Is the Tech Rally Showing Cracks? With Peter Boockvar

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2:44Is the tech rally showing cracks? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Peter Buchvar, Chief Investment Officer at Bleakly Financial Group and the editor of The Book Report. Hi, Peter. How are you? Hi, Maggie. Good to see you. Same here. We made it to Friday. It's been a little bit of a busy, turbulent week. We had inflation data out, producer prices today a little less market-friendly maybe than CPI. We could get consumer confidence out, weekly jobless claims. When you put it all together, what did you make of this week and the market action we saw? Well, it really sort of puts a bookend around a lot of important news over the last couple of weeks between tech earnings, jobs data, the ISMs and all the things that you mentioned this week.

3:29I think from here, as we look through the end of the month, it's a bunch of retailers that we get to hear about the state of the consumer. I think when you look at the inflation stats this week, if you look at the inflation break evens, particularly the five year, they're basically a little changed on the week. And the numbers itself were pretty much in line with expectations. Now, we know with CPI there are holes in it in terms of its measurement of rents and so on. I don't think it really changes the needle for what the Fed will do in September, even though we're going to see another batch of inflation stats and also jobs data.

4:05I think the Fed is not going to do anything in September, and we'll see what happens thereafter. But I don't think there was really any surprises. But that said, I think the Treasury market action was really the biggest surprise, because as I mentioned, we saw no change in inflation expectations. The stats themselves were basically in line, and we've seen horrible action in the long end of the Treasury yield curve. And that's the main takeaway that I think we should all be taking note of as we finish up the week. Yeah, absolutely. I mean, and again, that's a part of the market where that's not always where you're expecting to see the volatility.

4:45And there've been some really big moves. We've been talking about it all week on the daily briefing with people feeling really concerned or really optimistic. It's been a very divided camp. We have some highlights just to show at least what we've been hearing throughout the week. Let's look at them and then we'll talk on the other side. And I think that 10-year yields are gonna be lower than three percent in three to six months for sure today was the peak in yields i'm not rolling out if there's a shock and and we have a you know like a 10 down day in the market that people won't run to treasuries and that they'll get a pop but i think their ultimate destination is uh tlt under 90, 88, 86 and the 10-year 4.9, 5%.

5:36On the long end, I still think it is delusional. I think we can go to 5 % very easily. I actually think we will get there and we'll get there in a couple of days. I don't know when that's going to hit, but when it hits, it's going to be like the guild market. Everyone thinks that the bond market is going to be this ballast to their portfolio. And I've been arguing that it's going to be the anchor that drags it down. I think the primary risk that people need to be positioning for is the risk that the Fed declares victory too soon. So to me, the setup is right for oil to come alive here. And this is just going to be a regeneration of the great rotation, which really treated all the way back to where it started.

6:20it was very interesting for us to sort of watch that dynamic and jared's can get a lot of beef for his very bullish call um that was friday and i will say jared tends to be short term and some people's time frames in that uh little clip that we just showed are a little bit different some people are talking like vincent talking longer term but still what do you things going on with treasuries, Peter? Why are we seeing yields start to move up? The 10 years at 4.15%. What's happening? So I'm going to talk big picture here, and then I'll get more micro. And something that I've been arguing for a while is that post getting out of negative interest rate policy, where we had at the peak$18 trillion worth of them, the analysis on where long-term rates would go was not just looking at U.S.

7:13growth and inflation stats. It was the beginning of an unwind of the greatest financial bubble in the history of bubbles, that being sovereign debt. And obviously, inflation was the trigger to begin that unwind. So we had to, as part of this trying, this forecasting game that we play, was look at how it was going in terms of that monetary tightening and not just in terms of raising short-term interest rates, but how these central banks would maneuver through quantitative tightening and shrinking their balance sheets and outright selling long-end bonds like the Bank of England is doing and how that intertwines within the U.S.

8:00with how we were going to digest massive amounts of supply because of our rising debts and deficits, where for 40 plus years, it never mattered, but maybe now it matters. And the Bank of Japan, which essentially was the author of zero interest rates, was the author of the modern day version of QE. Well, they obviously tweaked yield curve control last year, but the possibility that now they're doing it in a broader fashion where they've now essentially raised yield curve control to 100 basis points. These are major structural shifts in terms of the flow of treasuries and is part of this gigantic unwanted.

8:43Now, taking it within this week, and also I have to mention Japan is the largest owner of U.S. treasuries. And if there is some repatriation that goes on because JGBs are more attractive or just the cost of hedging out dollar exposure is just not worth it anymore. Foreigners have been shrinking the piece of their holdings of U.S. Treasuries. So foreign holdings of U.S. Treasuries, that percentage has been shrinking for years. Banks are already loaded up on duration, and we know that that basically ended a few of them in March. So all these buyers, and the Fed is essentially selling, are going away.

9:22Now, the flip side, we have retail, we have institutional buying of Treasuries because, wow, we have yields the first time in 15 years, but they're tending to gravitate towards the shorter end of the curve. So the longer end of the yield curve in the U.S. doesn't have that same natural buyer. And I think this BOJ news was a game changer. And I think that that was sort of the switch being flicked in this recent upturn in long-term U.S. Treasury yields. Now, this week, we had a great, actually, we had a great three-year note auction. We had a very good 10-year, and we had a soft 30-year. And just within 20 minutes of that soft 30-year, whereas just before the 10-year yield got below 4 % on the inline CPI, rates just went straight up.

10:16And they continue, as I look today, pretty much at the highs of the day at 415. in. And that happens. So let's unpack a little bit of this for people who don't always watch the bond market as closely as you do. So when you're talking about there aren't natural buyers, that means that what are the implications for the U.S.? Right. We have natural domestic buyers right now, but those buyers being retail and institutional, they're not going for the 30-year. be on the short end of the yield curve. Right. So that means that in order to attract buyers, that interest, that yields on the third year has to go higher.

10:55Yeah. And starting at even the 10, you can have outright. And we have to also, and stepping back again, the day that the US and the EU froze Russian central bank assets, that was also a game changer for sovereign bonds. Because who's going to want to be too heavily weighted if you're a central bank and U.S. treasuries if that can get confiscated at any moment in time. So there are these major structural influences that are leading to this rise in longer term interest rates. I mean, you take a step back. Treasuries act like crap this week. You had a benign CPI. You have worries about economic growth.

11:39You had an uptick in jobless claims. And I beg people to read the transcript of what ZipRecruiter said this week in the earnings report for the third quarter in a row, talking about slowing pace of hiring. They are the number one online recruiting company. So you cannot discount what they say. You would every reason to see yields lower and they're not, they're much higher. This is terrible action that I think people should take note of. Okay, so... I think we've been so fixated on the Fed, given the dynamics that you just described. Even if the Fed were to do nothing, it sounds like you're saying that there are these forces which are going to be pushing yields up on treasuries anyway.

12:24The U.S., the Europeans, the Japanese, we are all in this bond boat together in addition to others. Look what happened to the European bond market this week. Look at the five-year, five-year euro inflation swap this year. I'm sorry, this week. It is now just below the highest level in 13 years. And it was Mario Draghi's favorite measure of inflation expectations for Europe. And we had a terrible day today in the European bond market. So it's not just the U.S. It's all of these central banks that went on this easing binge that now we're seeing the backside of it. So I tell people again, I've told them many times over the past year, if you're going to tell me what your 10-year yield forecast is, do not just base it on your expectations for U.S.

13:15growth and inflation. Because if that was the case, okay, yeah, I can see the 10-year yield going to three, three and a half maybe. But it is a much more complicated situation right now with sovereign bonds, and they're going higher for not good reason. 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.

13:46this is so important i hope everyone's paying really close attention to this because everything you see is the conversation based around inflation and growth and if the fed will pivot and these are i don't want to put them in the geopolitical camp that's not exactly right Peter, but it's the knock-on effect of this massive mechanisms coming out of the great financial crisis trying to unwind itself. And then for maybe the geopolitical reasons you mentioned with the freezing swift and the response to Russia and the Japanese now on their own journey with their, you've got all of this coming together, creating a problem and not enough international demand or not enough demand around for these bonds.

14:36So two questions. One is why are investors, domestic investors, because I'm assuming the argument is sort of the same, the higher the yields go for savers, that could be potentially interesting. Why do they not want to go out past the three-year? What's holding them back? Someone asked this question internally earlier. Why don't investors want their 10-year maybe, but especially 30-year bonds? Because short-term rates are just so attractive here. And yes, you do lose out on the possibility of the Fed starts slashing rates over the next couple of years and you take on this major reinvestment risk.

15:19But I think that there's just this nervousness about overall duration for a variety of the reasons that I just gave. I mentioned for people who look at the Zipper Crew CEO comments, watch what the Japanese 40-year yield does. That has been busting out to the upside as well. And that is the least tethered part of the Japanese yield curve to both yield curve control and negative interest rates. And that has gone higher. So I think that if you're retail, you're buying T-bills because you're sort of replacing your savings account. You're saying, I'm getting 0.01 in my savings account. I'll just buy a 3, 6 or 1-year T-bill, sort of the same thing.

16:07So it's easy for them to make that short-term maturity decision on what they buy. The institutions are saying, hey, 4 % is certainly more attractive than what it's been for the last 15 years. But I got to digest and think about all these worries. If you look at TLT, the ETF that's 20 plus years of treasury maturity from its peak of a couple of years ago, it is down 40 percent, not including coupons that you get back. That's the price. The price is down 40%. This is not a meme stock that got cut in half. These are long-term treasuries. So duration has burned people's fingers in the socket. Now, other people can say, well, that's what makes them so attractive right now.

16:55How can you not buy the long end of the curve? Inflation's falling. We're going to go into a recession. The Fed's going to cut rates. Everything's going to be a problem, and you've got to buy 10-year treasuries. I get it. I get that argument. But I just don't think there's enough appreciation for all these other things that we said. And what happens if the Fed does start cutting and the curve steepens? But it steepens not only because short-term rates fall, but long-term rates go up because the long end of the yield curve doesn't believe that this inflation fight is over. You know, there's one thing to have an inflation spike, have inflation come back down again.

17:31The other thing is to actually keep inflation down because the Fed's job is not done if we start to see a two-handle on inflation by the end of the year. It's keeping it at a two-handle for a sustainable period of time. And I think that we're far away from having that happen on a sustainable basis. Maybe we have it a few months here and there as rental growth starts to really fall within CPI as we get into the latter part of this year and into next year. Because rents, when they fall, are not going to stay down. Because as long as mortgage rates are at 7.5%, a lot of the multifamily supply that's coming our way, and I'm going off a little bit on a tangent here.

18:11No, that's okay. Yeah, yeah. The family supply is going to be absorbed rather quickly. And I can tell you this, there is almost zero multifamily construction that is the beginning today because none of the numbers work anymore with interest rates where they are and rent growth slowing to the extent that it is. Right. And we, of course, have people who can't move because they're locked in, thankfully, but they're locked in mortgages with low interest rates. So the mobility and the turnover for existing is non-existent. So given these other factors that have the potential to put upward pressure on yields, what's your forecast?

18:52I mean, where do you see this headed? Is it the kind of thing where if you get a few more of these auctions that don't go well, does this begin to feed on itself? Is there a level where it feels like that's the correct level coming out of this extraordinary? Because you could argue historically, Treasury yields were ridiculously low. Do they go back to some sort of historical norm? What does this look like, do you think? Well, I stated all the reasons why I think yields go up on the long end. But because a lot of these reasons are so unprecedented, like global QT is pretty unprecedented. These U.S.

19:31debts and deficits as a percentage GDP is pretty unprecedented that it's, I'm just throwing a dart and trying to figure out where we go on the upside. I'm just more worried about the trajectory to the upside. But now in the short term, four and a quarter, 423, 425 is going to be the level that everyone's watching because that was the peak a few months ago. So technically speaking, that's the level that everyone's watching. But I think we're going above that. And once we do, we're going to go to four and a half rather quickly. What happens above that? This is all for not good reason. And you just have to wonder, you know, at what point does the Fed start to get concerned about that?

20:17And, you know, because there are problems here with what's going on because of the amount of holdings that foreigners have still of U.S. treasuries. I talked about them slowing the pace of their ownership. But what happens if they're like, why do I own long term U.S. treasuries here with with the selling that's going on? And that can exaggerate further selling that could then weaken the dollar. You know, there is some these are things that I'm watching for. And I don't think a rise in long end yields was on many people's playbooks and radar screens over the past month because they have all been focused on.

20:58Yeah, inflation is moderating, Fed's almost done and everything is going to be fine. And it's not that easy when you are unwinding. And I'll say again, and I'm sorry if I'm sounding hyperbolic, the largest financial bubble in the history of bubbles. 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.

21:26yeah there have been plenty of you who have come on our platform and warned about this but when it seems so far off and disconnected you know it can sound like um just perma bears you know but these are real concerns when when this is a huge financial experiment and there's not a lot of rule books in terms of getting out so what does this mean so what is let's kind of walk through what this means for the rest of the investing universe, that sort of stubbornly higher, perhaps a quick jump in yields, because there is this sort of confidence issue. And we've had, Vincent, last week was talking about, do you see an event like the guilt market, where suddenly this thing shoots higher in a really unsustainable way?

22:07Let's hope that doesn't happen. But what are the implications for this higher, unexpectedly higher interest rate environment for corporates? I mean, I know you sit and listen to all of the earnings calls we had discussed in the past, a reset. I mean, even if you were able to get through this period because you were able to lock in rates, eventually people have to take out more loans. Eventually they have to capitalize their businesses. What does that sort of higher interest rate environment mean for the economy? Well, that's my biggest worry about the economy when we look out over a period of time.

22:43When people have these debates about recession, no recession, hard landing, soft landing, whatever landing, they all think that a recession is like some sort of an event because they're so used to COVID, a major event, and 08 where you just had this collapse of a major event. And I've said this before with you that I'm more worried about a death by a thousand cuts type situation as debt reprices higher because we've had this extraordinarily unusual circumstance where you've had 15 years of no interest rates. And then you go straight up over an 18 month timeframe. So all the debt that's out there, essentially, is priced at a dramatically lower level than where we sit today.

23:32And but it takes time for this sort of this dragnet to capture people. You know, if you if you're a business that doesn't have debt coming due until November, well, you've been fine over the past 18 months, but you the train's still coming your way and you've got to deal with it in November. If your loan doesn't come to you until March 2024, it's still out there. And unless rates dramatically collapse from now until March, you're facing a major refinancing issue. And you're just going to have to come up with a lot more equity. And I can tell you this, and I'm not saying anything that we don't already know, every single person in the commercial real estate business that doesn't have long-term fixed rate debt is going to sleep every night thinking, how am I going to deal with this?

24:21How am I going to deal with this? The only answer is if they want to keep that property is a lot more equity and hope they can get some generosity from the bank that doesn't want to take back that property. On the household level, because so many people have these longer term mortgages, they're certainly more insulated, but there's still plenty of adjustable rate mortgages that are resetting every day. You still have people that would want a first time buyer that wants to buy a new home that can't afford a 7.5 % mortgage. You have credit card interest rates that are 22%. You got to buy a car. The rates basically doubled.

24:59Right. So it's not just affecting existing debt holders, but it's affecting future activity because there's maybe one less person that's going to say, let me drive this car for an extra year because it's paid off and I don't want to have to pay and I don't want to get a new car and pay nine percent for a used car. And so it's inhibiting new activity from here. That's not getting necessarily captured in, in, you know, in the data with, with, with regards to people that have existing data. Yeah. I mean, you're speaking to the preaching to the converted Warren Buffett would be very proud of it. We were driving around with a car that has a CD player in it.

25:41That's how old it is. Forget about a computer. It's actually got a real CD player in it. I mean, the thing is. Hopefully you have electric windows. Exactly. Yeah, I don't have to crank it down, but we're close, much to the horror of my children. So what does this mean for equities? We started the show by saying it's our tech stocks showing crack. I mean, someone joked yesterday that all we've talked about for the last year is basically NVIDIA. We have the Nasdaq down again today. It's been leading the way down on down days. What does this mean for tech and broadly for equity markets if we have this potential for much higher rates than people had anticipated.

26:16Okay. So with tech and the difficult 2022, tech was looking for any reason to rally in 2023. Buyers in the dip, these are the greatest companies in the world. They're going to recover, blah, blah, blah. And AI just happened to be that spark, as we know. Now, tech was rallying before this AI craze occurred. So there was some rebound after certainly the notable correction last year. But AI, as we know, was the spark that accelerated the move higher. But there's a couple of things of importance here, is that when we looked at first quarter earnings for big cap tech, they were very pedestrian in terms of their growth rates.

27:00Apple saw basically no revenue growth. Microsoft's revenue growth was up 7 % in Q1. Meta, Google, Amazon, very modest revenue growth. And then AI just sort of whitewashed everyone's minds of that reality and thought that we were seeing this new tomorrow in general of AI. And what has happened over the past three weeks was that earnings season again sort of wiped away the delusions of AI grandeur and brought people back to reality that Apple still does not have any revenue growth. And why did we just jam the stock up to 33 times earnings? Microsoft, as great a company as it is, and sort of at the epicenter outside of NVIDIA of the AI craze, and Microsoft's numbers were good but very pedestrian.

27:54I'll use that word again. And we just jammed up Microsoft to elevated levels and to a record high. Why did we do that? Because of the AI craze. But AI doesn't print you money. You have to prove to us how AI prints you money. How do you generate revenue from integrating AI into that business? Now, NVIDIA, certainly they're doing it because they're powering it. Microsoft will through their co-pilot software. But it still remains to be seen how this drives the revenue and earnings growth that everyone got so excited. I mean, that's the beauty of earnings season. It's always a great reality check.