Peter Boockvar: How To Position Your Portfolio In The Face of The Iran War

0:00The straight is going to reopen whether there's tolling or no tolling. The straight is going to reopen. So what is the world going to look like post that? Where does oil go back to? Well, I argue it doesn't go back to$65 WTI. I just don't see that happening because I think there's a mindset change here that this caused. You're going to see global stockpiling for many months, quarters, maybe even the next couple of years of a lot of key things. 2025 was the industrial and precious metal bull market. Now we're in an energy commodity bull market. And I think ag will be the next commodity bull market after that.

0:38And I like to remind people that 75 % of the world's GDP takes place outside the US. 96 % of the world's population lives outside the US. But if I'm right, that the AI tech trade just slows down. It's not a bear call. It's just saying that the rate of change, the level of outperformance is going to slow. I do think it's important that investors should look globally because there are just so many good opportunities outside the US that I find attractive. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge.

1:21The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today is the CIO of One Point BFG Wealth Partners and the editor of the book report on Substack. He's one of the most meticulous and independently minded strategists and economists I know on the street. And I'll give him this accolade, perhaps the most helpful to someone either on the buy side or in the media, trying to have the hardest bits of work done for them.

2:12So, Peter, it is great to see you. Welcome to the Master Investor Podcast. It's really an honor to be here, Wilf. And I've been a big fan of yours for a while and listening to all your pods and all the other stuff that you've done. And it's really great to be here. Well, right back at you. And as you know, I've been a big fan of the book report for a long time. And that's spelt, guys, listening, B-O-O-C-K report. We'll definitely list where people can find it. It's really well worth subscribing to our listeners. And then what is one point? Because that's new since we used to talk to each other regularly on CNBC.

2:51So the firm was originally Bleakley Financial Group. Bleakley was the last name of a gentleman 40 years ago who left 35 years ago. But the firm kept his last name. And then we brought in a minority investor last year. And we felt that it was time to go away from somebody's last name to an actual brand. And so it's the same firm, just rebranded. It's a pretty straightforward wealth management firm with about 60 different financial advisors in about 22 different cities, with many of them in New Jersey, where I am based. Let's start diving in, Peter, to some of your key advice for our listeners at the moment.

3:34And I'm going to put a pin in the Iran war, if we can, first of all, as crazy as that might sound. But you were already someone who thought the risk of inflation was much higher than people were pricing in even before the war. So in order to really dig deep into inflation, I think you do have to go back to the 2020, 2021, because we know what happened. And we saw the spike and we were naturally going to have a fallback as the year of year comparisons got tougher. A lot of the supply chains sort of opened up again and we had some normalization between supply and demand. But we were, of course, never able to get back to that arbitrary two percent level.

4:18And the interesting dynamic currently right now is we're seeing this deceleration on the services side. And I'm going to talk pre-war and then we'll talk post-war. Pre-war, the deceleration on the services side, because rental growth continues to slow in the U.S., and that's the main component of that part of CPI. But the good side has inflected back higher again, and the good side is where most of the disinflation took place after the 2022 peak. Now, can it be some tariffs? No doubt. But also just a normal rebound and also some friction just in the economy that leads to that higher goods price inflation.

5:00And then, of course, now you throw on the war, which is only going to exaggerate this. And it's important to have the setup also going into the war. If you look at the February data, particularly with PPI, it was hot. It was well higher than expected. core goods prices in particular, which I was just talking about, rising at north of a 3 % rate. And on the import price side, we saw that February number also rise more than expected. So the setup going into the war was still very persistent inflation. And I want to really emphasize here because some people, they define their inflation outlook based on what the consumer price index looks like.

5:43If consumer price indexes are falling, well, then we should be okay. If the rising, we're not. But just because a price increase doesn't show up at the consumer level and instead is at the producer level and gets eaten by margin, doesn't mean that price pressure all of a sudden disappears and that a central bank should ignore it. And that was the perfect example that we saw, as I mentioned, with PPI being hot and maybe the CPI not as hot. Price pressures are still here, whether it's borne by the producer, the company, or the consumer, if it's been able to pass through. Bottom line is inflation is still rather persistent.

6:25Now you layer on energy. And it's not just looking at oil and gas prices and how that flows through to the CPI and the producer prices. It's also the drip that takes place throughout the economy, transportation, airline fares, and a variety of other things where petro products show up as a raw material in a lot of finished goods like plastics and packaging and so on. So there is a ripple effect. And I know the conventional inflation is, yes, if you have too much fiscal spending monetized by too much monetary policy easing, that's your classic case of inflation. But from a consumer standpoint, a business standpoint, a rise in prices, whatever the cause is, is inflationary and hurts.

7:13And then let's add on the war on top of that. I mean, I guess my question on this is, even if it did suddenly end tomorrow, which clearly is less than likely anyway, but even if it did, are there already significantly inflationary pressures added on top of that setup you just outlined that are also being underpriced? Just the six weeks of war that we've already had will boost inflation more than people are currently pricing in? I think so. And I think it's important to think about what is the world going to look like after this ends, because it's going to end. The strait is going to reopen. Whether there's tolling or no tolling, the strait is going to reopen.

7:53So what is the world going to look like post that? And a lot of things will normalize. There's no question. It'll take time. It's going to take a couple of months. I mean, when you think about just on oil, only oil, we're losing, what, 10 to 12 million barrels a day if you sort of net out the gross number with the pipeline increase in Saudi Arabia and Oman has one and a few other outlets. You're still losing, call it 10 to 12 million barrels a day. Well, we're a month into this, so that's 300 plus million barrels that have not flowed through. And, of course, aluminum and fertilizer and naphtha and helium and so on.

8:30So let's assume this normalizes. Where does oil go back to? Well, I argue it doesn't go back to$65 WTI. The fertilizer prices fall back down again? Well, I'm not sure because that also means that sulfuric acid prices need to fall a lot. It also means ammonia prices need to fall back to where they were pre-COVID. I just don't see that happening because I think there's a mindset change here that this caused. And you thought that maybe after COVID, people would have been much more diligent with stockpiling supplies, but there's only so much you can do with that. But I do think with this sort of second iteration of supply disruptions, you're going to see global stockpiling for many months, quarters, maybe even the next couple of years of a lot of key things, whether it's strategic reserves in crude oil that were drawn down in the U.S.

9:26that are going to be rebuilt here and probably built up in a lot of different places. Make sure you're stockpiling fertilizer, even critical minerals like copper and nickel and lead. Not that that is necessarily being disrupted out of the street, but hey, what happens if there's some supply disruptions that I can't get my hands on? What happens if something happens in the Congo? What happens if Indonesia halts exports of copper? I need to stockpile this stuff. So I do think there's going to be an underlying bid to a variety of commodities, even after this war ends. that is going to show up in producer prices and consumer prices.

10:02You can draw a chart over the last 20 years, particularly on the Royal Industrial side, the CRB Royal Industrials Index relative to CPI, and they pretty much mimic each other.

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10:39Let's talk about GDP impact, Peter, because, again, one wonders if, certainly if you look at the S &P 500, you know, only down 5 % or 6%, for example, since the start of the war, where people wonder whether this is being underpriced a little bit. We are not so much in the US, but in other major economies, a lot in Southeast Asia, Korea, Japan, Australia, now Europe and the UK, talking about actual shortages, not just the inflationary impact, actual shortages. In the UK and Europe, the eye of the storm is aviation fuels. How much does that affect GDP for an economy? Even if it's temporary, and even if it's not all fuels or all commodities, is the GDP impact being underpriced?

11:27Well, that's a really important point because we are shifting the conversation from price to volume. And if this doesn't reopen fully within the next couple of weeks, you're going to hear more and more stories about COVID-like shutdowns. Whether the story I read that the UK sort of got their last shipments of jet fuel, and then there was a story that Italy is now rationing. And we're seeing rationing in a variety of other countries for a variety of different things. You have countries that are going from five-day work weeks to four-day work weeks. And this is going to continue if this goes on.

12:03And it is rather scary when you think about sort of where you can extend this to. Now on the food side, which is obviously very impactful in terms of something that we use every single day, at least there's some deferring out of the food supply because the planting season in many countries are going on right now. But we don't really harvest that until, call it September, October, November. So at least on the fertilizer side, but jet fuel, if we can't travel, NAFTA, which goes into making ethylene, which is a petrochemical that's making a variety of different things. If I can't get packaging, well, then how can I ship anything?

12:44If I can't get my helium, how do I cool down my semiconductor equipment, that you really roll this out and you let your mind go to different places. And it's rather scary if we don't start seeing shipments ASAP. So let's talk about some of the potential commodities that might move off the back of this if they haven't already. I want to start with gold and silver. I mean, you have been a gold and silver bull for as long as I can remember. It's been a fantastic call. You also held your nerve last summer. I didn't. I took my profits, but that was all right. And talk me through why you were bullish gold and silver from years ago and whether, again, pre-war, it did overrun a little bit in the short term and why it hasn't performed better since the war began.

13:33So when I started really focusing on gold was when, in the early 2000s, when Greenspan experimented with 1 % Fed funds rate in response to the tech bubble crash. And a 1 % Fed funds rate was nothing we really ever saw. And it was an experimentation too with negative real interest rates. And that is a major driver in the price of gold is where real rates go, not where nominal rates go, but where real rates go. And he felt that at the time, negative real interest rates was the right policy. Of course, that led to the housing bubble, Bernanke experiment. There was zero, QE and so on. And the Eurozone decided, well, hey, zero is a great idea.

14:15Let's do even better and go to negative. And in that kind of environment, when you're talking about owning a piece of metal that doesn't yield you anything, you have to have reason to buy it. You have to have reason to buy it because maybe it preserves its purchasing power better relative to a fiat currency, whether it's being debased by what these central banks are doing and so forth. Now, the last leg of the gold bull market really began in 2022, as we know, when the EU and the U.S. froze half of Russia's central bank reserves. And it was a wake up call to all these central banks around the world, particularly China.

14:55Just imagine the look on Xi Jinping's face when he owned, at the time, probably$1.2 trillion of U.S. treasuries, and we in the EU just froze half of Russia's reserves. He said and tapped everyone on the shoulder, OK, let's call time out on buying U.S. treasuries. We need to own more gold that we can store on our own land, in our own vaults, and no one's going to wake up and not like us one day and freeze our reserves. So there's been this major transition out of U.S. dollar assets into gold. Now, the U.S. dollar is still the reserve currency. It's still the predominant transaction currency. It's still the biggest reserve currency.

15:35But there's been diversification, and gold has been a key beneficiary of that. And what gold now also has become, and then I'll get to its action in late last year, early this year in the parabolic movement and the war, it's become a settlement currency. In other words, if China now is going to start buying their oil from Saudi Arabia in yuan, if they're going to buy their oil from Russia in yuan, and then Saudi Arabia and Russia are going to take their yuan and then buy product from China, well, there's going to be many times balance of payments and balances, and gold is going to sort of be that settlement currency.

16:12So as more transactions take place and currencies outside of the dollar, gold, I believe, becomes more and more important as this central bank settlement currency. Then you throw in, of course, the parabolic move late 2025, where silver joined the party. Now, historically, when silver eventually joins the party, ironically, that tells you, at least in the short term, that's probably the latter part of the move in precious metals. And I think we saw that. Silver went parabolic. Gold almost did. We sold most of our silver in that move because I've been doing this long enough to know what a parabolic move looks like.

16:49And I think in the first two months of this year, actually more February, because January we continued the rally, gold, silver was due for a pullback, was due for a consolidation and digestion of that incredible run. And then, of course, you throw in the war. Going into the war, there was a lot of non-dollar trades out there where the dollar actually became the carry trade. You know, we talk about the yen for years being this carry trade currency. Well, the dollar became that. Not necessarily because dollar rates were so low, but because there was this global diversification taking place. You saw international stock markets do incredibly well last year.

17:28And people thought, well, this will continue. I'll sell my dollars and I'll buy gold and I'll buy international stocks. I'll buy emerging market local currency bonds and have non-dollar assets. And then, of course, when the war starts, everyone wants to get their hands on dollars. That trade unwinds. gold falls silver falls the international markets fall people focus on okay who are the bigger uh energy uh importing countries let's sell their currencies and and so on so here we are today gold settling out at call it forty seven hundred dollars an ounce and okay where does it go from here i do think we still have a few more months of consolidation i do think also we've thrown now a new thing where gold was bought for rainy days from the perspective of central banks.

18:15And now we have a rainy day. So you have Turkey that's selling some of their gold, mostly via a swap where they're taking in dollars, using it to buy lira to prop up their currency. There was talk that Poland may be interested. And Poland's been one of the largest buyers of gold since 2022 when Russia invaded Ukraine. There was talk that maybe even they would trim some of their gold to finance a buildup in their defense purchases. So gold could be a little bit of a source of funds here for the rest of the year if oil prices stay elevated. But it doesn't take away from that big-picture status that I think gold has achieved that still has one last leg of this bull market.

18:56So if you look at it from a baseball game, I think we're maybe in the seventh inning of the gold bull run. acknowledging the timeout that it's now called, but maybe a setup for another run higher at some point this year or next year. What's your view, before we come back to the war on oil and energy companies, on platinum and palladium, particularly platinum, which is, how does it historically track gold and silver? Is it next to run up or are they not linked in the same way that gold and silver Well, historically, and we'll take platinum, because palladium, 80 % of the use of palladium goes into the building of a catalytic converter, which we know goes to an automobile and to limit the auto emissions.

19:43Whereas platinum, about 40 % of its use is for catalytic converters. The rest is for jewelry, tableware, electronic products, and so forth. So platinum, to me, is more interesting because of those broader uses. and there was a time when EVs were really picking up steam in terms of its traction and people thought okay everyone's going to drive a full-on EV and why am I going to need a catalytic converter therefore I'm not going to own platinum and palladium. Now to your question of its relationship with gold well historically speaking platinum traded at a level per ounce above gold. Then we reached a point where people realized you know what full-on EVs are just not the most efficient form of the vehicle.

20:26And actually hybrids are much more practical, much more efficient, and you don't have the same range anxiety or not any range anxiety that you would with the EV. And it's also much more energy efficient. Well, a hybrid actually uses as much, if not more, platinum per vehicle than even an internal combustion engine. So I think that is what gave platinum a big leg higher last year, and also this desire to close the gap in its price relative to gold. Also, who were the three largest producers of platinum in the world? South Africa, Russia, and Zimbabwe. Not really the most reliable suppliers of this metal.

21:12And again, in this world of minerals that are considered critical, minerals that are tough not necessarily to get out of the ground, but to source from the producers of it, where politics also sort of cloud the ability to get it out of the ground. These metals have become literally, figuratively precious. And I think that after this pullback that we've seen in the platinum and palladium group, that they're going to be buys again. And we're five years into supply shortages relative to demand in platinum. Well, it's interesting hearing that as well on the location of where you find it, those countries.

21:57I think it's the focus, even though they're not involved in this latest war, the focus will be on those types of topics again.

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22:37Let's talk about energy companies. Again, you've made some great calls here. You've been long energy companies and they've had a great period. Again, great period even before the war broke out. They've had another leg up off the back of it. Are they still cheap or not? Well, it's interesting because owning these in our portfolios prior to the war and then seeing the run up, it's very easy to buy a stock. It's very easy to invest in something. The more difficult position to be in is when to monetize it. So I think about that question every day now. Now, at$60 oil, I argued that it was one of the cheapest assets in the world.

23:1820 years ago, oil was$60. And here we are 20 years later. This was pre-war when it was again. And I was seeing a couple of things that led me to believe that I didn't know the timing or catalyst for when a move would go up, would take oil prices up. But I felt like we were sowing the seeds. And that was particularly U.S. shale. When you look at over the last 10 to 15 years, U.S. shale has been the major swing producer, non-OPEC plus, where U.S. shale provided about 85 % of the world's supply outside of OPEC in Russia. And if you look at the production numbers that took us from 5 million to 14 million in the U.S., they're now flattening out.

24:01And a lot of the major basins, they're now rolling over. So I thought, OK, this is really interesting. And oil is still stuck here at 60. and a variety of other reasons. On top of that, we had bought a bunch of oil stocks. And of course, not predicting the war, you get the war, you get this rise. So to your question, I do think there's no question that when this ends, the street reopens, oil prices are gonna have a nice correction. But as I said earlier, we're not going back to$65. To me, 80-85 is the new 60-65. And if you look at the futures curve, even today, where the front month in WTI, looking at the May contract, is trading at around$110 per barrel.

24:42The December contract is trading around$7172. So on any pullback with these oil stocks, I would be, for those that aren't long, I would be buying this pullback. Energy as a group, as a percent of the S &P 500, which got to around 3 % pre-war, which historically speaking, it's rare that it's ever been that low. Now it's maybe closer to four with the rally and the self and the S &P. It's still very low. And I think it can get to six or even seven when all is said and done. And you look at the natural gas side. Well, U.S. natural gas and U.S. LNG exports are going to be even more important, particularly with the supply disruptions in the Qatar facility in the Middle East, where we know 20 % of their LNG is going to be offline for three to five years.

25:37A few pit bears to pick up. I want to ask you about the European oil and gas names. But firstly, that disconnect between the current oil price around 110, for argument's sake, and the December price, the futures price at 70. Has it ever been that wide a gap? And do you think one of the two prices is wrong? And which one is it? So it's rare. I can't remember the last time it's been other than a major geopolitical event. I have to see where it was right after Russia invaded Ukraine to see how wide it got. I'm of the belief that the back end of the curve is going to catch up. Now, I want to make clear with listeners that the futures curve, while it's sort of predictive in a way, it's not predictive past today.

26:25It's telling you where they think oil would be in December today, but this can very much change tomorrow. So don't look at the futures curve and say, okay, I'm going to breathe a sigh of relief because the market's telling me that oil is going to be 70 by December. Well, that's only what they think today. It can change tomorrow. So I do think, though, that that back end is going to play catch up. And when the war ends, and again, it will, and that trade's going to reopen, hopefully within days, I still think that 80-85 is going to be the new normal. And a lot of these energy companies that were making money at 65, they're going to make a lot of money at 80-85.