Unstoppable trends are better than Bitcoin in the long-term: analyst

David Bailin, Citi Private Bank chief investment officer, joins Yahoo Finance to discuss rapid resuscitation of the economy and sectors of the market poised for robust growth.

Video Transcript

MYLES UDLAND: All right, let's stay on the markets here and talk a little bit more about everything happening these days. David Bailin joins us now. He's the Chief Investment Officer over at Citi Private Bank. David, great to talk with you.

Let's talk this morning about kind of how you guys are seeing things ahead of this Fed decision and, you know, a lot of the trends that we've been talking about. Higher rates certainly seems to be top of mind on the program. What kind of conversations are you having there with your clients?

DAVID BAILIN: Sure. Well, I mean, first of all, these are the most important topics. So we're coming out of a very unusual time. We have never been through a pandemic before, right? We've never actually come out of a time when there's been this much stimulus applied to the economy, all with good intentions, really except for the period around World War II, when we were funding a World War for four years, almost four years.

So with this much stimulus, we're going to have this incredible burst of economic activity that takes place, really, over the next year-- starting probably now with the stimulus checks being issued, but extending out over the next year. And you've seen projections from the Citi Private Bank and from all of our competitors about growth rates of 6%, 7% for a time. And that's engendered two concerns.

One is inflation, right? Will there be inflation. And I think-- we think that there will be inflation. But it'll be in different areas of the market, and not general. And it will not necessarily be sustainable, unless that inflation is pumped up by more fiscal stimulus.

And the second thing is we're seeing an extraordinarily different economic policy and interest rate policy in the US than in Europe and in Japan, meaning that the Europeans have said, hey, we can't tolerate rates being higher for, let's say, our five- and 10-year securities, where in the US we're seeing the steepening of the yield curve. While not being encouraged necessarily, we're seeing it actually take place as a part of policy.

Now, here's why this matters and actually is good news for the United States, which is that when our curve goes up and the European curve or the Japanese curve stays flat, it creates an ability for a Japanese or European investor to hedge-- to make an investment in the US bond market and hedge it into their currency, meaning that our ability to fund our deficit for the next couple of years could be sustained by that difference in policy. And so with this normalization, which is what the Fed is doing and the Europeans and Japanese aren't, with this actual normalization-- that is going to be, I think, the thing that markets are going to have to adapt to here. And in general, that is a good thing for the US, to have an ability to attract capital into the bond market to pay real yields as opposed to negative yields.

And ultimately, that normalization, I think, could be good for the economy-- and frankly, good for the equity markets, although the transition is incredibly volatile. And that's the time-- that's what you were just pointing out. That's where we are right now. So a little bit long winded, but that's actually what we think is going on.

BRIAN SOZZI: David, some chatter on the street this week that a 2% level on the 10-year would bring a market correction. Would you subscribe to that?

DAVID BAILIN: I would in some ways, but not generally. And let me describe that. This rotation from, let's say technology, to cyclicals-- which is part of our switch right now-- is in part a revaluation of high-growth stocks. It's something to do with what you talk about with SPACs.

In order to believe that these companies are worth something, you've got to go out five or 10 years and then discount back their earnings or their cash flow, right? You can't discount back their revenues. You have to actually have that. And so when rates go from 1% to 2%, that discount rate is a significant change and significantly changes the value of technology shares that have yet to generate income.

So that's what's happening on that side of the market. And there are some companies that are going to continue to be able to generate the growth and earnings that markets need to see, but others that will not. So that's, I think, the transition we're in.

And so then in terms of our real level of concern, let me just bring you back to December of 2019. At that moment in time, rates were 1.9%, before this pandemic really was even on the radar. So the idea of having a 2% 10-year, ultimately, can the market digest that? Absolutely. We could even imagine a normalized rate of 2 and 1/2% on a 10-year if we were to go out to 2022, as an example. There should be, we hope, a yield curve and a normalization.

I would remind everyone that for seven years in the last decade, we had short-term rates pinned to near zero. So we just have to get from here to there, right? And then we have to see economic growth continue.