Stubborn Inflation & Debt Crisis: Warning of Economic ‘Death by 1,000 Cuts’ | Peter Boockvar

Andrew Brill  0:00  
Hello, and welcome to Wealthion. I'm your host, Andrew brill. And now that we are past the most recent Fed decision to leave rates unchanged. Let's get to talking about what comes next. And we'll do that right now.

The date of our next online conference is June 1, we have some of the most prominent names and economics and equities come to talk about how we can all keep and grow our own wealth. We hope you'll join us for details go to our website, Wealthion.com. We welcome in Peter Boockvar, an independent economist Market Strategist. He independently produces the book report, which contains a wealth of information. He's the chief investment officer of Bleakley Financial Group. Peter, welcome back to Wealthion. 

Peter Boockvar  0:45  
Thanks, Andrew, for having me on.

Andrew Brill  0:47  
So, Peter, we have a stubborn inflation number, the Fed, obviously leaving rates for longer What's your take on the economy as we sit right now? 

Peter Boockvar  0:58  
I think that the economy is remarkably mixed and uneven. And I say that even with individual industries, take housing, for example, we have the pace of existing home sales, near 30 year lows, but new builds that are doing fine filling up this this supply vacuum. With consumer spending, we have lower to middle income consumers that are skimping on Starbucks coffees and McDonald's cheeseburgers, but we have the high end that is still spending and traveling and, and going on cruises and so on. You have manufacturing that's still in contraction, even though it's trying to find signs of a bottom but we have all this government spending and government enticements to build manufacturing facilities and ship plants and so on global trade that is somewhat mixed with with soft economies overseas, in Europe, but then you have strength in India, weakness in China. So a tremendous amount of cross currents. So you can't really paint the US economy with one brush. There's sort of this this sort of two lane, economic highway that would that I'm seeing.

Andrew Brill  2:12  
So we talked about, there's so much talk about recessions, soft landing, what you're trying to explain to me is that there's different parts of the economy that could be in recession now, but certain parts that are kind of doing okay.

Peter Boockvar  2:25  
Yeah, that's what it seems, you know, the person you know, as I said earlier, that's not going to Starbucks as much. You know, they're sort of in their own personal recession having to deal with a cumulative rise of 20% in their cost of living, hopefully, least offset as much as possible with with wage growth, but it still stings. And I think consumers are, are really prioritizing on more needs than wants. But you know, as I said, higher income consumers are benefiting from a return on their savings of 5%. If they're in treasuries and a wealth situation that is, is on firmer footing, then a lower income income consumer that is renting and doesn't own a home relative to somebody else that may own a home and has a locked in 30 year mortgage, three and a half percent.

Andrew Brill  3:20  
Is that a switch from what you've seen in the not so distant past is that people were the discretionary spending was really, really high. Now we see at which point what you're explaining is that the discretionary spending is kind of in certain income groups is waning, and in certain income groups is just continuing to grow. 

Peter Boockvar  3:40  
Well, you know, COVID, certainly, definitely, you know, polluted and pulled forward a lot of of spending on discretionary stuff, particularly on goods we know, that was where the consumer spending strength was in late 2020, 2021. And then that flipped after everyone already bought their laptops and bought their redid their kitchens and, and redid their deck and spent on stuff. Then they shifted to spending on going out for dinner and traveling and more experiential type stuff, that that trend seems to still be in place where experiential type, consumer spending is doing better than than hard, good stuff. Particularly if it's an expensive hard, good stuff like a car where you have to borrow money, and the cost of money to buy that car is obviously much higher. That was pre 2022.

Andrew Brill  4:37  
Especially for the government. Do you see the higher for longer is it working? Peter, it's, it seems to be stuck in that, you know, just under three, just over three range. Do you see it starting to get down to where the Fed wants it?

Peter Boockvar  4:51  
Well, strangely, it's, it's working in some areas, but it's also counterintuitively, facilitating inflation. On the other on the higher end, because you're getting a lot of interesting come, you're spending a lot keeping prices elevated cruiselines, for example, to say them again, they have a lot of pricing power right now, because of those boomers that are spending. So, higher interest rates are actually inflationary. If you're trying to buy tickets for a cruise, or a sporting event, for example, or a concert. Look at look at the housing industry, home prices continue to go up in the face of higher interest rates. So in that case, because of the distortive nature of the Fed's policy, going back 20 years with what they've done to the housing market, it's it's completely failed in reducing the inflation of home prices. On the flip side, cheap money drove an enormous amount of multifamily construction. So their attempt to create inflation actually sowed the seeds for eventual rental deflation. But now we're sowing the seeds for an eventual uptick in rental inflation in 2025 2026, due to the dearth of of new construction after the current projects are done. So it's hard to answer that question in one way, because there's so many nuances and how rate cuts rate increases flow through the economy. But I guess the simplified if you need to borrow money to to build a business, if you need to borrow money to buy a house or a car? Well, yeah, it's working if you're in commercial real estate, higher interest rates are certainly working, because we've seen certainly a collapse in the values of a lot of office buildings. And we're seeing stress in other areas of commercial real estate. So it's working in some areas, and it's creating more inflation in others. 

Andrew Brill  6:51  
And since you mentioned commercial real estate, I'll ask you the question. I know there's a lot of commercial loans that are coming due this year, those loans are going to have to be refinanced at a very much higher rate, probably double than what some of these people are paying and the property 

Peter Boockvar  7:08  
More than double, it'll be potentially triple. 

Andrew Brill  7:11  
And the property values because of the higher rates have come down. How is this going to affect the economy and the market?

Peter Boockvar  7:19  
Yeah, that's, I mean, just imagine every day some of these loans coming due. And, you know, a lot of loans that came through and 2023 were pushed to 2024. So interestingly, going into this year, there was the assumption that there was about six to $700 billion of commercial real estate debt that would mature this year. Well, turns out that number is closer to a trillion, because a lot of 2023 maturities will push to 2024. So that industry needs a lot more equity. I think that's the bottom line. Either that or there's going to be a lot of wipeout of existing equity that will transfer to the lenders via foreclosure and handing back the keys. So there's going to continue to be a bunch of pain. For those operators that have debt coming do have your own multifamily building that's 98%. Leased and your maturity is not to 2027, 2028 or where you're all equity, then you're fine. If you're an industrial warehousing, maybe your your rent growth is slowing also multifamily. But if you have a good balance sheet, you're okay. It's really going to affect the piece of that $20 trillion market of commercial real estate, where your balance sheet is all sides, which obviously definitely ensnares a lot of people. And we have to see how that sort of ripples into other parts of the economy, also higher for longer when you think about its impact. And we talk about how it impacts existing businesses, existing real estate owners. But we also have to think about what higher interest rates mean, for future economic activity, what business doesn't get started, because VC money is not coming their way, what house is not being bought, and instead is rented? Because the cost, you know, because interest rates are high on top of higher home prices for a millennial or Gen Z or who wants to buy what what business is not expanding because they don't feel like taking a 10% loan from the bank. It's it's what activity does not take place because of higher interest rates in a very credit dependent economy. 

Andrew Brill  9:30  
And that will take a little bit of time to figure out right if you know what isn't being done?

Peter Boockvar  9:36  
Right. That's why this is not sort of an easy, quick. You have the digestion of higher rates and then you move on. You know, this is something that plays out over many years because of the amount of debt that was priced pre 2022 that over the coming years will get repriced much higher, and if rates stay higher for a while. There's obviously sort of this pernicious death by 1000 cuts impact that I've been thinking is going to happen for a while now. And it sort of seems to me to be playing out in that fashion.

Andrew Brill  10:09  
So the amount of debt that people take on our government has taken on a ton of debt. And to finance that debt, we're selling bonds like it's going out of style. Peter, how is this affecting our economy? Because now the government's borrowing money, they're paying more to borrow that money? Our debt continues to rise? It the bubble is gonna burst at some point, don't you think?

Peter Boockvar  10:34  
Well, it's for 40 years, we've been talking about wide US budget deficits, you know, outside of a couple of years. And it never mattered, but to your question is, does it now matter? And I do think it does matter. I mean, in the 30 years, I've been doing this, I'd never paid attention to the Treasury's quarterly refunding announcement, or overlap. You've never really paid attention to Treasury auctions until the last couple of years. So now that we're talking about this, and paying attention to it, it really is important. And when you have an expanding economy, with an unemployment rate, below 4%, and a budget deficit relative to GDP at 6%. That's highly stimulative. So there's basically $2 trillion more being spent relative to the income the government is collecting, that's flowing through all parts of the economy. So here you have the Fed, tightening, but fiscal policy continuing to ease. And question is, can the US Treasury continue to finance all this? And I do think it's, it's getting more tougher around the edges. Now, the Fed has relieved some of that via trimming their Qt from 60 billion a month and treasuries down to 25. So, Janet Yellen got some relief, and not a coincidence that it's shortly before the election. But foreigners have also been a large contributor to financing the US debt, and their percentage ownership of marketable securities. While they're still buying on an absolute basis, that percentage continues to drop. So more and more supply, wondering where the buyers come could sort of flow in and give reason why at least the long end of the yield curve rates are gonna stay high for a while as well, in addition to what the Fed does with the short end.

Andrew Brill  12:25  
And I'm glad you mentioned the yield curve explained to me what's happening. I know, I know what the yield curve, we kind of want to see it on a you know, as an upward trajectory, it seems to flattened out even towards the end of it has come down a little bit. Explain to me what's happening with the yield curve?

Peter Boockvar  12:42  
Well, it's inversion. I think it's the longest inversion that we've ever seen. And that's, again, this this very strange nature of, of inflation and, and monetary policy and response. And and what I talked about with the US financial situation, and this very uneven economy. And also, it does. So there's always this debate is is the inverted yield curve just reflective of the current economic situation. And or could it actually trigger a slowdown in bank lending because banks need a steep yield curve in order to make money? And I think it's combination of both. Now, I do think that the yield curve is going to really steep and an unconverted, obviously, when the Fed starts to cut interest rates, even if they do modestly, because I still expect higher longer term interest rates, actually counter intuitively to if the Fed cut short term interest rates. 

Andrew Brill  13:46  
Have you seen, have you seen this counterintuitive pattern before?

Peter Boockvar  13:53  
No, this seems to be pretty unique. I mean, typically, where the Fed moves, short term interest rates, long term interest rates sort of had followed. Now that we had a little conundrum, as Greenspan called it when he was raising rates in the mid 2000s. And long term interest rates didn't go up that much. And he called that a conundrum. But, you know, we had the fastest inflation, 40 years, and the most aggressive monetary tightening in 40 years. So what we're seeing now is not something that many people in the markets are used to seeing, you have to sort of open up your history books. For this, not to say that this is exact similar pattern as then. But there are definitely similarities and still a lot of distortions in a post COVID world where the government has spent such extraordinary amounts of money to combat COVID And that spending from a baseline perspective, never, never retraced itself. 

Andrew Brill  14:49  
So with bond prices where they are, would this be a good time to sort of put some money in that, in that vehicle?

Peter Boockvar  14:57  
So we are we agree, but mostly owning shorter duration bonds, I have no interest in taking interest rate risk on the long end of the yield curve, which I think still very much, much exists. I do think that there are going to be some more temper tantrums in the long end of the US yield curve, which may actually also occur in yield curves in Europe and Japan, as well as we all have some high correlations to each other as bond markets. So but on the short end, where you can go out two to three years in terms of duration, yeah, for the first time, in 15 years, they're actually attractive places to get some low risk, no risk if you're in treasuries interest income.

Andrew Brill  15:46  
Now, the European Central Bank is probably right on the verge of a rate cut. And the Bank of Japan is thinking about that as well. Is things loosening a little bit in overseas?

Peter Boockvar  16:02  
Well, Bank of Japan is actually thinking about raising rates. So we have the Riksbank today and Sweden that cut interest rates sort of front running what the ECB is likely to do, Europe's economic situation is certainly much more muted than other parts of the world. So they're leaning more towards focused on that slow growth and the the downward trajectory of inflation, and feeling the need that that could be enough to tweak rates lower, we'll see what the Bank of England does with Japan. You know, the obviously got out of negative interest rates and yield curve control. But now they're dealing with this pronounced weakness in the end that resulted in two rounds of foreign exchange intervention, which won't last unless the BOJ further raises interest rates. And interestingly enough, Governor Uwaydah, speaking to Parliament this week, actually said and raised the possibility of them using monetary policy to stem the decline in the yen, which I think is is definitely a trend change of tone of his because they realize that a weak yen when inflation is already higher, and particularly when it comes to what they import food and energy, you really don't want to piss off your your citizen tree by depressing the value of your currency when you need to buy and import a lot of these non discretionary items.

Andrew Brill  17:28  
And I was actually reading your article and your quotes from the governor saying that a weekend doesn't do anybody any good. And it's certainly not the citizens of Japan any good. So they're obviously looking to tighten things up a little bit. Let's come back to the home and talk about wages a little bit. And I was reading a report how you know, wages are up, but they're there's creeping up at a much lower rate. Is that what the Fed is looking for? And how is that going to affect our economy because prices of goods are not coming down. So things are going to seem like they're a little bit more expensive? 

Peter Boockvar  17:28  
Well, the wage growth is definitely moderating, but part of that also is just tougher comparisons. And when you have to comp against the very strong wage growth last year, you're just the math is going to show you a deceleration. So that that I think is a key part of that. Now, the Fed, Feds sort of relationship with wages is is definitely polluted here is that they want to generate higher inflation, when inflation is low. But then we finally get it and wages start to go up to compensate for that high inflation. But then the Fed doesn't want higher wages, because they're worried about that, then further and further price increases. So higher wages sometimes leads to higher prices, sometimes it does not. It all depends on the productivity of that business. Now, if you're a restaurant in California, who just had an increase in your minimum wage bill, if you're a fast food franchisee to $20, well, you're raising your prices and from what we've seen, restaurants are raising their prices from six to 8%. So whatever wage benefit, someone in California is getting, it's being completely offset by a higher cost of living. So, but from the Feds, you know, econometricly driven mind? Yes, they're happy with a slowdown in the rate of wage increases.

Andrew Brill  19:27  
Do we expect to see prices come down a little bit now that the wages aren't coming down, but they've they're stabilizing? Somewhat? Do we expect the prices to come down a little bit at some point?

Peter Boockvar  19:39  
No, prices will never come down. Maybe they'll just go up less. Unfortunately for those that have suffered through a very sharp rise in their cost of living when it comes to wages, wages just for perspective in the 20 years leading up to COVID average hourly earnings were averaged about two and a half percent year over year. here. So now they've moderated but they're still running at about four. So that's off the boil of north of five, but still running well above where it was pre COVID. Now, for the wage earner, that's a good thing because of higher inflation. But it definitely from the feds perspective, certainly makes their job more difficult. And California, as I said, their minimum wage increase, as certainly doesn't make the Feds job easier either. If all that wage increase gets passed through to higher prices, which it seems to have been, there's only so much productivity a restaurant can instill in its business.

Andrew Brill  20:37  
Let's talk about unemployment for a second, since we're talking about wages. The unemployment rate ticked up slightly, although we're hearing Peter about layoffs all over the place, layoffs that don't seem to have hit the numbers yet. Do we expect to see those hit the numbers? Or are these people getting packages where there's told ya don't apply for unemployment, stuff like that?

Peter Boockvar  20:59  
Well, I caution people, when you hear about job cuts, that always makes the headlines, right? When you hear about a big company hiring 5000 new people, that doesn't necessarily get it. I do think, though, as we've seen an initial jobless claims that the pace of firings remains somewhat muted. Now, you We can quibble with the jobless claim number, because if you get a severance package, you're not necessarily applying for unemployment benefits. And there are some people that for some reason, don't think it's worthwhile because it doesn't offset their cost of living or they don't, they're not eligible, whatever. But I think the labor market change that, to me is becoming more evident is the slowdown in the pace of hiring. And we've seen that in the NFIB. And we've seen it in a lot of the anecdotal softer data rather than the BLS data, I think the BLS data is still being overstated. ADP still showing some pretty good job growth. But if you look at NFIB intentions to higher that's fallen dramatically. If you look at continuing claims, those are still collecting benefits that's remaining elevated near multi year highs. We looked at the Conference Board consumer confidence survey last week and the answers to labor market questions weakened, even within the BLS jobs report last week, those that can't find full time work, and are working part time because of that, or working part time because they're slack work that those numbers are actually increasing. Hours worked fell. So to me that there's a clear slowing of demand for workers. And I think that that is something that we need to pay attention to now whether that starts to flip two firings, we'll have to see, because a lot of employers are reluctant to lay off workers that took him so much time and effort to get back after COVID.

Andrew Brill  22:52  
Is there a I was reading report that there's a change in the the open job status that that number is coming down to have you seen that as well?

Peter Boockvar  23:01  
Yes. So that number has receded as well. So sort of adding to this matrix of a lesson to demand for for new workers, not necessarily shifting to a layoffs phase, but less than demand for new hires.

Andrew Brill  23:18  
So let's start to talk about some happy stuff, things that, you know, we can help people make some money, we're coming into the tail end of earnings. I know that McDonald's and those companies said that they are going to probably enter a price war to try and get more business that they might be going through a price war in their own company with people going away from the quarter pounder and buying something a little less expensive. But what are you seeing in earnings season that thinks that look, maybe the economy is still doing okay?

Peter Boockvar  23:48  
So when we go into an earning season, you have to assume that about 75% of companies will beat EPS estimates. That is just the going rate, call it and according to FactSet, I think for q1, that number was about 77%. So call it slightly better, but only slightly on the revenue side. Only about 60% of companies exceeded expectations. Usually the average is closer to 70 and even earnings. Now you have to also keep in mind with earnings is there's so many variables it's what your tax rate is and what sort of unusual stuff who's reporting GAP earnings who's reporting non GAP earnings. So, I always I always feel it's important to sort of look under the hood of what the headline numbers read about earnings. You know, your earning seasons great because 77% of companies beat expectations, like I said, but as I also said only slightly. That's only slightly above and what were the real reasons for the beats as I mentioned, revenue numbers were actually disappointing. So it's, um, but yet, like I said, there's pockets of strength if you're Vulcan materials and you're selling aggregates to rebuild bodes well, you're doing fine. If you're if you're building steel and electrification equipment that's going into a new battery facility in Kansas. Well, you're doing fine. If like we talked about the cruise line stocks, you're doing fine. If you're Marriott, that's relying on travel, particularly international travel, you're doing fine. So it all depends on who you're sort of catering to. If you're in the real estate brokerage business, you're in a lot of a lot of pain. If you're in if you're a big homebuilder, you're doing fine. If you're in parts of the industrial manufacturing world, like if you're selling, here's a perfect example of this mixed and uneven. If you're a semiconductor company that's selling chips into the industrial world, well, that business is down because there's still continued inventory destocking going on, if you're also selling into the data center that's been getting from AI spend while your business is doing better. So the answer really is it all depends.

Andrew Brill  26:03  
So is the AI craze still something that we're going to be writing for for a period of time?

Peter Boockvar  26:09  
Well, the AI craze and capital spending will continue for the next couple of years, the capital spending numbers from meta Microsoft, Google, Amazon are just off the charts. Now, what return on that investment we get, I think remains to be seen. 

Andrew Brill  26:26  
Where other, what other sectors? Now I know that, you know, housing. If you're a housing builder, you said you're doing very, very well. But with interest rates the way they are, do you expect that to wane a little bit? 

Peter Boockvar  26:38  
Well, it hasn't yet. Because builders the bigger builders have been able to mitigate those higher interest rates via mortgage rate by downs, teaser rates or other discounting. So that's one of the reasons why they've been able to continue on with good volumes because they can magically turn a seven and a half percent mortgage rate to five and a half via that buydown. A smaller builder doesn't necessarily have that same flexibility. So that has definitely helped to drive more volume. In that then of course, you also have all cash buyers, you have some of those new builds going to community developers that will then take those new hose houses and rent them out. So it's not necessarily the end user that are buying that home. It was homes, it's the single family rent, buy to rent or I should say, own single family rentals that are also buying those new homes too. 

Andrew Brill  27:33  
So is this a good time to put your money in gold? It seems like it's a little bit more stable. It creeps up, it comes down but it's it's staying a lot state more stable and some of the stocks that we're looking at? 

Peter Boockvar  27:45  
Well, I'm a little biased, because we're very long gold and silver. And we have been for years. So this this run higher. We finally are enjoying. But I do think that there is a lot more upside to come for gold and silver, silver sort of lagging gold, for sure. But we're still bullish, we're still long, and we still expect much higher prices.

Andrew Brill  28:08  
So given the geopolitical stuff we're going through, it seems to me that oil should be creeping up. But it's still it's under $80 a ballot just a few weeks ago, it was 85. And now it's just under $80 a barrel. That also seems to be against the grain as you as I would say. 

Peter Boockvar  28:31  
Well, I think it it is because there hasn't been really any supply disruptions yet. So we have the worry of geopolitics. But the reality of of no change in oil, the oil delivery supply chains. Now, there obviously have been some disruptions in the Red Sea. But that's more on the container side. But actual production and delivery of crude oil that has not been affected yet. And that's why well prices are where they are. Then, of course, you also have worries about the demand side with China and even in the US and Europe. So a lot of those sort of cross currents, but either way, you know, we'll still around $80 And you know, that's still at least now we're in the summer driving season, gasoline prices are you know, people are now focused on it again, after, you know, some relief that we had during the winter. 

Andrew Brill  29:30  
So, I know you're pressed for time, but the million dollar question, how do we make money in today's economy and with everything is going in the market?

Peter Boockvar  29:39  
So we remain on you know, I mentioned precious metals, but we're long and bullish on on a bunch of different parts of the commodity landscape, energy, agriculture, particularly fertilizer stocks, also bullish on some of the industrial metals like copper, and some of the stocks and that industry. I still think that There's been just a dramatic pace of underinvestment in commodities over the past decade as everyone's shifted to spending on technology and other things. You know, if you're a VC investing in that new copper mine was not that sexy. Other things was was more attractive. So I do think that prices on the commodity space are going to be high for a while and will go higher. And I still think that there are a lot of areas of, of commodity stocks that are cheap, particularly agriculture. That's one of our newer positions over the last couple months is buying some of the fertilizer stocks. And that I think, that have a bunch of upside. And also we also invest very internationally. And I still find markets in Asia very attractive, particularly in Hong Kong, which has been a dramatic underperformer up until recently, where one of my contrarian calls going into this year was the Hang Seng was going to outperform the S&P and after a pretty brutal start to that call with the Hang Seng down 10% in January, it's finally done a lot of catch up. So I think there are opportunities in Asia to play the growing middle class there.

Andrew Brill  31:08  
So that's how to make money. How do we protect ourselves from the volatility, some of the volatility that we've seen someone who's maybe on a little bit more of a fixed income? 

Peter Boockvar  31:19  
Well, you can never really protect yourself completely. If you want to be invested in the markets, the only way you're fully protected as if you're in a treasury money market. But I think people just have to learn to live with volatility. And I think extending out when one's time horizon is, is the best way to deal with short term volatility. Because if you know you have that long term time horizon, you can deal with a lot of the short term noise. 

Andrew Brill  31:44  
Peter, last question, are we in a position now where you know, maybe the Fed will think about an interest rate cut? Do we have to retrain ourselves, we're long, I think that the time of zero interest rates are long gone, we need to now retrain ourselves to say, you know, three 4%, maybe that's not so bad.

Peter Boockvar  32:01  
I agree. And the level of interest rates, even where we are today, historically speaking, is somewhat normal. The problem is, is that 15 years of zero, which was of interest rates, zero interest rates, was very abnormal. So there is a transition period that takes place, not without pain. So at some point, we're going to get to a better place where the whole economy adjust to this higher interest rate environment, particularly relative to the rate of inflation, which is a normal good thing. But that's still a transaction transition to be had. But to your point, yes, the days of zero interest rates are over and I do say good riddance to them.

Andrew Brill  32:41  
Peter, I know that we can find you on substack with your book report, where else can we find you? Or is that the best place to find you?

Peter Boockvar  32:50  
Well, if they want to read my daily work, they can go there. If they want to learn about our wealth management services, they can go to our website bleakly.com.

Andrew Brill  32:57  
Peter, thanks so much. This was this was great. And I appreciate it. And I hope to have you back again soon.

Peter Boockvar  33:02  
Thanks, Andrew. Be happy to.

Andrew Brill  33:04  
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