Peter Boockvar discusses the inevitability of a recession and essential strategies to protect your wealth. In this episode of Wealthion, host James Connor speaks with Peter Boockvar, Chief Investment Officer of Bleakly Financial Group and editor of The Boock Report. Boockvar provides a deep dive into the economic landscape, highlighting the inevitability of a recession, the potential for a massive market correction, and shocking insights on inflation.
Peter Boockvar 0:00 They won't cut rates in July. But I'm beginning to think that they could cut in September because a few fed speakers, including Powell, at that press conference at his last meeting, did highlight the growing importance of them watching the labor market and the unemployment rate as something factoring into their debate on rates where for the last couple of years, we know, it's all it's been all about inflation. And if you start to see, well, 4% unemployment rate we know is historically low, but it just so happens to be a two and a half year high. So if that all of a sudden starts to creep up ahead of that September meeting, 4.1 4.2 4.3, whatever it is, because we're also seeing lessening demand for labor and the continuing claims data of pickup and firings in the initial claims data, job openings that are shrinking, that if you get a further increase in the unemployment rate here, I think the Fed might try to squeeze one in in September. James Connor 0:56 Hi, welcome to wealthion. I'm James Connor. Well, here we are at the start of another quarter. And companies will be reporting their q2 numbers soon in the coming weeks. But we've already seen a few companies warn ahead of their q2 numbers. And they're all citing the same reason why and that is a weakening consumer is this foretelling of what's to come in the economy? To help answer this question. My guest today is Peter Boockvar chief investment officer of Bleakley Financial Group and the editor of the book report. Peter, thank you very much for joining us today. Peter Boockvar 1:34 Good to be here. Thanks, James. James Connor 1:36 Peter, I want to start our conversation on the US economy, the q1 GDP was revised down from 1.6 to 1.3%. This implies a slowing economy. Walgreens recently announced that they're shutting down over 2000 stores. And one of the reasons is because of the weakening consumer. And the CEO did state that he continues to see persistent pressures on the US consumer. And we've heard the same same sort of scenario coming out of Starbucks, and also McDonald's. What are your thoughts on the US economy and maybe you can also share your thoughts on how you think the US consumer is doing? Peter Boockvar 2:12 Yeah, the comments were widespread amongst all retailers and restaurants and anybody selling consumer products, based on all the earnings calls that I've listened to over the past few months. One of them were sort of sad, but interesting. comments came from a company called KC general stores, which owns a bunch of convenience stores in the Midwest. They said the higher income consumer is doing fine when they pump gas or hop into their mini mart and, and buy stuff. But they gave an example of lower income consumers that are buying more fountain soda, instead of buying bottles out of the fridge to save money, I mean, you're talking about saving, what 50 cents, maybe. So that tells me just how value conscious and deal seeking a portion of the consumer population is. And it's not just low when it's it's middle income, it's those that are making more than 100 grand 150 grand that are now shopping at Walmart or going to Dollar General, because they're looking for bargains and in fact, Walmart at a bank of America conference, use the same word that I've heard from now from the CFO there for two to three quarters now. And it was choice for and the consumer being, again, budget conscious and prioritizing their spend on needs more so than wants on non discretionary things, more so than discretionary things. But well, that said, we also had great numbers from carnival, saying that their earnings and their revenue and earnings and bookings and yield are at record highs and they have pricing power and business seems to be great, because they're catering to both a budget consumer for those that want to travel, lower cost, but also baby boomers and other retirees that are benefiting from a higher stock market 5% interest income on on their savings. So it is a very bifurcated sort of two lane consumer highway that we're seeing. And I think that can be said for other parts of the economy to reflecting overall a very mixed and uneven economic situation right now. James Connor 4:40 Yeah, there seems to be a big disparity between various companies in the market right now. In q1. Ticketmaster came up with their numbers. They said they were the strongest numbers in the history of the company. They're expecting record numbers for this year. So people are still going on. They're spending a lot of money on events such as concerts. and buy to your point, you know, here, people don't even want to spend five bucks on a cappuccino at Starbucks or to buy a can of Coke at a convenience store. Peter Boockvar 5:10 So we actually own Live Nation stock. So I follow that industry very closely. And speaking also, from personal experience, I was just at the sphere in Las Vegas, seeing debt and company, and it was jam packed. And you would not think that there was any stress on the consumer, and we're talking about prices that are with fees face value, or up to almost $400 per ticket. And in the secondary market, they were going through almost 2000. So there was no recession there, there was no consumer strain there. And, you know, again, to your point about live entertainment being a positive area, the economy, but also to the experiential point made on Carnival, to where consumers are allocating or spent. James Connor 6:01 Peter, I haven't been to Las Vegas in a long time. And I haven't gotten to this new event space that I keep hearing about, but how was the concert and how was this fair. Peter Boockvar 6:11 It was phenomenal. Not only do I love the music, the visuals, is what really blows you away. And combining the two made it an amazing experience and a sight to be seen. You have to tolerate the heat, it was 108 degrees. But that's Vegas during the summer, but that's when the band is playing there. So you got to adjust. And I highly recommend it. James Connor 6:36 So yes, I'm gonna have to check it out at some point. Now I made mentioned earlier, the fact that q1 GDP came in or was was revised downwards to 1.3 from 1.6. Where do you think the q2 number is going to come in as it's going to be closer to one or even lower? Peter Boockvar 6:52 So the what we're looking at the Atlanta Fed to use that as one sort of measure of an estimate is down to 2.2. I've been arguing for the last couple of months, actually going back into q1 Before we even saw GDP number that based on everything that I was hearing from from, from companies and on corporate earnings calls, and all the data, that it just felt much more like a one and a half percent type of economy than a 3% economy. And I feel even more confident of that, from everything that I've seen in q2. So I think when all is said and done, when the q2 GDP number actually gets reported, I think it's more likely to have a one handle than a to handle. Now, that's not a recession. But it's pretty lackluster growth. But with a lot of puts and takes and we talked about the two different types of consumers we're seeing, look at the housing market, the pace of existing home sales, around 30 year lows, but new builds doing better manufacturing in a recession, but government spending and government induced manufacturing, facility construction doing well, infrastructure spending, pretty robust global trade, very mixed. So there's a lot of uncertainty with respect to what we're seeing in visibility in the economy, and also capital spending a layer on we said durable goods, durable goods, Core Durable goods orders is essentially flatlined for two years now. So like I said, this feels like a one ish type of economy, rather than something around three, or even in the twos. James Connor 8:34 And when you talk about core durable goods, what products are you talking about? Exactly? Peter Boockvar 8:39 It's a non defense capital goods X aircraft. So it takes out of all defense spending takes out aircraft, because you can get big orders one month in a slit on the next and it's just a timing thing. So it's measuring orders for durable goods such as machinery, electrical equipment, autos, metals, stuff like that, that is a good proxy measure for capital spending. James Connor 9:08 So let's talk about inflation. Now the personal consumption expenditure PCE came in at 2.6% for the month of May, in line with expectations and this is a key indicator for the Fed. But do you think inflation is coming under control or do you think it might be reigniting again? Peter Boockvar 9:25 So it's mixed. I mean, obviously it's certainly moderating. It's nice to see you to handle I have a personal issue with PCE relative to CPI, because they overweight health care in the PCE, but that healthcare calculation is mostly Medicare, Medicaid reimbursement rates and when the government is price fixing, it doesn't really give you a good gauge of inflation, as opposed to CPI, where it's mostly measuring out of pocket medical costs, like your health insurance, for example. But the Fed it's certainly going to be happy with the trajectory of inflation. But what I have, I think we have to understand that seeing an inflation spike and watching it come back down. The downside of it, getting to the two ish level is not winning the war inflation, it's keeping it down on a sustainable basis. That's what wins the war. And here we are goods prices have been the main driver of this disinflation. In fact, goods prices year over year, give or take is averaging about zero, which is where it was pre COVID. But I'm seeing signs that that's going to inflect higher, particularly in shipping costs, I watched the the world container index every Thursday, which gives pricing on the container shipping route from Shanghai, to other cities, like Rotterdam in the Netherlands, LA, on the US West Coast, Genoa, in Italy. And those prices have skyrocketed. To give an example, the Shanghai to Rotterdam route got as high as almost 15,000, at the peak in probably 2021, it's early 2022, then it fell all the way down to under $2,000. That's on a 40 foot container, which is basically where it was in February 2020. Well, now it's back over 7000. And that's over called six months and just over the past 10 weeks, that index is up 140% On that particular route up a little less than that, if you on the ship, ship trip from Shanghai to LA. So this is already impacting air cargo routes, because people who are having issues getting a space on a container ship or don't want to pay that are shifting to air and those prices are jumping. Trucking prices still remain low in the US because still a lot of excess capacity. But we're sort of getting this this replay of the COVID situation. And this is definitely going to flow into consumer products at some point. Or if it's not, it's going to be eaten and in profit margins. And this is just we're a few months away from starting to ship holiday goods. So you have the potential inflicting harm on goods price. And now the flip side, services should continue to decelerate because rental growth is going to slow and show up in PCE and CPI in the back half of this year. But we're sowing the seeds for reacceleration in rental prices, because after the flood of construction this year gets completed. There's very little supply coming online there after. And I still see very robust demand for renting. Because of the very unaffordable situation with buying a home. You made mention of the fact that you prefer CPI. And the three largest components of CPI are shelter, food and energy and oil has been up 10% Here in the last month or so trading around $80 a barrel. Are you concerned about the price of oil here and that it might keep going and maybe go to $90 or $100 a barrel? Well, from an investor standpoint, we're long energy stocks. So I'd like to see 90 from a consumer standpoint and an economic standpoint, it would put a further squeeze on a consumer that can afford a further squeeze, because it would also imply higher gasoline prices. Now I do think oil prices go much higher. In the next couple of years, I do think we see triple digits again, and possibly well into the triple digits. Because of the big picture lack of investment. I mean, I follow weekly rig counts at least in the in the US. Obviously the US is only a call it 13% of will less than that total total global oil production on a daily basis. But it's amazing at $80 oil prices that rig counts in the US continue to drop. So US oil production, at least for now is plateaued. That's not to say that it can't start increasing again. But if $80 is not incentivizing more more oil drilling, it tells me that we need higher prices in order to do so. James Connor 14:07 And the fact that oil is trading around 80 bucks. And it's been in a pretty tight range here this year 70 to $80. Do you think that's an indication that maybe the economy or the global economy is slowing? Peter Boockvar 14:19 So that is one of the questions is whether there's a demand side issue right now, whether it's it's less diesel demand for trucks that are taking stuff from point A to point be or it's the consumer that's not driving as much because they're they're obviously watching their the the dollars that they spend it very well could be, you know, China's a big consumer of will. And that economy has been extraordinarily mixed. So it's something that I'm watching closely, no doubt about it as a potential negative for the price of oil. James Connor 14:54 So now that inflation is at least heading toward the Feds 2% target rate. The the Fed had a meeting in June, they left rates unchanged. We have another one coming up at the end of the month, I believe on the 31st. Do you think we will see the Fed cut rates in this month? Peter Boockvar 15:15 They will cut rates in July. But I'm beginning to think that they could cut in September because a few fed speakers, including Powell, at that press conference at his last meeting, did highlight the growing importance of them watching the labor market and the unemployment rate as something factoring into their debate on rates where for the last couple of years, we know, it's all it's been all about inflation. And if you start to see, well, 4% unemployment rate we know is historically low, but it just so happens to be a two and a half year high. So if that all of a sudden starts to creep up ahead of that September meeting. 4.1 4.2 4.3, whatever it is, because we're also seeing lessening demand for labor and the continuing claims data of pickup and firings in the in the initial claims data, job openings that are shrinking, that if you get a further increase in the unemployment rate here, I think the Fed might try to squeeze one in in September now, they'll likely Telegraph that attracts some hole in August. But I do think September is a growing possibility. Whereas before, some commentary from like Mary Daly, for example, over the last couple of weeks, I was thinking, You know what they don't want even bother with the with the election, they don't even want to be perceived as being political. They're just going to wait till December. I think a 4.2 4.3 unemployment rate is going to sort of pressure them to, to cut, but also couching that into some similar to where the ECB did, as a hawkish cut that letting the markets know that this is not the beginning of a long string of rate cuts. But if it ended up being the beginning of a string of rate cuts, that would be because the economy is really rolling over. So I don't think we want to wish for that. James Connor 16:59 So I want to get your views on the s&p and the Nasdaq now, and in spite of some of your concerns that you have for the economy and that the economy might be slowing, the consumer is not spending as much. It's like the stock market doesn't care about anything, right? It just keeps going higher. The s&p is up 15% of the Year, NASDAQ's closer to 20% on the year. And video, I gotta bring that one up. It's up 150% on the year. What's your view on the stock market? Do you still like it here? Do you think it's going to keep going higher? Peter Boockvar 17:31 Well, just as there's seemingly like a two sided economy here, there's also a two sided stock market. Yeah, the s&p is up 14 plus percent, but the Russell 2000 is down on the year, maybe 1%, or even maybe flattish. The equal weight, s&p is up maybe four and a half percent. So it's it's a very bifurcated stock market, just as it is a bifurcated economy. So it really depends on what you own, will determine whether you're having a good year in the stock market or not. Now, you can always say that that's always the case. But it's seemingly more so now, since a select few are driving those major indices. I do think that has to be reconciled at some point. Because who the customers of Microsoft buying software and services. It's small, medium sized businesses, who are big customers of Netta and Google buying advertising. It's small, medium sized businesses. So how can you have those companies doing so well, but many of their customers not doing so well? That is just not a sustainable trend. Now, of course, AI and all the excitement there is, is what's resulting in some of this discrepancies and divergences, but it does need to be reconciled at some point. And I think sooner rather than later, either the smaller names are going to catch up to the upside, or the bigger names are going to catch up to the downside. Historically speaking, when you get this divergence, it's usually big that that that dips down to the small, but we'll see. James Connor 19:11 Right, and so once again, as we go into the second half of the year, do you think the s&p keeps going? Peter Boockvar 19:17 It's shocked me year to date on how well it's done. But again, it's very isolated in terms of what's driving it most of the performance. And I think with the valuations in the video, for example, $3 trillion, I went back and looked at what the peak price to sales ratio was because I prefer to value in the video on a price to sales basis. Not price earnings. People tell me Oh, it's it's reasonable. It's only 45 times price to earnings. And I said yes, it's only reasonable at that price. If you assume that a 76% profit margin is sustainable for many, many years. And I believe it's not especially when but the video is I think half of their revenue is coming from four or five customers. And those customers are everyday trying to design their own chips that will inevitably compete within a video. So I would rather value in a video on a price to sales basis. And on its January 25, fiscal year, revenue estimate of 120 billion, it's trading at 26 times sales. If you go back to the peak nividia, price to sales ratio, in 2000, it was priced at 24 times sales. Now their gross margin then was about 65%. So it was less than a video. And it's P multiple was much greater. But on a price to sales basis. It's rather similar. And here we are 24 years later, and Cisco stock is still below where it was. I'm not saying that's the video, we own stock in it. But I don't sleep well, knowing that we do. James Connor 20:56 I like that comparison to the early 2000s. In the late 1990s. Those were crazy times. And and talking about AI I mean, all you have to do is just mentioned AI and your stock will catch a bid. And when you look at Apple, I think it was flat on the year. And then they came up with this apple, what do they call it? Peter Boockvar 21:13 Apple intelligence. James Connor 21:16 Apple intelligence. Now the stocks up 15% on the year. So it's kind of interesting, it makes it it makes you wonder to have this whole AI thing is over done. Peter Boockvar 21:25 Well, the spending on it on developing it, the generative AI is certainly for real. The return on that spin, though, is highly uncertain, the market needs to see more use cases. Now from what I've seen so far, there's a lot of impressive stuff that that will come of this. But it now in order to really show the benefits in terms of productivity and revenue generators or expense savers, the markets gonna need to see that. Because right now we're really only seeing one side of this, this AI craze. And that's really the spending side, we need to see the benefits on the consumption side of generative AI and the returns on that consumption. James Connor 22:13 So Peter, I want to get your views now you've expressed a lot of concerns about the economy slowing down and also valuations in the stock market. What are you recommending to clients in terms of asset allocation. Peter Boockvar 22:24 So I'm just going to tell you what some of the stuff that we own. Just to put our money where our mouth is. I mentioned owning energy stocks, we've been pretty bullish on commodities for last couple of years believing that they're just bombed out relative to the s&p 500. So energy oil and gas stocks, uranium stocks, precious metals, and the physical and the miners, copper stocks. Also ag stocks also bought and also their i i think there's a lot of bunch of value names that we that we own and like that have been beaten down because of this shift out of them compared to other parts of the market. There are parts of Asia that were bullish on we bullish on Japan, or one of our recent Japanese purchases was the company that owns 7-eleven, seven and holdings, trading at a pretty reasonable valuation and one of the dominant convenience store operators in North America and Japan and going to be rolling out a lot of 7-eleven's in other countries in emerging markets. So an example of of one name and we've been bullish, but it hasn't been the best trade and on on Asian travel and the growing middle class we own some of the casino stocks and Macau. Numbers are rebounding nicely. But the stocks haven't really reflected that yet. So I just think that there are a lot of opportunities out there outside of the most popular names, which again, have done extraordinarily well as we know, but I don't think that that should prevent people from solely focusing on them because they're very crowded, they're very rich in valuation, and other parts in the market do exist. And we all breathe the same economic air. James Connor 24:14 So it sounds like you have a big waiting toward commodities, your long energy, uranium and copper. What's your thesis there? Peter Boockvar 24:21 So copper, it's certainly a supply demand story. We know the growing demand for copper is not as is not no longer Chinese construction of apartment buildings that it is obviously found some new use cases. Precious Metals, it's well silver is half the demand for Silver's industrial. So there's some overlap there in terms of benefits that coppers deriving from that also very much bullish on the monetary side of of gold and silver. Just because of the rising debts and deficits of the US the growing central bank demand On four metals, the growing demand in terms of trade outside of the US dollar, like the Chinese buying oil from Saudi in renminbi buying oil and natural gas from Russia, in renminbi buying corn and soybeans from Brazil and Australia, I'm sorry, Argentina in renminbi India buying oil from Saudi Arabia and rupee. To me, that's a very interesting, interesting dynamic, where dollars or less dollars are getting recycled, and US Treasuries. And whatever's left over, gets bought in the gold mining gold in the gold market. So to me, that's interesting, AG, has been beaten up. And we had own, like mosaic of nutrients to fertilizer names going into the Russian invasion, and we sold it on that spike. But both stocks have gotten cut in half since we've recently reenter them. Think believing that crop prices are cheap. And there's an opportunity here where you get a good dividend cheap valuation, and believe that this kind of environment, it's pretty good opportunity because I prefer looking at things through a value lens. And that's what attracts me to names like that. James Connor 26:15 Well, that's great. That's a great overview, Peter. And as we wrap up, if someone would like to learn more about you and your various services, where can they go. Peter Boockvar 26:23 So in the wealth management side, they can go to our website bleakly.com, and learn more about our services and they can reach out. And if they're interested in reading my daily commentary, or they can check me out on substack under my name, and it's the book report, and I write daily on macro and micro, economic and market stuff. James Connor 26:42 Well, once again, thank you and I look forward to our next discussion. Peter Boockvar 26:46 Thanks, James. Same here. James Connor 26:48 Well, I hope you enjoyed that discussion with Peter Boockvar and provide you with some insights on what to expect in the coming months. If you're trying to figure out how to prepare for your financial future. Consider having a discussion with a wealthion endorsed financial adviser at wealthion.com. After providing some basic information wealthion will put you in touch with vetted advisor. There's no obligation to work with any of these advisors. It's a free service that wealthion offers to all of its viewers. Don't forget to subscribe to our channel, wealthion.com and hit that notification button to be kept up to date on upcoming events. Once again, I want to thank you for spending time with us today and I look forward to see you again soon.
