Ep 48 – Peter Boockvar: What Will Cause the Fed to Pivot?

Peter Boockvar

Chief Investment Officer of Bleakley Financial Group Peter Boockvar joins the Gold Exchange Podcast LIVE at the 2022 New Orleans Investment Conference to discuss market dynamics, a potential Fed pivot, unemployment numbers and more!

Read Peter’s Boock Report and connect with him on Twitter

Connect with Keith Weiner and Monetary Metals on Twitter: @RealKeithWeiner @Monetary_Metals

Additional Resources

The Dollar Milkshake Theory

Fed Rate Hike Graph

Ukraine and Useless Ingredients

Fed Hammer Article

Podcast Chapters

00:00-00:15 Intro

00:15-00:36 Peter Boockvar

00:36-02:08 Fed Pivot?

02:08-04:42 Key Indicator

04:42-06:16 Unemployment Figures

06:16-09:06 Zombie Slaying and the QE Pivot

09:06-11:53 Gold and Silver Prices

11:53-15:04 Dollar Milkshake Theory

15:04-15:27 The Boock Report

15:27-16:11 Investing Wisdom

16:11-16:52 Outro

Transcript:

Benjamin Nadelstein:
Welcome back to the Gold Exchange Podcast. My name is Ben Nadelstein from Monetary metals. We are coming at you from the 2022 New Orleans investment conference. I’m joined, as always by Monetary Metals founder and CEO Keith Weiner. And we are delighted to be joined by Peter Boockvar of Blue Financial Group and the Book. So Peter, let’s get into it. Let’s dive straight in. Interest rate hikes in 2022. Do you see them continuing or are we going to pivot?

Peter Boockvar:
What are your thoughts through the next two meetings? They’ll definitely continue and we’ll probably see another 100, 225 basis point increases split up between the two remaining meetings. Then we’ll see what happens in 2023 based on how the economy plays out in response to this, where the unemployment rate goes and so on. But Fed wants to get the Fed funds rates of 4% plus and they’ll do that the next two meetings.

Benjamin Nadelstein:
Keith, do you agree? What do you think 2022 stay the course?

Keith Weiner:
Yeah, they’ve definitely said they’re going to hike. To me, they’re causing a lot of or precipitating a lot of damage, but they’re like in this ivory tower on the 100th floor, so they see all the little people down below is like ants and the flames have to rise to the height of the window for them to pay attention to it. And the question is, when do we get to the point where they notice, hey, we’ve caused a lot of problems and now we’re going to be forced to pivot? The question is when.

Benjamin Nadelstein:
Probably not forced to pivot, just a question of when.

Peter Boockvar:
Well, it’s when. But what causes the pivot? Is it a market disruption like the bank of England experienced or is it going to be a rise in the unemployment rate or a combination? So yeah, at some point they’ll stop hiking and at some point they’ll end their QE. It’s just a question of also what the trigger is for that. But it’s inevitable that they eventually stop, just as they always do in response to their tightening.

Benjamin Nadelstein:
Well, let’s talk about that kind of key indicator. What is the key indicator that market should be looking for and what do you think the Fed is looking as their key indicator? Keith, let’s maybe start with you.

Keith Weiner:
I like to look at the spread between junk and treasury yields. There’s something called the bank of America Merrill Lynch option adjusted spread. But people like to look at what is the JNK TLT minus JNK, but no matter which one you’re looking at, you’re seeing are the credit spreads for poor quality companies blowing out, which means the defaults are coming, which means holes and balance sheets are coming. I agree with Peter. There’s a lot of different things that could precipitate the Fed pivoting, but that would be one of them. All of a sudden you start to see real carnage and credit land. That’s what I’d be looking at.

Benjamin Nadelstein:
And Peter. What about you? Maybe a key indicator that they’re looking for for a sign as a pivot.

Peter Boockvar:
It’ll be that it’ll be the unemployment rate if it gets to 5% plus and it will be disorderly behavior in the US treasury market.

Benjamin Nadelstein:
Right. And what about a key indicator that’s seemingly overhyped? Everyone is looking at this, but what is it really telling us? Maybe a key indicator that’s overhyped?

Keith Weiner:
Key CPI inflation.

Benjamin Nadelstein:
CPI inflation. Okay.

Keith Weiner:
Because there are so many non monetary forces with lockdown and web flash and trade war in Ukraine that it isn’t necessarily what the Fed is making and everyone’s hyper focused on it. And then the Fed itself is like, oh, we’re going to hike interest rates. What, to fix the shortfall of commodities that used to come from Ukraine and obviously all the export seats. How can interest rates possibly fix that?

Benjamin Nadelstein:
Peter, what do you think?

Peter Boockvar:
I mean, I think the data points are important, but I think people have to analyze them in terms of the context in which they’re reported. Is it leading? Is it a leading indicator? Is it just telling us what already happened that is not relevant to what’s going to happen? I think that’s what people need. They can’t just look at a number and in isolation because a lot of these data points capture, like I said, what’s happened and a lot of times they don’t quickly adjust to what’s currently happening, that there’s a lag in the reporting. So I think people like the unemployment data is a lagging indicator in terms of how it follows economic activity. So we can’t just look at it in isolation. We have to understand that decisions on hiring and firing people happen well after a direction and economic activity has taken place.

Benjamin Nadelstein:
Yeah. Keith, let’s talk about unemployment for a second, seemingly. Okay. I’m scared at the moment. The numbers aren’t too volatile. What do you think unemployment in the future? 2022 and 2023 going forward?

Keith Weiner:
Yes, I think it’s inevitable. Going to have to rise both by the stated, the mainstream theory we have to destroy demand in order to get consumer prices down or how do you destroy demand? Render people unemployed. Right. But a space that I follow very closely is capital markets availability to early stage companies because that’s where the growth in employment is mature. Businesses are always increasing efficiencies and therefore, if anything, shedding workers. But it’s the new up and coming companies that are really creating the opportunities and the jobs. Well, funding for those companies has basically seized up as of sometime last spring or maybe early summer. So those companies are being told, get the cash flow positive. They’ve done modest layoffs. So you’re not going to really see that in the unemployment number yet. But as some of those companies begin to run out of runway they’re going to be forced to close and lay off their entire workforces. That’s very much a lagging. You know, like the capital market closes as a result of tightening. How long does it take before you see huge amounts of light off from early stage companies? It could be six to twelve to 18 months before they run out of runway and finally just pull the plug.

I don’t think that really has largely hit yet.

Benjamin Nadelstein:
Right. So I want to talk about zombie corporations for a second. So these are companies whose profit is less than their interest expense and obviously with interest rates hikes that really puts a lot of these zombie corporations on the chopping block. Unfortunately, some of these zombie companies are actually employing people. Right? They might not be the healthiest companies but they do employ people. So with interest rate hikes really kind of slaying some of these zombies, where do you see the unemployment numbers and is that something that is going to be taking into consideration?

Peter Boockvar:
Well, when money is easy, when rates are at zero and there’s QE, all you need is a heartbeat and a PowerPoint presentation and you can raise money. So when the cost of capital goes up then obviously everything changes and investors become more discriminating in terms of what they’re going to finance and what they’re not. So business models that exist when rates are at zero, they don’t exist when the cost of money is higher. And now the strong business models separate themselves from the weak ones and that’s what happens in economic cycles in a downturn. It’s the creative disruption that goes on. This obviously this cycle is unique in that we’re going from a time period of extraordinarily easy monetary policy to a very short pivot to the other side. So there’s going to be things that break. But the Fed is obviously trying to regain their inflation credibility and are willing to risk those accidents. It’s just a matter of how many accidents and how much damage needs to take place before they take a step back.

Benjamin Nadelstein:
Right. And I think the other thing you want to think about is that if this kind of going back to easier monetary policy is inevitable, if this interest rates going back down. Keith, you talk about people are stateful, right? They remember it’s not that the same trick works twice in a row. If we go back to this position, how are markets going to react to what would be QE or falling interest rate?

Keith Weiner:
Well, depending on how long this goes. If a lot of those early stage companies and also the Peterspoint companies that either their business model or the competitive situation, they couldn’t make any money if they fold and then you flood the market with excess liquidity, well all those things for that liquidity aren’t there anymore. So what does it do? It goes into the treasury bonds and maybe real estate or maybe the next nonfungible token Craze or whatever and then it will take years for, I like your phrase heartbeat and a PowerPoint. It will take years for people to muster up the PowerPoints and the heartbeat to go and create the next bubble and whatever the next emerging startup Craze is going to be. But it doesn’t happen instantly. And if you pour all that stimulus on the corpses of dead companies, if you’ve done it six months earlier you might have gotten the effect but six months later it’s kind of too late.

Benjamin Nadelstein:
Well, let’s talk about this. We’ve kind of created a bubble economy. Some people say it’s the bubble of everything. What are some of the worst assets that performed in 22 that might have surprised you and what do you see in 2023 that people are still on this bubble bandwagon?

Peter Boockvar:
Well, gold and silver have been the major disappointments for the last couple of years in this kind of environment. So that’s what surprised me, that the markets are going down, that bonds are selling off, that other assets are repricing. Shouldn’t surprise anybody when you see a sharp rise in the cost of capital and a sharp rise in the dollar. Now of course higher interest rates and the stronger dollar. Yeah, you can say, okay, that’s a negative for gold and silver. But just how everyone’s running to the dollar while that physical currency is getting debased and devalued with inflation and not running to something that has maintained its purchasing power for 5000 years is a little bizarre to me. But I know how markets work and the algos get triggered when you see a rally in the dollar and rising rates and a rise in real rates and this is what you get. But that’s what surprised me.

Benjamin Nadelstein:
Keith, gold and silver, we have the gauntlet laid down for us. Obviously monetary metals are about paying a yield on gold and silver so we’re less worried about the price and more about earning clients ounces. But let’s talk about the price of gold and silver. Not really budging recently.

Keith Weiner:
Yeah, I was going to say an interesting thing is that as I was writing about this for a few months, how silver went into backwardation as it was sold off in the previous round and every drop in price the backwardation was increasing and that subsided. It’s like whatever buying pressure of the physical was driving that has not gone away but decreased significantly in volume. And now you have both metals kind of returning to a normal condition as the prices come down. Which means maybe at least in the short term, the indicator is kind of saying there’s no real driver for a sharp upward price. Now that said, what I think is going on, particularly in gold is I think there’s a huge amount of buying because I think a lot of people are looking at what every central bank is doing in the world uneasily, and gold is the antidote to that. But at the same time, I think there’s huge selling pressures because of margin calls and portfolio rebalancing. I mean, if gold is supposed to be X percent of your portfolio and the entire rest of your portfolio is going down, there’s a rebalancing where you’re like, okay, I want to decrease my allocation to gold.

And so there’s this seemingly relentless selling pressure which has over matched the buying pressure. I think the selling pressure is going to be of limited duration, but the buying pressure is there. And so once the selling pressure is over, boom, the next wave.

Benjamin Nadelstein:
All right, I’ve got just a couple of more Keith questions. Brent Johnson walks by. We’re at the New Orleans Investment Conference, and Brent is obviously big on this dollar milkshake theory. With the DXY going higher, other currencies kind of falling in comparison. What do you think about that? Are we going to see the DXY continue to rise? Is there going to be a quick kind of turnaround there or what do you think?

Peter Boockvar:
He’s definitely had a good year with the thesis, no question. I think the real test for the dollar is whether this rally has been just an interest rate differential thing where the Fed’s been more aggressive than everybody else and has it benefited against the Euro because of the energy crisis in Europe and for those two reasons. The reason why I say that is because if you look at the dollar against the Brazilian reality, mexican peso, for example, those currencies have traded great against the dollar. That’s because their central banks were actually much earlier in raising interest rates in the Fed and have been much more aggressive. They’ve also benefited as commodity currencies. So that tells me, yeah, that those two factors are really the only reason why the dollars rallied. So once we get close to the end of the Fed tightening, at the same time other central banks are still aggressively raising, then that’s the end of the dollar rally. And really was just as simple as that, wasn’t anything else. It was just those two factors. And if Europe can somehow get through the winter without any further damage and pain with respect to energy prices, then maybe the euro then has its bounce.

So I think that the dollar big picture structurally is still challenged. But I think it’s really just as simple as that with the dollar rally and really nothing more. It’s not like the dollar is just great shakes, it’s just getting those flows for those reasons. But my theory will be put to the test when the Fed’s almost done raising interest rates.

Benjamin Nadelstein:
Keith, what about you? Dollar milkshake DXY, do we see it going higher?

Keith Weiner:
It’s very hard to say in the short term. Does DXY go higher? It seems like it’s kind of hit that point, maybe overextended and do for correction for sure longer term, to say you’re bearish on the DXY is to say you’re bullish on the euro and I just can’t quite go there. As messed up as the dollar is and the management of the dollar and the US government, when you look at Europe, you have the mess is bigger, so clean and dirty shirt. The other point that I always like to make is that the other currencies are all dollar derivatives. So in a certain sense, how can the derivatives really structurally outperform the underlying and there’s a point at which it starts to matter as you really tip into the final bust of the whole system, then all the peripheral stuff gets wiped out and the dollar becomes the only thing. I don’t think we’re at that point, so I think we go to another cycle and repeat.

Peter Boockvar:
Peter, I just need to add also the dollars obviously rallied against the end because of yield curve control. That’s a perfect example of an interest rates differential and the differential between central banks. If we wake up one day and the bank of Japan decides to widen the YCC band or at least get rid of it, well, then the yen is going to have a rip your face off rally against the dollar. So getting back to my point of this is just an interest rate differential thing.

Benjamin Nadelstein:
Well, I’ve got one more question for you, but before we go. Where can people find your work? You’re obviously really in tune with the markets. You’ve got some great insights. Where can people find some of more of your work?

Peter Boockvar:
So I write daily on the macroeconomic and market picture and that’s at boockreport.com Boockreport.com. And I’m the CIO and portfolio manager at Bleakley Financial Group. And you can learn about us at bleakly.com.

Benjamin Nadelstein:
All right, well, I got one more question for you, Peter. We’re at the New Orleans investment conference. So what is the best investment advice that you’ve ever received and what can you tell us about markets right now?

Peter Boockvar:
I don’t think there’s one best investment advice that I’ve received. I think a lot of the investment advice that someone learns is from their own mistakes. And yes, you need to read and learn, but it’s how you adjust your own mistakes and try to repeat them less going forward.

Benjamin Nadelstein:
Well, hopefully no more mistakes in 2022 and beyond. Peter, it’s been awesome having you and hopefully see you again.

Peter Boockvar:
Thank you!

Benjamin Nadelstein:
And that’s all for us here in New Orleans. Thanks, Peter. Thanks, Keith. And we’ll see you soon.

Additional Resources for Earning Interest on Gold

If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:

The New Way to Hold Gold

The New Way to Hold Gold

In this paper we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.

 

 

 

 

 

Case for Gold Yield in Investment Portfolios

The Case for Gold Yield in Investment Portfolios

Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.

 

 

 

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