What Does the Fed Do Now? With Peter Boockvar

0:00Hey, everyone. Today's Real Vision Daily Briefing is sponsored by Crane Shares. Learn about their KRBN ETF at craneshares.com forward slash KRBN forward slash real vision. Now to the top analysis of today's markets. What does the Fed do now? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Peter Buchvar, CIO of Bleakly Financial Advisory. Hey, Peter. It's great to see you again. Hi, Maggie. Thanks for having me. Always good to see you. Yeah, and what a day. What a wild end to the week. I mean, we had that headline payroll number that surprised everyone to the upside. That sparked a big move higher in Treasury yields, higher in the U.S.

0:40dollar, caused a sell-off in stocks. But then if you walked away and came back, stocks turned around, rallied strongly. But interestingly, it's kind of been fading a little bit into the close. They're still up. The Dow up a little under 1%, S &P a little over 1%, and the NASDAQ hanging on about 1.6%. What did you make of this market action today? Well, heading into the number, and then we can go into the number because I think it's important to look through some of the details and under the hood. We reached some extremes. We had the dollar index, which got very overbought. We had the stock market, which was very oversold.

1:22We had oil prices when it got into the 90s, was very overbought. And we have treasury yields, which I guess you can argue is also overbought, but it doesn't seem to want to go down. So that was sort of the setup. So we had some sort of extremes that wondering what was going to cause the reversal. Now, in terms of the actual payroll number, a couple of things. The headline number was helped out by an increase of 73 ,000 government jobs, mostly at the state level. Now, the private sector job growth definitely exceeded expectations by about 100 ,000. So it still was a good number, but not as extreme as the headline number would portray.

2:05plus the upward revision of about 110 ,000 to the two prior months was all governments. In fact, the private sector revisions for the prior two months was down by about 12 ,000, as I said, for the private sector. So the headline was one thing that I think when people digested it, they realized, okay, it was good, but not great, particularly when you look at the household survey, which showed a job gain of about 89 ,000, which was rather mediocre. And when you combine that with a similar increase in the size of the labor force, the unemployment rate held at 3.8%, which is still the highest since January 2022.

2:53Then, of course, you had continued evidence of a plateauing in wage growth. And while the Treasury market still sold off today, the 10-year yield came well off its highs, which I think helped spark the equity rally, again, in the context of it being oversold. Oil prices have come down, dollar index down for three days in a row. So I think that all combined for a little sort of relief going into the weekend. Yeah, just a sort of a correction, as you say. So does it matter that they were government jobs? Why is that a bit of a relief and maybe not indicating overheating? Well, first of all, a government job is typically not as productive as a private sector job.

3:41I think engaging the health of the U.S. economy is looking at business and how they're behaving. Because hiring somebody in the private sector is a very important economic decision. whereas if I'm getting a job in the public sector, it may not be an economic decision. You're obviously a police officer or a firefighter. I need you. If you're someone in administrative areas, well, it doesn't matter if I need you or not. I'll just hire you anyway. So I think there's a different complexion of jobs, and it's a different sort of messaging on who the employer is. So yeah, hiring in the public sector, you're giving somebody a job and they're getting a paycheck.

4:31But it's definitely more deeper than that, that I think we should be looking at. And this also comes after the, we can call it faulty ADP report this past Wednesday that showed, I think the job gain was of about 86 ,000. Granted, they were overstating job growth during the summer. Maybe they're understating now. Maybe the truth is somewhere in the middle. Now, that's all measuring hiring. Firings remain pretty muted. Jobless claims yesterday around 200 ,000 shows that employers are still pretty reluctant to let go of anybody. Do you think this jobs number changes anything for the Fed? I think the long end of the bond market has done a lot for the Fed.

5:19Since the July rate increase, the average 30 in mortgage rates up 100 basis points without the Fed having to do a thing. The bond market's tightened further for the Fed. So for the Fed to then hike again, I think, is ignoring what the market has just done. And I think we've gotten some hints. We got that hint from Mary Daly, who talked about financial conditions tightening, aka long-term interest rates are higher. Bostick talked about the same thing. Now, then you have Governor Bowman, who says, yeah, we'll raise another few more times. She apparently doesn't have a quote machine, because, like I said, the long end of the yield curve has further tightened for the Fed since their July rate increase.

6:09There's no reason for them to hike again if these rates stay at these levels for a sustainable period of time. Yeah, we've been discussing the bond volatility a lot this week. I mean, that seems to be really driving so much of what's going on. We've had some great conversations. Here's a highlight of some of them, and then we'll talk on the other side. How is the U.S. economy going to perform over the next year or so? I'm relieved to see Maggie finally. I don't know if you've noticed this as well, but the insistence on the soft landing seems to be softening slightly. And that's coming as a huge relief.

6:47I've been saying for some time we are going into a recession. I'm trying to get a little bit ahead of that and buy when there's a little bit of blood in the streets. And I think that we're getting, you know, within the seventh, say within the eighth or ninth inning of a tradable bottom in the S &P. It may not be today, but I think that it's we're there within the next couple of sessions, quite honestly. Today, the TLTs or the long bonds actually closed about one and a half percent higher where the junk bonds only closed a half a percent higher. So what's so interesting about that one stat right there is that people are so much cheering for the TLTs to rally and the yields to fall.

7:26But I always say, be careful what you wish for in this case, because that would actually flip if somehow those long bonds started to outperform the junk bonds. That would actually be a risk off scenario and could be a signal of recession. You know, where the issues are, in my opinion, are in the non-bank financial sector, the unregulated financial sector, folks who don't have access to the federal home loan banking system, folks who don't have access to the BTFP. What if we see a broad-based reduction in credit intermediation across the non-bank financial sector? Now, we are way too soon to make that kind of call in terms of what we could see from a broader financial contagion perspective.

8:04But if we actually start to see growth really slow materially and the credit, that the animal spirits of these actors in terms of their willingness to win the lend to themselves and the lend to private sector borrowers, that's where you can have a real serious bank blow up, in our opinion. And so it's so great to look back. And I'm so happy we're able to get that clip of Tony in talking about sentiment. He was so prescient with that call. It was Tuesday. But, you know, when you've done it a long time, you just put your finger in the air and there was a feeling that he was expressing that he could kind of feel like things were maybe getting to the point.

8:37We saw the turn today. Remember, he's short term, though, so he's now going to kind of probably reevaluate after the action today. But, Peter, I wanted to ask you about some of the concerns that Dale expressed. We've had this relentless move up in Treasury yields. And, Brian, if you could pull up the chart on the platform of the 10-year, and, Peter, you referenced this before. I mean, that has just been a march higher since the spring, sort of April, May. Can the global economy and the credit markets handle yields at these levels? So way back when, before central banks started to experiment with negative interest rates, zero interest rates, and QE and so on, the level of the 10-year yield typically, give or take, mimicked nominal GDP.

9:29And that was thrown out the window. So on an historical basis, you can say, OK, well, rates are back to where they should be. The problem with that analysis right now is not where yields are today, but where yields are today relative to where they were the last 15 years. Right. And that is the problem because you have and I've said this many times to you before that. Every day, somebody's loan is coming due and it's being repriced if it is being repriced at a much higher interest rate than the rate on the loan coming due. And that is a continuous problem. Now, for those that have had floating rate debt, well, they saw the impact immediately.

10:18as whatever borrowings they had outstanding repriced rather quickly. But for those that have staggered out maturities, whether you're a big business or even a small business that borrowed money from a bank at a fixed rate for a short period of time, maybe even a couple of years, that repricing is going to really sting. I mean, you have people, you have businesses that have three, three and a half percent loans coming due this year, next year, the year after that are going to reprice at nine percent or more. Hey, everyone, we're going to take a quick break right now to hear a word from our partners.

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12:04That there's no way even a conservative really, you know, would be able to sort of account for something like that, you know? Right. And if you look at the and I the 9 percent, so the high yield index is yielding about nine and a half percent. If you're a triple C credit, those yields are 14 percent. Now, granted, it's not as high as the 16 % that we saw when the S &P was at 3 ,600 last October. But imagine paying 14 % on a loan. So balance sheet matters a lot. And we sort of got a taste of that over the past couple of weeks when it seemed that any company that had a notable amount of floating rate debt or had an over-levered balance sheet, the algos sort of went after them.

12:54And I think that that is really important to focus on now. Just to elaborate more on this. So a lot of floating rate debt out there is SOFR, or used to be LIBOR, plus. And if you think that the Fed is done raising short-term interest rates, well, maybe the cost of capital is not going to get any worse. Now, that said, if your loan's coming due, your bank may say, OK, SOFR plus 300 instead of SOFR plus 150. So it may get worse. But for others that have floating rate debt that doesn't mature for a couple of years, maybe those rates have stopped going up. But the rise in long-term interest rates, it's going to have its impact.

13:44And it's not just on the refinancing ability of companies. It's what economic behavior is not taking place because of this rise in rates. The level of existing homes that we saw in the mortgage bankers data on Wednesday hit its lowest level since 1995 in terms of the pace of transactions could be existing or new. But for someone getting a mortgage, most of it is existing in that data set. So you're talking about 28 years that the last time we were at these levels. And because during COVID, a lot of people invested in their homes, they don't need to repeat that. So for every home that's not transacted means that there's less stuff getting done in a new home.

14:32There's less wood floors being put down or carpet or less walls that needed to be painted and so on. Who's going to build a commercial real estate project right now? You can be sure that there are a lot of pencils down on potential deals and whether that's an office for obvious reasons, but it's industrial. It's happening in multifamily, which have been the areas of strength in real estate, but a lot of projects that are not getting done, which affects immediately the construction of them, let alone the ongoing serviceability of them thereafter. What business just can't get a bank loan because the banks want to charge you 10 % and you can't come up with enough equity?

15:18So there's a long string of things. And of course, I'm just talking about the US, but you look at Europe. I mean, Germany is basically in a recession. The UK is on the cusp of one because they are having to digest this sharp rise in the cost of capital, particularly in a lot of the housing markets that have been very reliant on floating rate debt, particularly in Australia and Canada. So we had a really interesting comment. So this came up a lot this week, too. We've had Treasury yields shooting up. We've had the dollar shooting up as well. I wanted to flag a comment from one of our community members, Chang, who wrote, with the US dollar continually strengthening, I'm amazed that no one's talking about how it's going to make debt servicing of foreign US dollar denominated debts that much more expensive, basically ever rising risk of defaults worldwide, especially China.

16:13We were just talking about businesses just not being able to afford, you know, going to the credit, getting a loan, getting the money they need, tapping capital markets. Are we going to, if you marry that with this, you know, if you're abroad, the issue of this strong dollar, are we facing the threat of defaults for either one of those reasons? Well, the dollar is still well off its highs of October 2022. The dollar index was about 114, I believe, and now we're 106. So while we've had a nice rally in the dollar, it's still well below that level, previous level. And if you look at emerging market currencies, they've certainly weakened over the past month plus, but they've also had a nice bounce.

16:59So I'm not as worried about that. And I do think that with the Fed, with the bond market sort of doing the Fed's work, that we're going to probably see some give back on the dollar. I think it's important also to tie the dollar into the Treasury market, because a lot of people are all trying to pinpoint reasons why we've seen this very sharp rise in long-term interest rates. And everyone's got their own theory. And certainly, the supply story is a main factor. And I believe in that supply story, where the supply story didn't really matter for 40 years plus, and now maybe it does. But the US is not going to be treated as an emerging market banana republic with this rise in interest rates, unless the dollar breaks down.

17:50So that has obviously not happened yet. The dollar is benefiting from the interest rate differential and the rise in long-term interest rates. What you don't want to see is a rise in long-term interest rates and weakness in the dollar. That's when you become like an emerging market. And we're certainly not seeing that just yet. And the dollar, you know, it's trades just OK against, like I said, against other emerging markets. The strength has really been against the yen, the pound, the euro, and less so elsewhere. Yeah, which is great to point out. And we've had guests on before who say they don't love the DXY for that reason, because it's so heavily weighted against those major currencies.

18:32They don't feel like it's always representative of the broadest basket it could be. We have a question coming in about, let me see if I know who, from Claudio. Does he think the service is the recession trigger? I think the service sector is what they're talking about. Are you expecting a recession? Maybe we should start there. Well, there's no doubt we're going to get one as the economy globally fully absorbs this rise in interest rates. And so it's a matter of when it technically happens, because the impact of higher interest rates is sort of a rolling event. But I talked about the pace of housing transactions being at a 28-year low.

19:21Well, I would consider that a recession in existing home sales, again, in the pace of transactions. Manufacturing is essentially in a recession. global trade is essentially in a recession. What's keeping us afloat is consumer spending and parts of the CapEx stack. You listen to a lot of retail calls and earnings releases over the past month plus. That US consumer seems to be on very shaky ground, particularly lower to middle-income people. I mean, Conagra, which, full disclosure, is a stock that we own, they reported earnings yesterday. And when you hear the CEO cite some of the reasons and some of the consumer behavior changes, it was quite sobering, where families, and they probably get this information from surveys that they do with their customers, where families, when they're prepping meals, it's not just one person prepping a meal for one person.

20:29They're prepping a meal for the whole family to last the whole day. They're being very focused on not letting things go to waste in their inventory and their pantry, and also being very focused on, like I said, not letting things go to waste. So when you see this kind of behavior, it tells you that the The consumer is really focused on every penny. You heard from Costco this week when they came up their monthly comps, continued strength in food and sundries, continued weakness in more discretionary stuff. So this is a broad trend. And I do want to bring up Walmart, because Walmart somehow blamed those Zempics.

21:15RAOUL PAL You know, you're reading my mind, Peter, because I was thinking in addition to everything else, you don't buy that. You don't think it's like, oh. Yeah, to me, that's BS. I heard somebody on TV yesterday that said by 2030, maybe 3 million people will be on Ozempic. We have a country of 330 million people. So there's no chance. So I think Walmart is seeing a softer consumer. And that just happened to be a convenient excuse. 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.

21:56That's hilarious. I'm sure most of you saw it, but Walmart said that because so many people are now getting on Ozempic, which was a diabetes drug now, is being widely used for weight loss, that people are buying less food. If they were to spun that again, you can spin that another way. Well, people are losing weight on Ozempic. They're going to buy new clothes. They have to buy new clothes. Exactly. Which Walmart also carries. I mean, I'm not saying we all clothes shop at Walmart, but yeah, that's interesting. That caught my eye too. I thought, oh, that's an interesting comment. That seems very quick to be able to sort of run the numbers and figure out, pinpoint that's exactly why.

22:38Yeah, jumping on the news flow. So another question coming in, this one's from Michael Jordan. So those of you, Peter, you won't be aware of this. So I'm explaining it every day. But as we migrate people over to the new website, which is fantastic. Check it out, everyone. In the process, until we migrate back to one website, we're sort of running two at the same time. The comment section, people's names are coming up as serial numbers, like a long serial number. It's so frustrating for everyone. So Brian has been having some fun in naming people just famous people, like what he wants to. So this one's from Michael Jordan.

23:18Peter, when do you think the Fed will intervene at the long end of the US Treasury yield curve, yield curve control, or some other alphabet soup? What would trigger that sort of Fed intervention? 5 %? Is there a number that you're looking at where you're like, okay, this is going to unnerve Fed officials and might force them into action? So a really good question, because in a way, central banks and the Fed, the ECB, they're losing some control of long end of the yoke curve. Theoretically, in their eyes is, OK, we have inflation. We are going to sharply raise interest rates to control that inflation, and that will allow us to keep in check longer term interest rates.

24:08Because if longer term interest rates theoretically just trade off growth and inflation expectations. If they have confidence in us as the Fed to control inflation, then we can keep a good handle on long-term interest rates. Well, they didn't foresee a big, sharp increase in long-term interest rates over the past month plus. I think it correlated. It really started when the BOJ widened yield curve control. It did it on July 28th. You can look at a chart of the 10-year yield, and you can see right after July 28 is when the 10-year yield in the US started to really spike and where European rates jumped as well.

24:43So at what level do they respond? It's one of those things, and Powell said this at his conference when he was asked a few different questions. He was asked, basically, where's the balance sheet going to go on the downside? Well, we'll know it when we see it. What's the neutral rate? Oh, we'll know it when we see it. And at what level will they step in? Well, we'll We'll know it when we see it. And it's one of those things where if things get disorderly, and how do we define disorderly? You get a couple more weeks of this rate move, and all of a sudden, we're talking about a 5.5 % tenure in a couple of weeks.

25:21That can be enough for the Fed to at least make it clear that they're not going to hike in November. So that's the sequence of things here, is that the Fed's first thing they're going to do is, they're going to tell you that they're not going to raise interest rates, because the bond market's done it for them. Then they're going to wait to see, because then the question is, OK, let's just say the Fed is done. Are we going to continue to see a rise in long term interest rates, because maybe the long end doesn't want them to be done, or for other reasons it's going higher? Or do we get a rally in long-end yields when the Fed acknowledges that they're done on the short end?

26:00We'll have to see. So a lot of this is sort of play-it-by-ear type central bank behavior. Because if the BOJ gets rid of negative interest rates, let's just say, and we get another global rise in long-term interest rates, is the Fed going to try to fight that? I don't know. It's a very difficult thing. I think with yield curve control, which was part of the question, that's a really difficult experiment because you're basically fighting the market. Yeah. I mean, it's so hard. The Bank of Japan's been doing it. And once you declare you're fighting them, they're going to come at you with all they have, right?

26:38Back to George Soros, because they know at some point it's hard to sustain. Right. The US Treasury market is so big that if the Fed wanted to really take on the market, the dollar is just going to tank, which then creates its own problem, because then oil is going to go to$150. And then what's the Fed going to do? And look at the Reserve Bank of Australia. They experimented with yield curve control a couple of years ago, and that blew up in their face. So it's a very dangerous thing. It's a roach motel that I hope we don't see. But that said, I'm sure if things get disorderly, the Fed will do what the Bank of England did.

27:24We'll step in and try to calm things down and hope and pray that the market doesn't test them again thereafter. It's very interesting because right at the beginning, when you were talking about the bond markets doing the work for the Fed. That's exactly the question I had. Are they doing work for the Fed or is the Fed losing control of the bond market? Well, it's a combination for sure. Just by the nature of the average 30-year mortgage rate going up 100 basis points since the July meeting, well, that's a lot of tightening. And housing is the most interest rate sensitive part of the economy. That's a lot of tightening.

28:02So it is the market doing the tightening for them, but not because the Fed necessarily wanted them to. Right, exactly. So for now, maybe achieving the aim, but the question is, can they call it off really? A couple of people noting that we've had NatGas up very strongly. Wow, we have so many comments. I love the conversation that's happening on the chat, on the platform. But yeah, 15%, Ralph saying in five days. And David has a question from YouTube. What about energy, especially if Europe has a hard winter? They got lucky last year without Russian gas. That's true. By the way, Andreas and I talked about this.

28:45Andreas has been taking a look at this. We have a whole show on the platform we did recently, and we'll keep revisiting that theme, David. So it's a great thing to flag. But Peter, that's got to be a worry for Europe. Yeah, definitely focus, particularly now that we're sort of in the shoulder season where you're not really using your AC anymore, and you haven't turned your heat on. So you have more subdued demand for natural gas. And maybe this is sort of a dress rehearsal that we're going to see a reversal this coming winter from the mild one that we saw last winter. So it's definitely a big focus.