and gave us calendar guidance. They dropped that. They gave us forward guidance. They dropped that. They gave us threshold guidance: 6.5% unemployment, 2.5% on the inflation rate. They dropped that as well too. This is, depending on how you measure it, either the fourth or sixth attempt by the Fed to stop QE… We've been down this road many times with the Fed. They've promised us they'd be done, markets get a little wobbly, and then they start back up again. So, I'm skeptical that we're seeing the end of QE just yet."
Do you think the Fed will be forced to raise rates sooner than the market expects?
"Again, what I see from the Fed is reasons for them to keep putting off the rate hike a lot longer than the Street thinks... The newest one is this labor market composite indicator (LMCI), which puts together all of the labor market metrics into one composite indicator. And guess what? It shows that the labor market isn't as good as the 6.1% unemployment rate tells us, which is what they were using earlier this year. At every turn, the Fed seems to invent a new metric or new piece of data that says, "You know what, things aren't as good as we think they are. We're probably going to have to push everything off into the future." So, I'm of the opinion that that's probably what they are going to end up doing—stalling on the rate hike."
How much of an impact do you see the U.S. shale boom and energy sector having on U.S. economic growth?
"Oh, it's huge. Right now if you look at the last four years through the second quarter, U.S. growth has been 2.2% GDP growth for the last four years... Estimates by economists are that the energy sector alone could be .5%-1% of that. So, 25% to half of the growth of the U.S. economy could be in the energy sector alone in the last four years...and so, yes, the energy sector has been a huge driver..."
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