DION RABOUIN: Everyone, welcome into the Real Vision Daily Briefing. It is Wednesday, September 29th, 2021. I'm your host, Dion Rabouin. We got a spectacular show today. We're going to be talking all things Federal Reserve. We're going to be talking Treasurys and the stock market. And of course, the moves going on in currencies and most particularly the US dollar. I've got the best possible guests that you could ever have with me today. We've got Peter Boockvar. He is the Chief Investment Officer of Bleakley Advisory group, and you know him from his report, the Boock Report. Peter, thanks so much for being with us on The Real Vision Daily Briefing today.
PETER BOOCKVAR: Thanks, Dion, for having me. Appreciate it.
DION RABOUIN: We close lower on the NASDAQ or real tired close there for the NASDAQ, but the S&P and the Dow both closing higher. It seems like it's really though all about yields, the moves on the10 Year note and the 30 Year bond. I don't want any bond nerds out there dropping in my mentioned. Talk to me, Peter, when you see these moves on the stock market, we had a big move down lower yesterday. Today, we got a dead cat bounce and not even a bounce in the NASDAQ. What are your thoughts about what we saw from today's market action?
PETER BOOCKVAR: Well, it's very much a replay of the first quarter where we saw this sharp rise in interest rates. And we saw selling in all the growth the high value stocks. And that is happening again here as the rising rates and the potential likely potential that the Fed begins to taper that all of sudden valuations begins to matter, and we know where the frothiness evaluations are in the market. And that's obviously technology and the store, whether it's stocks trading on multiple sales, because they have no earnings, or high level of earnings. They're certainly in those vulnerable to a change in interest rates and change in Fed policy. And that's exactly what we're seeing at least over the past week plus.
DION RABOUIN: And with this action from the markets with rates rising, I know, the 10 Year is still about 20 basis points below the high just a few months ago. But with the market having this reaction, I call it taper tantrum to Electric Boogaloo, is there a chance that maybe the Fed doesn't actually make its move in November, or that we get, I don't know, maybe a stop and stammer from Fed Chair Jay Powell?
PETER BOOCKVAR: Well, I say that the level of the S&P 500 may dictate whether they follow through in November or not. I think that just from an evaluation of the economy and inflation that they're absolutely going to taper. But yeah, the S&P is at 3500 by the time they walk into that November 3rd meeting, maybe they back off. Then if that's the case, then that just reflects this really ridiculous feedback loop that they are in where it's their easy policy that causes a rise in markets, and then when they pullback the markets fall, and then they respond to that fall in markets and that pullback.
So, I think though, they'll at least start QE, and then I doubt they finish it because this tightening, and I believe taper is tightening, coincides with a change of pace that we're now beginning to see then potentially going to see with other central banks. So, the world that is backing away all at the same time, and good luck to the markets in trying to manage through that.
DION RABOUIN: I think one thing that's really interesting about the way the markets responded, I'm talking particularly about the Treasury market is we saw these prints, I think it was four straight prints from the CPI above 5%, 5.1%, 5.3%, 5.4%. Then back down to 5.3% if my memory serves, but four straight months of over 5% on the CPI, the consumer price index, and the market really did nothing. It said okay, whatever I'm not worried about inflation.
But then you get this taper announcement, and we get a 20 basis point jump in the 10 Year moving above 1.5%, you get the 30 Year moving above 2%. And now all of a sudden, the markets worried about inflation. Is it inflation or is it simply the market is responding to the fact that the Fed is in complete control and saying, okay, well, maybe the Fed is really going to take this seriously now?
PETER BOOCKVAR: Well, a couple of things in there. We have to keep in mind that in three months, January, February, March, the 10 Year yield basically doubled in three months. So, the inflation stats that you're talking about, that rate move priced in and reflected that sharp rise in inflation. Then I think then rates came off really starting middle of June. At the Fed meeting when they said they're talking about talking about tapering, that's when you saw the flattening of the curve, and this belief that okay, yeah, maybe inflation is transitory and then of course, we had this stagflationary growth slowdown. And that's why you saw that flattening.
And keep in mind every single time with the previous QE, so when QE was on, your curve steepen. When QE came off or ended, your curves flat. I think this rate move over the past couple weeks, yeah, maybe it's an initial reaction to the slight tapering in Europe and what will happen here, but I think that people are waking up to the fact that inflation is not so transitory because over the past week we've seen a 10 basis point increase in inflation expectations. Now the TIPS market, we've seen a sharp rise in inflation expectations in Europe. And I think part of that is this big sharp rise in energy over the last couple of weeks.
The transitory argument, I think is now wasting away. I mean, first it was base effects, then it was transitory. And I think now people are beginning to realize that this is longer lasting. So, yeah, maybe the taper helped raise longer rates. But as I said earlier, typically the taper leads to a flattening of the curve [?] these people take this to believe that the tapering and maybe rate hikes after that will eventually slow growth and you want to flatten the curve when that happens. And we even having central banks to walk away from their transitory argument. Now, I don't know if they actually go there or not when they said it.
Even the irony of them saying it is, if they keep saying it's transitory why were you rooting for higher inflation to begin with? Why were you shifting policy to this symmetrical goal of having higher inflation to offset low inflation and all you're doing is talking about inflation? Well, inflation is not transitory at least for the next couple of years, I believe. And the markets are waking up to that back, yield curve is waking up that back. And how taper weaves its way through that is going to be tricky because again it pays to flatten the yield curve when the Fed is tapering.
Maybe this time is a little different where the lack of Fed buying leads to a steeper yield curve, I'm not sure. And I think you can throw situation with the debt ceiling, maybe that was an influence on the Treasury market and the possibility of them spending a few trillion dollars more. So, a lot of moving parts here. But I think the bottom line is that inflation is sticky, persistent and will last longer than then will transitorily camp beliefs.
DION RABOUIN: One person who seems to be, as you say, waking up to that reality, Fed Chair Jay Powell. He was speaking with the European Central Bank or part of a symposium that was put on by the European Central Bank. And I want to read you a quote from him today that I think just really, it says, I think it speaks volumes to where the Fed is and where the Fed was. Powell said, "It's also frustrating to see the bottlenecks and supply chain problems not getting better. In fact, at the margins, apparently, it's getting a little bit worse. We see that continuing in the next year probably and holding up inflation longer than we had thought."
So, I remember I read this quote and I was like, yeah, people I was talking to, we're saying that in January, February, when the Fed was predicting 2.4% inflation for 2021. People I have spoken to were saying that. I think you said that Peter. I heard you here on Real Vision back in March or April. And now, that it's September moving into October, we've got the chairman of the Federal Reserve saying that. What are your thoughts on that?
PETER BOOCKVAR: Well, of course, central banks never do anything wrong. And any side effect is never their fault. So, it's very convenient that Powell's just blaming the supply side without taking any responsibility that monetary policy is pushing demand side when there's not enough supply. So here, let's take the two most interest rate sensitive parts of the economy, housing and autos. Well, he's got pedal to the metal pushing the demand for housing and autos when you can barely find a home or a car. And if you do, you're paying through the nose for it.
So, of course, he's not going to acknowledge that, okay, yeah, Jay, you're right, the supply chains are all screwed up and it's going to remain that way. Then why are you full pedal pushing the demand side when there's not enough goods to buy?
DION RABOUIN: That's an interesting question and one that he didn't really address in this particular address or in any others. That I think takes us really well into this clip that we've got. And this is Real Vision co-founder and CEO, Raoul Pal speaking with chief economist and strategist of Rosenberg Research and Associates, David Rosenberg. David's talking about QE, Central Banks and gets into a lot of the things that we've been talking about. So, we're going to roll that clip for you right now. This is David Rosenberg talking to Real Vision co-founder and CEO, Raoul Pal.
DAVID ROSENBERG: Why are you linking taper to the labor market? Your taper did nothing for the labor market, or QE, your QE just boosted risk appetite and animal spirits and had nothing to do with the labor market. Why don't you come out and just say we're doing QE because we think we're in an asset bubble, and we're trying to defuse it? Oh, no, no, they would never, ever dare say that.
But what is QE and taper got to do with the labor market? And what's going to happen next year is even if the Fed did nothing, even if the Fed did nothing, and of course, they're barking right now, but people don't understand that, the extent of the fiscal squeeze next year, and we're locked into that, is going to be equivalent on its own to 250 basis points a Fed rate hikes. That is the magnitude of the fiscal stimulus withdrawal.
DION RABOUIN: So, that was David Rosenberg, chief economist and strategist of Rosenberg Research of Rosenberg Research Associates, talking about Real Visions own Raoul Pal and that's available today on the Essential Plus and Pro Tiers of Real Vision. So, if you're a member, make sure to check that out. If you aren't a member, become a member so you can get access to that full interview. Peter, I want to get your reaction, your thoughts on that, this 250 basis points of tightening that's going to come from the lack of fiscal stimulus. What does that mean and why is that important to the market?
PETER BOOCKVAR: Well, he's talking about a lot of the government transfer payments that happens at the end of 2020 and in March of 2021, in addition to the unemployment benefits that were juiced up by the Federal government, how that's not going to be repeated. So, that's what he's referring to. The question is this to what extent to people have higher wage growth and more jobs to mitigate that? And that remains to be seen, but there'll be some fiscal hangover. There's no question. At the same time inflation is running for many faster than wage growth. You're seeing a decline in wage growth.
Now his point about QE, yeah, is dead on and that QE can't print jobs. Someone's not going to make a hiring decision because the Fed is doing QE. We don't know what QE does other than juice asset prices and monetize government debt. I mean, prior arounds of QE, they were meant to suppress interest rates, well, interest rates went up. And when QE ended, interest rates went down as you've talked about earlier with the flattening of the yield curve. So, QE is the central bank drug which I don't even think they understand its use anymore, again, outside of raising asset prices and monetizing debt. They're just doing it to do it.
DION RABOUIN: They seem. And I'll tell you, I've had conversations with Vice Chair Clarida, Atlanta Fed Chair Bostic, I've spoken with San Francisco president daily, as well as Fed Governor Brainard. And they all to a person stand steadfastly by this belief that QE influences the job market, that it's going to make more people get jobs and to increase hiring. And when I asked them about this report that came out from the New York Fed that says, QE has minimal influence on increasing jobs and hiring, particularly in marginalized communities, like black and brown communities and lower income communities, but has a lot of influence on increasing asset prices.
And so, it actually goes against what they say they're trying to accomplish. They say, oh, well you know, we don't really look at that, or oh you know, there's other research that says the opposite. And I say, what research? And they say, I'll send it to you. And then they don't.
PETER BOOCKVAR: There is no empirical research that can draw a line between QE and job growth. It doesn't exist. Now, they'll theoretically say, well, QE is meant to suppress interest rates and that's stimulative and that therefore creates jobs. But if you look in the real world, I don't see job creation taking place in the auto sector because there are other factors here. I don't see job growth in housing and construction. In fact, you can't really even find anybody and projects are getting cancelled because there's not enough stuff.
So, we have a problem with the supply side as they continue to push the demand side. Why are you trying to push people to buy a home when they're not there? So, all these people never actually had to hire somebody in the private sector. So, they go off their models and they think as smart as they may be and as many degrees as they may have, they think very simplistically, high rates, slows growth, low rates, boost growth. Well, if low rates boost growth, even lower rates must boost growth even more.
And if zero rates are great for the economy, then negative must be spectacular. Not understanding that the purpose of monetary policy and the same with fiscal stimulus is to stimulate behavior to happen now. It's the pull forward things. But if rates are just low forever, you eventually stop pulling forward things and in fact, you pulled forward so many things that you end up having a downturn, they're out there because you've already pulled forward so many different things. So, they just don't understand that concept.
And when rates stay low for a long time it limits the urgency of doing things. If a homeowner realizes that rates are just going to stay low for a long time, well, maybe there's not a rush. And you're not even going to do anything if prices skyrocket if you're a stoner that's trying to make a capital investment decision. Yeah, maybe rates on the mortgage may have an effect but if rates, keep being told by the Fed, the rates are going to stay low for a long time, like they're doing with short rates saying, yeah, we're going to end QE, but who knows when we're going to raise interest rates.
Well, then there's no rush to do anything. There's no sense of urgency to do anything because you're being told by the Central Bank that rates are going to stay low. That's why forward guidance actually slows growth but their models saying that it's a stimulant to growth. So, the world is quite different in terms of reality and output compared to what their models tell them.
DION RABOUIN: Yeah. And that takes us to a great question I want to ask you from one of our viewers on Real Vision's the exchange. We're going to be taking questions during this period, during the Real Vision Daily Briefing from the exchange, that's Real Vision social platform. I want to get to a question from Ralph Humphrey. Ralph asks, do you think the transitory thing is more managing psychology or do they believe it?
This talk about inflation is transitory, inflation is transitory, inflation is transitory. Even in last month's statement, they still left it in there. So, what do you think about Ralph's question? Is that all about psychology or is it really something they're really sticking to?
PETER BOOCKVAR: Well, it's a good question. I think that they believe it but there probably is a bit of psychology to it in the sense that the Fed and that central banks, they want to obviously maintain control over interest rates. They want to be able to ease when they want to. And they want to be able to tighten the schedule at which they want to. And when you have inflation, that alters that equation. They lose a bit of control because the markets respond to the inflation numbers rather than to Fed policy.
But on the other hand, if they keep pushing this transitory story and it looks dead wrong, which is looking dead wrong, well then, their credibility is at stake. And to be toned up to what's going on-- I mean even Powell yesterday saying and he even repeated, yeah, it's just a few things that's causing the inflation. Well, no, Jay, it's not a few things. It's every single fluid that's made in this world and it's just about every single service that's now taking place at seeing inflation. It's the most widespread price pressures that we've seen since the 1970s.
So, there is now credibility that's on the line for the central banks because we know the Feds been dead wrong in their forecasts, as you mentioned for 2021. And you had John Williams, I think it was either today or yesterday saying yeah, just inflation is going to magically fall back to 2% next year.
DION RABOUIN: That's right. That's still a projection.
PETER BOOCKVAR: He's not talking to businesses and understanding what is going on. I encouraged him to look deeper into the used car market. There's this belief that we have the spike in used car prices up 40% year-over-year, and they're just going to magically fall back. Not understanding what happens in the car market. Because of the lack of new cars right now, we're obviously seeing spike in prices as well. Keep in mind when a lot of people buy a car, they lease it. So, the lease matures in three years. Then it goes back into the market as a used car.
Fleet buyers, rental car buyers, buy a new car and then