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'What you're seeing in financials is a knee jerk of higher rates': Jim Bianco

Jim Bianco, Bianco Research President & CEO, joined The Final Round to discuss his outlook for the financial sector and why he's worried about inflation and its impact on risk markets.

Video Transcript

MYLES UDLAND: All right. Welcome back to "The Final Round" here on Yahoo Finance-- Myles Udland with you in New York. Let's turn to the markets now. We're joined by Jim Bianco, president and CEO at Bianco Research. Jim, always great to get your thoughts. Let's start with an area of the market I know you follow closely, that's what's happening in gold-- just a tremendous move in metals-- not only today, but over the last couple of months, really the last two years. What have you made of the run-up here-- gold above $2,000? And then does today's sell-off do anything for you, or is it to be expected, I guess, given what we'd seen running higher?

JIM BIANCO: Well, it's not to be expected. It's a 6% down move. You know, you got to go back a couple of decades, and you can only find a handful of such days like you're having today in gold. So it's a big down move. Now, if I put my technicians hat on, I'd say that after the big run-up and the run-down that we've had in gold, I don't think we've broken any trend lines, but we've come right back down to them. And let's add in that it isn't just gold that's moving today, you're having a big move in bond yields, you're having a rally in the dollar-- they're all somewhat related to each other-- that you would normally in normal times-- pre-pandemic times-- call this a risk-off move-- yeah, risk-off move.

But yet, stocks aren't really enjoying, you know, what you would expect them to be benefiting from such a move as everybody gets out of gold, gets out of bonds, you know, towards stocks as well. So it's been more of the post-pandemic confusion we've gotten so far.

MYLES UDLAND: Well, and speaking of those interconnected macro trades-- so you've got the dollar, we've got treasuries, gold-- as you mentioned, today's specific price action would suggest a risk-off. I would actually kind of bounce this idea off you-- with the NASDAQ selling off, isn't that also risk-off? I mean, hasn't the NASDAQ been a safety trade of sorts in this market? Is that a fair characterization of how the FAANGs have played a role here?

JIM BIANCO: Yeah, well, all the FAANGs are basically-- you're right, they are safety trades, because they are the stay at home stocks, and that's where you want to hide if you think that we're going to continue to have some kind of a problem as well too. So you've got a lot of that that would have suggested that if you were to just show me what the FAANGs were doing, what gold is doing, what bonds are doing, what the dollar's doing, I would have said to you the Russell 2000 type of stocks, the non-FAANG S&P stocks would be having a monstrous update today, but they're not. And so that's where I think the confusion comes in just yet on what we're seeing in the market.

DAN ROBERTS: Jim, Dan Roberts here I know we're talking about gold and the impact there, but also as we see markets turn negative within the last hour or so, we had the big news about college football-- first the Big Ten and now actually breaking just a moment ago one of our colleagues at Yahoo Sports, Pete Thamel, saying that the Pac-12 has followed suit with canceling the fall season. I would think you wouldn't necessarily see a direct impact from college football news on the markets, but you think definitely. We were talking to break about this. Give us a little bit on the impact, you think.

JIM BIANCO: Yeah, I mean, having college football in the fall is a sign of normalcy returning, especially for a lot of the schools that you have college football in the Pac-12 and the Big Ten. They're not in the major media markets. This is not Chicago and the Giants and the Patriots that we're talking about. We're talking about some of these other schools. And it's a sign-- it's an indication to everybody in those neighborhoods or in those states that things have not returned to normal yet.

And as much as we want to believe it's going to return to normal, and that has definite impact on the election as well too, that it is telling you that it is. Now, the big one in college football is the SEC-- from Florida all the way to Arkansas, you know, all the way to South Carolina, and Clemson which is there as well too. They haven't said anything. But I think if they were to delay until the spring as well too, that could actually bleed into the election too, because you'd be telling everybody in that important place for voting, it ain't ready yet. It ain't right yet. And that's what-- I know the Trump administration wants everybody to believe that we're on the way to getting better, and that would be an indication that we're not.

EMILY MCCORMICK: Hi, Jim. Just turning back to the sort of rotation that we're seeing over the past couple days, over the past week into cyclical value, taking a look at those financials, industrials, and materials leading the way higher today-- this isn't something that we've seen-- this isn't the first time that's happened. You know, I think at the end of May, beginning of June, we also started to see this, and that sell-off in big tech. So how resilient do you think this rotation is right now? How long do you think it's going to extend? And what might serve as a catalyst to send things going back the other way and back into tech and back into these other names?

JIM BIANCO: Yeah, I'm going to be a little bit skeptical that this is going to be a real rotation into those names. I think what you're seeing in financials, to use one example, is a knee-jerk of higher rates-- higher rates, wider yield curve. That's supposed to be good for them. The algos say, OK, it's time to buy financials. But don't think it's anything more than just that.

I think what could really upset this-- and this is what I've been worried about-- and this is probably not next week or the week after, but looking down the line-- is higher interest rates-- I mean, much higher interest rates. You have the 10-year yields at 62, 63 basis points right now, and it makes a run towards 1% towards the end of the year-- maybe through 1%, 1.75% to 2% in the 30-year-- I think the story then becomes that inflation is a issue. That's why you've got dramatically higher yields if you get that.

And that will be problematic for risk markets, especially the cyclicals and everything else, because they're dependent upon the economy recovering. And I don't think that, you know, they can just default back to, well, inflation is going up, and we're-- you know, we're a cyclical company, and that should benefit us. No, you need the minus-32.9% GDP to go positive is what you need as a cyclical. And higher rates could really put the lid on that, and that could be very bad for them.

So 62 basis points isn't a problem. But we rejected 50 on the 10-year note just in the last week. And if we continue to see rates move higher and higher, I think that that can be a problem over the weeks and months ahead.

MYLES UDLAND: And then, Jim, quickly before we let you go, we haven't really talked about the virus. Like, we've talked around it, but not explicitly. As we looked at case counts, you know, a couple of months ago, we would have said, every tick might be moving the market. That hasn't really been happening for a while. Do you expect that to come back into play as we head towards the fall? Or has the market made peace with the virus?

JIM BIANCO: No, I expect it will come back to play as we head into fall. Right now, the virus count has peaked. It's been heading down except in the upper Midwest where I am. It's kind of showing some resiliency but at lower levels, as well, too, as it's starting to move up. But I think a lot of people have really concluded that whatever the virus has done, it's over with for now. When the weather turns in the fall and we all go back inside-- think of this as being an indoor disease, where we all breathe indoor air and pass it to each other-- then we'll all have to wait and see whether or not we get an uptick in the virus in the fall. And then that will really tell the story. But for the next few months, I think you're right. I don't think we're going to be as focused on the virus count, at least in the United States, as we have been, say, over the last two months.

MYLES UDLAND: At least until November 4-- because everything up to the 3rd, of course, we all know what leads to that. All right, Jim Bianco, president and CEO of Bianco Research-- always great to get your thoughts. Thanks so much for joining the show.

JIM BIANCO: Thank you.