ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Thursday, April 28th, 2022. I'm Ash Benington. Joined today by Peter Boockvar, Chief Investment Officer of Bleakley Advisory Group. Peter, welcome.

PETER BOOCKVAR: Thank you, Ash, for having me.

ASH BENNINGTON: Here obviously an incredibly busy day in markets and macro today. Looking out here, it looks like the NASDAQ is up over 3% on the day, closing down here at 12,871. Everything up, lots of green on the screen. S&P 500 up about 2.5% closing out at around 4300, 4,287. And Dow Jones Industrial Average also up 1.85%. Peter, a lot happening, lots of moving parts. What's your big picture? How are you thinking about this at the 50,000-foot level?

PETER BOOCKVAR: Well, I went to sleep Monday night, and I just woke up and the S&P is same level, so I'm wondering if there's anything going on. I think that the market is right now trying to get through earnings. And not just seeing what companies are doing relative to the expectations embedded in the stocks, but also trying to figure out, where's the US economy? Where's the global economy from here?

And I think that the level of unknowns is why we're seeing such huge moves on top, of course, this monetary and interest rate news that is slowly tightening around everything. Now, of course, going into today with the Facebook move, obviously, expectations were very low going into the print, the stock was trading at 13 times earnings going in, so there was room for a readjustment higher.

But I think all in all, it's just really churned, and it's churned with lower highs, and the market trying to try to hold it stance against the February and March lows. My sense of earnings so far to tie into what's going on this week and the week before, after listening to a lot of conference calls and reading through transcripts is obviously, there's a lot of fear out there about the economy and everything and consumer confidence is in multi decade lows or actually probably back to where we were in 2009.

But from what I'm hearing from companies is that the US consumer, notwithstanding the inflation pressures and all the worries. They're still hanging in there. But the question is, for how much longer it can. And if you look at a big-ticket item, like selling cars, Ford and GM said that there's very little demand destruction you see from historically high prices and now rising funding costs. But you'll listen to the CEO of Coca Cola, who is selling a product that cost $1, maybe if you buy one of the other drinks, it costs you $2 or $3, so we're not talking about big ticket items here.

And he's wondering whether we're now pushing up against the limits of how much they can raise prices without hurting demand, getting into this whole debate about elasticity when it comes to products. And I do think we're getting close to bumping up against it. And it's interesting when you look at also--

ASH BENNINGTON: There's this idea of bumping up against the limit of pricing power with what we're seeing right now with inflation and with consumers able to deal with that capacity.

PETER BOOCKVAR: Right. And I do think we're now just beginning to test it. And listening to CEOs, they're still okay with today. They're still okay with how the first quarter was in terms of demand, and even the first month of Q2. And they're obviously hoping that that continues. But there's definitely acknowledgment that we're unsure how much it can continue. I also read the Maritimes Homes to get into the housing industry since that's also a big focus here, particularly with the sharp rise in mortgage rates and record high prices.

Their business in Q1 was good, solid demand, but they're even acknowledging that it's unsustainable. You can't have 20% home price gains. And now, mortgage rates that are up 150 basis points in a short period of time and expect that business just to continue. If you look at the last couple of weeks, we've got regional manufacturing surveys from New York, Richmond, Philly, and Dallas.

April was okay. But the six-month business outlook fell sharply. And I think it was New York that fell to the lowest level since March 2020. There is definite hesitancy about what is to come even though CEOs today haven't necessarily seen it yet.

ASH BENNINGTON: Yeah, so much to unpack there. By the way, you mentioned Facebook, Meta platform's up on the day 17.6% closing around 205 off fractionally here in afterhours trading. Peter, I started my day today earlier reading The Boock Report with Peter Boockvar where you unpacked some of the data that we got from GDP from the BDA report out this morning, obviously, an interesting report, things moving in every direction.

It seemed overall aggregate contraction, 1.5% quarter over quarter after being up almost 7%, 6.9% in Q4 21. The estimate was for a 1% increase. Obviously, we didn't get that and yet strong consumer demand. Talk to us a little bit about this paradox, and what it means. You also pointed out in the report, the GDP deflator impact, in addition to trade imbalance.

PETER BOOCKVAR: Right. The perspective for Q1 was a 6.9% increase in Q4. That was the tough comparison that we ran up against where inventories in Q4 added, I think it was 530 basis points of the 690. In Q1, we had some reversal on the inventory side. Inventories were dragged, but the biggest drag was trade. And the very large trade deficit with imports rising much faster than exports took off over 300 basis points from the GDP figure.

And the tip off, that was yesterday, when we saw the trade deficit for goods that was expected to be at 105 billion came in at 125 billion a fresh record high. And we can also tie it into the dollar considering what's going on with the dollar here, but as you said the consumer and capital spending is what kept Q1 from being worse.

And in terms of the deflator, that took off eight tenths, because the expectations were for price deflator of 7.2%, came in at 8%. If the deflator was in line, that contraction would have been six tenths instead of 1.4. But also, government spending took off a little bit. The question is, okay, what happens with Q2, and I do think trade will still be a drag. I think we can definitely-- and understand the possibility that China is going to see negative growth in Q2, the second biggest economy, Europe is very possibly in a recession in the second quarter.

The trade side should be a drag. Capital spending could be okay, again, and consumer spending should still be a positive. We should see a positive number in front of Q2 GDP. But I think Q3 Q4, the risks are rising that we start to see negative numbers again.

And that really is the bottom line with the US economy is, and getting to what we talked about in the beginning, is we're approaching the breaking point of the consumer saying no [?] with increases relative to my wage gains. Hasn't happened yet, but I think we're progressing towards that breaking point. And it may not be Q2, but Q3 I think is very likely.

ASH BENNINGTON: The $10 trillion question here, how will we know when we begin to cross that threshold? What will be the early warning signs that are going to flash on the dashboard that will give us this sense that we won't be able to see this continued growth with consumers getting priced out of markets?

PETER BOOCKVAR: Well, I'll take you back to 2008. When the economy started to roll over, everyone started getting worried about they're going under and Lehman going under. And then Pepsi said, we're seeing a slowdown in sales. And they're selling, getting back to Coke, potato chips, Doritos, and soft drinks.

And if that low ticket item, low price ticket item starts to get impacted by consumer spending, then you know we have a bigger problem. As I mentioned, Coke feels like we're getting close to the limits at which consumers will accept for the price increases, even though we're not there yet. If all of a sudden you start to see the trade downs from some of these brands to more to private label, then we should start to worry.

Because global trade, that's going to contract again. Capital spending? Well, it'll hold up as long as cash flows hold up. And that's an important thing too, because big companies, they can continue on with their capital spending plans, because they're more insulated from a cash flow perspective. But small, medium sized businesses are seeing crimps in cash flow, they're seeing falls in profit margins.

I don't know how much longer we can go with these capital spending levels. But it still comes down to the consumer. That's most of the US economy. And it comes down to housing and autos. Those being the two most interest rate sensitive big-ticket items out there.

ASH BENNINGTON: Yeah, that's exactly right. It's about 70% of GDP is consumer expenditures. It's interesting, and this is why it's so great to have you here on a day like today, Peter, you mentioned 2007, the Bear Stearns hedge fund collapse.

I remember that period. There were folks who shrugged it off, like why do I care whether the Bear Stearns high grade structured credit enhanced leveraged fund, that was actually what it was called, collapse? There was a collective shrug, it seemed immaterial, and then it starts to filter in precisely as you say, when it's Coke and Doritos. I think such a powerful metaphor for this question of where we sit right now.

PETER BOOCKVAR: I think we're headed towards a recession. And that's not really that profound, because, well, when the Fed tightens monetary policy, that's where we usually end up. A soft landing is a rare occurrence. And I think right now is a pipe dream.

We are on the cusp of experiencing the most aggressive monetary tightening in the post-Volcker world, where we may see three to four meetings in a row, a 50-basis point increase. Now, the last time the Fed raised 50 basis points was in I think it was 2000, when they raised the Fed Funds rate from 6% to 6.5%. And then back in 1994, I think Greenspan raised 75 basis points at one meeting.

But those were one-offs. And yeah, the Fed Funds rate went from 3% to 6% in a short period of time in 1994. That was the soft landing. But now, you have this tightening priced in, now it's been priced in already. But then quantitative tightening was going from to 95 in three months. When they started the last one in October 2017, it started at a 10 billion a month and went from basically to 50 over a 12-month timeframe.

This is what I'm referring to. And they did also in 2018, double barreled tightening in a very aggressive way. And there is no chance that with that, we see a soft landing. Yeah, the short end of the yield curve, we priced in those rate hikes. What we have not priced in yet is the economic impact of all this. I haven't seen S&P earnings estimates fall one penny for this year. I'm assuming we're going to go into recession and there's zero chance we're going to realize those earnings numbers.

I don't think that earnings estimates really reflect what will be a European recession driven by the spike in energy prices. I don't think we've really modelled in this China slowdown, even though I don't think that these shutdowns will last longer than the next month, because it's just humanly unsustainable. I think that there's a lot to price in, in terms of the economic impact of the sharp rise in interest rates and global monetary tightening. And on top of obviously, in response to this inflation story, that is going to begin to bite the consumer.

ASH BENNINGTON: Yeah. By the way, Peter, I'm looking here, as we have this show, at the streaming comments in YouTube. I'm seeing this comment coming from Is This It. Amazon misses earnings estimate by 11%. I'm looking on the Bloomberg terminal. We should probably take a look here and see what's happening right now with Amazon earnings. Boy, there's some interesting things that are coming out.

Worldwide shipping costs jumped 14% over in Amazon this quarter. This is pretty significant. Any thoughts on this? I know it's a breaking story. I know we're having to play from audibles off the screen as we cover this. But what are your thoughts on what's happening over Q1 2022 earnings at Amazon.

PETER BOOCKVAR: Without even reading the release, we know, okay, let's separate out the two businesses, retail and the AWS. AWS, I'm sure was fine. But the retail business is a very competitive low margin business. And Amazon as much as any company is subject to rising wage costs, and accelerating transportation costs and all the supply chain problems, Amazon is smacked in the middle.

I have to believe those challenges explains why they missed as badly as they did, and I'll have to see what they say with AWS. With respect to Apple, which think their reported for 30, what are they going to say about their business in China? What are they going to say about their business in Europe? If all of a sudden, your European consumer and your energy bills just went through the roof, maybe you'll hold on to your current iPhone for a few extra months or quarters.

And what are they going to say about the supply chain? They're not immune. What we learned with Google and what they said about YouTube, and those numbers missing, and particularly citing a slowdown in Europe, these companies are part of the global economy, they're not immune to what's going on. And you can be sure there's been a lot of money that's hiding in them thinking that they are, but they're not. And now, they're finally getting around to them.

ASH BENNINGTON: Yeah, very well said. Peter, what does it all mean big picture as we talk about this, and we try to digest these earnings? How do you effectively process this new information relative to the to the big picture thesis that you have on markets?

PETER BOOCKVAR: I think when-- look at the progression of events, and it all starts with a change in monetary policy. The meme stock craze peaked in February 2021. That was the height of euphoria. And it's no coincidence that four months later, Jay Powell said, we're now thinking about tapering QE. And that was the first step away from the extreme easy monetary policy that started in March 2020.

And it is no coincidence that the market started to chip away at all those high-flying stocks. Because when the monetary tide changes, valuations all of a sudden matter. Through the end of last year, they clipped all those high fliers and evaluation rethink. In conjunction with a rate adjustment, we saw, obviously rates rise last year.

And then this year, when people realize that inflation is not transitory, we had a further rate adjustment, and then of course, that valuation rethink begin to spread. Now, it's what is the economic impact of that? And that is what is to come. And like I said, that is what is not yet priced in, or only beginning to get priced in.

If you look at auto stocks, GM and Ford, if you look at Home Depot, you look at the homebuilders, yeah, they've corrected already. They've already begun the adjustment process for this sharp rise in interest rates. They've already repriced. Now, whether the repricing still has further to go, yeah, probably does. But a lot of repricing has already taken place.

But there's still hopes and wishes that somehow everything is going to be fine. And we're going to be able to weather not just this inflation move, but this interest rate move, but it's just not possible. We are a credit dependent economy. And I've said this a million times, we have credit cycles that ebb and flow with the cost of capital. You cannot not slow down when the cost of capital rises, particularly as short as it has.

ASH BENNINGTON: Peter, I'm glad you mentioned credit and credit cycles. I want you to take a moment here to take a look at a clip about US Treasurys. This actually is out today on the Real Vision platform for Essential Plus and Pro subscribers here at Real Vision. And the host is Harry Melandri hosting Jens Nordvig of Exante Data. Let's take a look at this clip.

JENS NORDVIG: There is a big constituency in the institutional fixed income management that I think have a hard time essentially de-learning this notion that you never get inflation.

HARRY MELANDRI: It's such a good point. We have evolutionary deselected it. Same as we have, there are no JGB bears left, they will be selected by nature. In that same way, there are no G7 real money manager bears. If you were, you were deselected and sacked years ago.

JENS NORDVIG: I think that's still the reason why it's hard to get bond yields above three. Now, if you look at this and you know you can get easily 5% surprise in inflation above target, and then the bond yield is still free. I think that has to do with that bid still being there and they're more persistent, and now has become like a no, no to talk about transitory system.

The longer it's going to last here this year and into next year that we have disinflationary pressure and overshooting relative to target, we're going to have essentially-- we used to talk about inflation premium in the bond market, right? And now, we've had a couple of years where you could read academic papers about the negative inflation premium in the bond market. Given that asymmetry I just alluded to, I think that's going to be repriced going forward.

ASH BENNINGTON: That's Jens Nordvig and Harry Melandri. By the way, if you're watching on YouTube, these are the kinds of conversations we'd love to have you join us for on the Real Vision platform. Talking of the conversation, Peter, thoughts about US Treasurys and how it ties in with credit cycle.

PETER BOOCKVAR: Well, it's a really interesting moment for US Treasurys. Not only because of the inflation and growth situation where, on one hand, you got the Treasury bulls, because they see a recession coming and you got to buy long term treasuries. But still this inflation story that is remaining, I believe, very sticky and so we're running well above nominal rates. But you also have the dynamic of where European bond yields go from here and where they've already gone as an influence on US Treasurys.

And also, of course, the direction of JGBs, where they haven't gotten much yet in terms of movements, because the BOJ has got its foot on the neck of JGB yields, but something that we have to pay attention to. In addition to the Fed walking away to the tune of 95 billion a month, at the same time, foreigners have been reducing their percentage ownership of US Treasurys. And we will soon see whether that is going to be accelerated post the sanctioning of the Bank of Russia.