#966 - Does the Jobs Data Paint the Real Picture? with Peter Boockvar

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0:35Does the jobs number paint the real picture? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Peter Buchfar, the Chief Investment Officer at the Bleakley Advisory Group, and now also a member of the RV Marketplace, which we are so excited about. Hi, Peter. Thank you, Maggie. Great to be here. So the great thing about your research and the work you do is that you really get under the hood of both the economic reports, the earnings reports. I mean, you look at this stuff in more detail than most people I know. So I'm interested to get your reaction to what was big news on both fronts, right?

1:10The U.S. non-farm payroll number blew away expectations, way stronger than anyone had anticipated, especially as we debate recession and Fed easing. And then on the earnings front, meta-earnings, way stronger than expected. Huge move in that stock today. The entire stock complex rallied off the back of that S &P 500 at a record close. We saw treasury yields moving higher, though. So we're going to unpack all of it. Let's start with the data. What did you make of that jobs report? Maggie, I've been doing this for more than 30 years now. And I don't think I've ever been more confused about the economic picture as I am now.

1:51I mean, everything to me lined up for just a mediocre hiring number, whether it was just the ADP report on Wednesday, whether it's continuing claims that are near multi-year highs, whether it's the daily drumbeat of firings, even though you don't necessarily announce a hiring of all these firings, the employment component of manufacturing and services data, everything's pointing to moderation in hiring. And also, even this week, heard from Manpower reported earnings, Robert Half reported earnings. Even Microsoft, when they talked about LinkedIn within their conference call, talked about a slowdown in hiring.

2:34And then all of a sudden you have this big upside surprise. But to complicate it even more is the household survey, the other side of the jobs calculation, that showed another decrease in jobs. Then you looked at hours worked when if you don't include COVID, it was the lowest in 14 years. You have more people that are not working full time because of slack or they can't find full time jobs. So it was rather a dizzying report. And I know that there's probably some seasonal adjustment issues that were benchmark revisions. I think there was a lot of noise here, but it definitely complicates the broad economic story, which itself had so many mixed signals that it was tough to figure out.

3:21Yeah, that's why we keep saying this is such a hard macro environment we're in. By the way, I heard someone mention not only was this month strong, but they revised it was there were upward revisions to previous months. So that sort of is, again, if you're trying to say, okay, there's noise in this one, it kind of goes against what we're hearing. And we've been seeing these layoff headlines, by the way. And I love you pulling in the feedback from these other reports that people are in the business of the employment market and anecdotally what they're saying about it. It's exactly that kind of stuff that you do that I love.

3:58So what does the Fed do with this, Peter? We're confused. What about the Fed? Well, if you just look to Wednesday and listen to what Powell had to say, I think in a way, Powell wants to trim rates. And I say trim rather than cut because he's not looking to just slash interest rates because he doesn't need to. Inflation's on the downside. Growth is still pretty good. So there's no reason for him to slash interest rates like the markets are begging him to do. But if he does, it's because the economy is probably weak. And if he doesn't, it's because the economy is hanging in. But he basically told us that they're not going to have enough information by the March meeting to cut interest rates.

4:40And certainly today's payroll number gives them no reason to cut. But there are a lot of other cross currents that point to weakness in the economy that I think that the Fed itself is probably just as confused as we are on this call and why they're going to just take their time. I think the more pressing shorter term issue, assuming they don't cut in March, is what happens with their balance sheet since the reverse repo facility only has about a half a trillion left, which is quickening the pace at which the Fed is going to have to make a decision on their balance sheet and what level of bank reserves they need to have.

5:23Either way, I think Powell's worst nightmare is a reacceleration of inflation and why he's going to be reluctant to give the markets what they want on rate cuts, again, unless you see a notable decline in the economy and a short rise in the unemployment rate. Yeah. What do you make of the bond reaction we saw today? We did see yields move higher. I mean, we've seen them really spike in the past. This was a pretty strong jobs report. They definitely moved quite a bit, but it was funny that you saw equities rally too. It doesn't seem like both can be right. I mean, that's a little bit interesting.

6:04You think that bond yields are going to have to continue to move higher against this confusing backdrop? What feels like equilibrium here? So, you know, the yields up through Friday, so Monday through Thursday, yields have fallen this week. We did get a little backup in the short end on Wednesday with Powell. But I think today's payroll number is just a reminder that rates are still going to stay high for a while. And if you want them to cut, they're not just going to tweak the Fed funds rate just because inflation goes from three to two and a half or two and a half to two, because it's not just seeing a fall in inflation that they're waiting for.

6:46It's seeing inflation stay down after it drops. And that's still a process to see whether you have that sustainable drop in inflation. Sustainable is a word we've been hearing countless times from a variety of Fed members. I think we were in a situation where, you know, worries about debts and deficits seem to have gone away. But it was a worry last year, but I think it's going to reinforce itself. And whether Janet Yellen wants to sell more two-year notes or three-year notes rather than 10 years, regardless, we still have an enormous amount of treasury supply. I think the economy is still very mixed where tax receipts are only mediocre.

7:31And there's still reason, in my opinion, to see a rise in long-term interest rates, even if short-term interest rates were obviously tethered to what the Fed is going to do is going to stay relatively low. So we did get a nice uptick in the two-year yield today of about, call it 15 basis points. It was almost as much as 20. But I still think that the prospect of rate cuts is going to keep that muted. But I still see the scenarios of higher long-term interest rates. And I'm still pretty convinced that 5 % is going to get retested again on the 10-year. And chances are, we go through that and not necessarily for good reasons.

8:10So So I think net net higher for longer is still here. And while one of the consequences of that is another hit to commercial real estate and New York Community Bank this week and Azura, I don't know if I'm pronouncing that right. Yeah. And so there's a lot of pain to be had with respect to the adjustment to higher interest rates. And you read my mind, Peter, because that's exactly what I was thinking about when you're talking about rates possibly going back up to five percent. that higher rate environment we know has been so difficult for community banks. And we've been talking about that. A few of the guests we had on this week were like, you know, listen, you see, it's not New York Community Bank in and of itself, but it's the reaction, what you see happen.

8:51And if everybody, it's everyone's been kicking the can down or extending and pretending until we get to better economic conditions, lower rates, so they could deal with this in an orderly manner. But if rates are back up at 5%, can that happen? Do we start to see the cracks in commercial real estate start to, you know, inflict some pain on the banking sector again? The interesting thing here is that unless you get a vertical rise in rental growth, even a good economy is not going to save your building. if your interest rate is going from 3 % to 8%. And that's the problem, is that we're having trouble...

9:39Now, putting aside office, which has its own secular challenges, let's take multifamily. Multifamily, the demand for rentals is great. 7 % mortgage rates makes it unaffordable for many to buy. They would rather rent. So well-run apartment buildings are high 90 % occupancy. But if you got too much debt, if you have debt coming due that was priced pre-2022, you're still going to be in trouble, even with a decent economy, even with a high rent roll. So saving you is either going to be putting up more equity or the Fed cutting rates to zero again, which is not happening. So this lag of an impact from higher interest rates is much more drawn out than I think those calling for a recession last year ever imagined.

10:34And I thought we would definitely have a recession when Fed funds rate goes from zero to five and a half in 18 months. It's easy to assume that you will. But what I'm seeing is that this is going to be the pernicious impact of that is just more drawn out. Now, interestingly, a lot of small to medium-sized companies that have floating rate debt, well, they've probably seen the worst of it because their interest rates have skyrocketed. And I'm talking companies whose interest expense doubled over the past year and a half. But now you're going to start impacting those businesses and bigger companies that have termed out their debt that is now coming due this year, 2025, 2026, that is going to reprice at a higher interest rate.

11:19Now, a lot of investment grade companies will be fine. They can handle it. But their interest expense will go up in that scenario. So, and even today with the market action, it wasn't until like this afternoon that the breath on the S &P 500 actually went positive. I mean, it was one of the more bizarre stock market days with all the money piling into Meta and Amazon. And even, you know, Apple came off its lows where everything else was left for dead. I think the Russell 2000 closed down today. And even the NASDAQ, the breath was deeply negative. So it's just these bizarre days where if the economy is so great, a lot more things should be rallying.

12:03But the economy is more mixed and therefore you're getting a much more mixed stock market performance. But enough to scratch your head and make you even more confused with what the heck is going on out there. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo.

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13:26Yeah, great point. So I want to dig into that earnings and the conundrum about the narrow aspect or characteristic of this market. But the lag, I think this is really important to underscore the lag from that rate adjustment. It's taken so long that people think it's not going to happen. uh is that an overly complacent view uh because i think that um there is a sense the economy's strong enough to be able to and we talked about it with commercial real estate but i think sort of writ large across the economy as long as the economy's doing well people think that it's sort of manageable do you think it's inescapable is there a way that outside of commercial real estate that rate reset maybe that pain people can muddle through and they're in a different circumstance?

14:16Is it going to be the hit on the economy that everyone thought it was going to be? Because we thought we haven't seen the defaults. We haven't seen the kind of fallout that you might expect. Is it still coming or are people weirdly in a rolling way managing it? Well, there's no doubt that a part of corporate America is managing it, but that doesn't mean that they manage it and there's a free lunch. One of the two biggest drivers of profit margin expansion over the last 15 years when we discovered zero interest rates in QE was very low interest expense and very low labor costs. So while we may weather the rise in interest rates in terms of re-fenancing for a certain part of the corporate world, you're still talking about over the next couple of years, the highest corporate debt, or I should say total business debt, is a percentage the GDP that we've seen that is going to reprice in this higher interest rate environment.

15:11Whether it pushes us into a recession or not, we'll have to see. But I know a lot more money is going to be allocated to interest expense rather than other things. And that's what's going to keep a lid on overall profit margins. In addition to wages, while they've plateaued, it's still an issue for a lot of companies. I mean, I listened to a lot of conference calls over the past couple of weeks and companies said, yeah, my raw material prices are going down. Supply chains have normalized. Well, now they're getting disrupted again if you're trying to get something through the Red Sea, of course.

15:44But my labor costs are still very sticky. And that is keeping a lid on my profit margins. So that is still a factor here overall. But we know, at least in the housing market, what higher interest rates have done is turned it upside down where you have the level of existing home sales in 2023 low since 1995 but the new build part of the market that's obviously doing better because of builders creating supply but also buying down mortgages and and and creating discounts so it's just this very strange market i mean even this week when you talked about i mean if you listen to Starbucks even talked about some moderation in their growth of people buying coffee in Mondelez who sells Ritz crackers and biscuits and chocolate and Oreo cookies talking about a choiceful consumer in Diageo selling liquor talking about a choiceful consumer.

16:46And then you see Meta, which is essentially an advertising company, doing great. This is exactly what I wanted to ask you. And Oliver, I see your question. It's kind of related. So we have these confusing things, reason for concern, and that's exactly your point about meta. Is this a meta execution story? I mean, we know they did a dividend for the first time. Or is this a broader comment on the strength of the consumer and the economy? Because they are essentially an advertising company that would normally be a bellwether of a robust economy. And there are going to be people who look at that and say, absolutely.

17:26Well, I think it's a combination of those. But when you think about Facebook said, or Meta said on the call, they touch, one of their apps touches 3 billion people a day. And when you think about how tethered and addicted we all are to our phones, they have this incredible captive audience. So you almost get their engagement. Now, those businesses that are advertising on their platform, yeah, they're going to be sensitive to the overall economy. But in terms of effectiveness, when you have 3 billion people looking at one of your apps. It's just scale. Yeah, you look at Amazon. Amazon was up a lot today, but they had 13 % revenue growth.

18:12AWS is down to low teens, 13 % too. Those are pedestrian numbers, but there's still this cult mentality to these stocks. And that's why Amazon, even with a low teens revenue growth rate and an operating margin line that trades like an EKG machine from quarter to quarter, can trade at 45, 50 times earnings. But interestingly, in this Mag 7, well, Tesla kind of fell out, we're Mag 6. You wonder whether Apple has much staying room in this group because they had 2 % growth, which after a few years of no growth, but you wonder what the cattle started to see growth there. Google, facing slowdown in their advertising business, which is the core of their company being searched now questions about how generative AI may disrupt their business.

19:09If I can search a question on chat GBT rather than Google, and maybe we're just left with meta Microsoft and NVIDIA, which the irony of that would be is that in the movie Magnificent Seven, four died at the end, and there was only three left. So I think that that's one thing that we should keep an eye out here is whether we're sort of winnowing down these great seven cult stocks and further narrowing what was an extraordinarily narrow market to begin with. Right. And there's the question of, you know, why do we fear that? So Oliver's saying, question for Peter, what do you think about the fact that the overall market didn't care about the unemployment numbers and that rates are probably not going down in March?

19:59Nothing gets in the way of the rally when it comes to these tech stocks. How can stocks be rallying and bonds be rallying at the same time? Doesn't one of them have to be wrong? It's a great question. And I wish I had a good answer. I mean, on Wednesday, you know, the market was bothered by Powell saying we're not cutting in March. Today, it didn't care at all about the spike in interest rates because of Meta and Amazon. But even today, I mean, you had Microchip, which is similar to Texas Instruments, saying that, you know, and Trum had a company that has, I think, over 100 ,000 customers in automotive and aerospace and communications and other areas of tech and industrials and automotive saying that business is not good.

20:46So I wish I had a good answer. It's scratch your head type behavior and just watching small caps just die on the vine where a lot of them, like I've said before and probably on this channel, that a lot of these small, medium-sized companies advertise on meta platform and advertise on Google. and you just, it's hard to connect dots here. Yeah, and we may, I know that one of the things that we learned from last year is that, and you mentioned this, the lag from all the fiscal and the monetary and it's just the timing is not fitting into any models. And so the signals of strength and weakness, it's hard to figure out which one's the pace car and if something is just a lagging sign as opposed to a forward indicator.

21:40You know, all of it seems a little off based on the, you know, the sort of information that we used to go off of because we're in such extraordinary times. Not to mention we remain there because we're in an election year. And so that's that's going to sort of, you know, confuse things. So there's a question because I want to move into the a little bit and look at the international picture before we talk about what you like, don't like. Because we know you keep an eye on all of it.

22:09questions about China. I'll pull up the specific one in a minute, but what are you looking at in terms of China? Someone was talking about the fact that there was a time when we know the real estate bubble was bursting. Any headline on Evergrande sent spooks to the whole global economy, that was liquidated. Nobody seemed to be paying attention to that either. What are you thinking about in terms of how China bolts onto this narrative? I think the key, there are a lot of moving pieces in China as well. I think it's a good thing that Evergrande went bankrupt and is getting liquidated. And a lot of other developers in China are getting thrown into bankruptcy and are liquidating.

22:51That's how you cleanse. But this takes time to do. I think China's focus right now, the Chinese government's focus, is to finish projects that have been started. give the people that have put down deposits on uncompleted projects let them get their appointments and this is going to take more time but we are moving through this sort of liquidation phase with a lot of these developers which i think is a good thing but it's very painful right now particularly uh from not just the construction standpoint but the value standpoint because we know a lot of chinese people have their wealth tied up in real estate but on the other hand You look at the Macau numbers and they're doing great.

23:34Gross gaming revenue in China is back to where it was in Macau, is back to where it was in 2019. Domestic travel within China is above where it was in 2019. International travel is finally growing again as China is now eliminating the need for visas and they're trying to make it easier. travel manufacturing. When you look at Chinese manufacturing, well, they're experiencing the same challenge as US manufacturing is and European manufacturing is, but China manufacturing is still a powerhouse. And when the world starts spending on goods again, when the world starts to restock inventories again, Chinese manufacturing is going to do just fine.

24:17And the one thing that when you look at emerging markets generally, we had the most aggressive pace of rate hikes in 40 years, and not one emerging market blew up. Typically, emerging markets blow up when the Fed raises interest rates and the dollar gets stronger. That didn't happen this time. There is something to be said for emerging markets. Now, of course, everyone's obsessed with Meta and Amazon and Microsoft and who cares about emerging markets, but there is something to be said about the resilience this time around with emerging markets. And I think that creates a lot of investment opportunities, which hasn't been seen in a while and they've lagged tremendously, but I think how they weathered this tightening cycle says a lot.

25:10And I do think that this year, early next year, the Chinese economy is going to bottom out, particularly with how they're trying to at least ring fence residential real estate right now. And that would be good for that entire region, which I think would be beneficial to markets there as well. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

25:42yeah um nick that was from nick and he had a great follow-up question um is china's china struggles and india's positive performance a reflection of the global or west consumer sentiment in other words good versus services the u.s spends more on services right now benefits india less on goods uh hurts china as long as that's in place do we continue to see India outperformed China? Yes, but India is also benefiting from its own internal growth. They're spending an enormous amount of money, trillions of dollars on infrastructure, where from one spot to another, three years ago, would take you seven hours.

26:26They're building new highways that'll take two hours. I mean, the advancements of infrastructure, whether it's the grid, whether it's the highways I mentioned, the airports that they're building, they are modernizing as quickly as they can that country. Plus, you also have a huge amount of young people there that also just creates organic growth as well. So it's not just someone in the U.S. calling the airline and getting an operator in India that's helping them out. There's real organic growth going on over there that is benefiting from a few different levers. Whereas China is still dealing with, you know, a debt hangover that manifested itself in residential real estate.

27:13And we know there's a lot of debt on the books of a lot of local governments. Yeah, absolutely. That's so interesting, right? Demographics. Yeah. And there's been a lot of there's been a lot of reform too in India, which has helped a lot. So we have a question, which I really like. It's another, you guys are on fire today. It's a really good question from Jay and Jay. How would Peter express economic uncertainty other than to hold cash while it gets 5 % or maybe not 5 % now, but, and wait for other buying opportunities. So that's one option. Is there another way that you like sort of holding here through this economic uncertainty?

27:57Well, cash obviously always is dry powder, but in a lot of the uncertainty out there too is on the geopolitical side. We know I'm still very bullish on energy. I still think oil prices are going to a hundred dollars. So that's sort of a, you can call that even defensive in a way. Precious metals for sure, which I've talked about for seemingly forever, which I'm very bullish on. And just while it's not working, still finding cheap stuff. I mean, one of the ideas that I've been dead wrong on was I was pretty bullish that we were seeing the final phase of the bear market in the Hang Seng, speaking of China.