ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Wednesday, July 21st, 2021. I'm Ash Bennington, joined today by Jack Farley and our guest Peter Boockvar. Welcome, gentlemen. Here's what we're looking at. The story of the day that I've got my eye on is the rebound continuing. Looks like equity indexes up across the board big winner on the day once again, second day in a row, Russell 2000 settling at 2233 up 40 points, 39.63 or up 1.81% on the day. Jack, what are you looking at?
JACK FARLEY: Well, earnings season is here, Ash, with Chipotle surging a whopping 11% today on strong digital sales and Netflix down 4% because it failed to meet expectations on net income. Overall, Ash, earnings have continued to beat expectations at quite a fierce clip. Arguably challenging, the narrative that the reflation argument is under attack. We'll get into that. What else is on your radar, Ash?
ASH BENNINGTON: Jack, I'm looking at the bond market 10-year yields out. Once again second day in a row, yields rise, prices fall. Looks like right now, 1.9-ish on the 10 Year Treasury yield. Peter, let's throw this over to you. You've had some interesting analysis of both of these markets, the stock market, bond market, you're looking across assets. You've called these markets bipolar in a recent Boock Report. Peter, how do you see what's happening right now in the context of the day's events?
PETER BOOCKVAR: Well, it's amazing how we went from Monday, where Delta was the main worry. It just disappeared in a day being yesterday and then carry through to today where everyone piled into the reopening trades again. It is, as I wrote, bipolar, and it's confusing too. I'm of the belief that we're going to power through Delta and that it will certainly lead to an uneven back half of the year, possibly, around the world as things get disrupted. They probably will, but I feel like that we just have no choice but to work through it and that I don't want to get distracted by it from what I believe is really the main stage of inflation, where interest rates go and how central banks respond to that. To me, that still remains the most important factors in trying to figure out where markets go and the back half of this year.
ASH BENNINGTON: Jack, jump in. I know you're a close reader of the Boock Report. Questions for Peter.
JACK FARLEY: Well, Ash, you are hosting this, and Peter is the guest. I'm really just tagging along, but I have been reading Peter's report, the Boock Report. I've got my eye on inflation globally with South Korea posting its producer price index which jumped 6.4%. Did bond yields go up? No. Likewise, in Germany, we had really some stunning numbers out there. Let me just pull this up. Which is that in June, they jumped 1.3% month-over-month amounting to a six-month annualized increase of 13.2% for the producer price index. That is what producer's companies are paying for the goods that they produce, which they ultimately sell on to consumers.
Ash, that is the highest monthly increase since 2008. That by the way is in a country that has some of the oldest people on earth. If you look at the median age, I think it's the fourth oldest on age which of course, advanced people, populations that are older tend to be more deflationary because they want to buy bonds and they don't spend as much money. I've been reading a lot of Peter's works, but I'm seeing a lot of signs that the inflation narrative is definitely not dead.
ASH BENNINGTON: Peter, to Jack's point, what are your thoughts right now on inflation?
PETER BOOCKVAR: Well, the interesting thing that Jack cites is that at the wholesale level at least, inflation is a global phenomenon. In contrast though, it's been more idiosyncratic on the consumer level. Japan, for example, printed their national CPI number just the other day and it was still pretty muted. We are seeing that in other countries and China also, depending on you can believe the data or not. Where it's more pronounced in the UK. It's more pronounced in the US. I do think it's going to pick up more steam in Europe at the consumer level.
I know everyone likes to harp on lumber prices and used car prices and cherry pick out what they don't like within CPI and say, see, it's just those. Tin for example hit a record high the other day. The CRB Index Raw Industrials, actually the CRB Raw Industrials Index, just the other day hit a fresh 10-year high. I don't think people appreciate what we're about to see in the rent component of both CPI and PCE. CoreLogic today said that single family home rental increases are running at about 6.5% year-over-year. That is going to surprise on the upside.
You show me a decline in used car prices, I'll show you a jump in rent. Since housing is basically 1/3 of CPI, that will trump in accordance any moderation that we're going to see then use core prices. I think cherry picking these core prices is missing the point. Every single good that is manufactured in this world, you're seeing major price pressures, whether that is because shortages of key inputs to that, higher commodity prices, and particularly very aggressive shipping cost increases where the cost to getting in containers up five to six times. It just to say it's only one area because of a shortage of semis. There's a shortage of essentially everything.
Now, we're also going to see what it means for wages, and how companies are going to pass that on. Just some of the conference calls that I've listened to the last couple of days, there's really no message from companies that yeah, things are about to calm down a lot. Maybe there's some chatter that-- for every auto executive saying, yeah, I'm seeing an increase in semi supply, I'm hearing about another factory that has to shut down.
I think that this drags well into 2022. As I've said on the show before, there's nothing transitory about services inflation. It is always higher. This debate is really about where the good side shakes out and I'm also of the opinion that just in time inventory is dead so we're not going to go back to the same structural inventory situation that we sat pre-COVID and decades pre-COVID. If we're not going to adjust in time, that means more inventory sitting on shelves, higher working capital needs, lower productivity, and chances are higher prices as a result. Don't just look at a few things. Again, I want to highlight rent, because that's going to start to reflect the double-digit home price gains that we're seeing right now.
ASH BENNINGTON: Well, it's a good thing I just signed my lease. Let me ask you this. When you're talking about these changes in structural supply chains, is the idea here that just in time inventory showed its weaknesses during the pandemic through shortages and the inability of supply chains and distribution chains to get those goods to consumers when they were most needed, and now we're going to see more inventory being held as a buffer which will create higher working capital needs and be a drag on earnings?
PETER BOOCKVAR: That's exactly right. Just in time really just assumed that every piece of that assembly line was well greased, and that there was not going to be any shortages. That ship coming from Hong Kong to LA was going to make it on time. If it got backed up, maybe it would be backed up by a day or two because of bad weather and nothing more than that, instead of being backed up for weeks at a time or even more.
You see the negative economic impact. A lot of this is now happening which gets to the whole stagflationary discussion about whether we are in that situation and how long that's going to last. If you're a home builder, and you can't get your HVAC system because there are delays, well then you can't finish the house. If you can't get electricians to wire the framing, well then you can't put up the sheetrock and everything gets backed up and bogged down. That's clearly what we've seen. Then that leads to shortages and leads to higher prices and hearing stories and talking to people that we've now reached a point in the housing market where in some markets, consumers are saying, no more, I can't handle these price increases.
Now, private equity, they're all cash buyer that is buying a house because they want to rent it. Well, they're a little less price sensitive, but for that natural family that wants to live in a house for that first time buyer, they're saying enough is enough. We saw that in the Michigan conference last week where buying [?] both for a home and a house were back the levels last seen in the early 1980s. Price matters. Inflation is not so transitory. I think it's going to lead to, I wish I was a fly in the wall in next week's Fed meeting.
ASH BENNINGTON: Talking of which, Peter, we're going to get to some of our viewer questions in just a few moments here. If I were a viewer, this is the question that I would want to ask you. How do you understand what's happening at the long end of the curve? I was looking at the 30 Year Treasury yield a little bit earlier today. Basically, it rolled down from late 2018, from about 3.4 peak, then it bottomed at 1.19-ish are thereabouts in August of 2020. Then we had yields back up again, rates doubled in this very short period of time, and then it rolled over again in March. What do you make of all of this movement in the curve? How do you interpret it? What do you think is going to happen going forward?
PETER BOOCKVAR: Well, 2018 was interesting because you had the contractionary impact of the tariffs that basically sent the manufacturing sector into a recession around the world, particularly in the US, at the same time that Powell was raising interest rates. So, you saw the curve flattening. Then of course, he backed off, and then you saw the ski bang, and then you roll into COVID. I think the yield curve here really started to flatten again on the day in mid-June when the Fed said that we are now talking about tapering, and more people wanted to hike rates in 2022 rather than waiting till 2023. That was the perfect excuse to flatten the curve.
You can look back QE1 on, QE1 off, QE2 on/off, QE3 on/off. Every time QE was on, yield curve steepens. Every time it was off, yield curve flat. There was just to me that the trade was the Fed's going to hint that they're going to change policies soon. You flatten the curve. Then of course, you throw in the stagflationary stories we keep hearing and worries about have do we reached peak growth, and then of course, Delta, and that all combines for this further flattening and big drop in the long end.
As you say, Ash, we did see a pretty sharp rise in rates for the first three months of the year that I think discounted a lot of the inflation stats we see today. When trying to figure out what's the next big test for the bond market, certainly, the direction of Delta will matter in dictating how uneven this recovery is going to be or what potholes we're going to find ourselves having to drive around. I think that if you see a few more months of hot inflation which I'm expecting, then that will heighten that discussion on temporary or not, and also pressure the Fed.
Now, the thing with the Fed is that, unfortunately, Jay Powell has institutional thoughts in his mind that if he wants this job to be renewed in February 2022, he's thinking I can't screw this up. Janet Yellen at the same time wants him to be purchasing as many Treasurys as she's selling. There's this very incestual situation between the Fed, the Treasury and the White House looking at the back half of this year. On the other hand, there's no question that the White House has gotten more defensive about inflation. Jay Powell has gotten more defensive. You look at the testimony he gave in front of the House and Senate last week, he was asked about the inflation story a multitude of times.
The spotlight is on this inflation story because it's not just a Wall Street pontification discussion. It's a Main Street situation that the average person is now feeling, and now constituency is calling their Congress people and saying what is going on with inflation. Powell's got a really tough needle here to thread. There'll be a difference between what they should do, and that's stop conducting monetary policy in July 2021 as if we were in July 2020.
There's something just not consistent there. At the same time, he's probably going to use the Delta excuse as a reason to wait. The problem with the Fed is that they think by waiting that the outcome is going to be somewhat different, and the outcome is not going to be different. At some point, the market is going to have a taper tantrum and a hissy fit. It's just inevitable.
The problem this time around is that he's playing a much reader game of chicken with the markets because of this inflation story which is something that no central bank has really had to deal with since the Great Financial Crisis when all of a sudden, we had rates of zero and negative rates in QE that didn't really exist prior. That was with the lack of inflation was a free ride for them and license to print and do whatever. Now, that license has some points on it and I think that therefore, they should be driving a little slower, and not doing the 200 miles an hour in a 55. Maybe slow down to at least 150.
ASH BENNINGTON: Peter, as soon as I jump off this call, I'm heading to the DMV in Harlem to get my driver's license ID card renewed. Talking of which, Jack, jump in into the fast lane. Any questions, comments for Peter, or thoughts to add?
JACK FARLEY: I have to ask Peter, if as I believe you think and as many anticipate Fed Powell and the dominant people at the Federal Reserve on the market committee, if they remain dovish, and they are not hawks, I'd say, doves don't have talents. If they continue to do quantitative easing and you know that for a fact, how are you positioning your portfolio? I know that because you are believing in inflation will be robust and permanent, or at least not transitory, you are by no means a fan of bonds. But unlike an individual investor, you were managing serious money in the billions of dollars, so you have to own at least some portion of bonds. How are you thinking about portfolio allocation as you anticipate the Federal Reserve next week?
PETER BOOCKVAR: The bonds that we own are more short duration. That's our way of being short the long end, as opposed to having an outright debt against the long end. I think that if the Fed does not taper and remains dovish, well then, you're going to get an unwind of the flattening yield curve because the Fed is about to taper trade. You're going to get a re-steepening. You'll get repeat of what we saw in the first quarter of this year, where the bond market said, okay, Fed well, we're not really happy with you running a hot economy. I don't like sitting at the beginning of the year, the 10 Year was at 90 basis points.
What holder of a 90-basis-point paper wants to hear their central bank yelling, we want to run things hot. If the Fed endorses, okay, let's run things hot next week, even though we're seeing like in housing and autos running things too hot, you will quickly flame out. Then the yield curve is going to steepen again, and the bond market's going to do the tightening for the Fed. While the stock market, I'm sure will have its initial reaction, oh, yeah, the Fed is not going to taper for a while, I would not be surprised if the 10 Year went straight back to at the upper end of its February, March range if, if the Fed remains easy and doesn't hint at any tapering anytime soon.
ASH BENNINGTON: Jack, some decades from now, when you're a multi-billionaire investor and you write your memoir, can you please call it, doves don't have talents?
JACK FARLEY: Okay. Yeah, sure. I'll do it.
ASH BENNINGTON: Jack, shifting gears here a little bit from the capital markets to the crypto markets. We were talking a little bit off air. I know you watched the interview that I did with Christine Kim, did you want to weigh in on that?
JACK FARLEY: Yeah. Well, Ash, as you know, the crypto markets have been subject to a lot of volatility and if you follow the headlines, one day, it's crypto crashes, the other day, it's crypto rebounds. Wait, the three-day changes, it's been totally flat, almost like bond yields. What I like about Real Vision, I think it's a founding principle of the Real Vision is that we go beyond just that these price action and we actually try and understand the framework of how to invest. I liked watching something that wasn't tied to oh, my God, Ethereum is up 10% in the past hour. You tell the audience as you did the interview. You know a lot more about it than I do.
ASH BENNINGTON: It's an interview that talks about the underlying mechanics that are happening right now in Ethereum. EIP 1559, this is a change proposal for Ethereum and also gets into a little bit Ethereum 2.0, which is this major change that's going to be coming from proof of work to proof of stake in the Ethereum space. Christine Kim is a research analyst at CoinDesk. There are people who understand this. There are people who are good at explaining things.
There are very few who are good at both. Christine Kim is one of them. If you're curious about Ethereum, it's a great interview to watch, especially if you're curious about what's going to be coming down the road in the months and years to come for Ethereum, a great interview. Peter, let me ask you, are you interested in the crypto space? What are your thoughts there?
PETER BOOCKVAR: I am very interested and I'm trying to learn every week. What I'm coming around to is I'm less interested about where the price of Bitcoin is and more interested in learning about defi and how this whole crypto infrastructure is being built out. Because in a way, whether Bitcoin's at $30,000, $30 or $3 million, that infrastructure is going to get built out regardless. In a way to me, the price of Bitcoin is relevant.
Now, as an asset class, as a store of value, well to me, that's almost like a different conversation right now with all the advancements that crypto is making. That's where I'm really trying to learn more about. I have to say, I listened to some of your interviews and some of the experts are speaking a different language that I'm anxious to learn. Some of it's still Greek to me, but I am confident that it's here to stay. I'm just trying to figure out in what form and how it plays out.