James Bianco: Draghi Is Going To Make The Same Mistake As The Fed


James Bianco: Draghi Is Going To Make The Same Mistake As The Fed by Christoph Gisiger, Finanz und Wirtschaft

James Bianco, President of Bianco Research, cautions about the unintended consequences of the new European stimulus program and doesn’t think that the Federal Reserve is going to raise interest rates this year.

Mario Draghi is going all in. On Monday, the President About James Biancoof the European Central Bank will launch a bold bond buying program to stimulate the economy. «I don’t think it will work that way» doubts James Bianco, leaning over a bowl of cereal and sipping on a large glass of OJ. To be sure, the influential market strategist from Chicago who is highly regarded among institutional investors expects the massive liquidity infusion to drive up European stock markets.

But by doing so, the ECB is going to make the same mistake as the Federal Reserve in the US and catalyze social tensions, Bianco fears. In contrast to the mainstream on Wall Street, the unconventional thinker does not believe that the Fed will raise interest rates this year. In addition to that, Bianco spots an especially dangerous development in the energy sector. Despite the burst of the huge oil bubble, investors have built on to their positions, he warns and draws worrisome parallels to earlier excesses in the housing market.

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Mr. Bianco, the Federal Reserve has initiated the countdown to liftoff. When will Fed chief Janet Yellen raise interest rates for the first time since the financial crisis?

James Bianco: When you talk about the Fed there are two things you need to discuss: What will they do and what should they do? I think what they will do is they are going to hold off and not raise rates this year. My unconventional argument is that the Fed is much more concerned about financial stability than they let on.

That is a nice way of saying that they are afraid they are going to raise rates, the stock market goes down and it is all Yellen’s fault and she gets yelled at. They will raise rates when zero interest rate policy is perceived as a problem. It is not perceived to be a problem now because inflation is low. But the day comes when the market is selling off and the perception is that it’s because the Fed is too easy. Only then will they raise rates.

What does that mean for the Fed’s next policy meeting in mid-March?

James Bianco: I think that the March meeting is going to be the most important meeting of the year. Because, as we go through the year, the data is going to get worse. It’s not going to get bad and I am not calling for a recession. But the data is going to do what it has done since 2010. It is going to get people to slam their fists on the desks and go: «God, it’s just not good.»

It is just average-to-below average and that is going to make it harder for the Fed to justify raising rates in March, April, May and June than in January, February and March. So it comes really down to the March meeting and if they do not take the window at that meeting to set up a rate hike then there is not going to be a rate hike – and the market seems to agree with that.

What do you mean by that?

James Bianco: Wall Street is telling us that Yellen was more hawkish in her last testimony before Congress and it is all set that the Fed is going to raise rates in June. But that is not the way the market was reacting. The market has actually pushed the odds of a rate hike further away from June. Fed Funds Futures are now pricing in a first rate hike out in October and they are moving away from the Fed from September to October to December.

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