ED HARRISON: It's Fed day. We've got tapering, or we don't have tapering. All of that and more coming right up with Peter Boockvar, who is the CIO of the Bleakley Advisory Group and editor of The Boock Report. Welcome back to the Real Business Daily Briefing.
PETER BOOCKVAR: Thanks, Ed, for having me on.
ED HARRISON: So a lot to talk about, especially with regard to the Fed. I saw that bond yields were down ever so slightly. What do you think about what the FED-ED had to say, what's your macro sort of takeaway?
PETER BOOCKVAR: Well I'll preface it by saying that people that have heard and seen me, they're probably tired of my criticism of the Fed. But I'm going to have no choice today but to rant again about the Fed, and Jay Powell, because there seems to be this ever-growing chasm between their policy and the reality of the world. Their policy, of course, being as easy for as long as possible with no hint of tapering until they meet some metrics that they can't even themselves define. Powell can't even define what substantial progress is when asked about it.
And then the reality is that we have what I believe are major intensifying inflation pressures that, the Fed in their statement, and Powell in the press conference, continue to refer as transitory. Well, they better hope that it's transitory or else they're going to be mugged by some serious reality this summer and they're not going to be allowed to wait any longer in terms of pulling back policy. Because, if they continue as is and don't pull back, then the market's going to have another leg higher in the level of interest rates. And the 10 year pulled back a little bit today, but at the high, we were up 10 basis points in just a couple of days.
And what is noteworthy, is that inflation expectations and the TIPS market continue to move higher. In fact, the biggest move of the day in the entire treasury market was looking at break even three years out, which saw a rise of almost 9 basis points just today alone. So we're now approaching at least three years out-- the highest level since 2006. So, that's even before things blew up and the housing bubble aftermath. So, I think that the Fed is really continuing to drive a car 200 miles an hour in a 55 mile an hour speed zone, and the roads are getting icy here.
ED HARRISON: Well, it sounds to me like what you're saying, Peter, is that we're looking at just a pause right now. We got over the 175 hump just ever so briefly once or twice, and we pulled back. We were in the 150s-- now we're actually back to the 160s. You think you said there's going to be a retest. What kind of levels are you looking at, and over what time frame do you think this retest is going to happen?
PETER BOOCKVAR: Well, we got extremely overbought in yields oversold in price when the 10 year yield got to that 178-177, and we've started working that off. So I think that 151-75 could be a trading range for the next month or two as we get through what is already been priced in these high inflation numbers. Jay Powell likes to talk about base effects in year over year, but if the month over month inflation numbers in the next couple of months surprise to the upside, then I believe that we're going to be breaking above that one and three quarters level on the 10 year. Because what we're going to see, I believe, in the next couple of months and maybe even stretches into the summer is that the Treasury market is going to again, tighten in the face of it, notwithstanding the Fed.
So we know what the Fed thinks. We know that they're just going to sit there and do nothing. The bond markets already sort of tightened for them already. So the two year is very much pinned, of course, because the Fed funds rate. So I think it's important to really look at the five year because it is sort of in that middle ground between being influenced by the Fed funds rate, but still having some market characteristics. That rate closed today 85 basis points. It was about 35 basis points on December 31st. So at least the five year has essentially tightened-- twice. And you look at the 10 year, it's essentially tightened three times. And I think we're going to go through another round of tightening in the next couple of months because these inflation numbers, I believe, are not going to prove so transitory.
ED HARRISON: You know, we're focusing on inflation--
PETER BOOCKVAR: And another thing that really--
ED HARRISON: I was going to say, we're focusing on inflation now, but Jay Powell, when he was talking he would say, we gave you some numbers. Some targets to hit. It seems like there are three targets. They have the dual mandate so that's inflation. They also have unemployment, and they also have GDP growth just the overall economy. How important are those other two components in the mix, in terms of what's going to force the Fed to react most aggressively?
PETER BOOCKVAR: Well, they can't even define the answer to that question, themselves. They can't tell us what substantial progress means. I don't know if that means a five handle on the unemployment rate, a four handle, a three handle. I don't know if that means getting back the jobs that were lost, even though Powell even admitted that some of these jobs may not be coming back because, for a variety of reasons. He acknowledged that there's a large demand for labor right now that's not being met. So for him to just sit there and say we're not going to do anything until that number comes down of those that lost their jobs, well, it's going to come back on its own with the re-opening and it's not going to come down that fast, because we know for reasons that there's, right now, friction in the labor market where the supply side is not meeting the demand side. On the inflation side he can't even define what symmetry means. 2% average? Well, what average are we taking? Are we taking a one year average, a two year average, a five year average, a 10 year average, a 30 year average? What does that even mean?
So, the Fed is just winging it. Listening to Powell today was painful. He had scripted answers to some of these questions. And even to the housing question, which I'm glad that somebody asked, that you have in the Case Shiller Index yesterday for the month of February, even though it's somewhat dated, showing that home prices are rising now at a 12% year-over-year rate. That's even before the easy comms kick in, at least for March and April. And, he's talking about household balance sheets and bank stability and their exposure to the housing market. Not acknowledging that 12% is serious housing price inflation that is pricing out, potentially, a generation of home buyers, first time home buyers, young home buyers, that want to buy a home. And the Fed is just juicing it.
And then somebody asked, "why are you buying mortgage backed securities? What's going on in the housing market?" And he's like, "well we're buying it because 13 months ago, we had an issue in the mortgage market. And I guess we're just still buying it, because we're just still buying it." It's scary to listen to him as Fed Chair, and I don't know if there's a fear of tapering and what that means for a recovery that's trying to get its legs, or a level of clueless-ness about what's going on around him. But I do know that, like I said earlier, the market is going to mug him, I believe this summer, when these inflation numbers are not going to prove so temporary. ED HARRISON: I think of him in the same seat as Bernanke, or Greenspan and Yellen, and it's clear to me that we're talking about someone who's not just representing his views, but he's representing the consensus view, if you will, of the FOMC. So, that's a tough balancing act to play. How much do you think the balance of power within the FOMC is behind some of what he's saying, and how he's saying it, and how much of it is Jay Powell himself telling you straight what he believes? PETER BOOCKVAR: Well, I think Powell is a lightweight. So, he is probably hearing from others and incorporating that into his message. But Greenspan told you what Greenspan thought. Bernanke did what he wanted to do, whether you agreed with what it was or not. He did what he wanted to do, and he had others coalesce around his thinking. That's the thing is that you're a Fed chair you try to get others to agree with you. You absorb other people's opinions, but what we've seen in the past is the chair trying to have others coalesce around the chair's view. Yellen, I'm not really sure. She had her view, and she probably tried to get others to agree with her. Powell is just seemingly all over the place, which tells me that he just doesn't have a firm belief on things and is taking input from others. But it's clear that they're just deathly afraid to disrupt things.
But the problem that I think they're going to have is they feel like they're still in control. Based on the statement-- based on his comments, that they're still in control of the narrative, that they are still in control of the yield curve. And I think what we've seen so far, to sound like a broken record, is that they are not in so much control, and that the bond market now has a voice. They have a voice and they've expressed that voice, and that's why, again to repeat, the five year yield has gone from 35 basis points to 85 basis points without any change whatsoever in Fed rhetoric.
ED HARRISON: So, Peter, let me just expand this. I know we're talking about the Fed, and my lead-in was about Fed, but the reality is that we're also in the United States at a minimum looking at some serious fiscal action. We have Joe Biden about to make a speech today based upon a massive change in fiscal policy, and I want to talk about this in the context of global divergence of policy, or the potential for global divergence and what it means in terms of your thinking about tactical strategies and your longer term investment strategies, whether it be for the United States.
You talk about Asian assets, but I'm thinking about Europe in particular. The way that I would put it, is that Biden is going to tell us today that he's going to have a massive spending program. And it's also going to be more taxes, particularly on the rich, and that's going to go in concert with everything that you said about the Fed in terms of continued monetary accommodation.
To me that speaks to a potential that we're at the maximum point of United States out-performance maximum easiness relative to other countries. Maximum easiness on the fiscal and monetary policy front, and potentially also maximum GDP growth relative to other countries because of the emergence out of the pandemic. First of all, is that even true? And then secondly, if it is, what does that mean in terms of your tactical view on all sorts of assets?
PETER BOOCKVAR: Well on the fiscal side, when they just spent almost $2 trillion, a good chunk of that, $6-700 billion went directly into the economy via the checks and extended unemployment benefits. So that had an immediate impact. The infrastructure bill, even if they got a fraction of that passed, that's going to be spread out over eight years. What he's going to talk about tonight is just social welfare spending. Whether you agree with it or not, that's what it is. So that doesn't have an immediate impact on economic growth. So, that's not really fiscal stimulus, that's just social spending. So I think that the $1.9 was sort of peak fiscal stimulus spending, again, because the impact is immediate as opposed to this other. So really to get to your point, is that by 2022, are we going to have this fiscal cliff that we hear about?
But before I get to that, what will have an immediate offset to the spending as these tax increases that are going to happen in year one, where the other spending is going to be spread out over multiple years. So you can even argue that there's actually fiscal contraction coming because of these tax increases. Then we'll have to see in 2022, when you get this fiscal hangover from the $1.9 trillion that was just spent on top of the $900 billion that was spent in December, you're going to get some hangover there. The hope is, of course, that you hand the economic baton off to the private sector and you won't necessarily have much of a pullback. But you can be sure in an election year there'll be another $1 to $2 trillion dollar check giveaway in 2022 because the last thing they want to preside over is a fiscal cliff, a decline in the economy ahead of the midterm elections.
ED HARRISON: Yeah, so I think that last point is very important, that, even to the degree that you think that inflation prints are going to be poor and you think that there's a fiscal cliff coming. If that is occurring at the end of 2021 or the beginning of 2022, that gives Democrats who control both houses of Congress and the presidency time to enact legislation in order to get things going again before the midterm elections. So, it would suggest that we are in a cycle now where we're going to continue to see some level of stimulus for the next year and a half.
PETER BOOCKVAR: I believe that that's their plan. They're not going to let, like I said, the fiscal falloff occur in 2022 in an election year. They're just not going to let it happen. How they'll spend that money, and to what extent we'll have to see, but I'm sure they'll do their best to try to get more checks out the door to try to help the economy not contract, or not pull back at all ahead of those elections.
ED HARRISON: And so how does that compare to other countries that you're looking at, both in terms of the effectiveness of the programs that they're implementing or likely to implement, in terms of their economies getting off the ground after the pandemic, and what your ultimate asset allocation thinking is? We know about being bullish in Asia, but how do other emerging markets-- how does Europe enter into that picture?
PETER BOOCKVAR: Well, Europe of course, is going to be allocating the $750 billion Euro split between grants and loans to individual countries and then those individual countries of course, are going to be coming up with their own plans to allocate it from this top-down perspective. But that money is going to be spread out over a couple of years. It's just central planning, writ large, is how this money is going to be allocated. So, I'm not very confident about the economic impetus that it's going to give to that region.
So, then you look at Asia where they're not relying on a lot of fiscal spending to generate economic growth. They're sort of recovering on their own. Even China, is trying to sort of slow down the credit growth that they've seen. So, fiscal spending and just throwing money out there doesn't really have much of a multiplier effect more than one, in fact, many studies have less than one, so it ends up being more of a waste of money more than anything.
ED HARRISON: So that leads you further toward a overweight Asia over the United States, and also over Europe.
PETER BOOCKVAR: Asia's my favorite region, but it's also still the reflation trade in the US. It's commodity stocks, energy, and agriculture, and precious metals, industrial metals. Also there's still, I believe, some attractive value stuff out there that is not part of the Reddit crowd, or part of the tech stocks that everyone loves. The thing about investing right now, I think I might have said this before on the show is that you either have to have a really short term time horizon in order to have a trade work, and be ready to jump off at the right time, or you got to have a really long term time-horizon to sort of block out the noise and absorb that the potential bumps in the road over the next six months. When you think about the next six months, again it's the rate story, it's the inflation story, and it's just going to be growing intense pressure on the Fed to taper.
And I'm not even going to talk about raising rates because they're not going to do that for a while, but I just think that the pressure on tapering's going to be extraordinary. Even the ECB has even talked about how the June meeting is going to be more heated with respect to the tapering of their pandemic emergency purchase program. Right now, that's supposed to go into March 20, 2022 but there is intense pressure internally that may not last that long. So you look at the back half of 2021, and there is going to be not just taper talk in the US, it's going to be also in Europe, and it could be for the UK. We know the Bank of Canada has already begun to slow the pace of their QE program. So that's what we have to look forward to.
So, at the same time, on one hand we're optimistic about growth in the vaccine, and so on, but a lot of this monetary largess, I think is going to be put to the test in the second half.
ED HARRISON: When you talk about the time frames, I think that's a very apropos thing to talk about, because when you talk about the pressures that are going to be in the back half, the real question I have is what does that mean for inflation hedges like commodities. And also what does it mean for precious metals, because that could be an environment in which real interest rates are actually increasing, which would be negative for precious metals. How do you play precious metals? What's the time frame that you're looking at?
PETER BOOCKVAR: I actually think real rates are going to take another leg down, because I think that inflation is going to rise faster than the move-in rates. And, I think, you listen to Powell today, and no wonder the dollar is rolling over. The dollar index, and granted it's Euro heavy, it's now trading below its 50-100 and 20-day moving average. So to me, Powell just gave the green light to the dollar bear trade, the negative real rate trade, and the bullish precious metal trade.
ED HARRISON: I spoke to David Rosenberg earlier today. I noted in one of his notes recently he was talking about DXY and Fibonacci retracements. He was talking about versus the Euro, and it seems, with the dollar I'm looking at it at 98.6 right now, that we've definitely broken through some levels. How do you see that playing out over the next few months? Do you think that the dollar has more weakness to come, or are there support levels that you're looking at?
PETER BOOCKVAR: I think it's breaking below 90, and not just higher inflation that's going to surprise, I believe that's dollar negative, but these perpetual budget deficits that are clearly apparent