#997 - Are the Fed's hands tied? | With Peter Boockvar

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0:59Are the Fed's hands tied? Hi, everyone. Welcome to the Real Vision Daily Briefing. with me today is Peter Bukvar, CIO of Bleakly Financial Group. Hi, Peter. How are you? Nice to see you again. So we're kind of all waiting for the Fed, aren't we? Stocks cobbled together, a modest rally. U.S. Treasury yields dipped a little bit, the dollar firmed a little bit, but it seems like everyone's really sitting on their hands until we hear from the FOMC on Wednesday. What, if anything, are you expecting to come out of the meeting? I know everyone's going to obsess about the dot plot. Are they going to reflect two hikes, three hikes.

1:35I mean, who cares at this point, whether it's two or three? I'm most interested in the balance sheet and what they say. Powell said that this is the meeting they're going to start discussing it and the fate of it, especially because the reverse repo facility is just above$400 billion down from north of two. And as that continues to shrink, if it shrinks, there'll be more focus on how much more room they have left to shrink the balance sheet. So that's, to me, what I want to hear. That is something that we probably won't get until the press conference, while the dot plot is going to come out right when the statement hits at two o 'clock.

2:16Yeah. You're right to point out that other really important part of it, but we'll have to wait. And you're right, there will be this sort of obsession with their forecasting. Do you think they have the latitude to signal lower rates or any kind of easing, And given the type of economic data we've seen coming in, I mean, do the numbers justify a path to easing? Well, the economic data has been mixed. I mean, the last payroll report, we saw a two-year high in the unemployment rate. On the other hand, since their last meeting at the end of January, the CRB index is up 5%. You have the inflation break-evens in the two-year tips of 50 basis points.

2:55and commodities, you know, specifically of energy prices now, WTI at 83 plus, you have gasoline prices at a multi-month high, you have food prices that are moving higher. So it's a tough situation for them. And going back on the economic stuff, retail sales are very mediocre in February after a soft January. So there's a lot of moving pieces for them. And it is, to me, somewhat stagflationary, even though the inflation number should continue to moderate in the coming months as rent growth slows. I still think it's a very difficult environment for them to figure out. Now, that said, I do think that Powell, if he's going to cut this year, wants to do it sooner rather than later.

3:45He doesn't want to wait until after the summer ahead of the election. But as I said, with the inflation stats remaining sticky and commodity prices rising, as well as inflation expectations, he's got a very difficult situation right now. Yeah, they are kind of between a rock and a hard place on a couple of fronts. The timing is difficult because they'd probably rather wait, but we are in an election year. And traditionally, they like to try to stay away from right in the thick of the election so they're not seen as aiding or abetting one side or the other. They also have another problem that really came up in the first week of our special series that we're doing, and last week really focused on the challenges.

4:22And this is the growing inequity or inequality across global economies. And the Fed is trying to serve two different groups, aren't they? They really understand, or you see the sort of bottom half, and I'll just be broadly and split it down the middle, but the bottom half, who you can see are feeling the pain. There are all these little anecdotal measurements. I know you've been looking at some of them where you can see that people are feeling strained. They've been dealing with these high prices for a while at the grocery store, even though one thing goes down and another one pops up and we all see it.

4:57Then off the flip side, the people who have seen their assets growing, they're benefiting from the higher interest rates. They just seem to be in a good spot. How does the Fed navigate dealing with both those constituencies? Well, we know inflation hurts the bottom end the hardest as what they spend on stuff that they need is a bigger percentage of their total income. So that's the tricky part here. And then the answer that the Fed gives is let's raise interest rates, but that also hurts those people because a lot of them use credit cards and don't necessarily pay off their monthly balances and are paying 23 % interest rate on the balance that they have.

5:42And then if they want to go buy a car, they've got to buy financing costs. So it is a difficult situation for the lower end. Now, over time, you hope that lower inflation actually ends up helping them because the lower income is also seeing some decent wage gains, particularly those in leisure and hospitality, for example. But yeah, they've been hit the hardest from the cumulative impact. And we've heard that from a variety of different retailers over the course of the past month, whether it's the dollar stores, whether it's the Walmarts or the specialty stores or the other discounters or apparel.

6:20You know, a lot of them talked about sort of this tale to consumers. But interestingly, Bank of America, they have their monthly snapshot of U.S. consumer. And they even today talked about even higher income consumers that are pulling back on spend. Those that make up to 600 grand, where people making north of 600 are spending the same and they haven't changed their habits. But now you have that gap between those that make 100 and 600. They're beginning to terrain it in as well. So you wouldn't know that from looking at the stock market, of course. But there are definitely some pockets of weakness.

6:58And I think we should really be focused on the labor market moderation that is being seen in a lot of different data points, because that could be sort of the next phase of the economic cycle that begins to bite from higher interest rates. Yeah. Do you think that, so do you expect the Fed to stay on course and just steady as she goes, not really change your messaging that much? Or do you think we'll see something different out of the meeting? And how are the markets positioned for that? Well, it comes down to what does Powell fear the most? Does he fear a further rise in the unemployment rate that he wants to respond to?

7:39or does he fear if he starts getting complacent that inflation starts to inflect higher again and he just cut interest rates and now inflation's back to 4.5 % again? That's a really difficult position to be in. I think he should stick it out and not cut too many times. If he's going to cut, okay, one or two times, let's give him that to maybe take some of the edge off. But he's really not going to be able to do much more because what happens if he gets more aggressive than that, the dollar tanks and oil instead of 83, up from 70, goes to 93 or 100. There aren't many easy choices for him right now.

8:26And I don't envy his position. Yeah, it's a tough one. The other sort of headline grabbing focus is NVIDIA. They've been having their conference. Boy, this is such a tough one. I feel like so many people have it in their portfolios. They're just wringing their hands about and really afraid to get caught. It's sort of some kind of bubble bursting on this. And then there are tech enthusiasts who just look at their plans and say that they're on the front edge of what is a revolution. How are you thinking about the NVIDIA story here? You know, leaving the fundamentals to more tech savvy and smarter people on this than me, I just think that investors that are going to be in it just need to have eyes wide open.

9:21Eyes wide open on its valuation. It's trading at what, 20 times sales. And if they grow revenue at 20 % a year for the next five years, and that growth rate assumes basically very little competition, even though their biggest customers today want to be their competitors tomorrow and developing their own chips. So let's just say you grow revenue 20 % a year for the next five years. You double revenue again. Even by 2028, you're trading at 10 times sales for a semiconductor company in a very cyclical industry. Again, I don't want to downplay downtown NVIDIA because I have no skin in the game other than we have clients that own it, whether it's individually or in funds.

10:03But again, like I said, I think investors should have eyes wide open on the valuation side, putting aside how great the technology is and also the parabolic nature of its stock. And when a stock goes vertical, for whatever reason, what it's doing, it's pulling forward future returns. and that's what people have to acknowledge here. Just like we saw, and not just in tech, we saw it in Abercrombie & Fitch and GE that went parabolic. We saw it in Vistra, which is an energy company that went parabolic. When a stock just gets into that pattern, and I'm still a technician, but I know a parabolic move when I see one, it just steals from future returns.

10:45And let's take Take Cisco, which I know a lot of people like to make the comparison, even though Cisco was more grossly overvalued in 2000 than Nvidia is today. The point still stands that when a stock goes crazy to the upside, you pull forward so much future returns. In 2000, fiscal year 2000, Cisco made$0.57 a share. This year, they're expected to make, I think, about$3.70 a share. And in the 24 years, the stock has gone from 80 to 50. That's because of that massive move in the late 90s into 2000, basically front-loaded 25 years and plus possibly of future stock market returns. And back then, Cisco was it.

11:36It was the backbone of the internet. So a lot of the sexy talk about Nvidia today, I heard a lot about the sexy talk with Cisco. And yes, valuations aren't necessarily the same, but Cisco ain't cheap. I'm sorry, Nvidia ain't cheap today. 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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14:29That's M-O-N-A-R-C-H-M-O-N-E-Y dot com slash vision. For your extended 30-day free trial, go to monarchmoney.com slash vision. I like that way of looking at it because it doesn't discount what NVIDIA is doing. It's just saying, listen, it's just pulling it forward, which is something I've been thinking about as well. So it doesn't discount their plan or their fundamentals. It's a great way to look at it, I think, and it's going to give some people some food for thought. We have a question about the BOJ coming in from Ralph. And I was thinking about this as well, because I know you watch Japan, and we're talking about getting ready for the Fed.

15:16The Bank of Japan, the central bank there, had its meeting and finally abandoned its negative rate policy. This is the last holdout for that. But Ralph asking, what do you think of yen-US dollar weakening despite the BOJ getting off its less than zero rate policy? So finally, yes, and good riddance to negative rate policy and yield curve control and the buying of ETFs, which was nonsensical if their goal was higher inflation. I think the yen move is more of just a sell in the news. It was definitely well telegraphed what the BOJ eventually did. I don't think that the yen weakness is going to be sustainable, but also we have to add into that, yes, now that Japan did this, quote unquote, big move by raising their overnight rate all of 10 basis points and 20 if you give it the range that they laid out.

16:13But we can't expect them to move anytime soon. So there's not like there's this immediate threat of a further interest rate hike because the BOJ is going to take their darn time doing anything more. But Ueda definitely did say that, hey, if inflation still remains well above our target, we can definitely raise interest rates again. Now, the problem with the BOJ is because of the debt of the Japanese government being so large, the BOJ is essentially an arm of the Japanese government and on one hand needs to keep financing costs low for the Japanese government. But on the other hand, if inflation is going to continue to print 3 % plus their core core rate, can they still with a straight face even keep their overnight rate of plus 0.1 %?

17:05I do think, though, BOJ has been buying less JGBs. At the same time, the Bank of England has been selling gilts, and the ECB is shrinking their balance sheet, and the Fed will continue on with QT, even if they tapered at some point. And so the liquidity pump, I do think, slows as the year progresses. And another thing that investors need to keep their eye on. So to what I said to start this interview is that people are going to obsess tomorrow about the Fed's going to cut two or three times this year. They should start shifting their focus to global balance sheets, global central bank balance sheets, as I do think that is going to begin to matter soon.

17:50Yeah, it's a great point. Right. So one of the things that we've been talking about, and I'm laughing when you were saying about trying to figure out this tech move in my head, because we get so many questions about people who are trying to figure out these very difficult questions, right? Whether you're looking at why the yen, why currencies are moving, when you anticipate something happening and it goes the opposite direction, there's a trader mentality to that. When you're trying to figure out balance sheets. That's so macroeconomic. And there's a lot of fear around all of it. We spoke with three performance coaches this week.

18:30We sort of kicked off this week. We're looking at solutions and opportunities and how to figure out what to do in this uncertain environment. And we talked to three performance coaches about the sort of mental game. And Denise Schull was one of them. And she had this very sage advice. Let's have a listen, and we'll talk on the other side. There are essentially infinite number of ways to make money in the market. Like, I mean, if you could catch every little price, you know, every little move of every little thing, think how much money is there. You just have to figure out like how you see it and what makes sense to you.

19:04What is your version of understanding what makes prices move and then stick with it. Like, and then stick with it. And it can be, you know, some people are scalpers and some people are trading for weeks and months at a time. I found myself to be a momentum trader. And this was back when I traded equities. That's how it made sense to me. The drug stocks move together. You have to figure out your version. You learned from somebody. And unless you're really sure that the person you learned from makes money and their viewpoint, their lens in the market. Makes sense? You've got to go back to like, where am I in this system?

19:48How does it make sense to me? And what can I do about that? Which, believe it or not, your feelings are going to give you all sorts of information about that if you learn to think of them as data. I mean, Denise just always nails it. You can see that whole session, fascinating conversation with all three of them, chock full of fantastic advice, both about trading, but about life as well. The full session is on our website. And Peter, you and I talked about finding your lane when we did the session on researching like a pro, and you very much had to sort of shift and pivot and figure out what you were good at.

20:30And I think that's such good advice to everyone. Yeah, I definitely agreed with what Denise said. And to her point that there's no one way to be successful investing or trading in the markets. You really need to just find your own way and get comfortable with what you're good at and get comfortable with what style best suits your personality. Yeah. And so Peter obviously leans into his research and ability to research and look deeply into stocks and fundamentals and find value where other people are not looking, which is what we always tap him for here. And of course, on the marketplace, his work is on the marketplace.

21:12If you head over to the tab, you can find out more and subscribe. And so, Peter, let's lean into your expertise a little bit, because we have a question. Who is this one from? It is on China. Dominic, any thoughts on China? That's very broad, but I do know you look globally. How are you thinking about what's happening in China right now? We saw signs of life from the economy to the extent that we can depend on any official figures coming out of that, but what are you looking at? I think it's important to separate out China long term, looking at the next five to 10 years, and China's issues that they have right now.

21:54I'm going to put aside the authoritarian government and Taiwan and what the government approach to businesses right now. But just looking at from an economic standpoint, they're obviously dealing with the stress of residential real estate. But I do think that policy-wise, they're doing their best to work through it. They're allowing developers to go bust. They're very focused on getting projects done that are uncompleted, that people have put down deposits. I think that would be very important in sort of clearing the system by getting these projects done and allowing people to get a fully constructed apartment that they decided to buy.

22:41manufacturing in China is dealing with the same challenges that manufacturing around the world is dealing with. And that's a manufacturing recession we've been in for more than a year as consumers have shifted their spent more services than goods and other parts of the global economy are soft. Then you have the consumer, which is still has some PTSD from the COVID shutdowns, but showing signs of life. We saw that with the travel numbers during the Lunar New Year. We see that in the Macau visitation numbers that are almost back to where they were 2019. And gross gaming revenues that are above 2019 levels.

23:18Domestic travel in China is well above 2019 levels. So that's the short-term sort of breakdown. But then the Chinese consumer is dealing with a reduction in the value of real estate prices. So there's still going to be a lot of pushes and pulls here. But looking out over the next 10 years, the size of the Chinese middle class is going to double. in the next five to 10 years from about 400 million people to 800 million people. They're going to add an entire United States and then some in terms of a growing middle class. And just think what that means for purchasing power, not just within China, but around the world.

23:552019, the Chinese tourists spent$250 billion internationally. And that went to zero during the shutdowns and is still below where it was in 2018, but should continue to recover. and again, looking out over the next 10 years. And it's not just the Chinese middle class that is going to see a big increase. It's India, it's Indonesia, it's Vietnam, it's Thailand that are going to see this growing middle class that should be a lift to growth in that entire region where it just so happens that half the world's population happens to live in. Yeah. So based on what we saw with, we know that tariffs and trade are going to be, there's going to be a lot of rhetoric.

24:41That doesn't mean it's policy, but there's going to be a lot of rhetoric around this US election. If you're going to play those growing middle classes, do you do it regionally in Asia as opposed to sort of maybe what you might have done it in a safer way with a mega cap Western-based consumer business? China favors their homegrown. Do you have to look at Chinese companies or do you have to look at plays within the Asian Pacific region in order to benefit from that? 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.

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26:00And unlike money, gold can't be printed. It's your shield in times of economic uncertainty. Invest in something you can hold. Go to noblegoldinvestments.com slash vision to get started. Don't wait. That's noblegoldinvestments.com slash vision. Well, it's a great question, because if we get into another global tariff where nobody wins, but it's possible that the U.S. actually loses more. because I mentioned half the world's population is over in Asia. And as time goes on, China is going to rely less on the U.S. consumer to buy their stuff because they have this growing middle class all around them.

26:45So it is possible that a trade war actually hurts us more. And look at the EU is trying to figure out how to keep all these Chinese-made EVs out of their economic region and the U.S. doing the same. I mean, it's going to be a lot of losers under a global protectionist trade war situation. Now, in terms of how to play the Chinese consumer, yeah, I think it's better to do it locally. It's owning casinos in Macau and other areas of Asia. It's owning things that can tap into the Chinese consumer that would spend, irregardless of what a tariff battle would do for manufactured goods. Yeah, that's a great point and a reason why we keep touching on it.