Keep Your Wits About You: Inflation Creeping In

Published on
December 1st, 2020
Duration
38 minutes


Keep Your Wits About You: Inflation Creeping In

Daily Briefing ·
Featuring Haley Draznin, Ash Bennington, and Peter Boockvar

Published on: December 1st, 2020 • Duration: 38 minutes

Bleakley Advisor Group CIO Peter Boockvar joins senior editor Ash Bennington to discuss a potentially higher inflationary environment for 2021 and why that may put central banks and markets at odds. Boockvar reviews this year’s market trends and dissects the latest ISM manufacturing data, pointing out reports of supply chain disruptions, labor cost pressures, and a general rise in inflation. With markets looking past recent COVID-19 data with promising vaccine announcements, value is growing increasingly attractive here in the U.S., the U.K., Europe, and Asia. However, Boockvar explains his concerns of markets tightening with the onset of growth and whether the Fed will choose to let the yield curve steepen or prevent it. As CPI increases are the kryptonite of central banks, should the inflation narrative take hold, Boockvar expresses how this may shock global bond markets. Real Vision's Haley Draznin explores the deep dichotomy between the real economy and equity markets, as all major U.S. indices were up today despite Treasury Secretary Steve Mnuchin shutting down the Fed's emergency loan programs for main street businesses.

Comments

Transcript

  • Jv
    Joël v.
    2 December 2020 @ 19:54
    Great episode.
  • DG
    David G.
    2 December 2020 @ 19:27
    Super great interview!!!!!! I should to wait until I listen to it all before commenting. I'm talking through the movie unnecessarily lol. Sorry.
  • DG
    David G.
    2 December 2020 @ 19:08
    Very interesting, and partly confusing to me. You seem you use inflation interchangeably with higher prices for what ever reason, with monetary expansion. While 2% inflation does give them room to cut, I've always viewed 2% as a roundabout target to achieve that allows them to expand the monetary supply enough to allow debtors to service their debt, without making the cost of money two high that they kill the demand for credit. Too high and you kill the demand for money by causing debtors to not be able to afford the loans, and too low and you kill too much of the demand for individuals, institutions, and countries to want to be creditors, especially they you are going to dilute the value of their return in the future. I personally think that they are tying to maximize their cut from the flow of money, by maximizing the flow of money, without killing the golden goose. So right now at this particular moment I think they need low rates so that debtors can service debt, they need US treasures to be better than alternatives, and they need the masses more fearful of inflation than deflation, so that they are will to spend rather than save. So if I understand correctly, right now that means, low rates, convince the masses that inflation is the future and not a deflationary debt crash, and be the creditor of last resorts if, they can't entice banks, institutions, and countries to be creditors at large enough levels at low rates in order to prevent a default crash form a lack of liquidity. To your point, it's getting harder and harder to pull this off. We should ask ourselves, how are countries, banks, and countries placing their bets on gold. If they think that we are going straight into hyperinflation, then gold is the last thing you would want to sell. If you think the world's central banks and IMF are going to fail at preventing a global debt crash(or cause it), then maybe you don't want so much gold at these prices. My understanding is that you only get the velocity of money to speed up and for money to leave the computer vaults dollars are stuck in, if you get corporations to raise wages, or penalize intuitions and individual who save or refuse to lend. I wish someone knew for a fact whether we will get a debt bursting crash or hyperinflation, and in what order and duration of time. Since we don't go to Bilderberg meetings, maybe the best we can to is hedge for both, and hope not to be wiped out by either.
  • JL
    Jason L.
    2 December 2020 @ 14:44
    RVDB at its finest. Great food for thought, Ash and Peter. And Haley has become an animated, deliberate and purposeful reporter. It's really great to see RVDB hitting its stride.
  • FR
    FLAVIO R.
    2 December 2020 @ 00:16
    Thanks Ash and , Haley and Peter. Proper daily briefing.
    • AB
      Ash B. | Real Vision
      2 December 2020 @ 00:49
      Thanks, Flavio. Much appreciated.
    • JL
      Jason L.
      2 December 2020 @ 14:42
      Agree!
  • SS
    Steven S.
    2 December 2020 @ 06:43
    Nice summary of the day, Haley. I found it very useful.
    • JL
      Jason L.
      2 December 2020 @ 14:41
      agree 100%
  • DG
    David G.
    2 December 2020 @ 09:25
    I won't overthink it. If speculation says tech is hot, then tech is hot. If it says reflation is the trade, then reflation is the trade. If it says go east with your money, then go east. If it says. I hate everything, then maybe you should hate everything too. I don't control enough capital to have anticipate. In the short term I only need to know what the market thinks. In the long term I only need to know if a deflationary crash will come before hyperinflation in the US. Who can answer that question with certainty?
    • DG
      David G.
      2 December 2020 @ 09:30
      while avoid divergences, earning, lower highs etc.
  • JA
    John A.
    2 December 2020 @ 04:29
    This whole discussion is based on the idea that the Fed actually knows what they are doing. Let's say everything Peter says is true. Consumer prices rise, and the reflation trade follows suit. Totally possible, because enough people believe it. Equities just need a good story, regardless if it makes sense or not. But where is all of this money to buy these goods and realize this inflation going to come from? Give me a story that gets these 20 million people back to work and I will believe your structural inflation story. M2 velocity is screaming at you that the money is not circulating. Prices increasing because of supply chain disruption due to COVID is not rampant inflation. Seriously, it's like people didn't witness the last 30 years and still think THIS time is different. Call me when congress gives a new stimulus that is perpetual or gives the Fed the power to direct money to individuals. Or call me when the Fed decides to let yields go up and stop QE. The system is still based on debt. You need debt to grow to create money. If debt defaults, then the money is destroyed. It is really that simple. Creating base money does fuck all unless commercial banks play ball.
    • JL
      J L.
      2 December 2020 @ 09:25
      You're missing a number of potential key drivers. First, reference Richard Koo and the logic of balance sheet recessions. It is true that stagnant reserves and unused liquidity in the system sits dormant. But as soon as the corporate sector switches back to net borrowing on an aggregate basis, that stagnant liquidity becomes inflation fuel which the central bank can't draw down fast enough, because if they act too fast they will harm the recovery. This is the situation where the Fed tries hard to create inflation, and then it finally comes around because of organic business activity, and then inflation gets away from them and they can't rein it in because they can't tighten fast enough without killing the recovery. In this scenario, the reserves built up in the system have a later payback. Second, you overlook the fiscal component. There will be more fiscal, without question. Even as of this writing, a $908 billion bipartisan bill is being discussed. If it doesn't pass before Jan 20, something will pass after. Fiscal stimulus is comparable to a helicopter drop because the debt goes on the government's balance sheet and the cash goes directly into consumer and business bank accounts. If you get that at, say, the same time minimum wage requirements are rising -- Florida just voted for $15 -- that is inflationary. Third, you overlook Janet Yellen at Treasury. She is a super-dove and knows the system like the back of her hand, having served four years Fed Chair, another four years as vice Fed Chair (no. 2 under Bernanke), and also the Chair of the White House Council of Economic Advisers in the 1990s. Yellen is the ultimate insider, and her and Powell are on the same page. They will work together to game the system and do things that would violate the Federal Reserve Act in ways that would break the system in normal times, but today nobody will care. The Fed has already violated the act with corporate bond pledges and nobody stopped them. What this means is that a creative Treasury Secretary who believes in MMT and fiscal, working hand in hand with a Fed Chairman who also wants fiscal, will be able to go further than we've seen in packaging loans that are really stimulus in disguise. Think games like municipal debt injections at rates that are so low with payback windows so far out they are like giving free money to the states. This will have more helicopter effect, with respect to Fed and Treasury figuring out backdoor ways to put currency into the system. Then, in addition to the above, large public corporations will see a historic expansion opportunity with millions of small businesses getting wiped out. If millions of bars and restaurants close, that is a huge expansion opportunity for Chipotle and Cheesecake factory. If millions of mom and pop retailers close, that is a huge expansion opportunity for big box players with strong balance sheets. The big corporations expanding into the gap that dead small businesses left behind will want to finance that expansion, and the banks will help them, and investors will cheer it. And against all of the above, there will be incoming labor regulations that make labor more expensive, environmental regulations that make production more expensive, green energy job initiatives that raise average wage levels, and more. It has the potential to be game changer inflationary. It is like a big freight train that is starting to build momentum and once it gets going it won't stop. And all of the mechanics are there. This isn't what is guaranteed to happen, but it is certainly a reasonable probability, maybe even a 60% probability, If you assume it is impossible, or don't see how inflation can be very real, you are stuck in single paradigm thinking and missing all the major drivers because you are fixated on a single aspect of a single model (the unwillingness of banks to create velocity in sluggish times). There is a lot more than just one variable going on here.
  • GG
    Guenter G.
    2 December 2020 @ 08:40
    Great interview. I like Peter,’s way of thinking and agree with his thesis.
  • DS
    David S.
    2 December 2020 @ 06:59
    This was a superb RVDB. Peter Boockvar explains his thesis very clearly, where he sees the economy/market heading and why. No confusing quant jargon that makes your eyes glaze over. Ash does a great job teasing out relevant information. The ONE thing I would love to hear a guest like Peter questioned about - one thing I think RV viewers NEED to hear an inflation-thesis guest like Peter questioned about - is the contrary argument regularly being proposed by the fearless RV leader, Raoul Pal. Namely, what about this gargantuan short position in bonds, 4 standard deviations from the mean, that Pal believes indicates a contrary risk should yields start to fall, instead of rise, and then snowball as the enormous short interest begins to cover? Furthermore, Steve van Metre is also out here suggesting deflation is the real threat, most recently by referencing treasury auction data and other points. Please push back a bit more against the guest's argument and challenge it so that we can hear how other contrary RV inflation/deflation theses hold up when addressed and make better informed decisions for ourselves. Meanwhile, thank you for this great interview.
  • CM
    Cory M.
    2 December 2020 @ 05:06
    Always appreciate seeing Peter Boockvar!
  • IN
    I N.
    2 December 2020 @ 04:36
    I need to watch this again and take some notes!
  • JL
    J L.
    2 December 2020 @ 04:30
    The issue with many of these outlooks is that they function well as a probabilistic scenario, but not a 100% scenario. From a Bayesian perspective there might be, say, a 40% chance scenario A happens. But there might also be a 40% chance for scenario B, a 20% chance for scenario C, and so on. in this respect picking the right scenario is impossible -- complex adaptive systems don't work that way. Instead you work with a range of plausible scenarios and then adjust in real time via incoming evidence provided by data and price action. A lot of the rigidity inherent in trying to decide what will happen six to twelve months out -- instead of making Bayesian adjustments to a portfolio, and the positions within it, as new evidence comes to light -- is born of artificial constraint in my opinion. This is why Soros and Druckenmiller were famous for the ability to change their minds on a dime. They weren't flaky or indecisive -- they were just good at recalibrating to real time changes in the probability distribution as new evidence came in. This isn't just a different view as to what will happen, but a different mindset as to what scenarios are for, with an argument that, to be prepared, you really need more than one, most of the time, with an ability to shift between the two or more scenarios you have mapped out.
  • MF
    Michael F.
    2 December 2020 @ 02:49
    Peter B. is extremely optimistic, perhaps over optimistic, about the vaccination of the "masses". I seriously doubt that the average citizen will have the chance to get vaccinated until mid to late summer. This process will take most of next year.
  • JA
    Jordan A.
    2 December 2020 @ 02:34
    I remember when Peter said go long southern copper like a year ago when it was about 30. I listened and boy was he right.
  • DT
    David T.
    2 December 2020 @ 00:04
    So, now we are flipping from deflation into inflation?
    • ns
      nikolay s.
      2 December 2020 @ 01:53
      You make your own choice, they find you both sides
  • SG
    Steve G.
    2 December 2020 @ 01:42
    Best Boockvar interview I have seen. He was much more relaxed in this one and I think he was able to communicate his ideas better. Really strong argument for inflation. First 10 minutes are pretty captivating.
  • TC
    Tim C.
    2 December 2020 @ 00:38
    Contrary to Peter's commentary, the rise in hospitalizations is extremely concerning. Anyone who understands how a hospital operates and has witnessed it first hand would know this. The lack of understanding of hospital operation is appalling from a financial analysis standpoint. On top of that, vaccine is going to take a long time to roll out. That is human nature. As far as long term rates rising, it is possible for the long end of the yield curve to rise. It feels like we are in uncharted territory to a certain extent. What Peter doesn't address, which I find disappointing is the impact on debt service. Currently only 14% of Outstanding treasury debt is bonds, but that doesn't tell the story. It's a slippery problem. As you keep rolling over debt you were paying higher coupon with to a new lower coupon until that trend changes. I've working on computing this runway... To me, it's the elephant in the room... Add to that, the problem that if the Fed does let the long end rise, they squeeze RE which will not be popular... As far as the value rotation, I would love to have someone on that can provide some insight into the credit worthiness of the value companies. If you are generating alpha, access to capital is key..
  • JH
    Jacqueline H.
    1 December 2020 @ 23:49
    I'm still not convinced that the "vaccines" will make everything all better on the expected timeline. Remaining cautious...
    • DT
      David T.
      2 December 2020 @ 00:03
      The market doesn't care, it's all hype now since FED gave tons of liquidity to financial organizations that drive markets and crypto crap.