Is The Credit Crunch Here? | Peter Boockvar

Adam Taggart 0:02
All right, we should be live. This is Adam Taggart CEO and founder of Wealthion welcoming you to Wealthion here. We’ll be in conversation today with Peter Boockvar Chief Investment Officer of Bleakley Financial Group and editor of the book report, who very kindly agreed to join me this week, I kind of called an audible on him. We were going to record later in the day, I asked if he could come on earlier and do this live. He very kindly agreed, we had to work through a couple of technical issues to make that happen. For those of you that have been waiting a few minutes for this to start, thanks for your patience. But we’re here. Peter, thanks so much for joining me.

Peter Boockvar 0:37
Thanks, Adam. I appreciate having me on.

Adam Taggart 0:39
All right. Well, look, we’ll we’ll have a great discussion. If there’s time. Then. Near the end, I if you’re alright, I’ll pull a couple of questions from the live chat. And we can do a little live q&a, because I know we have some folks who have been looking forward to having you on the program and have some questions they’d love to hear you address. Very quickly. Let me get to the question I always like to kick these interviews off with let me just read the intro that I had prepared. And we’ll go right in. Here’s the intro that I would have read off a teleprompter folks, but you get the joy of seeing me read it off a sheet of paper here. Now. The bulls are feeling increasingly confident these days, the s&p is up 11% and the NASDAQ and I had to check this number is up 28% Since the start of the year, and the speculation is that the most anticipated recession in history, may bypasses now that narrative is suddenly springing up everywhere. But the macro data continues to look grim and hardly merits such optimism at least not yet. So which is it? Do sunnier or darker days lie ahead? We’re going to dig into that here with Peter. All right, Peter. So on our way into talking about that, very quickly, just to kick us off the general question. I always like to ask you at the beginning. What’s your current assessment of the global economy and financial markets?

Peter Boockvar 1:59
Well, let me just say that the markets rallying because no one wants to miss the Fed is done raising rates rally. That is what’s helping the market. It’s not because of the economic data. Yes, we did have a pretty robust Friday payroll number, but there are plenty of holes in it that I don’t think itself, the headline number is carrying weight. If you break down the US economy, housing is essentially in a recession in terms of the pace of transactions. The US manufacturing is in a recession. If you look at consumer spending, consumers are spending a lot on travel, leisure, entertainment bars, restaurants. But that’s about it. They’re not at well, I should say they’re spending money on food, going to the drugstore and beauty products but other goods, they’re not really spending anything at all electronics, furniture, jewelry, and the sword even

Adam Taggart 2:56
started her up at Wolf. Wolf. Richter refers to the whole travel boom right now as revenge travel is really just trying to make up for you know, last time during COVID. But I love that term.

Peter Boockvar 3:09
Yeah, I mean, that’s certainly the case. And just also a shift in in spending habits. It’s, you know, you buy you buy goods don’t sit, durable goods don’t need to be replaced every single year. So it’s just okay, I already I already bought things from my home, I already bought an exercise bike and a DAC and a new bathroom. I’m not going to repeat that every single year, and particularly electronic products to like computers. And cell phones are not being upgraded at the same pace that we knew historically. But also people just got new ones just a couple of years ago. So yes, it is revenge. Travel. But it’s not just travel, it’s just going to a live event, it’s going to a concert. I mean, here we are into June, Live Nation has sold more tickets year to date than they did all 2019. So it’s just going out and doing the experience thing that I think is sort of capture that even also just going out for dinner, which not necessarily travel, but it’s just being social again. So it’s more that I believe, and that has been a good part of the economy and look at capital spending. It’s really slowing down. You know, outside of big cap tech, spending a lot of money on the video chips and their AI rollout. Tech spending in the aggregate is slowing down CW which is one of the major distributors, excuse me out there with a couple of 100,000 different customers out there selling everything between software hardware, and the like. They’re seeing there they expect it spending to actually decline this year, but also with earnings growth declining now, that then follows to a reduction in capital spending to so, to me, there are many bright spots in the economy. But this doesn’t mean that we’re sort of in this deep recession, because even if we’re growing call it a half to 1%. That doesn’t feel much different than no growth or a contraction of 1% it still feels kind of muddied.

Adam Taggart 5:21
Alright, so we’re, we’re kind of in the muddy, muddy phase here. I want to get to, in this discussion, kind of your odds you place on a recession coming this year, you know, do you where do you fall in the hard soft no landing, you know, Outlook. Couple of things, though. First, real quick question. So we’re seeing this spending on travel, and most of the things you listed off there that people are spending on right now our services, their experiences, right? Well, someone’s trying to call me that’s, that’s the danger of doing a live live event. So you know, when we look at the inflation story right now, yes, CPI is coming down, we are dis inflating. But the inflation that still remains in we’re still near 5%, is really shoved onto the services side of things. So it’s really funny when I just wrote an article yesterday, or we had a big Twitter discussion yesterday about the sandwich shop in my area, that if you go buy a BLT there, it cost you 34 to $36, depending upon what size tip you pay them when they turn little kiosk around and ask them to write. So like, why with a lot of the sort of sluggish economic growth stats that you just mentioned, like, why are people so willing to be spending so much on services right now, you know, we see things like the consumer debt going through the roof, right, it was beginning to get paid off during the pandemic, but then it shot back to record highs, we see a huge decline in savings rates. Like why why do you think people are willing to be spending so much right now on services? Is it? You know, is it because the economy is stronger? The consumer is stronger than maybe we think, or is there a different reason?

Peter Boockvar 7:13
Well, two things as we talked about, they’re spending less than other things. So they’re prioritizing their spend, and food is one of them. But also wage gains, while still has trended below the rate of inflation last couple of years, average hourly earnings year over year are running basically double the pace of pre COVID. In the 20 years leading into COVID, average hourly earnings on a year over year basis was about two and a half percent. And we got up above 5%. A few months ago, now we’re trending more like four and a half. So that is a quicker pace of wage gains. I’ll be it’s still below the rate of inflation. But I unfortunately, people are spending that kind of money. But if you dig deeper, you look at some of the publicly traded food companies like a ConAgra, which full disclosure we own, and General Mills and Kellogg’s and some other food companies, they’ve they’re actually losing volume from as a result of the sharp rise in pricing. You’ve seen that also in another Pepsi, for example, to and other consumer non durables, like even Procter where prices have far gone up to the point where volumes are now declining. So they’re spending that kind of money for a sandwich, but you don’t necessarily know what the traffic is Home Depot, for example, talks about sales went up, but traffic trends are down.

Adam Taggart 8:42
Okay, so just to make sure it’s really clear for folks, you’re saying sales volume measured in dollars is going up, but that’s more reflective of the increase in the sticker price than it is actual additional transactions, correct? Yeah. Okay. All right. So that that may be masking what’s going on here. And again, you said this is sort of a muddy time, right? Where you know, not every every indicator, maybe maybe the way it looks on the surface, you can have to dig deeper to really get a true understanding of what’s going on. So I want to talk here about comments that you’ve made recently. Just looking at your Twitter this morning, and you made the declaration, the credit crunch is here and you were talking about how, you know, there are lots of stories now in the commercial real estate space of construction being curtailed. We’ve very publicly had the Hilton Union Square hotel, basically walk away from their loan, they walked away from this massive property in downtown San Francisco. And I think that’s a you know, it’s a sign that it’s getting harder for builders, companies to get access to loans to do construction. Obviously, all their input costs are going up from wages to supplies to services. is. So we’re looking like we’re seeing, you know, canceled projects or diminished construction plans. And now we’re beginning to see, you know, defaults like like the Hilton there in San Francisco, these to me all kind of look like the relatively predictable impacts of the lag effects from Fed policy that’s, you know, occurred over the past year. And as a lot of the folks on this program, say, you know, they operate with a lag of a year or more oftentimes. And so, you know, the Fed started hiking rates last what, march in Word, maybe now just really beginning to see the cracks in the economy that are happening under that higher cost of capital. And, you know, of course, the continued inflation that’s continuing along here. So I want to give you a chance to expound on this. But But I’m just curious, do you do you think this is a manifestation of that lag effect?

Peter Boockvar 10:54
It’s exactly right. When you think about the lending world, the only loan that’s really more than 10 years is a 30 year mortgage. So most are just a few years out, they call it 10. So before the rise in interest rates, in 2022, what was the lending environment it was money was essentially free. And it didn’t cost you more than 300 basis points, 400 basis points at most to get a loan, even if that was high yield. So when you go vertical in one year, like we did, over the past, call it 15 months now to the point you made about starting in March with the rate hikes? Well, any loan that’s coming due this year, is having to be repriced, at a much higher interest rate than the loan that is maturing. And when your interest expense, you’re paying 3% You don’t need much cash flow in order to service that. And if even if you didn’t have cash flow, there was enough investors out there that would be willing to refinance and kick the can until you did achieve profitability and free cash flow. Well, now you’re in this new interest rate environment. And not everyone can service their debt with this new high higher rate world. So even before Silicon Valley Bank collapsed, banks had already started the process of realizing this and saying, well, our customers out there can they serve? Can they service their debt in this new rate world? Well, yeah, some can, but some can’t. And lending standards were tightening pretty aggressively before SBV went down to the point where if you don’t include COVID, the standards were the tightest since 2009. And then, of course, you throw in the bank failures and standards tightened further, but not only did standards shine further, the demand for loans has weakened too, because, well, I can off, I can afford a 3% interest rate, but I can’t afford an 8% one. So therefore, the demand for loans has also softened. So we are in a credit crunch world where banks which make up about 20 to 25% of the total lending market are focused on shrinking their loan books, not expanding it. And particularly in commercial real estate where, depending on Now, the interesting thing about Hilton and the hotel business is that if you own a hotel, you have pricing power every day. Right, as opposed to if it’s an apartment building, maybe it’s a year to lease. If it’s an office building, it’s could be three, five, even further 10 years, or you’re on a triple net lease. It can be a 10 year and five year ARM. So you’re much further out. So

Adam Taggart 13:42
change your hotel rates overnight. Yeah, right. So

Peter Boockvar 13:44
if the FAA, if anybody can adjust to a higher rate environment, it’s a hotel if you have some, but apparently, obviously, San Francisco in terms of the tourism and all that and the city issues, that can be a different story. But I think, generally speaking, Reuters had a story yesterday, and even the Hilton CEO, which was who was on CNBC yesterday, talked about the dearth of capital for new construction. And that’s where this credit crunch is, at least in real estate is now establishing itself at and it doesn’t matter if you don’t have to be an office to be having pencils down. In in real estate, you can be a multifamily project. You can be a hotel developer, as as the article that I tweeted talked about, in that your numbers just don’t pass the pencil out at an 8% interest rate relative to 3%. Pre the rising rates, now it might, but you have to come up with more cash and have a loan to value ratio that the bank is willing to accept is going to be much lower than you were budgeting and numbers are just not coming together in this high rate environment. So you do have construction that is that is in place already. Those will get done whether it’s hotel multi Family industrial and so on. It’s the new projects that are not getting greenlit because the economics have changed dramatically. And I think that that’s what that article talked about. I hear stories all the time about multifamily projects while are getting cancelled. So there is a lot of multifamily construction that is in progress, and we got a lot of supply coming over the next 12 to 18 months. But after that, there’s gonna be nothing.

Adam Taggart 15:23
Yeah, and it totally makes sense. Right? I mean, the the the cost of capital, is you just outlining that, right? I mean, it’s, it’s doubled in a lot of cases. Right. So not a huge surprise. And actually, this, this is intentional, right. I mean, this is what Jerome Powell has been trying to do, since he started the hiking campaign where he basically said, Look, you know, my job is to bring down demand, right, and this is a knock on effect of bringing down demand with with higher cost of capital, you’re not

Peter Boockvar 15:55
firing him, it is backfiring on him on the residential side, because they they didn’t appreciate and we’re experiencing now, the when you go vertical and interest rates, after a long period of, of fallow, essentially, in the cost of capital, you’re having distortive impacts, you look at housing right now. Yeah, you’re you’re shrinking the demand to buy a home. But home prices are not coming down, because you’ve trapped everyone in their house that has a mortgage under 5%, which makes up about 90% of the mortgage holders out there, about 70% have a mortgage less than 4%. So by trapping them, and resulting in less inventory, you’ve not seen the price response in homes, that they were hoping would sort of cool down that market and mitigate the impact of a doubling in mortgage rates. That is like the definition of stagflation of have a modest pace of transactions and home prices that the last four months in a month, or the month over month basis, are actually re accelerated.

Adam Taggart 17:05
Alright, so I was gonna get to housing kind of near the end of this, I’m going to pull it up now to the front. So totally true. And interestingly, it’s not not too dissimilar to how the Fed trapped the banks, where it got them totally conditioned to, you know, basically adding a ton of long term safe money, good securities, to their balance sheet, and then a jacked up the the interest rates, and then the value of those bond portfolios went down. And these banks, you know, are finding themselves sort of exposed as a result of that, right. So we’ve got all these people that are basically marooned in their homes. Really curious to think is that a will that clear out over time? Or do you think it will be persistent and the argument for it clearing out over time is that in the housing market, like many other asset markets, prices are set at the margin? Right, and there will always be some organic amount of transactions that have to happen because of deaths, divorces, you know, job loss moves, etc. And that eventually, those that percent of organic transactions will start resetting the new price in the market, it just may take more time. Do you agree with that, or you have a different outlook?

Peter Boockvar 18:23
Yeah, it will ease up as affordability continues to be difficult, and credit availability gets tougher.

Adam Taggart 18:33
Right. So sorry to interrupt. But I mean, we’re at the worst moment for both new for new homebuyers. This article just came out this week that it has never been this unaffordable to buy a house for new homebuyers. And obviously, there’s there doesn’t appear to be the immediate relief coming on on the cost of a mortgage. So it’s just it’s very bad on both those metrics right now.

Peter Boockvar 18:53
Right. So to your point, those that have to move are going to be the marginal buyer. Those that want to move will be able to take their time and and even if they want may not get a loan or just can’t pay with the current prices are. Now we’ve obviously seen homebuilders sort of trying to step up. Interestingly, where new home sales historically made up about 10% of the overall transaction market. Now you’re pushing like 30% markets,

Adam Taggart 19:27
and they can be a fort more afford to be more flexible and pricing, right because they just need to move the unit they don’t have to live in it. So they’re not trapped in a sub three mortgage subform. Right. The

Peter Boockvar 19:39
the builder can create incentives, they can buy down ones mortgage, they can put discounts on the home. So yeah, but but that doesn’t work in all markets. If you live in a in a dense suburban area. Well, there’s not just all this vacant land that a builder can come in and start building homes. And if there is then You know, it’s an hour further out. So it’s not like there’s all this vacant land and we’re in the country, that builders can come in and sort of solve this problem. There is more so in certain areas, more so than others. And getting back to, you know, you talked about monetary policy purposely trying to limit demand well yet from a consumer standpoint, and yes, from borrowing standpoint, but I don’t think that they should a game doubt, the dramatic impact on certain parts of the economy, particularly real estate, again, when things reprice at a much higher interest rate than before, and and what that potentially leads to, because that’s the irony of this is that is that because of new construction, essentially getting halted in a year or two, when the existing projects are done, well, who’s gonna have pricing power, all of a sudden, it’s going to be the landlords, and that’s going to cause another inflationary wave to the upside, if you’re trying to rent a property from a multifamily perspective, or you want to stay at a new hotel. Well, since there’s no new hotels being bought, all of a sudden pricing power will remain with travel and entertainment. So there’s just a lot of distorted factors here. That I don’t think is as easy as Okay, the Fed, let’s raise rates, we’re going to impact the demand when inflation will drop, and everything’s going to be fine.

Adam Taggart 21:29
Yeah, interesting. So I think your your descriptor is muddy, really, really does apply here. So let’s get back to just sort of economic outlook for a moment. So because I want to ask you about, we’re gonna get back to housing in a second. But I want to go through your outlook for recession, what that may mean for the employment market? And then, if those dominoes do fall, what impact they may have on housing? Where are you in terms of a recession outlook? Do you think we’re going to have one? If so, how severe?

Peter Boockvar 22:02
So when getting to the Fed raising interest rates, 500 basis points in a year? I don’t want to say 100%. But I’ll say a 99%. Chances are recession. The extent of it, though, I think, is in question. And interestingly, I believe, whether it’s a modest recession are a tough one will also depend on how the demographic impact is sort of spread out. And I mean, that where the stock market goes from here, is going to be an influencing factor on the depths of any recession. Because if the stock market at some point, after it gets off, the you know, the euphoria of okay, the Feds don’t hiking interest rates and focuses more on they’re gonna stay high for a while, and the Fed still shrinking their balance sheet at 100 billion a month. And we actually do get a resumption of this bear market. You know, if all of a sudden I’m not saying it happens, but this is something that I think is a key part to answering your question is, if and I emphasize if the s&p 500 goes to 3000, you can be sure that this will be a deeper recession, because that will have an immediate impact on high end consumer spending. That is been much less immune to the squeeze that lower and middle income people are feeling because of their squeezing their real wages. Another thing that maybe can kind of bring, the higher end recession forward is where a lot of the job cuts happening are happening in white collar. So maybe if that picks up, that can also create a tougher recession than then then thought but we can’t separate separate separate out what happens to the asset markets in trying to determine what the extent of this recession will be. They’re intertwined. They’re joined at the hip, just as monetary policy is joined. Between the economy markets and monetary policy. They’re conjoined triplets.

Adam Taggart 24:11
Okay, we’ve got we’ve got conjoined Siamese triplets here. Which one do you think? Does one lead the others?

Peter Boockvar 24:21
Well, let’s let’s look at the two recessions pre COVID. It was a decline in asset prices that drove the recession, tech prices fall, the bubble pops, capital spending collapses. And that’s what led to that recession wasn’t a consumer led recession. It was a CapEx for LED recession. Then what we saw the next one home prices fall and asset home prices fall. Collateral values get hurt, and we know what happened from there. So the asset prices have been a driver of economic activity since Greenspan created that environment. So if asset prices fall, well then that will have have a direct impact on the pace of economic activity.

Adam Taggart 25:04
Okay, so, alright, let’s then shuffle over then into asset prices. So we’ve, we’ve, we had a bad year for the markets last year, we could easily make the argument that asset prices were very distorted to the upside at the end of 2021. Right. So I mean, you could almost make an argument that just like they were going to have to correct just simply from a reversion to the mean, type standpoint, or a bubble excess standpoint. We’ve now seen the, you know, really robust start to the year, I mentioned the stats at the beginning, s&p up 11, NASDAQ, you know, pushing 30 At this point in time. Is there is there sustainable? Are there sustainable reasons for that strength in the market right now? And, you know, looking with your crystal ball here, do you expect them to continue to power higher? Or is this more like a classic bear market rally, where it’s, it’s convincing everybody, it’s time to get back in the water? Before the bear returns?

Peter Boockvar 26:17
Well, obviously, AI has, has given at least the NASDAQ the most recent left, but AI, the

Adam Taggart 26:25
AI narrative, right?

Peter Boockvar 26:26
I mean, the narrative, the AI, hype, whatever you want to refer to it as the AI excitement, whatever. But gets back to my point early on, this is to me all about the Fed is almost on hiking, and I don’t want to miss the rally. And what causes that attitude to stumble, is the realization that we’re not going back to zero rates. And we’re not going back, at least for a while too aggressive QE, those days are over for hopefully forever, probably not, but hopefully for a while. And that even if the Fed starts cutting rates into to respond to recession late this year, into next year, maybe they cut to four, maybe they cut to three. But that’s a much different environment than what we’re used to here. And I think that when people realize that, unlike prior recessions, that most people in the markets have been accustomed to is this aggressive monetary response. The Fed and other central banks are really handcuffed here, in eventually responding to that next recession. Now, even that said, if you go back to the 2000 2000 2002, bear market, and the OH 7209, stocks continued to fall all throughout the rate cutting cycle. And it wasn’t a total, they were almost on cutting that the bear market ended. And I appreciate, you know, everyone excited the Feds pretty much Dawn, they’re going to pause in June, and therefore it’s a green light, because that’s what everyone’s been trained on. But I think when people see that higher for longer is itself, a continuous form of tightening, right is of all the debt that needs to be refinanced every month, every quarter at much higher interest rates. I think this sort of intoxication with the Fed is going to save me and save the day, I think is going to wear off.

Adam Taggart 28:32
Okay, and why that outlook is important is because you’re you’re basically saying, Look, asset prices have led us into some of the most recent recessions. And there may be an aha moment for the market where they say, oh, yeah, it’s maybe not going to be as rosy as we thought. And there may have to be a market downwards repricing. I want to get your your thoughts on that. But But real quick, I just want to sort of share and exasperation that I have, and I’m sure a lot of the viewers do and to see if maybe you have a good explanation for this, which is we have had the markets repeatedly, being more optimistic about Fed policy and then having to revise their forecasts. Right. I mean, they were initially you remember not that long ago, they were predicting the first rate hike rate cuts in June. Right. And Powell kept saying, It’s not my plan. I’m not right. And the market kept saying, Nope, we don’t believe you note, we don’t believe you. And they’ve been shifting back and forth, you know, kind of all at the beginning of this year. But now the markets beginning to realize, yeah, actually, you know what, maybe Powell is not going to not going to cut it all this year. So higher for longer. We then had the banking, weakness or the you know, some of the biggest bank failures in history that is now forcing banks to tighten their lending standards further, you’ve already talked about that. And the Fed has said, Hey, that actually acts as if there are those act as additional rate hikes on the economy right there. There’s tightening bank lending standards. So it’s kind of like, Hey, pal is doing more than the market was planning. And then the banks are now doing more on top of that. And the market has had to react to that and keep repricing or keep Riri shifting its expectations. And you would think, because it’s really shifting its expectations, it would be bringing asset prices down in response. But stocks have been going up all year. So I’m just curious, how do you square that circle?

Peter Boockvar 30:24
To me, the Fed doesn’t. The market right now doesn’t care about the rate cuts, just yet. They just want the pain to stop in terms of the rise in interest rates on the short end. So let’s take this time, they’re celebrating the end of rate hikes. They think that that is an all clear, I think they’ll be mistaken, because qt is still going on in a pretty huge way. I mean, it’s amazing how dismissive people are of 95 billion a month, being sucked out. I do think that that reasserts itself just as they got excited about QE, I think they’re going to be worrying about QT. But I think that’s the mentality. And, and I think that people have to understand what Jay Powell, this is Jay Powell, his last job, he’s not going to leave the Fed when his chairmanship comes up, and he needs to get a job on Wall Street, and therefore, he needs to make everyone happy. He’s only focused on his legacy. And keeping inflation down, is playing for the not repeating the mistake of the 1970s. When inflation went up, it came back down, the Fed backed off at shot back up again, inflation, then it came down because they had a further tighten, the Fed backed off, and then it accelerated for a third time, he does not want to see that acceleration in inflation after this come down. And that is what is most important. But putting this aside, let’s just say inflation has a to handle by the end of the year, which are very well could. But we’re just settled out at next year. And if it’s not going back to one to 2%, then I’m sorry, everyone, we’re gonna have to live with higher rates, maybe they’re lower than where they are now. But they’re going to be higher than what we’re used to. And this gets back to a really important thing that we have to focus on is what level of real rates will the Fed be okay with, I don’t think a world of negative real rates is anytime we’re gonna see for many years, as long as Jay Powell was running this fed, and that a half a percent, I think is where we’ll settle out at. But that means of inflation next year, not where it comes down this year. But we’re at sustainably ends up next year, which I think it’ll be three to four next year, again, after fallen public below that before it settles out. So that means a Fed funds rate of 344 and a half percent on a sustainable basis. That is not an environment that we’ve seen for the last 15 years before 2022. So that is a different world. Everyone thinks that we’re just going back to this, this this, we’re going back to high school here. And but we’re not going back to high school again, high school is over.

Adam Taggart 33:16
All right, so So glory days are over, right? It’s like an old Springsteen song, we’re just going to reminisce about them. So look, Peter, if I if I told you before all this craziness happened, right, let’s say that’s a 2019. Right for pandemic hit and was in people’s eyes. And the economy was habituated, one might say addicted to close to zero policy. And I told you, Peter, you know, what, the Fed is going to take the Fed funds rate to five, and it’s going to hold real interest rates positive, you know, for years afterwards. What would you have thought would have happened to the economy? And I asked that in the mind with, you know, could how much of the economy could survive that persistently? Right, we’ve got the stat of what 20% Of companies are, were zombie companies back when credit was cheap. Right. I mean, are you expecting kind of a decimation of that whole, you know, cohort of corporate America?

Peter Boockvar 34:21
Well, actually, I think what’s happening now is is how it was supposed to play out in the sense of, I had somebody actually really kind of was talking to somebody over the weekend about this. They’re like, how is how was he was the economy still standing? How hasn’t it not blown up yet with all this debt, and this sharp rise in interest rates? And I said, because it doesn’t affect us all at the same time. If if I have a 30 year mortgage, and no other debt, it’s not affecting me. Now if I have if I if I’m a big company, and I’ve turned out my term debt, my death my debt to 2025 2026 It doesn’t yet affect me, it’s affecting the person who’s got a tenure arm, who’s coming through this year, right may not come due in June, maybe it’s coming in due in November. So they’re not affected yet, but they’re going to be affected in five months. It’s affecting those that didn’t hedge out there floating rate debt. It’s affecting those that have debt coming due this year, as we talked about, that’s who it is affecting. But as time progresses, it affects more and more people, it affects more and more businesses. So the cumulative effect doesn’t change, it’s just happening at a more spread out time. That’s this can be more of an economic malaise, as it’s going to take time for the economy, to acclimate to this new rate environment, we need more equity, banks are asking for more equity, investors are going to ask for more equity, and less debt because of that higher cost of debt. And this takes time, it’s not a V bottom economy, it’s not a no landing, soft landing situation, this is going to play out over time. And I think people just have to be more patient and understand that this is a different economic situation than what they’re used to over the past 20 years.

Adam Taggart 36:18
Okay, so it sounds like you’re saying it’s gonna be more of a grind, as opposed to a sharp event? Is it a grind kind of downwards for the next couple of years? Is it a grind sideways? Is it a upward grind? I mean, how do you see it?

Peter Boockvar 36:33
Well, it can be the initial ground grind down. And then we sort of settle out, you know, a lower growth type of environment. And you know, one thing to add to that I talked about businesses and households, but the US government to here, because higher rates for longer has its own sucking sound of liquidity out of the private sector, the US government is crowding out the private sector in terms of funding, because people are taking their money out of banks and sticking it into treasuries. And as time goes on, they will continue to do that. And it won’t be just out of banks into treasuries, it’ll be out of other assets as well. So this crowding out effect as US debts and deficits continue to rise. And if the Fed keeps rates higher, for a while, the government has more and more of an appetite for your money to finance themselves, which means less money for the private sector, which has its own depressing effect on economic activity. So to me, this is not a is it gonna be a short landing or soft landing? It’s how elongated, couldn’t this situation potentially last?

Adam Taggart 37:42
Yeah, I almost think of it as like a like a burrowing, the plane isn’t coming down and landing softer, hard, it’s kind of just getting on the ground and just kind of just grinding, you know, along as time goes on. But But what you just mentioned there, getting back to kind of the main point is, you know, that’s not, that’s not conducive of higher financial asset prices, both if the economy is going through a slow grind, and also if the government is stealing more liquidity that would otherwise be going into the private space. So, you know, again, you talked about kind of asset price declines, leading recessions. I guess you already said, you put a 99.9% probability on some some type of recession this year. So I guess we do have that answer.

Peter Boockvar 38:32
And then recession will be because of the higher cost of capital, the direction of asset prices from here will determine the extent of that economic slowdown

Adam Taggart 38:41
got it? Okay. Which then brings to my next question, which is, so what is your outlook for the markets, at least, let’s say for for h2.

Peter Boockvar 38:48
So I think that, you know, right now, we have two stock markets, we have, you know, the top 10 stocks, and then we have everything else exactly here. And so what the stock market does is obviously very difficult. I think that, you know, at least in the s&p 19 times earnings for the environment that I’m talking about, doesn’t seem very attractive to me. Now, that said, the other the rest of the markets, the 490 ish stocks and the 2000 and the Russell, small cap index, you know, there’s a lot of value being created there. So I think that this this growth, value sort of differentiation, that really exploded to the benefit of growth over the many years outside of 2022, we sort of reverse that, but then growth is now re accelerating its value. I think that that value relative to growth has more legs than just one year. And that I think once this sort of hype and AI calms down. And yes, it’s very exciting. And yes, it’s going to do transforming additional things. You know, AI has been around since the 1950s. And this new iteration is exciting, like I said, but it’s not necessarily something new. It’s going to be great fun to Vidya because they have a dominant presence in chipsets for this and, and some others, but I think the markets just going to be very choppy and directionless for a while and just as the economy can have sort of a malaise for multi year period, so can markets but that doesn’t mean that there’s not opportunities out there with a lot of cheap stuff, which I like. I also think that the that we are sort of set up for outperformance with international stocks, which have been just terrible relative to the US stocks over the past 10 years. I’m particularly bullish on Asian markets, putting aside the China us battle every day in the authoritarian government there, you know, the Chinese economy is reopen. This is 70% of the world’s population that was closed for three years. And but there ways of playing that reopening and it doesn’t have to be China it can be Japan is going to be a major beneficiary in the Japanese stock markets at a 3033 year high. We’re long Japan, we’re bullish on Japan, we think that can continue to work. Also bullish on Singapore, also bullish on Vietnam. I think the Asian region is going to be the most exciting marketplace to invest in when looking out over the following five to 10 years now you don’t necessarily have to buy an Asian stock to do that you can buy US companies that have a lot of exposure there. And I still like energy stocks. I think that

Adam Taggart 41:36
sorry. Can you just give an example of one for folks

Peter Boockvar 41:39
like the European ones like BP and Shell, like Canadian natural resources?

Adam Taggart 41:45
That’s great. And energy, I meant the big US stocks that are heavy Asian exposure. Oh,

Peter Boockvar 41:52
so I am very bullish on Macau. And we’re long Las Vegas Sands. Now, all of the businesses in Asia between Singapore and Macau Melco. Two was another one that that I liked the trades in the US big presence in Macau. They just opened up the the basically a Las Vegas of Europe of a new casino in Cyprus, which is a large casino hotel there as well. And they have a casino in the Philippines. So I think that that is pretty cheap stock. And you look at the Macau numbers. And it tells you that it’s not just Mainland China that wants to bust out. I think that over time, they’re going to get a lot more international tourists and Macau is going to reassert itself as the Vegas of Asia. Got it?

Adam Taggart 42:37
All right, Sorry, I interrupted you, you were you’re gonna be in energy and some of the other sectors you’d like to.

Peter Boockvar 42:44
Yeah, so energy stocks, I think that there’s more to this. And if we get to the point where the Feds cutting interest rates, I think the dollar is going to get sacrificed in that kind of environment, it’s going to re accelerate inflationary trends. And oil is going above $100. In that scenario, natural gas when it’s a $2. In the US, I think that that’s a buy in some of the large EMP companies in the US like EQ T and southwestern look attractive and the natural gas has asserted itself as a very important fuel for the world and US pipeline companies I think are a beneficiary of that, particularly as the US grows in importance in terms of exporting LNG.

Adam Taggart 43:25
Okay. Great. And thank you for being so specific here. This is great folks watching two things. One, I’m trying to leave a little bit of time here to take some audience questions. So if you have questions for Peter, ask them there in the live chat, and I’ll do my best to pull a few up here. Also, if you like this live format, we don’t do it all that often. When I do do it, I always think oh, we should do it more often. If you like it, please let me know in the chat. And if there’s enough positive feedback for it, we’ll try to do it more often going forward. So Peter, I mean, as a capital manager, I got to imagine this is a bit of a challenging time, right? You’ve got a lot of euphoria. I mean, to say euphoria, you don’t have to agree but euphoria right now that is crammed into a very small or very, very small number of stocks, yet still a very big part of the market, and one that influences the price of the major indices. So you’ve got that going on. But then you have, you know, all of the macro data that we talked about the recession concerns, etc. Right. So it sounds like there are there are parts of the market that have corrected enough where you’re seeing good value or value that’s catching your interest. But then there’s got to be parts of the market where you’re concerned that I imagined your concern that hey, this is pretty frothy. And if this goes down, it could take you know, a large chunk of market value the indicee market value down with it. How are you playing this? And I guess maybe first question is is how what percent deployed? Are you like, Are you are you We just went through a tough year where I know a lot of capital managers were holding more cash than normal. Are you still taking that kind of approach? Or are you seeing enough value here that you’re you’re really kind of more aggressively buying?

Peter Boockvar 45:13
No, in one of my strategies, I’m probably about half long equities. That 15% Plus, in precious metals, owning some international bonds and some tips and having some cash, I think it’s really difficult to be managing money here, especially when only a few things are, are outperforming. And I think it’s I think the when you try to figure out what type of investor you are, it’s, if you, if you suffer from fear of missing out, then this environment is even more excruciating. Because you find yourself making decision buying decisions, and sell decisions just based on where the current momentum is, you know, fortunately for me, I don’t suffer from that. Now, that doesn’t necessarily help me when people see, okay, you’re not participating in certain things. But I try not to get caught up in that. So a lot of it has to do with one’s time horizon. And the shorter your time horizon is, the more difficult this market is, the longer your time horizon is, the more you can sort of ride through the the bipolar nature and mentality of investors of wanting to go in to what worked so much for so long, over the past 10 years, thinking how that pattern is just going to repeat itself, you know, just a reality check in some of the big cap tech stocks, I mean, outside of nividia, where they’re seeing explosive growth in Microsoft Apple alphabet, I mean, these companies aren’t really seeing much growth anymore. These are phenomenal companies. But with very high multiples and very little growth. One has to ask themselves, is this where I’m going to get my return of substance over the next five to 10 years, these companies will still be around, they’ll still be great. But where am I going to get that incremental return, particularly relative to the risk that I’m taking? So like, bottom line is, it’s not easy? No,

Adam Taggart 47:34
it never is. But I got to imagine now is a you know, on the challenging scale, it’s closer to the more challenging side than not given everything you just went through. And it’s so so when I appreciate you sharing all that with us. I just got to ask, because it’s such fresh news. So Apple just revealed its was it Apple vision plus the new VR headset yesterday. And I honestly, I didn’t really watch much, I don’t really have very informed opinion. I’ve seen, you know, social media kind of eviscerate the look of the product and whatnot. And there’s a lot of dead bodies, you know, on the road to VR and AR. Maybe this will be the one that cracks the code or whatever. But I did see sort of a joke of somebody wearing the headset and looking kind of silly and somebody saying, hey, you know, don’t laugh, like, you know, all of our retirements are hinging on this being successful, because so many people obviously are our apple stock owners right now. But I’m just curious if you have any, any thoughts about that is are we potentially sort of witnessing the the apex moment or the jumped the shark moment where the the company that could do no wrong is, you know, it’s next. Next hyped products may be the one that doesn’t become the next iPhone?

Peter Boockvar 48:58
Well, that’s the thing that the beauty of the iPhone is that it became this mass market product that people use every day all day, a VR headset is not going to be a mass market product that people are necessarily going to use every day, all day. So I at least right now, maybe down the road. So I think that I think that is one of the issues, but it’s very difficult to come up with a product that’s mass market that everyone needs every day, along like once in many generations, so to make that a repeatable thing is almost impossible. And I see this being a point where an apple is just not the same growth company as it once was. It’s got a phenomenal existing franchise. And yes, they’re selling other things like the iPad and and on the watch which are was failing. And some people have it but some people don’t. But those aren’t necessarily the same. Same type of product that the iPhone was and that the goggles, particularly at the $3,000 price point, I mean, that’s just a no go. And in terms of creating a mass market product now I know over time, it’ll get cheaper, it’ll get better. But, you know, right now to me, it’s just a video game. And yeah, maybe I guess people will watch TV on their their virtual reality headset instead of actually looking at a TV maybe so I don’t know, we’ll have to see. But it’s going to be a long time. Before this becomes, I think a major contributor to the revenue of Apple.

Adam Taggart 50:34
Yeah. Well, we’ll see. And I don’t know enough to really opine intelligently. I do looking at some of their featured use cases of the person who’s kind of Minority Report wise, you know, moving spreadsheets and kind of managing their their professional life. In augmented reality, they’re

Peter Boockvar 50:51
just they can’t get there. Absolutely. We could get there

Adam Taggart 50:55
and it’d be more productive. Sure. I’m just thinking I’m one of the work from home people, right. And I already have so much blowback from my family, about my lack of boundaries between work and personal life. And if I’m sitting there, you know, in the kitchen, doing,

Peter Boockvar 51:09
imagine your family sitting at dinner while wearing goggles. I don’t think that’s going to happen. Maybe? Yeah.

Adam Taggart 51:16
Yeah, I don’t know. I don’t know. And yeah, we already talked about how lost kids are in their phones. Anyways, I don’t want to just hijack conversation on that. Let me pull a couple of questions here. There’s several on this one. So let me just pull it up. What impact do you expect from the student loan repayment starting by the end of August, which is part of the the debt ceiling deal that just got struck?

Peter Boockvar 51:45
So it’s a good question, because there are some interesting things out there that that are going to flow through the economy. With respect to the consumer, I’ve seen numbers that consumers student debt pay downs are going to cost about 5 billion a month, I call it 60 billion, annualized. We’ve cut off the extended SNAP benefits, that’s gonna be about 50 billion a month. So we’re gonna take 100 billion away from lower end, Washington State lowering because people are paying back their student loans could be medical school students, it can be higher. And so that’s about 100 billion. But look, we have $5 trillion of money market funds, that are now getting 4% 5%. That’s $200 billion of extra income that people that didn’t have a couple of years ago. So there’s some we got there multiple flows here in and out into consumer pockets, but specifically to the question student loans, that’s going to be that 5 billion a month.

Adam Taggart 52:43
Okay, and what do you expect from that? I mean, there’s, maybe I’ll conflate this with another question, which is sometimes talking all the experts on this channel, we will sometimes look at data and say, you know, what is the only thing that really matters, just liquidity. And when it’s going up, prices go up, when it goes down, prices go down? Are things like the student loan repayment. And I’m gonna mention the TGA. Because I meant to mention that earlier, the forced TGA refill, that’s now going to happen over the next couple of months. Could those potentially tip liquidity so much to the negative that it actually matters from a assets standpoint?

Peter Boockvar 53:24
Well, the student loan in the SNAP program that 100 billion is coming out of people’s pockets that are obviously less well off.

Adam Taggart 53:32
Right? But that’s also directly impacting Velocity of Money, though, right? Yes, less dollars gonna expand, right?

Peter Boockvar 53:37
We’re sure you know, the 200 million $200 billion of extra interest income is obviously helping those that have the most amount of savings. And a lot of them aren’t necessarily going to spend more because they have some more interest income. So there could be a net negative effect, if you combine the actual spending impact that it has, with respect to TGA. It’s, it’s a combination of things. It’s the US government that from now until the end of its fiscal year, I think is the end of September, there’s another 600 billion of of a budget deficit that needs to be financed, then plus the call it five or 600 billion that needs to be refilled in TGA. So there, you get about a trillion, then you have 100 billion a month that the Fed is essentially selling. So this gets my point earlier about the US government potentially crowding out the private sector, and they are becoming a bigger presence in the financing room that needs your dollars. And from a liquidity standpoint, yeah, more money is going into the public sector. Not to finance immediate spending, just to finance the ongoing business of running the governor limit. And that is going to create, yes, a liquidity sock of some sort. I know everyone’s trying to figure out what the impact is. But there’s going to be an impact. And just getting back to QE Q T. Markets love QE and look at the market stayed under QE, are we going to be so blind to think that qt is not going to matter for us?

Adam Taggart 55:22
Well, there are a number of folks that I talked to when you go back to the lag effect for a second, that they say, look, deflation, inflation is kind of taking care of itself here at this point. Meaning that if the Fed just kind of stopped now, which they may do with the next meeting, right like that, that we’ve talked about it sort of being like a bull elephant, right? That’s been mortally wounded, right, it’s going to trample around for a long time before it kills over. But it’s, it’s the fatal blow has already been delivered. And it’s yes, it’s going to tramp around for a while, but we know it’s going to die. And one of their concerns is, you know, the lag effects, as we talked about may just be hitting now. Right. And so that that pain that Powell predicted, we would see, maybe a lot of that still ahead of us here, even if they do nothing. Additionally, from here yet, they’re still continuing to do to tea, and they still could tighten them and the door is open for them to tighten, or to pause and then tighten again if they feel they need to. So there are some concerns that the Fed has been maybe taking they’ve been over tightening now. And they’re potentially making a much deeper and more protracted recession than might otherwise be needed. Do you have an opinion on that?

Peter Boockvar 56:37
I think it’s, it’s the Feds mistake really started when obviously, they were too easy for too long. Yeah. But I had more of an issue of not where the Fed was eventually going to get the Fed funds rate. But the rapidity with which they decided to get there and get getting to my point about this interest rate shock therapy was more of the problem. Because to me, negative real rates. Qe have done an enormous amount of damage to the global economy negative rates for for for a while now. And having positive real interest rates is a long term good thing. So

Adam Taggart 57:19
if we actually as of the last hike, alright, we have positive real interest rates for the first time in how long I mean a long time.

Peter Boockvar 57:29
So that’s why I said like a more of a more of a problem with the speed at which they raised rather than where their ultimate destination was going to be.

Adam Taggart 57:40
But But I guess my question is, is do you because of the rapidity. And that you said the interest rate shock, I guess people are arguing, we haven’t felt the full force of the shockwave yet. And yet, it’s still continuing

Peter Boockvar 57:53
that has only begun. We’ve had it we’ve had a two part economy, one pre SVB collapse. And we’ve just started the post SVB collapse world. And that is a world that where credit was already tightening, that tightening is going to accelerate. And this is only just begun.

Adam Taggart 58:12
Okay, so I’m going to put words in your mouth. But you know, what I kind of hear you’re saying is batten down the hatches? And yes, you’re you’re not predicting, perhaps a violent, you know, market crash or a violent, you know, kind of

Peter Boockvar 58:25
going for death by 1000. Cuts? Yep. Yep. This is where we acclimate to this higher rate environment until we have more equity, and we have less debt.

Adam Taggart 58:34
Yeah, this is that grinding borrowing that we were sort of talking about earlier. Okay, last question from the audience here, just because we’re getting short on time. It’s a question we already kind of touched on, Peter. But there’s just so many people asking this question, I’m going to give you a chance to revisit it, which is will the housing market crash? Maybe the right way to pose this question is you talked about how we have a lot of people that are trapped in these mortgages. And that was sort of an unintended consequence of what the Fed did in terms of their hiking interest rates. How do you see that resolving? And let’s let’s take a two to three year outlook on this. You know, did the existing marginal transactions finally get to a true price discovery? Or do we stay at a higher elevated level just because of the weird dynamics of current setup?

Peter Boockvar 59:31
We have the definition of stagflation in the housing market. If you look at weekly mortgage applications from the Mortgage Bankers Association, the purchase component is in a stone’s throw away from falling to the lowest level I believe, since 2011. So we’ve had quite a freeze on the pace of housing transactions. Now that’s for those that need a mortgage. Obviously, cash buyers don’t fall into that category. And they’ve been spending and buying. And we know homebuilders have been stepping into this breach. So we’ve had a pretty notable reaction in the housing market ready. I think the question goes to also what happens to price and what you said, like, what is going to be that clearing price? And it’s a really tough question to answer because of how distorted

Adam Taggart 1:00:24
things are. I’m sorry to interrupt. But But I think the question that folks are really asking here, so if you can address it? And your answer is, for the folks that thought housing prices, got to crazy levels, kind of pre pandemic, and then they’ve just gone bananas, right. And now, you know, not only do we still have pretty high prices, still near kind of records, but now the cost of financing has gone way up. If I’m sitting around waiting for a better opportunity, because surely the housing market must correct at some point, am I going to be disappointed?

Peter Boockvar 1:00:57
I think you potentially could be disappointed that prices are not going to fall to an extent enough to really fully mitigate the doubling of mortgage rates. Unless game this out, what happens if the Fed starts cutting interest rates? Well, that doesn’t necessarily mean mortgage rates are going to fall, if maybe, the long end, actually yields go up, because people are worried about a fall in the dollar, and that the Fed rate cuts are going to re accelerate inflation. And maybe the yield curve starts to steepen. Again, we’re, let’s just say it does not, let’s just say that mortgage rates actually go down. And that starts to open up some inventory, people say, You know what, I can now get a mortgage rate that’s not much, not much different than the house that I’m in. So I’m going to sell here to buy here, maybe we can ease up and add to some of the supply that can maybe slow down the rise in home prices. But on the other hand, that person still needs to move somewhere and go find another home, which then creates its own demand. It’s just it’s, it’s it’s upside down here. And it’s really, I think, difficult to have a confident answer to that question.

Adam Taggart 1:02:12
Okay, and look, I have let you off the hook here, because we also do have housing specialists. So bring on here to really dive into this, but it’s, it is, it’s muddy, as you’ve said, and I think in some ways that can be really infuriating. Particularly because I get the way that people look at it. And I gotta be honest, I look at it a lot that way myself, which is that prices just got incredibly insane versus fundamentals. And then now, you know, financing has gone bananas. And surely, just from the increase in mortgages alone, we should see a nice mathematical correction. But we’re not, you know,

Peter Boockvar 1:02:48
people had mortgage rates above four, instead of under before, you probably see more mobility and more easing of prices.

Adam Taggart 1:02:57
Got it? So I assume that you would say so yeah, look at a country like Canada or the UK where, you know, they have like five year mortgages or mortgages have to be refinanced every five years. So basically, every year, you’ve got about a fifth of the housing stock that needs to be refinanced. I’m assuming you would expect to see a faster correction in those types of countries.

Peter Boockvar 1:03:21
Yeah, you would you would think so? For sure. But even in the UK, you haven’t necessarily seen it just yet. I do think you’re beginning to see it in Sweden, they also have, you know, feasted on on cheap money and, and having more adjustable rate stuff. So I think there’s more vulnerability from affordability standpoint without question, because there’s not as many people sort of trapped in these little mortgages for a lengthy period of time.

Adam Taggart 1:03:48
All right, well, I gotta leave it there. Peter, I could go on all day with you. And I know there are a number of folks here that would love for us to but you got to get back to work. Thank you again, for not only coming on the program and giving us so much of your expertise, but for changing the plan coming on to do it live. I know you had a couple of technical issues as well. Building it through it. No, no, no, I like I said, I really appreciate you soldiering through everything to come talk to us today. For folks that have really enjoyed this discussion would like to learn more about you and your work follow you where should they go?

Peter Boockvar 1:04:20
Well, they can subscribe to the book report. It’s actually book report.com B O CK report.com. Actually, starting this week, I’m going to be shifting over two sub stack and we’ll see how that goes. But I write daily. And then on the wealth management side, you can reach us at You can go to our website@bleakly.com and learn more about us.

Adam Taggart 1:04:41
All right, fantastic. Folks, please give Peter A big thanks there in the live chat. Just wrapping up. I just want to remind everybody for the reasons we talked about every week, but particularly the reasons that Peter mentioned here in this entire comment recession, you know, it’s a very muddy, very confusing time, he talked about the challenges that he has, as an experienced capital allocator, trying to figure out how to play this right now. So, if you’re feeling, you know, overwhelmed by trying to figure out how to navigate your own wealth through this, again, highly recommend you do that under the guidance of a good professional financial adviser, one that takes into account all the macro issues that Peter and I talked about here, if you have a good one who’s doing that for you already. And then creating a personalized portfolio plan for you and then executing it for you. Great, you should stick with them. But if you don’t, if you’d like a second opinion from when it does, then consider talking to one of the financial advisors that Wealthion endorses. These are the guys you see come on the program with me every week, I just set up one of those free consultations just go to wealthion.com. I’ve got the URL right there at the bottom of the screen only takes a few seconds to fill out that form. Schedule One of these free consultations, they don’t cost anything. There’s no commitment to work with these guys, just to public service they offer. If you really enjoyed having Peter on as I always do. We’d like to see him come back on the program. Please vote your support by hitting the like button and then clicking on the red subscribe button below. Peter again, I can’t thank you enough. These are always just wonderful conversations. Good luck with your navigations here and look forward to having you back on the program as soon as your schedule allows.

Peter Boockvar 1:06:20
Thanks very much appreciate having me on.

Adam Taggart 1:06:23
All right, thanks so much, everybody else thanks so much for watching.

Transcribed by https://otter.ai